A N N U A L R E P O R T
2019
2019 A WORLD-CLASS DISTRIBUTOR
OF ARCHITECTURAL BUILDING PRODUCTS
1
KEY HIGHLIGHTS
North American leader in
the distribution of architectural
building products
Trusted partner to a diverse
base of leading suppliers
in the industry
90%
of the business
operates in the US
1,350
employees
500
in sales
and marketing
With whom we have built long lasting relationships
Provides us with a wide offering of products, including
proprietary and exclusive offerings
Bringing value to
40,000
customers
Industrial manufacturers use our products to
make end-use applications for the commercial,
residential, repair and remodel,and diversified
construction markets
Customers rely on us for tailored
and unique material supply solutions,
best-in-class service, and top quality products
Hardwood Plyw
Hardwood Plywood
Hardwood Plywood
Hardwood Lum
mber
Hardwood Lumber
Decorative Sur
Decorative Surfaces
faces
Doors and Rela
Doors and Related Millwork
ated Millw
Diversified
Diversified
Composite Pan
Composite Panels
nels
2
2019
Sales
32%
HEAD OFFICE
VANCOUVER (LANGLEY), BC
17 US LOCATIONS
LOS ANGELES, CA
KAPOLEI, OAHU, HI
DENVER, CO
N
I
A
T
N
U
O
M
N
O
I
G
E
R
NORTHRIDGE, CA
PORTLAND, OR
PORTLAND, OR
PHOENIX, AZ
SEATTLE, WA
SACRAMENTO, CA
SPOKANE, WA
SAN FRANCISCO, CA
ELKHART, IN
DALLAS, TX
HOUSTON, TX
GRAND RAPIDS, MI
MATTOON, IL
SAN ANTONIO, TX
MINNEAPOLIS, MN
8 CANADIAN LOCATIONS
CALGARY, AB
KELOWNA, BC
EDMONTON, AB
VANCOUVER, BC
TORONTO, ON
WINNIPEG, MB
SASKATOON, SK
VICTORIA, BC
5 LOCATIONS
CINCINNATI, OH
M
DENVER, CO
M
SAN ANTONIO, TX
M
CHICAGO, IL
M
KANSAS CITY, MO
M
34 LOCATIONS
ATLANTA, GA M
BIRMINGHAM, AL
DALLAS, TX
M
HOUSTON, TX
BLAKESLEE, PA
M
BOSTON, MA - STOUGHTON M
CHARLOTTE, NC
SAN ANTONIO, TX
CHATTANOOGA, TN
ALBUQUERQUE, NM
2
D
COLUMBUS, GA
AMARILLO, TX
GORHAM, ME M
MILFORD, CT M
MOONACHIE, NJ
KERNERSVILLE, NC
LOS ANGELES, CA
NY – BRONX
ROANOKE, VA
SAVANNAH, GA
SUWANEE, GA
TAMPA, FL
WILMINGTON, NC
PHOENIX, AZ
D
KANSAS CITY, MO
D
NASHVILLE, TN D
OLATHE, KS D
NY – LONG ISLAND
BOISE, ID
DENVER, CO
D
LAS VEGAS, NV D
M
PORTLAND, OR
D
SALT LAKE CITY, UT
D
N
O
I
G
E
R
T
S
A
E
H
T
R
O
N
C
I
F
I
C
A
P
N
I
A
T
N
U
O
M
N
O
I
G
E
R
T
S
E
W
H
T
R
O
N
C
I
F
I
C
A
P
T
S
E
W
D
I
M
A
I
B
M
U
L
O
C
H
S
I
T
I
R
B
L
A
R
T
N
E
C
N
O
I
G
E
R
T
S
E
W
H
T
U
O
S
N
O
I
G
E
R
T
S
E
W
D
I
M
N
O
I
G
E
R
A
I
N
R
O
F
I
L
A
C
S
A
X
E
T
S
E
I
R
I
A
R
P
N
O
I
G
E
R
T
S
A
E
H
T
U
O
S
CLINTON, MI
HDI IMPORT DIVISION VANCOUVER, BC
HDI IMPORT LUMBER DIVISION LELAND, NC
HDI IMPORT PANEL DIVISION RENTON, WA
HDI ACROSS NORTH AMERICA
COVERAGE ACROSS NORTH AMERICA
PRINCE
EDWARD
ISLAND
NOVA
SCOTIA
M
M
RI
CT
M
M
NJ
DE
MD
D
D
M
M
D
D
D
D
D
D
M
M
D
M
HAWAII
M
M
D DOOR MANUFACTURING
Multi-brand strategy, a differentiator in the marketplace
M MOULDING AND MILLWORK MANUFACTURING
D DOOR MANUFACTURING
M MOULDING AND MILLWORK MANUFACTURING
34 LOCATIONS
ATLANTA, GA M
BIRMINGHAM, AL
CHARLOTTE, NC
CHATTANOOGA, TN
COLUMBUS, GA
KERNERSVILLE, NC
ROANOKE, VA
SAVANNAH, GA
SUWANEE, GA
TAMPA, FL
WILMINGTON, NC
L
A
R
T
N
E
C
I
N
O
G
E
R
T
S
E
W
H
T
U
O
S
I
N
O
G
E
R
T
S
E
W
D
M
I
I
N
O
G
E
R
I
N
O
G
E
R
T
S
A
E
H
T
U
O
S
DALLAS, TX
M
HOUSTON, TX
SAN ANTONIO, TX
ALBUQUERQUE, NM
2
D
AMARILLO, TX
LOS ANGELES, CA
PHOENIX, AZ
D
KANSAS CITY, MO
NASHVILLE, TN D
OLATHE, KS D
D
I
N
O
G
E
R
T
S
A
E
H
T
R
O
N
I
N
O
G
E
R
M
BLAKESLEE, PA
BOSTON - STOUGHTON, MA M
BRONX, NY
GORHAM, ME M
LONG ISLAND, NY
MILFORD, CT M
MOONACHIE, NJ
BOISE, ID
D
DENVER, CO
LAS VEGAS, NV D
D
PORTLAND, OR
M
SALT LAKE CITY, UT
D
I
I
C
F
C
A
P
N
A
T
N
U
O
M
I
17 US LOCATIONS
LOS ANGELES, CA
NORTHRIDGE, CA
PHOENIX, AZ
SACRAMENTO, CA
I
A
N
R
O
F
L
A
C
I
T
S
E
W
H
T
R
O
N
C
F
C
A
P
I
I
I
N
A
T
N
U
O
M
I
N
O
G
E
R
DENVER, CO
KAPOLEI, OAHU, HI
PORTLAND, OR
PORTLAND, OR
SEATTLE, WA
SPOKANE, WA
5 LOCATIONS
M
CINCINNATI, OH
M
CHICAGO, IL
DENVER, CO
M
SAN ANTONIO, TX
M
KANSAS CITY, MO
M
SAN FRANCISCO, CA
ELKHART, IN
DALLAS, TX
HOUSTON, TX
S
A
X
E
T
T
S
E
W
D
M
I
GRAND RAPIDS, MI
MATTOON, IL
SAN ANTONIO, TX
MINNEAPOLIS, MN
8 CANADIAN LOCATIONS
I
S
E
R
A
R
P
I
CALGARY, AB
EDMONTON, AB
SASKATOON, SK
I
A
B
M
U
L
O
C
H
S
T
R
B
I
I
KELOWNA, BC
VANCOUVER, BC
VICTORIA, BC
TORONTO, ON
WINNIPEG, MB
HEAD OFFICE
VANCOUVER (LANGLEY), BC
HDI IMPORT DIVISION VANCOUVER, BC
HDI IMPORT LUMBER DIVISION LELAND, NC
HDI IMPORT PANEL DIVISION RENTON, WA
CLINTON, MI
D DOOR MANUFACTURING
M MOULDING AND MILLWORK MANUFACTURING
3
17 US LOCATIONS
5 LOCATIONS
LOS ANGELES, CA
KAPOLEI, OAHU, HI
DENVER, CO
CINCINNATI, OH
M
DENVER, CO
M
SAN ANTONIO, TX
M
N
I
A
T
N
U
O
M
N
O
I
G
E
R
CHICAGO, IL
M
KANSAS CITY, MO
M
34 LOCATIONS
ATLANTA, GA M
BIRMINGHAM, AL
DALLAS, TX
M
HOUSTON, TX
BLAKESLEE, PA
M
BOSTON - STOUGHTON, MA M
CHARLOTTE, NC
SAN ANTONIO, TX
BRONX, NY
CHATTANOOGA, TN
ALBUQUERQUE, NM
2
D
COLUMBUS, GA
AMARILLO, TX
KERNERSVILLE, NC
LOS ANGELES, CA
N
O
I
G
E
R
T
S
A
E
H
T
U
O
S
ROANOKE, VA
SAVANNAH, GA
SUWANEE, GA
TAMPA, FL
WILMINGTON, NC
PHOENIX, AZ
D
KANSAS CITY, MO
D
NASHVILLE, TN D
OLATHE, KS D
N
O
I
G
E
R
T
S
A
E
H
T
R
O
N
C
I
F
I
C
A
P
N
I
A
T
N
U
O
M
N
O
I
G
E
R
GORHAM, ME M
LONG ISLAND, NY
MILFORD, CT M
MOONACHIE, NJ
BOISE, ID
DENVER, CO
D
LAS VEGAS, NV D
M
PORTLAND, OR
D
SALT LAKE CITY, UT
D
L
A
R
T
N
E
C
N
O
I
G
E
R
T
S
E
W
H
T
U
O
S
N
O
I
G
E
R
T
S
E
W
D
I
M
N
O
I
G
E
R
NORTHRIDGE, CA
PORTLAND, OR
PORTLAND, OR
PHOENIX, AZ
SEATTLE, WA
SACRAMENTO, CA
SPOKANE, WA
SAN FRANCISCO, CA
ELKHART, IN
DALLAS, TX
HOUSTON, TX
GRAND RAPIDS, MI
MATTOON, IL
SAN ANTONIO, TX
MINNEAPOLIS, MN
A
I
N
R
O
F
I
L
A
C
S
A
X
E
T
S
E
I
R
I
A
R
P
8 CANADIAN LOCATIONS
CALGARY, AB
KELOWNA, BC
EDMONTON, AB
VANCOUVER, BC
TORONTO, ON
WINNIPEG, MB
SASKATOON, SK
VICTORIA, BC
T
S
E
W
H
T
R
O
N
C
I
F
I
C
A
P
T
S
E
W
D
I
M
A
I
B
M
U
L
O
C
H
S
I
T
I
R
B
HEAD OFFICE
VANCOUVER (LANGLEY), BC
HDI IMPORT DIVISION VANCOUVER, BC
HDI IMPORT LUMBER DIVISION LELAND, NC
HDI IMPORT PANEL DIVISION RENTON, WA
CLINTON, MI
NBALBERTASASKATCHEWANMANITOBAONTARIOBRITISHCOLUMBIAQUEBECNEWFOUNDLAND AND LABRADORALABAMAGEORGIAILLINOISIOWAINDIANAMAINEARKANSASARIZONACALIFORNIAIDAHONEVADACOLORADOUTAHNEWYORKKANSASOKLAHOMANEW MEXICONORTH CAROLINASOUTHCAROLINANORTH DAKOTASOUTH DAKOTAKENTUCKYTENNESSEETEXASMICHIGANOHIOMINNESOTAWISCONSINMONTANAWYOMINGWASHINGTONOREGONNEBRASKAMISSOURIPENNSYLVANIAVIRGINIAWESTVIRGINIAMSLAFLMANHVT
GROWTH
Sales (in $ millions)
Sales Growth
Sales of $1.2 billion,
$625 million from acquired
businesses. Compound annual
sales growth rate of 22%
since 2010.
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Adjusted Earnings Per Share (in $)
Adjusted Earnings
Per Share (in $)
Growth leads to strong
earnings per share, and
accretive growth for
shareholders.
Compound annual
growth rate of 43%
since 2010.
$1.80
$1.60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
EBITDA and Cash Flows (in $ millions)1
Cash Flow
Generation
Significant cash flow
generation, and
conversion of EBITDA
to cash flow before changes
in working capital has
averaged 85%.
$60.0
$60.0
$50.0
$50.0
$40.0
$40.0
$30.0
$30.0
$20.0
$20.0
$10.0
$10.0
$0
$0
2010
2010
2010
2011
2011
2011
2012
2012
2012
2013
2013
2013
2014
2014
2014
2015
2015
2015
2016
2016
2016
2017
2017
2017
2018
2018
2018
2019
2019
2019
EBITDA
EBITDA
Operating Cash Flow Before Changes in Working Capital
Operating Cash Flow Before Changes in Working Capital
1 Excludes the effects of IFRS 16
4
SHAREHOLDER RETURNS
DIVERSIFICATION AND GROWTH
Total Shareholder Returns
+900% return
150%
130%
150%
130%
110%
90%
70%
110%
90%
70%
50%
50%
30%
30%
10%
10%
-10%
-10%
Last Ten Years
Last Ten Years
Last Five Years
Last Five Years
Last Year
Last Year
TSX
TSX
TSX Small Cap
TSX Small Cap
HDI
HDI
Residential
• New Construction
• Repair & Renovation
Residential
• New Construction
Commercial
• Repair & Renovation
• Office Buildings
• Restaurants, Bars, Hotels
Commercial
• Retail
• Schools, Hospitals, Airports
• Office Buildings
• Restaurants, Bars, Hotels
Diversified
• Retail
• Schools, Hospitals, Airports
Diversified
$175 m
+$1.5 billion
$125 m
+$1.1 billion
$150 m
+ 6 % C A G R
2018
Anticipated
market
growth
Taking market
share from
competitors
Acquisitions
2023
5
Total
Shareholder
Returns
Our shareholder returns
have generally exceeded the
TSX and TSX small cap indices.
Share returns include share
repurchases and
dividends, which have
been increased every year
for the last seven years.
End Markets
We are diversified by end
market, participate in all major
architectural building
products categories, and
have no significant customer
or supplier concentration.
Growth
We are the largest distributor
of architectural building
products in North America and
have 10% market share.
Significant opportunity exists
for both organic and
inorganic growth, and
we are strategically positioned
to achieve it.
To our Shareholders,
We continued to execute our growth strategy in 2019, leveraging our strong financial position
and significant acquisition capabilities to complete two new transactions. The addition of Pacific
Mutual Door Company and Far West Plywood added approximately $90 million of annualized
sales to our top line, while also strengthening our presence across the US Midwest and in
California.
These additions now bring the total number of locations we have acquired to 47, representing
$625 million of acquired annual revenues. HDI is now North America's largest distributor of
architectural building products with impressive five-year compound annual growth rates of 21%
for sales, 15% for adjusted EBITDA, and 11% for adjusted earnings per share. And growth has
strengthened HDI in other fundamental ways:
We are a more stable business with significantly increased geographic, end-market and product
diversification. We saw the steadying benefits of diversification in 2019 - a year that brought a
late start to the construction season and significant headwinds in the domestic hardwood lumber
segment. Despite these challenges, we increased sales by 3.3% or $37.7 million year-over-year,
improved our gross profit margin to 18.1%, generated record cash flow from operating activities
of $92.8 million and achieved profit per share of $1.38.
We have gained hard-to-match competitive and supply chain advantages. Our size and North
American-wide distribution network enable us to attract the industry's most sought-after
products. Our global sourcing capabilities allow us to provide proprietary and customized
solutions for our customers. These represent critical strengths in an industry evolving to more
design-oriented materials, many of which are branded. We also have the resources to provide
industry-leading sales support to our customers. For example we boast an elite team of
specification selling reps who work directly with architects and designers to assist with
decorative and engineered panel choices.
Hardwoods Distribution Inc. | Annual Report | 2019
6
We are better positioned to reward investors. Our business model features significant cash
generating efficiency, meaning that as we have grown, cash flow from operating activities has
grown as well. This has enabled us to reinvest in our business, strengthen our balance sheet and
reward investors. In 2019 we increased our dividend by another 6%, representing our seventh
dividend increase in as many years. We also returned cash to investors via share buybacks. In
total, our cash returns to shareholders for the 2019 year totaled $10.3 million, including $6.9
million in dividends and $3.4 million in shares repurchased.
We Will Continue to Pursue Successful Growth
Growth has been good for HDI - and for our investors - and it will remain a priority as we move
forward. We have set a goal of achieving $1.5 billion of sales by 2023 and one of the ways we
will do this is through continued acquisitions. Our goal is to add 3%-5% of revenues in acquired
sales, and our run rate in 2019 exceeds this goal. Given our strong balance sheet and excellent
pipeline of opportunities, we expect our success in this area to continue.
While we do not expect to see significant near-term growth in market demand given economic
uncertainties related to the COVID-19 situation, we will continue to aggressively pursue market
share growth. The business is well positioned as our model converts a significant amount of
EBITDA to operating cash flow, we maintain efficient working capital, and have no term debt.
We have proved that we can leverage our opportunities, resources and know-how to transform
HDI into a world class distributor at the top of the North American architectural building products
industry. Importantly, we have also demonstrated that we can grow successfully - strengthening
our business, enhancing our performance and rewarding investors. I am proud of what we have
accomplished, and with our platform, strategies, and 10% market share today, we see significant
opportunity to continue our growth trajectory.
_______________________________________
Rob Brown
President & CEO
Hardwoods Distribution Inc. | Annual Report | 2019
7
Management’s Discussion and Analysis
March 19, 2020
This management’s discussion and analysis (“MD&A”) has been prepared by Hardwoods
Distribution Inc. (“HDI” or the “Company”) as of March 19, 2020. 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, 2019 and
2018. Results are reported in Canadian dollars unless otherwise noted. 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 bank debt-to-
EBITDA after rents (net bank debt as described in section 5.3 as compared to EBITDA after
rent payments), and certain Liquidity Ratios such as working capital (as defined in section 5.2
of this report) and net bank debt-to-capitalization (net bank debt as compared to 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 non-
cash Long Term Incentive Plan (LTIP) expense, transaction expenses, and allowance for duty
deposits. "Adjusted EBITDA margin" and "net bank debt-to-Adjusted EBITDA after
rent" (together the "Adjusted EBITDA Ratios") are as defined above, before non-cash LTIP
expense, transaction expenses, and allowance for duty deposits. 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 non-cash LTIP expense, transaction
expenses, and allowance for duty deposits. The aforementioned adjusted measures are
collectively referenced as "the Adjusted Measures". We consider the Adjusted Measures to be
useful supplemental measures of our profitability, our ability to meet debt service and capital
expenditure requirements, our ability to generate cash flow from operations, and as an indicator
of relative operating performance, before non-cash LTIP expense, transaction expenses, and
allowance for duty deposits.
Hardwoods Distribution Inc. | Annual Report | 2019
8
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, Working Capital in section 5.2, and Revolving Credit Facilities and Debt
Management Strategy in section 5.3 of this report.
Hardwoods Distribution Inc. | Annual Report | 2019
9
Contents
This MD&A includes the following sections:
1.0
Executive Summary
1.1
1.2
1.3
Overview
Recent Acquisitions
Outlook
Business and Industry Overview
Results of Operations
3.1
3.2
Years ended December 31, 2019 and December 31, 2018
Three-Month Periods Ended December 31, 2019 and December 31, 2018
Quarterly Financial Information and Seasonality
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
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
Internal Control over Financial Reporting
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0 Note Regarding Forward-Looking Information
Hardwoods Distribution Inc. | Annual Report | 2019
10
1.0 Executive Summary
1.1 Overview
We achieved our tenth consecutive year of sales growth in 2019 with sales of $1.172 billion up
$37.7 million or 3.3% from 2018. We also improved our gross profit margin to 18.1% from
17.7% in 2018, generated a record $92.8 million of cash flow from operating activities, and
achieved $1.38 profit per share and $1.49 adjusted profit per share.
Our results were achieved despite a number of external challenges, including severe winter
weather that contributed to lost sales days in the first quarter and delayed the start of the
construction season, as well as uneven market sentiment affecting some US construction
markets. In addition, while we realized sales growth across the majority of our product lines in
2019, we were negatively impacted by significantly lower market prices for hardwood lumber
as a result of excess industry supply and a shift in demand to lower-valued species. Hardwood
lumber represents approximately 27% of our sales mix.
Our performance in light of these conditions reflects a number of strengths, including the
significant diversification in our business. We benefit from a broad North American-wide
geographic footprint; a large base of suppliers and customers with no significant concentration
in either; diverse end-markets including residential, commercial, repair & remodel, and other
construction sectors; and a diverse product mix made up of a wide array of architectural building
products. This diversification helps to offset downward shifts in any one product category or
end-market.
The continued successful execution of our acquisition strategy was also an important contributor
to our performance, with the addition of new businesses (described in Section 1.2 below)
contributing $36.3 million of the sales growth achieved in 2019. Our 2019 results also benefited
from the favorable foreign exchange impact of a stronger US dollar when translating our US
sales to Canadian dollars for reporting purposes. The positive foreign exchange impact
contributed $23.4 million to sales in 2019, helping to offset a $22.1 million decline in organic
sales primarily related to the lower prices in the hardwood lumber product category.
The improvement in our gross profit percentage to 18.1% was achieved, in part, as our new
import supply lines began to gain traction, particularly in the second half of 2019. Our gross
profit percentage performance in the third and fourth quarters of 2019, at 18.2% and 18.3%
Hardwoods Distribution Inc. | Annual Report | 2019
11
respectively, was our best since Q3 2017. Gross profit percentage in the fourth quarter was also
positively impacted by our newly acquired Pacific Mutual Door business, which carries a higher-
margin product mix.
Our very strong operating cash flow performance reflects both the inherent efficiency of cash
flow conversion in our business model, as well as a reduction in working capital in 2019 as our
new import supply lines gained momentum and enabled us to release extra inventory stocked
to guard against supply disruptions.
Profit per share of $1.38 for the 2019 year was $0.10 lower than the $1.48 we achieved in 2018,
primarily due to lower organic sales, as well as higher operating expenses. Operating expenses
for 2019 reflect the impact of a stronger US dollar on translation of US operating expenses to
Canadian dollars for reporting purposes, together with the addition of expenses from the two
new businesses acquired in 2019 and continued investments in support of our business strategies.
Additionally, 2019 saw a return to a more typical level of bad debt expense after a historically
low level the previous year.
Adjusted EBITDA was $79.0 million, slightly higher than the $78.9 million we generated in
2018, and our ratio of operating cash flow before changes in working capital to Adjusted EBITDA
was 85% in 2019. As indicated in the table below, it is historically normal for a majority of our
Adjusted EBITDA to convert to operating cash flow before changes in working capital.
Historical figures in the table above have been restated to comply with IFRS 16 - leases (see Section 6.0).
Hardwoods Distribution Inc. | Annual Report | 2019
12
Balance Sheet
We maintain a strong balance sheet which enables us to enjoy excellent financial stability, pursue
our growth strategies, and return value to shareholders in the form of dividends and share
repurchases. As at December 31, 2019, our net debt-to-Adjusted EBITDA ratio was 2.0 times,
the debt-to-capital ratio was 27.0%, and we had $69.8 million of unused borrowing capacity.
1.2 Recent Acquisitions
Through our acquisition strategy, we are enhancing our position as North America's #1
distributor of architectural building products, while strengthening our presence in the large US
market. Recent acquisition activity (the "Acquired Businesses") includes:
Diamond Hardwoods
On March 9, 2020 we purchased substantially all of the assets and assumed certain liabilities
of Diamond Hardwoods ("Diamond") for a total value of US$3.0 million. Diamond is a
wholesale distributor with annual sales of US$6 million and locations in Fresno and Bakersfield,
California. The addition of Diamond broadens our service capabilities in Northern California,
while adding bench strength to our team and a customer set with minimal overlap.
Pacific Mutual Door Company
On October 28, 2019, we purchased substantially all of the assets and assumed certain liabilities
of Pacific Mutual Door Company ("Pacific") for a total value of US$36.2 million. Pacific is a
multi-site distributor located in mid-west with estimated annual sales of US$58 million. The
addition of Pacific complements our existing door and related millwork business, and provides
an entry point into the attractive Tennessee market.
Far West Plywood
On January 28, 2019, we purchased substantially all of the assets and assumed certain liabilities
of Far West Plywood ("Far West") for a total value of US$3.6 million. Far West is a single site
distributor located in Southern California with estimated annual sales of US$12 million, and it
represents a contiguous expansion of our current Southern California operations.
Certain distribution assets of Atlanta Hardwoods Corporation
On June 11, 2018, we purchased certain of the distribution assets of Atlanta Hardwoods
Corporation ("Atlanta") for a total value of US$3.7 million. Atlanta brought us three new
operations and is expected to generate US$13 million in annual sales.
Hardwoods Distribution Inc. | Annual Report | 2019
13
1.3 Outlook
While the outlook for US construction markets coming into 2020 was positive, the rapidly
evolving COVID-19 situation is having a significant impact on global economies and could
influence near-term demand levels and disrupt supply chains. We are monitoring this situation
closely.
Over the longer term our business remains well positioned for success. As the only North
American-wide distributor in the industry, we benefit from a large and diverse geographic
network and a comprehensive suite of architectural building products, including proprietary
offerings from a diverse global supply chain. In addition, we have a robust pipeline of accretive
acquisition targets, maintain a strong balance sheet, and benefit from a business model that
generates significant cash from operations with exceptional cash flow conversion efficiency.
Moving forward, we will continue to pursue our business strategies, which include:
•
capturing market growth and market share as we leverage our professional platform
and significant resources to create competitive advantages;
•
capitalizing on our strong balance sheet and the significant opportunities in the
fragmented distribution market to continue growing through acquisitions; and
•
improving profitability as we enhance and leverage our supply chain and partner
management strengths, employ technology-enabled solutions, and optimize our strategic
human resources capabilities.
Our capital allocation priorities for 2020 include:
• Maintaining sufficient capital reserves to weather the impacts of a potential
economic slowdown;
executing on our acquisitions pipeline;
continuing to return value to shareholders in the form of dividends and share re-
•
•
purchases; and
•
ensuring continued strong management of the balance sheet.
On January 8, 2020 we renewed our normal course issuer bid for the coming year. We believe
that the underlying share value of HDI may not be reflected in the current market price of our
shares and, as a result, will consider share repurchases depending upon future price movements,
our capital allocation priorities, and other factors.
Hardwoods Distribution Inc. | Annual Report | 2019
14
Hardwoods Distribution Inc. | Annual Report | 2019
15
2.0 Business and Industry Overview
Serving customers for over 60 years, HDI is North America’s largest distributor of architectural
building products to the residential, repair and remodel and commercial construction markets.
As at March 19, 2020 we operated 66 distribution facilities across North America. Certain of
these facilities include light manufacturing capabilities, which enable us to create custom
moulding and millwork packages for our customers.
Approximately 22% of our 2019 sales were made up of decorative surfaces and composites,
such as high pressure laminates, thermally fused laminates, medium-density fiberboard, and
particleboard. Approximately 32% of our sales were of hardwood plywood, 27% of our sales
were high-grade hardwood lumber, 10% of our sales were doors, and 10% were comprised of
other ancillary architectural building products. Many of our product lines are complementary,
and our customers, industrial manufacturers, 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 suppliers manufacturing
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 primary manufacturers to get their product to thousands of fabrication
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 terms.
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
approximately half of our products are used in residential construction and repair and remodel,
in the form of cabinets, mouldings, custom finishing, and home furniture. We believe the balance
Hardwoods Distribution Inc. | Annual Report | 2019
16
of our products ends up in other sectors of the economy not associated with new residential
construction, such 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, composites, and doors
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. | Annual Report | 2019
17
3.0 Results of Operations
3.1 Years ended December 31, 2019 and December 31, 2018
Selected Consolidated Financial Information (in thousands of Canadian dollars)
For the year
Restated(1)
For the year
ended Dec 31
ended Dec 31
$ Increase % Increase
2019
2018
(Decrease)
(Decrease)
$
1,171,921
$
1,134,267
$
37,654
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 $
779,203
138,100
211,979
18.1%
(163,721)
48,258
27,953
76,211
$
6.4%
(27,953)
(9,158)
(9,520)
29,581
1.38
1.38
1.327
$
$
$
$
766,662
140,903
201,263
17.7%
(150,931)
50,332
25,537
75,869
6.7%
(25,537)
(7,979)
(10,634)
31,719
1.48
1.47
1.296
12,541
(2,803)
10,716
12,790
(2,074)
2,416
3.3 %
1.6 %
(2.0)%
5.3 %
8.5 %
(4.1)%
9.5 %
$
342
0.5 %
(2,416)
(1,179)
1,114
$
(2,138)
(6.7)%
Analysis of Specific Items Affecting Comparability (in thousands of Canadian dollars)
For the year
Restated(1)
For the year
ended Dec 31
ended Dec 31
$ Increase % Increase
2019
2018
(Decrease)
(Decrease)
76,221
2,249
509
—
78,979
6.7%
29,581
2,360
31,941
1.38
0.11
1.49
1.38
0.11
1.49
$
$
$
$
$
$
$
$
75,869
2,096
89
880
78,934
7.0%
31,719
2,623
34,342
1.48
0.12
1.60
1.47
0.12
1.59
0.5 %
$
$
352
153
420
(880)
45
(2,138)
(6.7)%
$
(263)
(2,401)
(7.0)%
(0.10)
(0.01)
(0.11)
(0.09)
(0.01)
(0.10)
(6.8)%
(6.9)%
(6.1)%
(6.3)%
Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), per table above
Non-cash LTIP expense
Transaction expenses
Allowance related to duty deposits receivable
Adjusted EBITDA
Adjusted EBITDA as a % of revenue
Profit for the period, as reported
Adjustments, net of tax
Adjusted profit for the period
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
(1) Restated for the adoption of IFRS 16 - leases. See Section 7.2
$
$
$
$
$
$
$
$
Hardwoods Distribution Inc. | Annual Report | 2019
18
Sales
For the year ended December 31, 2019, total sales increased 3.3% to $1,171.9 million, from
$1,134.3 million in 2018, a year-over-year improvement of $37.7 million. The addition of
Acquired Businesses contributed $36.3 million of this growth, representing a 3.2% increase in
total sales, and $23.4 million of the increase related to a favorable foreign exchange impact
from a stronger Canadian dollar when translating our US sales to Canadian dollars for reporting
purposes. These gains were partially offset by a year-over-year organic sales decrease of $22.1
million, which represents a 1.9% decrease in total sales.
Sales from our US operations increased by US$12.5 million, or 1.6%, to US$779.2 million,
from US$766.7 million in 2018. The Acquired Businesses contributed sales growth of US$27.4
million, which was partially offset by a US$14.8 million reduction in organic sales. Organic
sales were impacted by softer market conditions in 2019 and lower prices for hardwood lumber
products.
Sales in Canada decreased by $2.8 million, or 2.0%, year-over-year. Demand-supply dynamics
and government policy aimed at cooling the housing market continued to moderate Canadian
construction markets.
Gross Profit
Gross profit for the year ended December 31, 2019 increased 5.3% to $212.0 million, from
$201.3 million in 2018. This $10.7 million improvement primarily reflects the increased sales
and a higher gross profit margin, which improved year-over-year to 18.1%, from 17.7%. The
gross margin percentage improvement includes the benefit we realized in the second half of the
year relating to our re-established import supply lines.
Operating Expenses
For the year ended December 31, 2019, operating expenses were $163.7 million as compared
to $150.9 in 2018. The $12.8 million increase includes $7.1 million of operating expenses from
the Acquired Businesses net of transaction costs, $3.3 million of expenses related to the impact
of a stronger US dollar on translation of US operating expenses, $2.2 million of increased
expense related to a return to a more typical level of bad debt expense in our business, and $0.2
million of added costs to support our growth strategy. As a percentage of sales, operating
expenses were 14.0%, compared to 13.3% in the same period last year.
Hardwoods Distribution Inc. | Annual Report | 2019
19
Adjusted EBITDA
For the year ended December 31, 2019, we reported Adjusted EBITDA of $79.0 million, as
compared to $78.9 million in 2018. Contributing to the results this year is a $10.7 million increase
in gross profit, offset by a $10.6 million increase in operating expenses (before changes in
depreciation and amortization, non-cash LTIP expense, allowance related to duty deposits
receivable, and transaction expenses).
Our EBITDA and Adjusted EBITDA results also reflect our 2019 adoption of IFRS 16 - leases,
which affects our calculation of Adjusted EBITDA by converting rent expense to depreciation
and interest (see Section 7.0).
Net Finance Income (Expense)
For the year ended December 31, 2019, net finance expense increased to $9.2 million, from
$8.0 million in 2018. The year-over-year increase primarily relates to higher interest expense
on bank indebtedness.
Income Tax Expense
Income tax expense decreased to $9.5 million for the year ended December 31, 2019, from
$10.6 million during the same period in 2018. The decrease was primarily driven by a lower
taxable income as compared to 2018.
Profit for the Period
Profit for the year ended December 31, 2019 was $29.6 million, as compared to $31.7 million
in 2018. The $2.1 million decrease primarily reflects the $12.8 million increase in operating
expenses and a $1.2 million increase in net finance expense, partially offset by the $10.7 million
increase in gross profit and the $1.1 million decrease in income tax expense. Diluted profit per
share was $1.38 as compared to $1.47 in 2018.
Adjusted profit for the year ended December 31, 2019 was $31.9 million, as compared to $34.3
million in 2018. Adjusted diluted profit per share was $1.49, as compared to $1.60 in 2018.
Hardwoods Distribution Inc. | Annual Report | 2019
20
3.2 Three Months Ended December 31, 2019 and December 31, 2018
Selected Unaudited Consolidated Financial Information (in thousands of Canadian dollars)
Total sales
Sales in the US (US$)
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 $
Three months
Three months
Restated(1)
ended Dec 31
ended Dec 31
$ Increase % Increase
2019
287,830
193,260
32,845
52,647
18.3%
(42,167)
10,480
7,686
18,165
6.3%
(7,686)
(2,756)
(1,142)
6,582
0.31
0.31
1.320
$
$
$
$
2018
(Decrease)
(Decrease)
$
12,844
10,327
(386)
5,020
4,126
894
1,045
4.7 %
5.6 %
(1.2)%
10.5 %
10.8 %
9.3 %
15.7 %
$
1,938
11.9 %
(1,045)
(879)
763
778
$
13.4 %
274,986
182,933
33,231
47,627
17.3%
(38,041)
9,586
6,641
16,227
5.9%
(6,641)
(1,877)
(1,905)
5,804
0.27
0.27
1.320
Analysis of Specific Items Affecting Comparability (in thousands of Canadian dollars)
Three months
Three months
Restated(1)
ended Dec 31
ended Dec 31
$ Increase % Increase
2019
2018
(Decrease)
(Decrease)
$
$
$
$
$
$
$
$
$
18,175
529
433
19,137
6.6%
6,582
780
7,362
0.31
0.04
0.35
0.31
0.04
0.35
$
$
$
$
$
$
$
$
$
16,227
(261)
—
15,966
5.8%
5,804
(267)
5,537
0.27
(0.01)
0.26
0.27
(0.01)
0.26
$
$
$
$
1,948
12.0 %
790
433
3,171
19.9 %
778
1,047
1,825
0.04
0.05
0.09
0.04
0.05
0.09
13.4 %
33.0 %
14.8 %
34.6 %
14.8 %
34.6 %
Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), per table above
Non-cash LTIP expense
Transaction expenses
Adjusted EBITDA
Adjusted EBITDA as a % of revenue
Profit for the period, as reported
Adjustments, net of tax
Adjusted profit for the period
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
(1) Restated for the adoption of IFRS 16 - leases. See Section 7.2
Hardwoods Distribution Inc. | Annual Report | 2019
21
Sales
For the three months ended December 31, 2019, total sales increased 4.7% to $287.8 million,
from $275.0 million during the same period in 2018, a year-over-year increase of $12.8 million.
The addition of Acquired Businesses contributed $16.8 million of this increase, representing a
6.1% increase in total sales. These gains were partially offset by a year-over-year organic sales
decrease of $3.9 million, which represents a 1.4% decrease in total sales.
Fourth quarter sales from our US operations increased to US$193.3 million, from US$182.9
million in the same period in 2018, an increase of US10.3 million, or 5.6%. The Acquired
Businesses contributed sales growth of US$12.7 million, partially offset by a US$2.4 million
reduction in organic sales. Organic sales were negatively impacted by the softer hardwood
lumber market conditions noted in Section 1.1.
Fourth quarter sales in Canada decreased by $0.4 million, or 1.2% , year-over-year. Demand-
supply dynamics and government policy aimed at cooling the housing market continued to
moderate Canadian construction markets.
Gross Profit
Gross profit for the three months ended December 31, 2019 increased 10.5% to $52.6 million,
from $47.6 million during the same period in 2018. This $5.0 million improvement primarily
reflects the higher sales and a higher gross profit margin. As a percentage of sales, fourth quarter
gross profit margin increased to 18.3%, from 17.3% year-over-year as we benefited from our
re-established import supply lines and the inclusion of sales from our newly acquired Pacific
Mutual Door operations, which carry a higher gross profit margin relative to the rest of the
business.
Operating Expenses
For the three months ended December 31, 2019, operating expenses were $42.2 million as
compared to $38.0 million during the same period in 2018. The $4.2 million increase includes
$3.9 million of operating expenses from the Acquired Business and transaction costs of $0.4
million. As a percentage of sales, fourth quarter operating expenses were 14.6%, compared to
13.8% in Q4 2018.
Hardwoods Distribution Inc. | Annual Report | 2019
22
Adjusted EBITDA
For the three months ended December 31, 2019, we increased Adjusted EBITDA to $19.1
million, from $16.0 million during the same period in 2018. The $3.1 million improvement
primarily reflects the $5.0 million increase in gross profit, partially offset by the $1.9 million
increase in operating expenses (before changes in depreciation and amortization, non-cash LTIP
expense, and transaction expenses).
Included in our EBITDA results for the quarter is a $0.6 million reversal of bad debt expense,
and a $0.6 million contribution from the Pacific business.
Our EBITDA and Adjusted EBITDA results also reflect our 2019 adoption of IFRS 16 - leases,
which affects our calculation of Adjusted EBITDA by converting rent expense to depreciation
and interest (see Section 7.0).
Profit for the Period
Profit for the three months ended December 31, 2019 was $6.6 million, as compared to $5.8
million in the same period in 2018. The $0.8 million or 13.4% increase primarily reflects the
$5.0 million increase in gross profit partially offset by the $4.2 million increase in operating
expenses. Fourth quarter diluted profit per share was $0.31, as compared to $0.27 in Q4 2018.
Adjusted profit for the three months ended December 31, 2019 increased 33.0% to $7.4 million,
from $5.5 million in the same period in 2018. Fourth quarter Adjusted diluted profit per share
was $0.35 as compared to $0.26 in Q4 2018.
Hardwoods Distribution Inc. | Annual Report | 2019
23
4.0 Selected Financial Information and Seasonality
4.1 Quarterly Financial Information
(in thousands of dollars)
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2019
2019
2019
2019
2018
2018
2018
2018
Restated to comply with IFRS 16 - leases.
See section 7.2 for further details
Total sales
Profit
$ 287,830 $292,459 $304,545 $287,087 $ 274,986 $290,354 $ 298,172 $ 270,755
6,582
8,854
8,165
5,980
5,804
7,962
9,838
8,153
Basic profit per share
Fully diluted profit per share
0.31
0.31
0.42
0.41
0.38
0.38
0.28
0.28
0.27
0.27
0.37
0.37
0.45
0.45
0.38
0.38
EBITDA
18,165
20,723
20,626
16,696
16,227
19,734
21,553
18,361
Adjusted profit
7,362
9,364
8,661
6,494
5,537
9,030
11,128
8,664
Adjusted basic profit per share
Adjusted diluted profit per
share
Adjusted EBITDA
0.35
0.35
0.44
0.43
0.40
0.40
0.30
0.30
0.26
0.26
0.42
0.42
0.51
0.51
0.40
0.40
19,137
21,297
21,185
17,282
15,966
20,847
23,111
18,927
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 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
Adjusted EBITDA
(1) Restated for the adoption of IFRS 16 - leases. See Section 7.2
ended Dec 31
ended Dec 31
ended Dec 31
2019 2018 (Restated(1))
2017
(Restated(1))
$
1,171,921 $
1,134,267 $
1,045,840
29,581
31,719
29,153
1.38
1.38
1.48
1.47
1.37
1.36
569,971
541,967
456,546
84,391
78,979
88,282
78,934
79,811
78,923
Hardwoods Distribution Inc. | Annual Report | 2019
24
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)
Year ended Dec 31
Three months ended Dec 31
2019
2018
Restated(1)
$ change
2019
2018
Restated(1)
$ change
Cash provided by operating activities before changes
in non-cash working capital
$
66,860 $
66,897 $
(37)
$
14,272 $
12,979 $
1,293
Changes in non-cash working capital
Net cash provided (used in) by operating activities
25,944
92,804
(40,824)
26,073
66,768
66,731
19,074
33,346
19,556
32,535
(482)
811
Net cash used in investing activities
(55,907)
(8,900)
(47,007)
(48,177)
(1,962)
(46,215)
Net cash provided by (used in) financing activities
(23,326)
(15,939)
(7,387)
22,601
(29,351)
51,952
Increase (decrease) in cash
Cash and cash equivalents, beginning of period
13,571
1,547
1,234
313
12,337
1,234
7,770
7,348
1,222
325
6,548
7,023
Cash and cash equivalents, end of the period
$
15,118 $
1,547 $
13,571
$
15,118 $
1,547 $
13,571
(1) Restated for the adoption of IFRS 16 - leases. See Section 7.2
Net cash used in operating activities
For the year ended December 31, 2019, net cash provided by operating activities increased to
$92.8 million, from $26.1 million in 2018, an increase of $66.7 million. Cash provided by
operating activities before changes in non-cash working capital was $66.9 million, the same as
in 2018. Investment in non-cash working capital decreased by $66.8 million in 2019, as compared
to 2018. An analysis of changes in working capital is provided in section 5.2 of this report.
For the three months ended December 31, 2019, net cash provided by operating activities
increased to $33.3 million, from $32.5 million in the same period in 2018, an increase of $0.8
million. Cash provided by operating activities before changes in non-cash working capital was
$14.3 million, compared to $13.0 million in the same period in 2018. Fourth quarter investment
in non-cash working capital increased by $0.5 million year-over-year. 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 for the year and three months ended December 31, 2019
increased by $47.0 million and $46.2 million, respectively, as compared to the same periods in
2018. The increases primarily relate to the purchase of Acquired Businesses during the year.
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
Hardwoods Distribution Inc. | Annual Report | 2019
25
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.
Net cash provided by (used in) financing activities
For the year ended December 31, 2019, net cash used in financing activities increased by $7.4
million as compared to 2018. This change primarily reflects an increase in share re-purchase
activities and principle payments on finance lease obligations.
For the three months ended December 31, 2019, net cash provided by financing activities
increased by $52.0 million as compared to the same period in 2018. This primarily relates to
an increase in bank indebtedness, which was required to finance the purchase of Pacific in the
fourth quarter of 2019.
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 short-
term credit provided by suppliers in the form of accounts payable and accrued liabilities.
Investments in working capital in 2019 decreased by $66.8 million as compared to 2018. The
decrease primarily relates to the reduction in organic sales, and management of our balance
sheet including a reduction in inventory to normal levels in 2019, following increased purchasing
of certain product lines in 2018 to secure supply.
Our investment in working capital may fluctuate from quarter-to-quarter based on factors such
as sales demand, strategic purchasing decisions taken by management, and the timing of
collections from customers. Historically the first and fourth quarters are seasonally slower
periods for construction activity, resulting in reduced demand for architectural building products.
A summary of changes in our non-cash operating working capital during the year and three
months ended December 31, 2019 and 2018 is provided below.
Hardwoods Distribution Inc. | Annual Report | 2019
26
(in thousands of Canadian dollars)
Restated(1)
Restated(1)
Year
Year
Three months
Three months
ended Dec 31
ended Dec 31
ended Dec 31
ended Dec 31
Source (use) of funds
2019
2018
2019
2018
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
$
3,180
$
(5,915)
$
12,902
$
14,121
16,107
(5,442)
12,099
(33,290)
932
(2,551)
581
(3,397)
8,988
5,624
4,214
(4,403)
Change in non-cash operating working capital
$
25,944
$
(40,824)
$
19,074
$
19,556
(1) Restated for the adoption of IFRS 16 - leases. See Section 7.2
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 bank debt
Shareholders' equity
Capitalization
Net bank debt to capitalization
Previous 12 months Adjusted EBITDA
Rental payments related to warehousing and trucks
Previous 12 months Adjusted EBITDA after rent
Net bank debt to previous 12 months Adjusted EBITDA after rent
As at
Restated
As at
December 31, 2019
December 31, 2018
$
$
$
$
$
$
(15,118)
121,548
106,430
283,445
389,875
27%
78,979
(24,700)
54,279
2.0
(1,547)
112,940
111,393
275,439
386,832
29%
78,934
(22,558)
56,376
2.0
We consider our capital to be bank indebtedness (net of cash) and shareholders’ equity. Overall
net bank debt compared to total capitalization stood at 27% as at December 31, 2019, compared
to 29% at December 31, 2018. At December 31, 2019, our ratio of net debt-to-Adjusted-EBITDA
after rent for the year was 2.0 times, in line with 2.0 times at December 31, 2018. Net debt-to-
Adjusted-EBITDA after rent and net bank debt-to-total capitalization serve as indicators of our
financial leverage, however they are not measures prescribed by IFRS and our method of
calculating these measures may differ from methods used by other issuers.
Hardwoods Distribution Inc. | Annual Report | 2019
27
We have independent credit facilities in both Canada and the US. 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, 2019 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
23.3 million
13.0 million
10.3 million
$
$
$
$
194.6 million (US$150.0 million)
July 14, 2021
165.5 million (US$127.6 million)
106.0 million (US$81.7 million)
59.5 million (US$45.8 million)
Covenant does not apply
when the unused credit
facility available exceeds
$2.0 million
Covenant does not apply when the unused
credit facility available exceeds 10% of the
maximum borrowings under
the credit
facility or US$15.0 million
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,
2019. Accordingly, there were no restrictions on dividends arising from non-compliance with
financial covenants.
We have a US credit facility ("the USLP II Credit Facility") and a Canadian credit facility ("the
LP Credit Facility"). The USLP II Credit Facility consists of a revolving credit line of US$150.0
million. The amounts made available under the USLP II Credit Facility are limited based on a
borrowing base determined by reference to the value of certain eligible accounts receivable and
inventories held by certain of our subsidiaries. The financial covenants under the USLP II Credit
Facility include, among others, a springing fixed charge coverage ratio of 1.0x, triggered if
unused availability under the USLP II Credit Facility falls below US$15.0 million at any time.
Hardwoods Distribution Inc. | Annual Report | 2019
28
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. We were in
compliance with these covenants as at December 31, 2019.
The LP Credit Facility 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 unused 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, 2019.
Our debt management strategy is to roll and renew (as opposed to repay and retire) our credit
facilities as they expire. We do not intend to restrict future dividends in order to fully extinguish
our bank debt obligations upon their maturity. The amount of bank debt that will actually be
drawn on our available revolving credit facilities will depend upon the seasonal and cyclical
needs of the business, and our cash generating capacity going forward. When making future
dividend decisions, we will consider the amount of financial leverage, and therefore bank debt,
we believe is appropriate given existing and expected market conditions and available business
opportunities. We do not target a specific financial leverage amount. We believe our current
credit facilities are sufficient to finance our working capital needs and market expansion strategy.
5.4 Contractual Obligations
There were no significant changes in our contractual commitments outside the normal course
of business, compared with those set forth in our 2019 Annual Report, available on SEDAR at
www.sedar.com.
5.5 Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Hardwoods Distribution Inc. | Annual Report | 2019
29
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, other liabilities 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 19, 2020, the date of this MD&A, we had 21,355,327 common shares issued and
outstanding. In addition, at March 19, 2020, we had outstanding 114,068 performance shares
and 158,475 restricted shares under the terms of our long-term incentive plan. The performance
and restricted shares can be settled in common shares of the Company issued from treasury,
common shares purchased by us in the market, or in an amount of cash equal to the fair value
of our common shares, or any combination of the foregoing. The restricted and performance
shares vest over periods of up to three years and employees have the option, when the restricted
and performance share vest, to receive up to half the fair value in cash and the remainder in
common shares. We intend to issue common shares from treasury to settle the portion of the
obligation not paid to employees in cash.
5.8 Dividends
In the fourth quarter of 2019, we declared a quarterly dividend of $0.085 per common share,
which was paid on January 31, 2020 to shareholders of record as at January 20, 2020. On
March 19, 2020, we declared a quarterly dividend of $0.085 per share, payable on April 30,
2020 to shareholders of record as at April 16, 2020.
6.0 Related-Party Transactions
There were no material related-party transactions during the three and twelve-month periods
ended December 31, 2019 or in the comparative periods in the prior year.
Hardwoods Distribution Inc. | Annual Report | 2019
30
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:
Adoption of IFRS 16 - leases: We are required to make estimates and assumptions related to
adoption of IFRS 16 - leases, including the discount rates used for each lease, determining the
lease term, and consideration of lease renewal options.
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
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
IFRS 16, Leases ("IFRS 16")
Effective January 1, 2019 we adopted IFRS 16, and elected to apply this new standard using
the full retrospective approach. The adoption of IFRS 16 had a material impact on our
Hardwoods Distribution Inc. | Annual Report | 2019
31
consolidated financial statements, including the comparative information. For a summary of
the financial statement line items affected, see our consolidated financial statements.
The main impact of IFRS 16 was the recognition of lease assets and lease liabilities on the
balance sheet for those leases that were previously classified as operating leases. As it relates
to the Company, our operating leases were principally comprised of our warehouse facilities
and automobiles. Under IFRS 16, we are 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 adoption of IFRS 16 did not have a significant impact on profit. The adoption of IFRS 16
however did have a material impact on the balance sheet related to the recording of a right-of-
use asset and related lease liability (see Consolidated Financial Statements for a summary of
the impact).
The adoption of IFRS 16 also had a material impact on EBITDA and Adjusted EBITDA since
the rental payments related to the operating leases described above are now reclassified as either
interest expense or depreciation. As a result of IFRS 16, EBITDA and Adjusted EBITDA
increased by $6.8 million and $5.8 million, respectively, in the three months ended December
31, 2019 as compared to the amounts that would have otherwise been recorded under previous
standards. For the year ended December 31, 2019, as a result of IFRS 16, EBITDA and Adjusted
EBITDA increased by $24.7 million and $22.6, respectively, as compared to the amounts that
would have otherwise been recorded under previous standards.
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. | Annual Report | 2019
32
9.0 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, 2019. 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, 2019.
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, 2019. 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, 2019.
There have not been any changes in our ICFR during the quarter ended December 31, 2019 that
have materially affected, or are reasonably likely to materially affect, our ICFR.
The CEO and CFO have limited the scope of their design of disclosure controls and procedures
and internal control over financial reporting to exclude controls, policies and procedures of the
Pacific business, which we acquired on October 28, 2019. Summary financial information about
the acquired Pacific business can be found in note 4 of the Consolidated Financial Statements.
Hardwoods Distribution Inc. | Annual Report | 2019
33
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 benefit from
a broad North American-wide geographic footprint; a large base of suppliers and customers
with no significant concentration in either; diverse end-markets including residential,
commercial, repair & remodel, and other construction sectors; and a diverse product mix made
up of a wide array of architectural building products; this diversification helps to offset downward
shifts in any one product category or end-market; it is historically normal for a majority of our
Adjusted EBITDA to convert to operating cash flow before changes in working capital; we
maintain a strong balance sheet which enables us to enjoy excellent financial stability, pursue
our growth strategies, and return value to shareholders in the form of dividends and share
repurchases; we are enhancing our position as North America's #1 distributor of architectural
building products, while strengthening our presence in the large US market; While the outlook
for US construction markets coming into 2020 was positive, the rapidly evolving COVID-19
situation is having a significant impact on global economies and could influence near-term
demand levels and disrupt supply chains; over the longer term our business remains well
positioned for success; we benefit from a comprehensive suite of architectural building products,
including proprietary offerings from a diverse global supply chain; we have a robust pipeline
of accretive acquisition targets, maintain a strong balance sheet, and benefit from a business
model that generates significant cash from operations with exceptional cash flow conversion
efficiency; Moving forward, we will continue to pursue our business strategies, which include
capturing market growth and market share as we leverage our professional platform and
significant resources to create competitive advantages, capitalizing on our strong balance sheet
and the significant opportunities in the fragmented distribution market to continue growing
through acquisitions, and improving profitability as we enhance and leverage our supply chain
and partner management strengths, employ technology-enabled solutions, and optimize our
strategic human resources capabilities; our capital allocation priorities for 2020 include
maintaining sufficient capital reserves to weather the impacts of a potential economic slowdown,
Hardwoods Distribution Inc. | Annual Report | 2019
34
executing on our acquisitions pipeline, continuing to return value to shareholders in the form
of dividends and share re-purchases, and ensuring continued strong management of the balance
sheet; we believe that the underlying share value of HDI may not be reflected in the current
market price of our shares and, as a result, will consider share repurchases depending upon
future price movements, our capital allocation priorities, and other factors; 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 and by changes in the foreign exchange
rate of the Canadian and US dollars; our investment in working capital may fluctuate from
quarter-to-quarter based on factors such as sales demand, strategic purchasing decisions taken
by management, and the timing of collections from customers; historically the first and fourth
quarters are seasonally slower periods for construction activity, resulting in reduced demand
for architectural building products; 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.
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
Hardwoods Distribution Inc. | Annual Report | 2019
35
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. | Annual Report | 2019
36
Consolidated Financial Statements
(Expressed in Canadian dollars)
HARDWOODS DISTRIBUTION INC.
Years ended December 31, 2019 and 2018
37
KPMG LLP
Chartered Professional Accountants
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
(604) 691-3031
Fax
www.kpmg.ca
Internet
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Hardwoods Distributions Inc.
Opinion
We have audited the consolidated financial statements of Hardwoods Distributions Inc. (the Entity),
which comprise:
•
•
•
•
•
the consolidated statements of financial position as at December 31, 2019, December 31, 2018
and January 1, 2018
the consolidated statements of comprehensive income for the years ended December 31, 2019
and December 31, 2018
the consolidated statements of changes in shareholders’ equity for the years ended December
31, 2019 and December 31, 2018
the consolidated statements of cash flows for the years ended December 31, 2019 and
December 31, 2018
and notes to the consolidated financial statements, including a summary of significant
accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated financial position of the Entity as at December 31, 2019, December 31, 2018 and
January 1, 2018, and its consolidated financial performance and its consolidated cash flows for the
years ended December 31, 2019 and December 31, 2018 in accordance with International
Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the “Auditors’ Responsibilities
for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are relevant to
our audit of the financial statements in Canada and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.
38
Hardwoods Distribution Inc.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.
Emphasis of Matter – Comparative Information
We draw attention to Note 3(q) to the financial statements (“Note 3(q)”), which explains that certain
comparative information presented:
•
•
for the year ended December 31, 2018 has been restated.
as at January 1, 2018 has been derived from the financial statements for the year ended
December 31, 2017 which have been restated (not presented herein).
Note 3(q) explains the reason for the restatement and also explains the adjustments that were
applied to restate certain comparative information.
Our opinion is not modified in respect of this matter.
Other Information
Management is responsible for the other information. Other information comprises:
•
the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon, included
in the “2019 Hardwoods Distribution Inc. Annual Report”.
•
Our opinion on the financial statements does not cover the other information and we do not and will
not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the audit and remain alert
for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis and 2019
Hardwoods Distribution Inc. Annual Report filed with the relevant Canadian Securities Commissions
as at the date of this auditors’ report. If, based on the work we have performed on this other
information, we conclude that there is a material misstatement of this other information, we are
required to report that fact in the auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in
accordance with International Financial Reporting Standards (IFRS), and for such internal control
as management determines is necessary to enable the preparation of financial statements that are
free from material misstatement, whether due to fraud or error.
39
Hardwoods Distribution Inc.
In preparing the financial statements, management is responsible for assessing the Entity’s ability
to continue as a going concern, disclosing as applicable, matters related to going concern and using
the going concern basis of accounting unless management either intends to liquidate the Entity or
to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial reporting
process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report
that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted
in accordance with Canadian generally accepted auditing standards will always detect a material
misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken
on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting
intentional omissions,
misrepresentations, or the override of internal control.
involve collusion,
from error, as
fraud may
forgery,
• Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Entity's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the Entity's ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in
our auditors’ report to the related disclosures in the financial statements or, if such disclosures
are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained
40
Hardwoods Distribution Inc.
up to the date of our auditors’ report. However, future events or conditions may cause the Entity
to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned
scope and timing of the audit and significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and communicate with them all relationships and
other matters that may reasonably be thought to bear on our independence, and where
applicable, related safeguards.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the group Entity to express an opinion on the financial statements. We
are responsible for the direction, supervision and performance of the group audit. We remain
solely responsible for our audit opinion.
Chartered Professional Accountants
The engagement partner on the audit resulting in this auditors’ report is Andrew James.
Vancouver, Canada
March 19, 2020
41
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
Assets
Current assets:
Cash and cash equivalents
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
Right of use assets
Intangible assets
Deferred income taxes
Goodwill
Total non-current assets
Total assets
Liabilities
Current liabilities:
Bank indebtedness
Accounts payable and accrued liabilities
Lease obligation
Dividend payable
Total current liabilities
Non-current liabilities:
Lease obligation
Other liabilities
Total non-current liabilities
Total liabilities
Shareholders’ equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Shareholders’ equity
Note
December 31,
2019
Restated
(Note 3(q))
December 31,
2018
Restated
(Note 3(q))
January 1,
2018
$
7
14
8
7
9
3(q)
10
14
11
$
15,118
113,740
820
207,935
9,887
347,500
2,376
20,430
93,982
28,248
4,461
72,974
222,471
$
1,547
112,005
789
223,785
4,594
342,720
1,857
20,357
97,241
16,828
6,844
56,120
199,247
313
97,263
1,582
172,106
5,268
276,532
1,359
18,044
82,816
17,215
8,910
51,670
180,014
$
569,971
$
541,967
$
456,546
12
$
3(q)
5
3(q)
13(a)
$
121,548
53,805
24,973
1,809
202,135
83,726
665
84,391
$
112,940
39,216
24,373
1,717
178,246
88,100
182
88,282
91,146
38,056
16,595
1,549
147,346
79,366
445
79,811
286,526
266,528
227,157
113,837
104,850
48,288
16,470
283,445
116,524
104,467
25,653
28,795
275,439
113,788
105,426
482
9,693
229,389
Total liabilities and shareholders’ equity
$
569,971
$
541,967
$
456,546
Subsequent events (note 4, 5)
The accompanying notes are an integral part of these consolidated financial statements.
Approved on behalf of the board of directors:
(Signed) JIM C. MACAULAY Director
(Signed) WILLIAM R. SAUDER Director
42
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2019 and 2018
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
Other comprehensive income:
Exchange differences translating foreign operations
Total comprehensive income
Basic net profit per share
Diluted net profit per share
Note
16
8
15
15
14
14
13(c)
13(c)
2019
1,171,921
(959,941)
Restated (Note 3(q))
2018
1,134,267
(933,004)
$
211,980
201,263
(124,782)
(38,939)
(163,721)
48,259
(9,784)
626
(9,158)
39,101
(7,227)
(2,293)
(9,520)
29,581
(12,325)
17,256
1.38
1.38
$
$
$
(114,933)
(35,998)
(150,931)
50,332
(8,931)
952
(7,979)
42,353
(8,287)
(2,347)
(10,634)
31,719
19,102
50,821
1.48
1.47
$
$
$
$
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
43
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2019 and 2018
Balance at January 1, 2019
Impact of changes in accounting policy
Restated balance at January 1, 2019
Share based compensation expense
Shares issued pursuant to LTIP
Shares repurchased
Profit for the period
Dividends declared
Translation of foreign operations
Note
3(q)
3(q)
13(b)
13(a)
13(a)
Balance at January 1, 2018
Impact of changes in accounting policy
Restated balance at January 1, 2018
Share based compensation expense
Shares issued pursuant to LTIP
Shares reclassified to liabilities
Profit for the period
Dividends declared
Translation of foreign operations
Accumulated
other
comprehensive
income -
translation
reserve
Share
capital
Contributed
surplus
Retained
earnings
Total
$ 116,524
$ 104,467
$
29,411
$ 35,530
$ 285,932
—
—
(616)
(9,877)
(10,493)
116,524
104,467
28,795
25,653
275,439
—
1,016
(3,703)
—
—
—
1,399
(1,016)
—
—
—
—
—
—
—
—
—
(12,325)
—
—
—
29,581
(6,946)
—
1,399
—
(3,703)
29,581
(6,946)
(12,325)
16,470
$ 48,288
$ 283,445
9,693
$
9,919
$ 238,826
$
$
$ 113,788
$ 105,426
3(q)
3(q)
13(b)
13(a)
—
—
—
(9,437)
(9,437)
113,788
105,426
—
2,736
—
—
—
—
2,593
(2,736)
(816)
—
—
—
9,693
—
—
—
—
—
19,102
482
229,389
—
—
—
31,719
(6,548)
—
2,593
—
(816)
31,719
(6,548)
19,102
Balance at December 31, 2019
$ 113,837
$ 104,850
Balance at December 31, 2018
$ 116,524
$ 104,467
$
28,795
$ 25,653
$ 275,439
The accompanying notes are an integral part of these consolidated financial statements.
44
HARDWOODS DISTRIBUTION INC.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Note
9
13(b)
14
15
13(a)
5
9
4
10
Cash flow from operating activities:
Profit for the year
Adjustments for:
Depreciation and amortization
Gain on sale of property, plant and equipment
Gain on bargain purchase
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:
Increase in bank indebtedness
Principle payments on finance lease obligation
Note repayment
Repurchase of common shares
Dividends paid to shareholders
Net cash used in 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 (made) received on non-current receivables
Net cash used in investing activities
Increase in cash
Cash, beginning of year
Cash, end of year
Supplementary information:
Property, plant and equipment acquired under finance
leases, net of disposals
Future cash settlement of LTIP's in accrued liabilities and
non-current liabilities
Transfer of accounts receivable to non-current customer
notes receivable
Restated (Note 3)
2018
2019
$
29,581
$
31,719
27,953
(635)
—
2,249
9,520
9,158
626
(4,293)
(7,299)
66,860
3,180
16,107
(5,442)
12,099
25,944
92,804
13,317
(26,346)
—
(3,443)
(6,854)
(23,326)
(3,321)
664
(52,850)
(282)
(118)
(55,907)
13,571
1,547
15,118
$
25,537
(156)
(92)
2,096
10,634
7,980
513
(3,938)
(7,396)
66,897
(5,915)
(33,290)
932
(2,551)
(40,824)
26,073
13,955
(23,454)
(60)
—
(6,379)
(15,938)
(4,076)
452
(4,843)
(280)
(153)
(8,900)
1,234
313
1,547
18,352
$
27,644
1,208
573
816
136
$
$
The accompanying notes are an integral part of these consolidated financial statements.
45
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
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 64 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 19, 2020.
(b) Basis of measurement:
These consolidated financial statements have been prepared a going concern basis under on the historical cost basis.
Comparative figures have been restated for IFRS 16 as discussed in note 3(q).
(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 consolidated financial statements, with the exception of per share amounts, has been rounded to the
nearest thousand dollar unless otherwise stated.
(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 consolidated 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 consolidated 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(j) - the annual goodwill impairment test;
• Note 7 - the collectability of accounts receivable and the determination of the allowance for credit loss;
• Note 8 - the valuation of inventories; and
• Note 14 - the recognition of deferred income taxes and utilization of tax loss carry forwards.
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 3 - the classification and valuation of lease obligations.
In assessing the Company’s 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
46
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
2. Basis of preparation (continued):
(d) Use of estimates and judgment (continued):
expiry. In making such a determination, the Company considers the carry forward periods of losses and the Company’s
projected future taxable income.
3. Significant accounting policies:
The significant accounting policies that have been used in the preparation of these consolidated financial statements are
summarized below. These accounting policies have been applied consistently by the Company and its subsidiaries to all years
presented in these consolidated financial statements.
(a) Principles of consolidation and business acquisitions:
These consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-
company balances and transactions have been eliminated on consolidation.
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.
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. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to
the functional currency at the exchange rate when the fair value was determined. Non-monetary items that are measured
based on historical cost in a foreign currency are translated at the exchange rate at the date of the transaction. Foreign
currency differences are generally recognized in the profit or loss and presented within finance expense.
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.
47
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
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 based on the consideration specified in the
invoice with a customer and excludes amounts collected on behalf of third parties. The Company recognizes revenue at
a point in time when control of the goods is transferred to the customer. The Company satisfies its performance obligation
and control of the goods is transferred to the customer generally when the customer has taken delivery of the goods. No
component of the transaction price is allocated to unsatisfied performance obligations.
(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
control 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 accounted for as a reduction of the cost of the related inventory and are
earned when inventory is sold.
(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:
48
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
(h) Property, plant and equipment (continued):
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 begins when the software is substantially
completed and ready for use. Costs capitalized for internally generated software are amortized on a straight-line basis
over their estimated useful life of 10 years and are measured at cost less accumulated amortization.
Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
(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") and Pacific Mutual Door Company ("Pacific",
see Note 4(a)) have been determined to be the cash generating units to which the goodwill balance 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.
Impairment testing was performed as at December 31, 2019 and the recoverable amount determined based on value-in-
use calculations which requires 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 3.0%. The growth rate is consistent with past experience,
market conditions and actual operating results.
Key assumptions used are based on industry sources as well as management estimates. A post-tax discount rate of 10.0%
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, 2019, was determined to be higher than the related
carrying amount and no impairment has been recognized.
49
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
(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.
The allowance for credit loss is determined using both specific identification of customer accounts and the expected credit
loss model. The Company uses an estimate of the net recoverable amount for specific customer accounts it has identified
and the expected credit loss model for the remaining customer accounts based on historical experience of uncollectable
amounts. Accounts that are considered uncollectable are written off.
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.
(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 including transaction costs.
The classification and measurement of the Company’s financial instruments is disclosed in note 6 of these consolidated
financial statements.
50
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
(l) Financial instruments (continued):
Financial assets
Cash
The Company considers deposits in banks as cash and cash equivalents.
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, payables, and lease obligations 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.
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.
51
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
(n) 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.
(o) 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.
(p) Share based compensation:
The Company has a share based long-term incentive plan as described in note 13(b). At the discretion of the Board of
Directors, the Restricted Shares and Performance Shares to which a grantee is entitled may be settled by the Company
in Shares or in an amount of cash equal to the fair market value of such Shares, or a combination of the foregoing.
The Company is accounting for half of the Restricted Shares and Performance Shares as employee equity settled awards
whereby the compensation cost is determined based on the grant date fair value and is recognized as an expense with a
corresponding increase to contributed surplus in equity over the period that the employees unconditionally become entitled
to payment. The amount recognized as an expense is adjusted to reflect the number of awards for which the related
service and non-market vesting conditions are expected to be met. For the remaining 50% of Restricted and Performance
Shares that can be settled in either cash or common shares at the employees option, the Company accounts for the award
as cash-settled share based compensation. Compensation expense is recorded over the vesting period based on the
estimated fair value at the date of grant. The fair value of this 50% portion of the Restricted and Performance Shares is
subsequently re-measured at each reporting date with any change in fair value reflected in share based compensation
expense in the statement of comprehensive income. The liability associated with cash-settled awards is recorded in
accounts payable and accrued liabilities, for amounts expected to be settled within one year, and in non-current liabilities
for amounts to be settled in excess of one year.
52
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
(q) New accounting policies
IFRS 16, Leases ("IFRS 16")
Effective January 1, 2019, the Company adopted IFRS 16, eliminating the dual accounting model for lessees which
distinguished 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 (ROU) 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. As a result of adopting
IFRS 16, the Company’s operating leases, which are principally comprised of its warehouse facilities and automobiles,
are recorded in the statements of financial position as a lease obligation with a corresponding ROU asset.
At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a
lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
To assess whether a contract conveys the right to control the use of an identified asset, the Company assess whether:
•
•
•
the contract involves the use of an identified asset - this may be specified explicitly or implicitly, and should
be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier
has a substantive substitution right, then the asset is not identified;
the Company has the right to obtain substantially all of the economic benefits from use of the asset throughout
the period of use; and
the Company has the right to direct the use of the asset. The Company has this right when it has the decision-
making rights that are most relevant to changing how and for what purpose the asset is used.
The Company has applied this approach to contracts entered into or changed on or after January 1, 2019.
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset
is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made
at or before the commencement date, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the
earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of the
right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of-
use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease
liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement
date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s
incremental borrowing rate.
Lease payments included in the measurement of the lease liability comprise:
•
•
•
•
•
fixed lease payments;
amounts expected to be payable under a residual value guarantee;
the exercise price under a purchase option that the Company is reasonably certain to exercise;
lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension
option; and
penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.
53
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
New accounting policy (continued)
The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change
in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the
amount expected to be payable under a residual value guarantee or if the Company changes its assessment of whether it
will exercise a purchase, extension or termination option.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-
of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
Some of the Company’s leases of office buildings contain extension options exercisable up to one year before the end of
the non-cancellable contract period. The extension options held are exercisable only by the Company and not by the lessors.
The Company assesses at lease commencement whether it is reasonably certain to exercise the extension options. The
Company reassesses whether it is reasonably certain to exercise the options if there is a significant event or significant
change in circumstances within its control. The assessment of whether the Company is reasonably certain to exercise such
options impacts the lease term, which significantly affects the amount of lease liabilities and right-of-use assets recognized.
The Company leases many assets including buildings, automobiles and forklifts. Information about leases for which the
Company is a lessee is presented below.
Right-of-use assets
2018 restated
Balance at January 1
Additions
Disposals
Depreciation charge for the year
Foreign currency transaction
Balance at December 31 restated
2019
Balance at January 1
Additions
Acquisition (Note 4)
Disposals
Depreciation charge for the year
Foreign currency transaction
Balance at December 31
Buildings
Automobiles
Forklifts
Total
69,553
20,941
—
(15,147)
5,673
81,020
81,020
18,698
4,493
(2,857)
(16,693)
(3,579)
81,082
12,793
6,343
(291)
(4,600)
1,135
15,380
15,380
2,775
—
(274)
(4,913)
(654)
12,314
470
509
—
82,816
27,793
(291)
(196)
(19,943)
58
841
6,866
97,241
841
—
—
—
(222)
(33)
586
97,241
21,473
4,493
(3,131)
(21,828)
(4,266)
93,982
54
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
New accounting policy (continued)
Lease liabilities
Maturity analysis - contractual undiscounted cash flows
Less than one year
One to five years
More than five years
Total undiscounted lease liabilities
Lease liabilities included in the statement of financial position
Current
Non-current
Transition
December 31,
2019
Restated
December
31, 2018
Restated
January
1, 2018
25,504
82,442
13,734
121,680
108,699
24,973
83,726
25,171
85,552
18,128
128,850
112,473
24,373
88,100
20,607
72,640
16,809
110,056
95,961
16,595
79,366
The Company has applied IFRS 16 using the retrospective approach, under which the comparative information presented
for 2018 has been restated.
At transition, for leases classified as operating leases, lease liabilities were measured at the present value of the lease
payments, discounted at the Company’s incremental borrowing rate at the lease commencement date. Right-of-use assets
are measured at their carrying amount as if IFRS 16 had been applied since the commencement date, discounted using
the Company’s incremental borrowing rate at the lease commencement date.
On transition to IFRS 16, the Company elected to apply the practical expedient to use hindsight when determining the
lease term if the contract contained options to extend or terminate the lease.
The Company leases a number of automobiles and forklifts. These leases were classified as finance leases under IAS 17.
For these finance leases, the carrying amount of the right-of-use asset and the lease liability at January 1, 2019 were
determined at the carrying amount of the lease asset and lease liability under IAS 17 immediately before that date.
Impacts on transition
On transition to IFRS 16, the Company recognized additional right-of-use assets and additional lease liabilities, recognizing
the difference in retained earnings. The line items that were restated on transition to IFRS 16 are summarized below:
55
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
Impacts on transition (continued)
Consolidated Statements of Financial Position
Non-current assets:
Property, plant and equipment
Right of use assets
Deferred income taxes
Total non-current assets
Total assets
Current Liabilities
Accounts payable and accrued liabilities
Lease obligation
Total current liabilities
Non-current liabilities
Lease obligation
Other liabilities
Total non-current liabilities
Total Liabilities
Shareholder's Equity
Retained Earnings
Accumulated other comprehensive income
Shareholders' equity
Total shareholders' equity and liabilities
As Filed
December 31,
2018
IFRS 16
Adjustments
Restated
December 31,
2018
24,184
—
3,051
102,040
444,760
39,387
1,529
155,573
2,018
1,237
3,255
(3,827)
97,241
3,793
97,207
97,207
(171)
22,844
22,673
86,082
(1,055)
85,027
158,828
107,700
35,530
29,411
285,932
444,760
(9,877)
(616)
(10,493)
97,207
20,357
97,241
6,844
199,247
541,967
39,216
24,373
178,246
88,100
182
88,282
266,528
25,653
28,795
275,439
541,967
56
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
Impacts on transition (continued)
Consolidated Statements of Financial Position
Non-current assets:
Property, plant and equipment
Right of use assets
Deferred income taxes
Total non-current assets
Total assets
Current Liabilities
Accounts payable and accrued liabilities
Lease obligation
Total current liabilities
Non-current liabilities
Lease obligation
Other liabilities
Total non-current liabilities
Total Liabilities
Shareholder's equity
Retained earnings
Accumulated other comprehensive income
Shareholders' equity
Total shareholders' equity and liabilities
As Filed
January 1,
2018
IFRS 16
Adjustments
Restated
January 1,
2018
20,650
—
5,477
96,371
372,903
38,254
1,281
132,230
1,068
779
1,847
134,077
9,919
9,693
238,826
372,903
(2,606)
82,816
3,433
83,643
83,643
(198)
15,314
15,116
78,298
(334)
77,964
93,079
(9,437)
—
(9,437)
83,643
18,044
82,816
8,910
180,014
456,546
38,056
16,595
147,346
79,366
445
79,811
227,157
482
9,693
229,389
456,546
57
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
Impacts on transition (continued)
Consolidated Statements of Comprehensive Income
Cost of goods sold
Gross Profit
Operating expenses
Selling and distribution
Total operating expenses
Finance expense
Net finance expense
As Filed
December 31,
2018
IFRS 16
Adjustments
Restated
December 31,
2018
(933,719)
200,548
(118,215)
(154,213)
(4,350)
(3,398)
715
715
(933,004)
201,263
3,282
3,282
(4,581)
(4,581)
(114,933)
(150,931)
(8,931)
(7,979)
Profit before income taxes
42,937
(584)
42,353
Income tax expense:
Deferred
Total income tax expense
(2,491)
(10,778)
144
144
(2,347)
(10,634)
Profit for the period
32,159
(440)
31,719
Other comprehensive income(loss):
Exchange differences translating foreign operations
19,718
(616)
19,102
Total comprehensive income for the period
51,877
(1,056)
50,821
Basic profit per share
Diluted profit per share
1.50
1.49
(0.02)
(0.02)
1.48
1.47
58
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
3. Significant accounting policies (continued):
Impacts on transition (continued)
Consolidated Statements of Cash Flows
Cash flow from operating activities:
Profit for the period
Adjustments for:
Depreciation and amortization
Income tax expense
Net finance expense
Changes in non-cash working capital:
Accounts payable and accrued liabilities
Net cash provided by (used in) operating activities
Cash flow from financing activities:
Principle payments on finance lease obligation
Net cash provided by (used in) financing activities
Impacts for the period
As Filed
December 31,
2018
IFRS 16
Adjustments
Restated
December 31,
2018
32,159
(440)
31,719
6,847
10,778
3,398
44,209
(1,922)
(40,195)
4,015
18,690
(144)
4,582
22,688
(629)
(629)
22,058
25,537
10,634
7,980
66,897
(2,551)
(40,824)
26,073
(1,396)
6,120
(22,058)
(22,058)
(23,454)
(15,938)
In relation to those leases under IFRS 16, the Company recognized depreciation and interest costs, instead of operating
lease expense. During the year ended December 31, 2019 the Company recognized $20.2 million (2018 - $18.6) of
depreciation expense and $4.5 million (2018 - $4.6 million) of interest expense from leases.
4. Business acquisitions:
(a) Diamond Hardwoods acquisition
On March 9, 2020, the Company acquired through one of its wholly owned subsidiaries substantially all of the assets and
assumed certain liabilities of Diamond Hardwoods ("Diamond") for total estimated consideration for $4.0 million (US$3.0 million).
Diamond operates two locations in Northern California and is engaged in the distribution of architectural building products to
contractors, industrial manufacturers, and retail customers. The acquisition will be accounted for as a business combination
using the acquisition method, with the Company being the acquirer and Diamond being the acquiree, and where the assets
acquired and liabilities assumed are recorded at their fair values at the acquisition date.
(b) Pacific Mutual Door Company acquisition
On October 28, 2019, the Company acquired through one of its wholly owned subsidiaries substantially all of the assets and
assumed certain liabilities of Pacific for total estimated consideration for $48.0 million (US$36.2 million). Pacific operates four
distribution centers in the US and is engaged in the distribution of interior and exterior doors, custom millwork, and other ancillary
architectural building products to customers that supply end products to the residential and commercial construction markets.
The acquisition will be accounted for as a business combination using the acquisition method, with the Company being the
acquirer and Pacific being the acquiree, and where the assets acquired and liabilities assumed are recorded at their fair values
at the acquisition date.
59
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
4. Business acquisitions (continued):
(b) Pacific Mutual Door Company acquisition (continued)
The fair value of Pacific's identified assets and liabilities assumed in accordance with the acquisition method are as follows:
Cash consideration
Assets acquired and liabilities assumed:
Accounts and other receivables
Inventories
Prepaid expenses
Property plant and equipment
Right of use asset
Intangible assets - customer relationships
Accounts payable and accrued liabilities
Lease obligation
Identifiable net assets acquired
Goodwill
Net assets acquired
US$
$36,199
7,332
6,349
87
1,059
3,387
11,000
(2,137)
(3,387)
23,690
12,510
$36,200
CAD$
$48,028
9,728
8,424
114
1,405
4,493
14,595
(2,837)
(4,493)
31,429
16,599
$48,028
The goodwill of $16.6 million (US$12.5 million) is attributable primarily to the skills and talent of Pacific'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 $14.6 million (US$11.0 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 purchase price was financed by the Company's US credit facility. In connection with the acquisition, the Company amended
its US credit facility, see note 12 for further details.
Had the Pacific Acquisition occurred on January 1, 2019 management estimates that the Company’s consolidated sales would
have been approximately $1,249.2 million and profit before income tax would have been approximately $45.1 million for the
year ended December 31, 2019. Included in these consolidated financial statements for the year ended December 31, 2019
are sales of $12.7 million (US$9.6 million) and profit before income tax of $0.5 million (US$0.4 million) relating to Pacific.
Transaction costs of $0.4 million were incurred in connection with the acquisition, and have been expensed in the consildated
statements of comprehensive income.
(c) Other acquisitions
On January 28, 2019, the Company acquired through one of its wholly owned subsidiaries substantially all of the assets and
assumed certain liabilities of Far West Plywood Company ("Far West") for a total value of $4.8 million (US$3.6 million). The
fair value of Far West's identified assets acquired consisted of accounts and other receivables of $0.5 million (US$0.4 million),
inventories of $1.3 million (US$0.9 million), property, plant and equipment of $0.1 million (US$0.1 million) and accrued liabilities
of $0.4 million (US$0.3 million). Goodwill of $3.4 million (US$2.5 million) was recognized as part of this acquisition and is
attributable to the skills and talent of Far West's workforce, value of the customer base, and an increase in market share. The
goodwill is deductible for tax purposes.
On June 11, 2018, the Company acquired through one of its wholly owned subsidiaries certain of the distribution assets and
assumed certain liabilities of Atlanta Hardwoods Corporation ("Atlanta") for a total value of $4.8 million (US$3.7 million). The
fair value of Atlanta's identified assets acquired consisted of accounts and other receivables of $1.4 million (US$1.1 million),
inventories of $3.3 million (US$2.6 million), property, plant and equipment of $0.4 million (US$0.3 million) and accrued liabilities
of $0.2 million (US$0.1 million).
60
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
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,
2019
December 31,
2018
January 1,
2018
$
$
(15,118) $
121,548
$
283,445
(1,547) $
$
112,940
275,439
(313)
91,146
229,389
389,875
$
386,832
$
320,222
The terms of the Company’s US and Canadian credit facilities are described in note 12. 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, 2019 and December 31, 2018, and accordingly there were no restrictions on
distributions arising from non-compliance with financial covenants.
Dividends and share repurchases are some of the ways the Company manages its capital. Dividends are declared and shares
are repurchased after consideration of a variety of factors including the outlook for the business and financial leverage.
On November 8, 2019, the Company declared a cash dividend of $0.085 per common share to shareholders of record as of
January 20, 2020. The dividend was paid to shareholders on January 31, 2020. On March 19, 2020, the Company declared
a cash dividend of $0.085 per common share to shareholders of record as of April 16, 2020, to be paid on April 30, 2020.
6. Financial instruments:
Financial instrument assets include cash and current and non-current receivables, which are designated as subsequently
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 subsequently measured at amortized cost.
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's cash and cash equivalents are classified as level 1 and all other financial instruments are classified as level
2 of the fair value hierarchy.
Fair values of financial instruments
The carrying values of cash and cash equivalents, accounts and other receivables, income taxes receivable, 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, other liabilities 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.
61
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
6. Financial instruments (continued):
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 $131.0 million at December 31, 2019 (December 31, 2018 - $115.2
million, January 1, 2018 - $96.4 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 2.0% (December 31, 2018 - 2.0%) of trade accounts
receivable and customer notes receivable at December 31, 2019. 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.
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%.
62
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
6. Financial instruments (continued):
Financial risk management (continued):
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.
(i) Credit risk (continued):
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, 2019, 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 $194.8 million (US$150.0 million). These
credit facilities can be drawn down to meet short-term financing requirements, including fluctuations in non-cash working
capital. The amount made available under the revolving credit facilities is limited to the extent of the value of certain
accounts receivable and inventories held by subsidiaries of the Company, as well as by continued compliance with credit
ratios and certain other terms under the credit facilities. See note 12 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 3 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, 2019 bank indebtedness balance of $121.6 million, a 1% increase or decrease in the interest
rates charged would result in a decrease or increase to profit after tax by approximately $0.9 million.
Currency risk
As the Company conducts business in both Canada and the United States it is exposed to currency risk. Most of the
products sold by the Company in Canada are purchased in U.S. dollars from suppliers in the United States. Although the
Company reports its financial results in Canadian dollars, approximately 90% 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.
At December 31, 2019, the primary exposure to foreign denominated financial instruments was in the Company’s Canadian
subsidiaries and relates to U.S. dollar cash balances, accounts receivable from U.S. customers (2019 - US$0.9 million,
2018 - US$0.5 million) and accounts payable to U.S. suppliers (2019 - US$1.3 million, 2018 - US$0.2 million).
63
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
6. Financial instruments (continued):
Currency risk (continued):
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 profit for the years ended December 31, 2019 or December 31, 2018.
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, 2019 and December 31, 2018 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.
64
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
7. Accounts and other receivables:
The following is a breakdown of the Company’s current and non-current receivables and represents the Company’s principal
exposure to credit risk.
Trade accounts receivable - Canada
Trade accounts receivable - United States
Sundry receivable
Current portion of non-current receivables
Less:
Allowance for credit loss
Non-current receivables:
Employee housing loans
Customer notes
Security deposits
Less:
Current portion, included in accounts receivable
The aging of trade receivables is:
Current
1 - 30 days past due
31 - 60 days past due
60+ days past due
December 31,
2019
December 31,
2018
January 1,
2018
$
13,401
98,877
4,386
1,257
117,921
$
13,131
97,907
4,973
802
116,813
13,458
79,880
6,745
1,360
101,443
4,182
4,808
4,180
113,740
$
112,005
$
97,263
$
120
1,065
2,448
3,633
1,257
2,376
$
$
136
570
1,953
2,659
802
1,857
$
257
921
1,541
2,719
1,360
1,359
December 31,
2019
December 31,
2018
January 1,
2018
$
77,922
20,016
8,061
6,280
$
76,206
22,549
7,037
5,246
112,279
$
111,038
$
65,635
19,075
5,204
3,424
93,338
$
$
$
$
$
$
The Company determines its allowance for credit loss using both specific identification of customer accounts and the expected
credit loss model. The Company uses an estimate of the net recoverable amount for specific customer accounts it has identified
and the effective credit loss model for the remaining customer accounts based on historical experience of uncollectable amounts.
Accounts that are considered uncollectable are written off. The total allowance at December 31, 2019 was $4.2 million
(December 31, 2018 - $4.8 million, January 1, 2018 - $4.2 million). The amount of the allowance is determined 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.
Bad debt expense, net of recoveries, for the year ended ended December 31, 2019 was $2.2 million which equates to 0.2%
of sales (for the year ended December 31, 2018 - $0.6 million, being 0.05% of sales).
65
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
8.
Inventories:
Raw materials
Work in process
Goods in-transit
Finished goods
December 31,
2019
December 31,
2018
January 1,
2018
$
$
1,171
3,821
8,442
194,501
$
780
4,584
12,630
205,791
1,306
4,950
7,947
157,903
$
207,935
$
223,785
$
172,106
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 statements 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
2019
2,453
$
913,363
46,578
959,941
$
2018
2,065
883,425
49,579
933,004
$
$
66
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
9. Property, plant and equipment:
Leased
vehicles
and
forklifts
Buildings,
machinery
and
equipment
Land
Leasehold
improvements
Total
Cost
Balance at January 1, 2018
Impact of changes in accounting (Note 3)
Balance at January 1, 2018, restated
Additions
Acquisition of Atlanta
Disposals
Adjustments:
Foreign currency translation
Balance at December 31, 2018
Additions
Acquisition of Far West and Pacific (note 4)
Disposals
Adjustments:
Foreign currency translation
$
770 $
—
770
—
—
—
4,222 $
(4,222)
—
—
—
—
30,377 $
—
30,377
3,696
390
(896)
68
838
18
—
—
(40)
—
—
—
—
—
—
2,567
36,134
2,952
1,520
(1,530)
1,299 $ 36,668
(4,222)
32,446
4,076
390
(927)
—
1,299
380
—
(31)
74
2,709
1,722
351
—
(131)
38,694
3,321
1,520
(1,661)
(1,672)
(53)
(1,765)
Balance at December 31, 2019
$
816 $
— $
37,404 $
1,889 $ 40,109
Accumulated depreciation
Balance at January 1, 2018
Impact of changes in accounting (Note 3)
Balance at January 1, 2018, restated
Depreciation
Disposals
Adjustments:
Foreign currency translation
Balance at December 31, 2018
Depreciation
Disposals
Adjustments:
Foreign currency translation
Balance at December 31, 2019
Net book value:
January 1, 2018
December 31, 2018 restated (Note 3(q))
December 31, 2019
$
$
$
$
$
— $
—
—
—
—
1,616 $
(1,616)
—
—
—
13,479 $
—
13,479
3,387
(740)
—
—
—
—
—
—
—
—
—
—
—
—
1,146
17,272
3,558
(1,456)
923 $ 16,018
(1,616)
14,402
3,518
(769)
—
923
131
(29)
40
1,186
1,065
173
(124)
18,337
3,731
(1,580)
—
(809)
(770)
(39)
— $
— $
18,604 $
1,075 $ 19,679
770 $
838 $
816 $
— $
— $
— $
16,898 $
18,862 $
18,800 $
376 $ 18,044
657 $ 20,357
814 $ 20,430
67
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
9. Property, plant and equipment (continued):
Depreciation of property, plant and equipment for the year ended December 31, 2019 was $3.7 million (2018 - $4.8 million)
and is included in the statement of comprehensive income as follows:
Cost of sales
Selling and distribution
Administration
2019
1,766 $
1,708
257
3,731 $
2018
1,614
2,936
224
4,774
$
$
Gains and losses on disposal of property, plant and equipment for the year ended December 31, 2019 was a net gain of $0.2
million (2019 - net gain of $0.2 million) and is included in selling and distribution in the statement of comprehensive income.
10. Intangible assets:
Cost
Balance at January 1, 2018
Additions
Adjustments:
Foreign currency transaction
Balance at December 31, 2018
Additions
Acquisition of Pacific (Note 4(a))
Adjustments:
Foreign currency transaction
Balance at December 31, 2019
Accumulated amortization
Balance at January 1, 2018
Amortization
Adjustments:
Foreign currency transaction
Balance at December 31, 2018
Amortization
Adjustments:
Foreign currency transaction
Balance at December 31, 2019
Net book value:
January 1, 2018
December 31, 2018
December 31, 2019
Internally
generated
software
Customer
relationships
318
280
38
636
282
—
(28)
890
—
6
—
6
36
(2)
40
318
630
850
$
$
$
$
$
$
$
$
19,775
—
1,729
21,504
—
14,595
(1,339)
34,760
2,878
2,067
361
5,306
2,358
(302)
7,362
16,897
16,198
27,398
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
68
Total
20,093
280
1,767
22,140
282
14,595
(1,367)
35,650
2,878
2,073
361
5,312
2,394
(304)
7,402
17,215
16,828
28,248
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
10. Intangible assets (continued):
Amortization of intangible assets for the year ended December 31, 2019 was $2.4 million (2018 - $2.1 million) and is
included in selling and distribution expenses in the statement of comprehensive income.
11. Goodwill:
Balance at January 1, 2018
Adjustments:
Foreign currency translation
Balance at December 31, 2018
Acquired through acquisitions (Note 4)
Adjustments:
Foreign currency translation
Balance at December 31, 2019
12. Bank indebtedness:
Cheques issued in excess of funds on deposit
Credit facility, Hardwoods LP
Credit facility, Hardwoods USLP II
(December 31, 2019 - US$81,650
December 31, 2018 - US$74,369
January 1, 2018 - US$66,323)
$
51,670
4,450
56,120
19,966
(3,112)
$
72,974
December 31,
2019
December 31,
2018
January 1,
2018
$
$
2,489
13,013
$
1,011
10,626
866
7,270
106,047
101,303
83,010
$
121,548
$
112,940
$
91,146
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”).
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")
The LP Credit Facility consists of a revolving credit facility of $25.0 million with the amount made available 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. The LP Credit Facility matures in August 2021 and can be prepaid anytime with no prepayment penalty. 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, 2019, the LP Credit Facility
has unused availability of $10.3 million, before cheques issued in excess of funds on deposit of $2.5 million (December 31,
2018 - $11.9 million, cheques issued in excess of funds on deposit - $1.0 million).
69
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
12. Bank indebtedness (continued):
Hardwoods USLP II Credit Facility ("USLP II Credit Facility")
In connection with the acquisition of Pacific (note 4), on October 28, 2019 the Company amended The USLP II Credit Facility.
The amendment included an increase to the revolver from US$125 million to US$150 million, and lowered borrowing rates.
The amount made available under the credit facility is limited to 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
USLP II Credit Facility matures in October 2024 and can be prepaid at any time with no prepayment penalty. The USLP II Credit
Facility is guaranteed by certain of the Company's subsidiaries.
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$15.0 million at any time.
In addition to the financial covenants, the ability of the Company's US subsidiaries to pay distributions and dividends, complete
acquisitions, make additional investments, take on additional indebtedness, allow its assets to become subject to liens, complete
affiliate transactions and make capital expenditures are limited and subject to the satisfaction of certain conditions.
At December 31, 2019, the USLP II Credit Facility has unused availability of $59.5 million (US$45.8 million), before cheques
issued in excess of funds on deposit of nil. At December 31, 2018, the USLP II Credit Facility had unused availability of $66.5
million (US$48.7 million), before cheques issued in excess of funds on deposit of nil.
The Company has letters of credit outstanding at December 31, 2019 totaling $3.6 million (US$2.8 million) (December 31, 2018
- $2.6 million (US$1.9 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, 2019 were 4.1% and
4.4% (2018 - 3.5% and 3.6%) for the LP and USLP II Credit Facilities, respectively.
13. Share capital:
(a) Share capital
At December 31, 2019, 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, 2017
Issued pursuant to long term incentive plan
Balance at December 31, 2018
Issued pursuant to long term incentive plan
Share repurchase
Balance at December 31, 2019
Shares
Total
21,419,985
119,131
$
21,539,116
87,491
(271,280)
113,788
2,736
116,524
1,016
(3,703)
21,355,327
$
113,837
At December 31, 2019 the Company had $260,000 (December 31, 2018 and January 1, 2018 - nil) accrued in accounts payable
related to share repurchase obligations. This amount was settled in January 2020.
(b) Long Term Incentive Plan (“LTIP”):
The Company has an approved long term incentive plan which authorizes the issuance of a maximum of 2,100,000 Shares
to qualified trustees, directors, officers, employees and consultants to align the interests of such persons with the interests
of shareholders.
70
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
13. Share capital (continued):
(b) Long Term Incentive Plan (“LTIP”) continued:
The LTIP is comprised of Restricted Shares and Performance Shares. Each Restricted Share will entitle the holder to be
issued the number of Shares of the Company designated in the grant agreement for that Restricted Share. Shares issuable
pursuant to Restricted Share grants will vest and be issued on the date or dates determined by the Company’s Compensation
Committee and set out in the grant agreement, provided such date or dates are not later than December 31st following the
third anniversary of the date the Restricted Share was granted. Each Performance Share will entitle the holder to be issued
the number of Shares designated in the grant agreement for the Performance Share multiplied by a payout multiplier which
may range from a minimum of zero to a maximum of two depending on the achievement of the defined performance criteria.
Shares issuable pursuant to Performance Shares will be issued on the date set out in the grant agreement if the performance
criteria are satisfied, provided such date is not later than December 31st following the third anniversary of the date the
Performance Share was granted.
The Shares to which a grantee is entitled under a Restricted Share or Performance Share may, at the discretion of the
Board of Directors, be settled by the Company in Shares issued from treasury, Shares purchased by the Company in the
secondary market, in an amount of cash equal to the fair market value of such Shares, or any combination of the foregoing.
Grantees have 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, 2019 the fair value of the Restricted Shares and Performance Shares estimated
to be settled in the future in cash was $1.1 million (December 31, 2018 - $0.4 million) and this value has been 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 or employees pursuant to the plan and other Share
compensation arrangements of the Company within a one year period, or at any one time, may not exceed 10% of the
issued and outstanding Shares.
A continuity of the LTIP Shares outstanding is as follows:
Balance at December 31, 2017
LTIP shares issued during the year
LTIP shares settled
Balance at December 31, 2018
LTIP shares issued during the period
LTIP shares forfeited during the period
LTIP shares settled
Balance at December 31, 2019
71
Performance
Shares
Restricted
Shares
121,506
55,079
(88,050)
88,535
67,181
(41,648)
—
114,068
116,650
94,373
(82,509)
128,514
136,763
(1,375)
(105,427)
158,475
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
13. Share capital (continued):
(b) Long Term Incentive Plan (“LTIP”) continued:
LTIP compensation expense of $2.2 million was recognized in the consolidated statements of comprehensive income for
year ended ended December 31, 2019 (December 31, 2018 - $2.1 million) . The equity classified portion of the LTIP
compensation expense was $1.4 million for year ended December 31, 2019 (December 31, 2018 - $2.6 million, January
1, 2018 - $1.4) and the liability classified expense was $0.8 million (December 31, 2018 - recovery of $0.5 million, January
1, 2018 - $0.5 million).
The key estimate in determining the compensation in any period is whether the performance criteria have been met and
the amount of the payout multiplier on the Performance Shares. The payout multiplier is reviewed and approved by the
Company’s compensation committee on an annual basis. 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 after one year.
(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,
2019 of $29.6 million (December 31, 2018 - $31.7 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 repurchased
Effect of shares issued during the year:
Pursuant to long-term incentive plan
Weighted average common shares - basic
Effect of dilutive securities:
Long-term incentive plan
December 31,
2019
December 31,
2018
21,539,116
(160,085)
21,419,985
—
240
34,863
21,379,271
21,454,848
109,652
124,331
Weighted average common shares - diluted
21,488,923
21,579,179
14. Income taxes:
Current tax expense
Deferred tax expense
2019
2018
$
$
(7,227) $
(2,293)
(8,287)
(2,347)
(9,520) $
(10,634)
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, 2019 is 26.9% (2018 - 26.9%) and in the
United States is 26.0% (2018 - 26.0%). 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:
72
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
14. Income taxes (continued):
Profit before income tax
Statutory rate
Computed tax expense at statutory rate
Effect of tax rate differentials and other restructuring
Non-deductible expenses
Prior year tax true-ups
Change in unrecognized deferred tax assets
Other
2019
2018
$
39,101
$
42,353
26.0%
26.0%
(10,166)
1,116
(547)
127
46
(96)
(11,011)
962
350
300
(1,081)
(154)
Income tax expense
$
(9,520) $
(10,634)
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, net
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
Deferred tax asset
December
31, 2019
December
31, 2018
January 1,
2018
$
$
1,208 $
466
2,433
6,055
—
516
270
(67)
10,881
(777)
(5,643)
(6,420)
4,461 $
1,115 $
764
2,672
4,722
1,047
115
518
91
11,044
(72)
(4,128)
(4,200)
6,844 $
1,014
532
1,867
4,049
3,088
252
746
104
11,652
(80)
(2,662)
(2,742)
8,910
Deferred tax assets and liabilities are measured at the substantively enacted rates expected to apply at the time such temporary
differences are forecast to reverse. At December 31, 2019, the Company and its subsidiaries have operating loss carry forwards
for income tax purposes of approximately $1.6 million in Canada that may be utilized to offset future taxable income
(December 31, 2018 - $0.4 million). These losses, if not utilized, will expire in 2040. The Company’s US subsidiaries have
no operating loss carry forwards.
At December 31, 2019, the Company and its Canadian subsidiaries have capital losses of approximately $23.0 million
(December 31, 2018 - $24.7 million, January 1, 2018 - $25.0 million), and suspended capital losses of approximately $44.7
million (December 31, 2018 - $44.7 million, January 1, 2018 - $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 $9.0 million (December 31, 2018 - $12.7 million, January 1, 2018 -
$8.6 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.
73
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
15. Finance income and expense:
Finance expense:
Interest on bank indebtedness
Accretion of finance lease obligation
Foreign exchange loss
Total finance expense
Finance income:
Interest on trade receivables, customer
notes, and employee loans
Foreign exchange gain
Total finance income
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.
Note
11
$
7
Restated (Note 3)
2018
2019
(4,721) $
(4,700)
(364)
(9,784)
626
—
626
(4,106)
(4,825)
—
(8,931)
513
439
952
$
(9,158) $
(7,979)
2019
2018
$
$
138,100
1,033,821
$
140,903
993,364
1,171,921
$
1,134,267
December 31,
2019
Restated (Note
3) December
31, 2018
January 1,
2018'
$
$
10,816
204,818
215,634
$
$
9,609
180,937
190,546
$
$
10,981
158,764
169,745
74
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
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
2019
2018
120,746 $
1,519
2,249
112,419
1,399
2,096
124,514 $
115,914
$
$
Employee benefit expenses are included in the consolidated statement of comprehensive income as
follows:
Cost of sales
Selling and distribution
Administration
(b) Pensions:
2019
26,260 $
71,235
27,019
2018
24,571
66,054
25,289
124,514 $
115,914
$
$
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, 2019,
Hardwoods USLP, Rugby Holdings LLC and Paxton Hardwoods LLC contributed and expensed $1.2 million
(US $0.9 million) (2018 - $1.0 million (US $0.8 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, 2019, Hardwoods LP contributed and expensed $0.4 million (2018 - $0.4
million) in relation to the LP plan.
75
HARDWOODS DISTRIBUTION INC.
Notes to the Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars)
Years ended December 31 2019 and 2018
18. Related party transactions:
The Company’s related parties include key management personnel and post-employment benefit plans for the employees of
the Company’s subsidiaries.
(a) Transactions with key management personnel:
Key management of the Company includes members of the Board of Directors, the President and Chief Executive Officer,
Chief Financial Officer, Senior Vice President and Vice Presidents. Key management personnel remuneration includes
the following expenses:
Short-term employee benefits:
Salaries and benefits including bonuses
Automobile benefit
LTIP Share compensation
Total remuneration
(b) Transactions with post-employment benefit plans:
2019
2018
$
$
3,583 $
40
1,603
5,226 $
3,732
40
1,595
5,367
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, 2019 or
December 31, 2018.
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, 2019.
76
Corporate Information
Directors
Robert J. Brown
Director
Officers
Robert J. Brown
President & Chief Executive Officer
Peter M. Bull
President, Blenheim Realty Ltd.
Lance R. Blanco
Senior Vice President, Corporate Development
Michelle Lewis
Principal, CapStreet Group
Faiz H. Karmally
Vice President and Chief Financial Officer
Jim Macaulay
Chief Financial Officer, Marvin Companies
Jason West
Vice President, Canada
E. Lawrence Sauder
Chair, Interfor Corporation
Dan A. Besen
Vice President, United States
William Sauder
President, Emax Investments Ltd.
Dan Figgins
Vice President, Imports
Rob Taylor
President, Sonepar North America
John Griffin
Vice President, Paxton
Graham Wilson
President, Grawil Consultants Inc.
Dave Hughes
Senior Vice President, Acquisitions
Drew Dickinson
President, Rugby
Head Office
Auditors
Investor Relations
#306 - 9440 202nd Street
Langley, BC Canada V1M 4A6 Vancouver, British Columbia
Telephone: 604-881-1988
Facsimile: 604-881-1995
KPMG LLP
Faiz H. Karmally
Chief Financial Officer
Telephone:604-881-1982
fkarmally@hardwoods-inc.com
Listings
The Toronto Stock Exchange
Trades under HDI
Transfer Agent
Computershare Trust
Hardwoods Distribution Inc. | Annual Report | 2019
77