2011
Annual Report
CONTENTS:
Financial Highlights 2011
Message to Shareholders
Management Discussion and Analysis Dated February 17, 2012
Consolidated Financial Statements
Annual Information Form Dated February 17, 2012
International Forest Products Limited
2
International Forest Products Limited
FINANCIAL HIGHLIGHTS
2011
2010
(in millions of dollars,
except share and per share amounts)
Financial Summary
Sales
EBITDA (1)
Net earnings (loss)
Per Share Data
Net earnings (loss) per common share
- basic
- diluted
Price range per share
$ High
$ Low
Book value per share
Cash Flow per share before working capital change
Weighted average shares outstanding (millions)
Financial Position
Total assets
Total debt (2)
Total shareholders’ equity
Invested capital (1)
758.0
47.0
(13.5)
(0.25)
(0.25)
7.49
3.50
7.00
0.81
53.6
614.8
110.7
390.8
501.5
625.6
53.6
(5.2)
(0.11)
(0.11)
6.25
3.21
7.34
0.86
47.1
614.6
156.0
347.5
519.2
Financial Ratios (%)
Return on average shareholders’ equity (1)
Return on average invested capital, adjusted (1)
Net debt as a % of invested capital, adjusted (1)
(3.6%)
(1.9%)
20.4%
(1.1%)
0.2%
29.7%
Notes:
1. See Glossary for definition.
2. Total debt, excluding short-term advances from the Seaboard partnership (2011 - $nil, 2010 - $15.7m)
“Business conditions in 2011 were similar to those of 2010.....in spite of these challenges,
Interfor moved ahead with a number of initiatives during the year which will serve the
Company well in the years ahead.”
Message to Shareholders – March 2012
For further highlights, please see the Message to Shareholders and Management’s
Discussion and Analysis on the following pages.
3
International Forest Products Limited
MESSAGE TO SHAREHOLDERS
OVERVIEW
Business conditions in 2011 were similar to those of 2010 as economic and political issues in the U.S. and
concerns over sovereign debt in Europe undermined confidence levels around the world. In spite of
these challenges, Interfor moved ahead with a number of initiatives during the year which will serve the
Company well in the years ahead.
Highlights for the year included:
• Production and sales volumes were up 14% and 15% respectively versus 2010;
• The Company’s “new look” was introduced;
• Sales to China increased by 64%;
• A $24 million capital upgrade was announced for the Grand Forks and Castlegar
sawmills;
• 8.2 million new Class A shares were issued; and
• Our financing agreements were extended to 2015.
These steps, along with others taken in prior years, have added to Interfor’s position in the industry and
will make the Company stronger and more profitable as markets recover.
I invite you to review the material covered in the next few pages and later in this report and to form your
own views on our progress. Please feel free to forward any comments you have to me directly at
duncan.davies@interfor.com
PRODUCTION AND SALES AHEAD OF 2010; FINANCIAL RESULTS OFF SLIGHTLY
Interfor took advantage of its strong market position to ramp up production and sales activity in 2011.
For the year, production volumes increased to 1.26 billion board feet from 1.11 billion board feet in 2010,
representing a capacity utilization rate of approximately 75% for the year.
In the B.C. Interior, the Company benefited from a full year of production at each of its facilities including
the Castlegar sawmill which resumed operations in mid-2010.
In the U.S., the Company’s sawmills at Molalla and Gilchrist, Oregon ran steadily throughout the year and
delivered strong results.
Production at the sawmills in Washington started the year strong but were negatively impacted in the
second half of the year by log availability and cost issues resulting from offshore pressure on log supply.
On the B.C. Coast, production levels were off slightly as log supply issues and other factors impacted
operating rates at the Hammond and Acorn sawmills.
Sales volumes kept pace with production during the year. Prices, however, were mixed.
4
After starting the year on a significant uptick, commodity prices tailed off in the second quarter as the
economic recovery in the U.S. stalled and domestic policy measures introduced in China affected credit
availability and activity levels in that market.
The Random Lengths’ Composite Index, which measures pricing levels for a basket of products, increased
from US$271 in the fourth quarter of 2010 to US$297 in the first quarter of 2011 before settling back to
the US$255-$270 range for the balance of the year. For the year, the RCLI was US$272, down from
US$284 in 2010.
More to the point for West Coast producers, the commodity benchmark SPF 2x4 was flat at US$255 in
2011 versus US$256 in 2010 while Hem-Fir studs were up slightly to US$285 versus US$263 in 2010.
Compounding the issue from a Canadian standpoint was an increase in the value of the C$ which came in
at US$1.011 in 2011 versus US$0.971 in 2010.
In financial terms, the benefits of higher production and sales volumes were more than offset by the
combination of lower prices, the high C$ and higher log costs in the U.S.
All-in, Interfor recorded a net loss of $13.5 million or $0.25 per share in 2011 on sales of $758 million
compared with a loss of $5.2 million or $0.11 per share on sales of $626 million in 2010. Excluding one-
time items and the effects of unrecognized tax assets, the net loss for the year was $6.4 million or $0.12
per share compared with a loss of $3.4 million or $0.07 per share in 2010. EBITDA, adjusted to exclude
one-time items, was $46.6 million in 2011 compared with $48.4 million in 2010.
NEW IDENTITY INTRODUCED
Interfor’s new identity – which is displayed in a number of places in this report – was introduced in May
to very positive reviews. The “new look” replaces the Company’s former Interfor, Adams Lake, Interfor
Pacific and CedarPrime brands and is a key element of our plan to fully leverage our size and presence in
the marketplace.
By all reports, the new identity has been well-received by customers, employees and other stakeholders.
We are looking forward to building on the positive elements of the new brand as we grow the Company
in the years ahead.
SALES TO CHINA CONTINUE TO INCREASE
Efforts to increase our presence in China continued to pay dividends in 2011 as shipments to that market
increased to 365 million board feet from 222 million board feet in 2010.
For the year, shipments to China represented a full 29% of Interfor’s total lumber sales compared to
20% in 2010.
We continue to believe the Chinese market holds tremendous potential. The efforts of the B.C. and
Canadian governments and by the industry to promote North American construction technology and
products fits well with China’s rapidly growing requirements.
Equally important, the growth in the Chinese market has enabled North American producers to increase
operating rates to a higher level than would otherwise have been possible given conditions in the U.S.
We remain committed to working with our industry counterparts and with the B.C. and Canadian
governments to develop the Chinese market and to growing our volumes to that market in the years
ahead.
5
CAPITAL UPGRADE ANNOUNCED FOR GRAND FORKS AND CASTLEGAR
The turnarounds achieved at our Grand Forks and Castlegar sawmills in recent years have been nothing
short of remarkable.
After being curtailed for more than two years, the Castlegar sawmill resumed operations in July 2010
following a number of changes to the operating regime at that mill. A similar transformation had taken
place at Grand Forks in 2009.
The credit for these changes is due fully to the management and crews at the two mills who found new
and constructive ways to work together. Other local stakeholders also contributed to the new spirit of
cooperation at Grand Forks and Castlegar.
The net result has been dramatic improvements in productivity, costs, quality and safety at the two mills.
Most significantly, both mills have made solid contributions to our financial results since resuming
operations.
Building on the positive climate that has been established at Grand Forks and Castlegar we announced
plans in November to move forward with a $24 million capital upgrade to the two mills.
The project at Grand Forks involves the installation of a new small log line to replace the two production
lines currently at the mill along with the funds to complete the installation of an automated lumber
grading system. The Grand Forks project is budgeted at $19 million and involves the installation of the
same technology installed recently at our Adams Lake facility.
The investment at Castlegar, which totals $5 million, consists of a series of high return projects including
an automated lumber grading system and other projects focused on the mill’s process control and
optimization systems.
The projects at Grand Forks and Castlegar will be completed by early 2013. When finished, the mills will
operate with a combined two-shift capacity of 375 million board feet per year.
EQUITY ISSUE BOLSTERS INTERFOR’S BALANCE SHEET; FINANCING AGREEMENTS
EXTENDED
In late March Interfor took advantage of a strong equity market by agreeing to a bought deal equity
issue with a group of Canadian underwriters. The transaction, which closed in early April, resulted in the
issuance of 8.2 million Class A Shares at a price of $7 per share. After accounting for issue costs,
Interfor received $54.9 million in net proceeds from the transaction.
At year-end, Interfor had net debt outstanding of $100.3 million compared with $146.7 million at the end
of 2010 and a net debt to invested capital ratio of 20% compared to 30% a year earlier.
Subsequent to the equity issue, agreement was reached with the members of our banking syndicate to
extend our credit facilities to July 2015. All other terms of our credit lines remained substantially the
same except for a reduction in pricing.
Maintaining a strong balance sheet has always been a key element of our management philosophy.
By adding to the Company’s equity base and extending our credit facilities we have further strengthened
the Company’s financial position.
We believe both moves will create significant value for our shareholders in the years ahead.
6
LONG-STANDING BOARD MEMBER ANNOUNCES RETIREMENT
Larry Bell, a member of our Board of Directors since 1998 and Lead Director since 2008, announced
recently that he would not be standing for re-election at the Company’s Annual General Meeting in May.
Larry’s steady hand and experience in financial and governance matters have been especially helpful over
the years, most particularly during the global financial crisis in 2008-9. His wise counsel will be missed.
On behalf of our Board and senior management I would like to extend our sincere thanks to Larry for his
contributions to the Company.
BUSINESS OUTLOOK IMPROVING BUT UNCERTAINTY REMAINS
Some positive signs are beginning to emerge in the U.S. and offshore laying the foundation for better
market conditions in 2012 and beyond.
In particular, improvements in economic activity in the U.S. along with better housing numbers are
beginning to create a more positive tone in that market. In addition, a pick-up in China is helping to
tighten demand/supply balances overall with higher prices evident on most items.
It is important, however, to keep things in context.
The housing recovery in the U.S. is fragile at best and the sovereign debt issue in Europe continues to
impact confidence levels around the world.
In the face of this uncertainty we believe it is prudent to maintain the same disciplined approach to
managing the business that has served us well in recent years.
At the same time, we are actively focused on those items under our control which need to be addressed
if we are going to reach our goal of becoming the most profitable, valuable and respected lumber
company in the world.
We’re convinced we are on the right track and look forward to making good progress in 2012.
Thank you for your patience and support.
Duncan K. Davies
President & Chief Executive Officer
March 2012
International Forest Products Limited
MANAGEMENT DISCUSSION AND ANALYSIS
Dated as of February 17, 2012
7
This Management’s Discussion and Analysis (“MD&A”) provides a review of Interfor’s financial performance for the year
ended December 31, 2011 relative to 2010, the Company’s financial condition and future prospects. The MD&A should be
read in conjunction with Interfor’s Annual Information Form and Consolidated Financial Statements for the years ended
December 31, 2011 and 2010 filed on SEDAR at www.sedar.com. The financial information contained in this MD&A has
been prepared in accordance with International Financial Reporting Standards (“IFRS”) except as noted herein. In this
MD&A, reference is made to EBITDA and Adjusted EBITDA. EBITDA represents earnings before finance costs, taxes,
depreciation, depletion, amortization, restructuring costs, other foreign exchange gains and losses, and impairments
(reversals) of plant and equipment (“asset write-downs”). Adjusted EBITDA represents EBITDA adjusted for other income
(expense) and other income of the investee company. The Company discloses EBITDA as it is a measure used by analysts
and Interfor’s management to evaluate the Company's performance. As EBITDA is a non-GAAP measure, it may not be
comparable to EBITDA calculated by others. In addition, as EBITDA is not a substitute for net earnings, readers should
consider net earnings in evaluating the Company's performance.
Unless otherwise noted, all financial references in this MD&A are in Canadian dollars.
References in this MD&A to “Interfor” and the “Company” mean International Forest Products Limited, together with its
subsidiaries.
FORWARD LOOKING INFORMATION
This report contains forward-looking statements. Forward-looking statements are statements that address or
discuss activities, events or developments that the Company expects or anticipates may occur in the future.
Forward-looking statements are included in the description of areas which are likely to be impacted by the
description of future cash flows and liquidity under the headings “Overview of 2011”, “Strong Financial
Position”, “Income Taxes”, “Financing Activities”, “Liquidity and Capital Resources”, and “Summary of
Contractual Obligations”; changes in accounting policy under the heading “Future Accounting Policy Changes”;
and in the description of economic conditions under the heading “Outlook”. These forward-looking statements
reflect management’s current expectations and beliefs and are based on certain assumptions including
assumptions as to general business and economic conditions in Canada, the U.S., Japan and China, as well as
other factors management believes are appropriate in the circumstances including an assessment of risks as
described under “Risks and Uncertainties”. Such forward-looking statements are subject to risks and
uncertainties and no assurance can be given that any of the events anticipated by such statements will occur
or, if they do occur, what benefit the Company will derive from them. A number of factors could cause actual
results, performance or developments to differ materially from those expressed or implied by such forward-
looking statements, including those matters described in this 2011 annual Management’s Discussion and
Analysis under “Risks and Uncertainties” and in Interfor’s current Annual Information Form available on
www.sedar.com. Accordingly, readers should exercise caution in relying upon forward-looking statements and
the Company undertakes no obligation to publicly revise them to reflect subsequent events or circumstance,
except as required by law.
OVERVIEW OF 2011
North American lumber demand remained weak in 2011 as weak economic conditions and excess housing
inventories in the U.S. continued to constrain new home construction. In contrast, higher lumber demand in
China helped to offset weak domestic demand and enabled the Company to increase production levels.
Chinese demand cooled in the second half of 2011 as the Chinese government took steps to address concerns
over inflation and an overheated housing market.
Against this backdrop of challenging economic conditions the Company did achieve a number of highlights in
2011:
•
•
Increased sales revenues of lumber, chips and logs, with substantial increases of lumber and log export
volumes to China;
Improved productivity rates, increased production and lowered manufacturing cost per unit;
• Generated EBITDA of $47.0 million for the year;
8
•
Increased capital spending on mills and roads to $36.1 million;
• Extended syndicated credit facilities to 2015 and reduced the pricing;
• Closed a public offering of 8,222,500 Class A Subordinate Voting shares for gross proceeds of $57.6 million,
strengthening the Balance Sheet;
•
Launched a new brand initiative to build the Company’s presence in the marketplace and support future
growth; and
• Received Board approval of the Kootenay Optimization Plan for $24 million to be spent over 2012 and
2013.
Markets and Pricing
The year commenced with positive signs based on growing U.S. and China market demand, relatively low North
American inventories, and improving North American lumber sales and chip prices. North American lumber
production levels increased in 2011 over 2010, however the North American and China markets softened during
the second half of the year 2011. North American and China lumber inventories began to grow and prices
declined through the second and third quarters; although prices did recover somewhat in the fourth quarter,
they never reached the highs of the first quarter, 2011. Additionally, our U.S. priced sales returns continued to
be impacted by the strong Canadian dollar which, relative to the U.S. dollar, strengthened by four percent in
comparison to 2010.
Lumber
• Structural Lumber
The U.S. market continues to be difficult with high home inventories, the continued overhang of
foreclosures and tight credit. 2011 annual housing starts in the U.S. were 607,000, a modest improvement
compared to 2010 at 587,000 units. In 2011, North American lumber producers ramped up production
and/or started up mills in anticipation of a faster U.S. recovery and ongoing rapid growth in China’s lumber
demand. However, lumber inventories in both North America and China continued to grow creating a
supply/demand imbalance. As a result, during the second half of 2011 producers began reducing
production. In Canada, while the economy was stronger than that of its U.S. neighbor, housing starts were
relatively flat in 2011 at 194,000 versus 190,000 units in 2010. In 2011 we saw the North American
production/capacity ratio rise through the third quarter before falling in the fourth quarter as producers
pulled back on production. In 2011 B.C. lumber sales to China have exceeded $1 billion compared to $668
million in 2010.
Lumber prices peaked in the first quarter of 2011 with the low inventories and high demand from China.
Although U.S. housing starts showed small incremental gains, China’s demand slowed significantly in the
second half of 2011 and prices began to fall through the second and third quarters with a slight recovery in
the fourth quarter. The average US$ price for Western SPF 2x4 #2&Btr for first quarter, 2011 was US$296
per mfbm compared to fourth quarter, 2011 at US$238 per mfbm, and US$255 per mfbm for the year,
2011 as compared to US$256 per mfbm in 2010, ending the last week of December, 2011 at US$261 per
mfbm.
9
US TOTAL HOME INVENTORY
Units: For sale at end of period
US HOUSING STARTS
Units: Millions
4,500
4,000
3,500
3,000
2,500
1.00
0.50
0.00
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009 2010 2011
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2009 2010 2011
BENCHMARK PRICE TRENDS
Western SPF (2 X 4 #2&Btr)
Units: US$ / Mfbm
350
250
150
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010 2011
Interfor Shipment Volumes to US and China
China
US
m
b
f
M
175,000
150,000
125,000
100,000
75,000
50,000
25,000
-
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2010 2011
Source: Random Lengths, used with permission
• Cedar
The 2011 North American market demand essentially remained flat with a slight decrease in pricing when
compared to 2010. The decrease in the year-over-year average price for knotty Western Red Cedar 2x6
was US$27 per mfbm; the annual average price in 2011 was US$976 per mfbm compared to US$1,003 in
2010.
10
BENCHMARK PRICE TRENDS
CEDAR (WRC 2 X 6 RL KD)
Units: US$ / Mfbm
1050
1000
950
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010 2011
Source: Random Lengths, used with permission
•
Japan
Exports increased over the prior year due in part to Japan’s post earthquake reconstruction. Housing starts
in 2011 are estimated to be 834,000 compared to 813,000 units in 2010. Compared to 2010, the average
2011 price for Hemlock Square 4-1/8”, as reported by Random Lengths, increased by US$8 per mfbm; the
annual average price in 2011 was US$783 per mfbm versus US$775 in 2010.
BENCHMARK PRICE TRENDS
HEMLOCK (Sq 4-1/8" 13' JP)
Units: US$ / Mfbm
800
775
750
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010 2011
Source: Random Lengths, used with permission
Logs and Residuals
Interfor log sales revenue in 2011 improved by 36% compared to 2010 with overall average prices higher by $5
per cubic metre. Sales volume in 2011 increased 25% over 2010 with the majority of the increase coming from
the Canadian market. Compared to 2010, chip and residual product revenues increased 22% year over year
due to higher chip prices and higher sales volumes generated from higher sawmill operating rates at our B.C.
Interior and U.S. mills.
Volatility of the Canadian Dollar
The Canadian dollar (“CAD$”) strengthened throughout the first half of 2011 against the US$ before weakening
in the second half of the year, ending the year at CAD$1.017 per US$1.00, down 2.3% from the end of 2010.
Year-over-year, the average CAD$ was stronger at $0.989 for the year 2011 compared to $1.030 for the year
2010.
The significance of the volatility of the CAD$ on Canadian lumber producers’ sales realizations is highlighted in
the following chart, which shows the average US$ price and CAD$ equivalent of a thousand board feet of
Western SPF 2x4 #2&Btr for the period 2007 through 2011.
Impact of CAD$ on Sales Realizations
Western SPF (2 X 4 #2&Btr)
(Source: Random Lengths and Bank of Canada)
CAD equivalent $/Mfbm
US $/Mfbm
Spot $CAD per US$1.00
2007
2008
2009
Monthly Average
2010
2011
m
b
f
M
/
s
r
a
l
l
o
D
400
350
300
250
200
150
100
Export Tax
11
$
D
A
C
:
$
S
U
t
o
p
S
1.50
1.40
1.30
1.20
1.10
1.00
0.90
0.80
As a result of the Softwood Lumber Agreement (“SLA”) implemented by the federal governments of Canada
and the United States on October 12, 2006, Canadian softwood lumber exporters pay an export charge when
the price of lumber is at or below US$355 per mfbm, as determined by the framing lumber composite price
(“RLCI”) produced by Random Lengths Publications Incorporated. The Province of B.C. has the right to choose
between an export charge only (“Option A”) or a lower export charge with a quota (“Option B”). The Province
of B.C. chose Option A for both the B.C. Coast and the B.C. Interior which results in the Company’s Canadian
lumber exports to the United States being subject to the following taxes:
Price (1)
Over US $355
US $336 - $355
US $316 - $335
US $315 or under
(1) Based on the prevailing RLCI
Export Tax (%)
Nil
5
10
15
Option A export charge remained at 15% all year, as a result of lower commodity lumber prices throughout
2011.
The Option A export charge varied in 2010 during May to July, from 10% to 0% based on the varying RLCI
thresholds reached, with the remaining months of 2010 at 15%.
On January 23, 2012, Canada and the U.S. signed a two year extension (from 2013 to 2015) to the 2006 SLA.
Softwood Lumber Agreement Arbitration
On October 8, 2010, the U.S. Trade Representative’s office filed a request for consultations with Canada under
the terms of the SLA over its concern that the province of British Columbia is charging too low a price for
certain grades of timber harvested on public lands in the B.C. Interior.
Under the terms of the SLA, consultations between the two governments were held but the matter was not
resolved and on January 18, 2011 the U.S. Trade Representative filed for arbitration by the London Court of
International Arbitration (“LCIA”). Decisions by the LCIA are final and binding on both parties.
In August, 2011, the U.S. Trade Representative filed a detailed statement of claim with the LCIA. In
November, 2011, B.C. lumber producers filed their statement of defense against the U.S. allegations that
Canada is exporting mountain pine beetle lumber at unfairly low prices. Oral arguments are to be heard
February 2012. The Company believes that B.C. and Canada are complying with their obligations under the
SLA.
12
As the U.S. arbitration request is still in preliminary stages the existence of any potential claim has not been
determined and no provision has been recorded in the financial statements as at December 31, 2011.
While the arbitration process is ongoing, export tax will continue to apply on all shipments of B.C. lumber to the
U.S.
Significant customer enters into creditor protection
On January 31, 2012, Catalyst Paper Corporation (“Catalyst”) announced that the company and certain of its
subsidiaries had obtained an Initial Order from the Supreme Court of British Columbia under the Companies’
Creditors Arrangement Act. Catalyst is the primary buyer of Interfor’s chips on the B.C. Coast, under long-term
purchase contracts. Catalyst is also a purchaser of Interfor’s pulp logs and other residuals.
Catalyst has indicated that the operations of Catalyst and its subsidiaries are intended to continue as usual, and
obligations to employees and suppliers during the restructuring process are expected to be met in the ordinary
course.
All trade accounts receivable outstanding as at December 31, 2011 have been collected in 2012 and therefore
no allowance was provided.
As at February 17, 2012 the trade accounts receivable at risk for non-payment totals approximately $0.4
million.
The outcome of Catalyst’s restructuring and any potential impact to the Company cannot be determined at this
point. The court has granted Interfor a security interest as a critical supplier, on all current and future products
purchased from Interfor.
Strong Financial Position
The Company continued to strengthen its financial position during 2011, ending the year with net debt of
$100.3 million or 20.4% of invested capital. In April, 2011, Interfor closed a public offering of 8,222,500 Class
A Subordinate Voting shares for gross proceeds of $57.6 million. In addition, cash flow from operations, after
working capital changes, for the year was positive $28.4 million.
In July, 2011, the Company amended and extended its syndicated credit facilities. The maturity dates of the
Operating Line and the Revolving Term Line were both extended to July 28, 2015. All other terms and
conditions of the lines remain substantially unchanged except for a reduction in pricing.
At December 31, 2011 the Company had unused available credit and cash of $159.7 million.
The Company spent $36.2 million in capital improvements on its mills, timber, roads and intangibles this year,
and management has received approval from the Interfor Board on its 2012 Capital plan. These investments
will enhance Interfor’s competitiveness and expansion into global markets, as it continues to balance production
against sales, while maintaining its focus on margin enhancement and cost containment.
REVIEW OF OPERATING RESULTS
Selected Annual Financial Information
1
Sales
–Lumber
–Logs
–Wood chips and other residual products
–Ocean freight and other3
Total Sales
13
International Financial
Reporting Standards
2011
2010
Previous Canadian GAAP2
2008
2009
2007
(millions of dollars except share, per share and
foreign exchange rate amounts)
538.1
108.4
68.4
43.1
482.0
288.6
79.8
56.2
7.7
60.4
34.3
6.4
297.4
103.6
30.6
5.6
434.5
118.6
50.2
7.7
758.0
625.6
389.8
437.2
611.0
Operating loss before restructuring costs and asset impairments
Operating loss
Net loss
Net loss per share – basic and diluted
Net loss, adjusted for certain one-time and other items4
(4.9)
(5.5)
(13.5)
(0.25)
(6.4)
(3.8)
(5.4)
(5.2)
(0.11)
(3.4)
(46.5)
(50.8)
(23.9)
(0.51)
(33.7)
Net loss per share, adjusted for certain one-time and other items – per share4
(0.12)
(0.07)
(0.72)
(33.5)
(68.4)
(55.4)
(1.18)
(32.8)
(0.70)
13.7
12.3
0.28
47.1
47.1
(25.1)
(27.1)
(13.3)
(0.28)
(11.0)
(0.23)
30.8
24.8
0.51
47.1
47.6
47.0
46.6
0.81
55.9
53.6
53.6
48.4
0.86
47.4
47.1
16.6
(6.4)
(0.46)
47.1
47.1
0.9891
1.0303
1.1420
1.0660
1.0750
1.0170
0.9946
1.0510
1.2180
0.9913
EBITDA8
Adjusted EBITDA8
Cash flow from operations per share5
Shares outstanding – end of period (millions)6
– weighted average (millions)
Average foreign exchange rate per US$1.007
Closing foreign exchange rate per US$1.007
1
2
3
4
5
6
7
8
Tables may not add due to rounding.
Years are not restated for conversion to IFRS.
Other revenues include ocean freight revenues of Seaboard which are included in the consolidated results from the date of acquisition
on January 5, 2011. The Company’s share of Seaboard results was previously recognized in equity income.
Net loss adjusted for certain one-time and other items represents the net loss before restructuring costs, foreign exchange gains and
losses, other income (expense), certain one-time items and the effect of unrecognized tax assets.
Cash generated from (used in) operations before taking account of changes in operating working capital.
As at February 17, 2012, the numbers of shares outstanding by class are: Class A Subordinate Voting shares – 54,847,176 Class B
Common shares – 1,015,779, Total – 55,862,955.
Rates are based on Bank of Canada closing foreign exchange rates per US$1.00.
The Company discloses EBITDA as it is a measure used by analysts and Interfor’s management to evaluate the Company's
performance. As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others. In addition, as EBITDA
is not a substitute for net earnings, readers should consider net earnings in evaluating the Company's performance. Adjusted EBITDA
represents EBITDA adjusted for other income and other income of an associate company.
EBITDA and Adjusted EBITDA can be calculated from the statements of operations as follows:
14
Net earnings (loss)
Add: Income taxes (recovery)
Finance costs
Depreciation, depletion and amortization
Other foreign exchange (gains) losses
Restructuring costs, asset impairments and other costs
(recoveries)
EBITDA
Deduct:
Other income
Other income of associate company
Adjusted EBITDA
1
Years are not restated for conversion to IFRS.
Volume and Price Statistics
(million fbm)
(million fbm)
Lumber sales
Lumber production1
Log sales2
Log production2
Average selling price – lumber3
Average selling price – logs2
Average selling price – pulp chips ($/thousand fbm)
($/thousand fbm)
($/cubic metre)
(thousand cubic metres)
(thousand cubic metres)
International
Financial Reporting
Standards
2011
2010
Previous Canadian GAAP1
2009
2008
2007
(13.5)
1.4
7.1
51.6
(0.2)
0.6
47.0
(millions of dollars)
(5.2)
0.5
10.4
46.0
0.3
1.6
53.6
(23.9)
(9.9)
7.8
38.2
-
4.4
16.6
0.4
-
46.6
-
5.2
48.4
23.0
-
(6.4)
(55.4)
(11.0)
5.1
41.0
(0.9)
34.9
13.7
1.4
-
12.3
(13.3)
(13.6)
(1.3)
49.7
7.3
2.0
30.8
6.0
-
24.8
2011
2010
2009
2008
2007
1,301
1,264
1,356
3,408
$413
$72
$46
1,132
1,110
1,081
2,661
$426
$67
$40
668
661
919
1,295
$432
$61
$40
503
498
1,319
1,881
$591
$74
$49
870
856
1,223
1,767
$499
$95
$49
Excludes lumber produced on a custom cutting basis for customers who have previously purchased the logs
1
2 B.C. operations
3 Gross sales before duties and export taxes
Comparison of Year ended December 31, 2011 to Year ended December 31, 2010
Interfor recorded a net loss of $13.5 million, or $0.25 per share for 2011, as compared to a net loss of $5.2
million, or $0.11 per share in 2010.
Included in 2010 results is an equity income inclusion of $6.1 million for a gain on disposal of capital assets by
an associate company, a change in unrecognized deferred tax assets of $5.1 million, and other one-time items.
Before restructuring costs, foreign exchange gains (losses), a change in unrecognized deferred tax assets (refer
to Income Taxes) and certain one-time items the Company’s net loss for 2011 was $6.4 million after-tax or
$0.12 per share, as compared to a loss of $3.4 million after-tax, or $0.07 per share in 2010.
EBITDA and Adjusted EBITDA for 2011 were $47.0 million and $46.6 million, respectively, compared to $53.6
million and $48.4 million for 2010.
15
Sales
Interfor’s total sales revenues were $758.0 million in 2011, an overall improvement of $132.4 million over 2010.
During 2011, the Canadian dollar continued to strengthen which negatively impacted sales values for products
priced in U.S. dollars.
Lumber shipments improved by 170 million board feet in 2011 reflecting the additional market demands and
availability of production volumes from our B.C. Interior and U.S. operations. The majority of this increased
volume went to offshore markets whereas the North American market remained relatively flat. The majority of
the increase to offshore export volume was shipped to China. We experienced decreasing shipments to China
during the second half of 2011 but the overall year over year increase was 64% compared to 2010. Shipments
to the Japan market also increased in 2011 over 2010. The U.S. accounted for 45% of Interfor’s total lumber
shipments in 2011, a decline of 5% over 2010, while shipments to China and Japan grew to 36% in 2011, an
increase of 10% over 2010.
Lumber sales prices for 2011 declined by an average of $12 per mfbm or 3% compared to 2010. The overall
2011 average net price was affected by lower North American structural lumber prices, higher volumes of lower
priced products destined for China and lower prices for cedar products when compared to 2010. Cedar average
price was affected by product mix in 2011 compared to 2010. Interfor’s diverse markets and product lines
minimized the overall decrease in prices in 2011.
Log sales increased by $28.6 million or 36% in 2011 when compared to 2010. Log prices to overseas markets
increased while prices decreased slightly in North America, resulting in overall average prices higher by $5 per
cubic metre. Sales volumes increased to all markets by 25%, with China’s volume almost doubling year over
year. In 2011, log sales within Canada continued to be our largest market at 80% of the total volume, growing
by 160,000 cubic meters or 17% when compared to 2010.
Pulp chip and residual product sales for 2011 were up $12.1 million, due to higher chip volumes and prices.
Overall 2011 average chip price was up 14% in comparison to last year. Compared to 2010, chip and other
residuals revenues increased 22% year over year.
Seaboard Shipping Company Limited (“Seaboard”) shipping revenues for 2011 were $34.7 million.
Operations
In 2011, Interfor produced a total of 1.3 billion fbm of lumber compared to 1.1 billion fbm in 2010; production
increased by 154 million fbm or 14% over 2010. This was achieved through increased operating hours,
improvements to productivity rates and higher lumber recoveries. Year over year production declined at our
two B.C. Coastal mills due to supply interruptions and curtailments resulting from the 2010 storm damage in
our coastal woodlands, a Fraser River bridge being repaired, log mix and capital project downtime; and at our
Beaver mill due to high log costs. The Adams Lake sawmill continued to show year over year operating
improvements. Productivity increased 6%, lumber recovery increased 4% and production volumes increased
4%, while operating five fewer days in 2011. Castlegar continued to ramp up its production in 2011 to over
double their 2010 production volume. Molalla also ramped up production in response to market demand
producing 49% more lumber than in 2010 while achieving higher lumber recoveries.
B.C. Coastal and Interior log production increased by 747 thousand cubic meters in 2011 over 2010. The
increase in logging activity was to support demand for additional lumber production and log exports. Increased
harvesting, log trades and timber sales helped to support the increase in fibre requirements on the B.C. Coast
and Interior regions. In 2011, total log production volume on the B.C. Coast increased by 15% over 2010.
Coastal log production cost per cubic meter decreased by 4% due mainly to increased harvest volumes,
reduced high cost heli-logging activity (from 22% in 2010 to 7% in 2011) and the cost recovery of $1.7 million
in settlement of the 2010 storm damage insurance claim. In 2011, total log production in the B.C. Interior
increased by 45% over 2010. B.C. Interior’s 2011 total log cost per cubic meter increased by 2% over 2010
mainly due to increased logging activity to meet increased operating rates at the Castlegar sawmill. In 2010,
Castlegar log costs were positively impacted by high log sales reducing the unit cost of delivered logs. In 2011,
the two Peninsula mills experienced increased competition and price pressure for logs due to increased log
exports to China. As prices became uneconomical log purchases declined and forced curtailment of our two
mills in the fourth quarter of 2011.
16
In 2011, lumber manufacturing costs, which includes cost of logs and conversion costs for lumber, increased
$77.3 million or 14% as a result of the increased operating rates compared to 2010. When compared to 2010,
our Coastal mills experienced an overall increase of 4% in total manufacturing cost per mfbm reflecting higher
whitewood prices (driven up by export demand for logs) and lower lumber production volumes. These costs
were offset in part by lower cedar log costs and the 2010 insurance cost recovery of $1.0 million for our Acorn
mill received as compensation for the interrupted log supply which resulted from storms in the late fall of 2010.
For our B.C. Interior mills, when compared to 2010, the normalized (excluding the impact of Castlegar 2010
high log sales) total log cost per mfbm was flat, however on a whole dollar basis log costs were up due to the
increase in log consumption. The B.C. Interior mills’ overall total conversion cost per unit was flat due to higher
production volumes, however whole dollar conversion costs were up due mainly to the Castlegar mill increase in
operating hours, when compared to 2010. Our U.S. mills, in aggregate, experienced 9% higher log costs due
to the competitive market demands for logs at our mill in Molalla, Oregon and our two Peninsula mills. In
comparison to 2010, the U.S. mills’ total conversion cost per mfbm was down 12% due to higher production
volumes, however whole dollar conversion costs are up due mainly to the increased operating hours at Molalla
and Gilchrist mills. The U.S. mills’ costs were also positively impacted by the strength of the Canadian dollar in
2011 as compared to 2010.
In 2011, Seaboard shipping activities increased the year over year consolidated production costs by 8%, when
compared to 2010.
Corporate and Other
Selling and administration costs in 2011 increased by $3.0 million as compared to 2010, arising primarily from
additional staffing due to export sales growth and initiatives in marketing, sales and logistics to meet customer
requirements today and in the future. Long-term incentive compensation (“LTIC”), which is impacted by the
Company’s share price, the number of grants made under the various plans and vesting periods, resulted in an
net expense of $0.4 million for 2011 (2010 - LTIC expense of $2.0 million).
The export tax paid under the SLA for 2011 increased by $1.6 million or 22% from 2010 as a result of the
increased volume exported to the U.S. The export tax was 15% all year in 2011. In 2010, by meeting various
thresholds during the year, the tax ranged from 15% to a low of zero for the month of June. Volumes
exported to the U.S. increased by 3.0 million mfbm or 1% in 2011 over the previous year. The stronger
Canadian dollar helped to reduce the impact of the 2011 export taxes payable in U.S. dollars when compared to
the 2010 foreign exchange rate.
Amortization of plant and equipment decreased by $0.2 million or 1% compared to 2010 despite the increased
operating days in 2011 over 2010. 2010 depreciation included accelerated depreciation on a number of assets
with shortened useful lives, most being retired in late 2010 or early 2011.
Road amortization and depletion expense for 2011 increased $5.7 million or 31% compared to 2010 as a result
of significantly higher logging activity on the B.C. Coast and Interior operations to meet export demand, and
higher log consumption and log inventory targets.
Restructuring costs and asset write-downs totaled $0.6 million in 2011 compared to $1.6 million in 2010. The
2011 charges include $0.8 million for the buyout of a logging contractor’s Bill 13 entitlements, $0.4 million
reversal of a previous asset impairment charge, $0.3 million charge for severance costs, and $0.1 million
recovery due to revisions to previously accrued expenses.
The following table shows the components of restructuring costs and impairments (reversals) of plant and
equipment for both years:
2011
2010
Contractor buyout
Plant and equipment impairment (recovery)
Severance costs
Other (recovery)
$
$
0.8
(0.4)
0.3
(0.1)
0.6
$
(millions of dollars)
$
0.0
0.5
1.1
-
1.6
17
Finance Costs
In 2011, the Company recorded $5.6 million of total interest expense compared to $8.5 million in 2010.
Reduction in interest expense was achieved by initially reducing our long term debt through our public offering
of Class A Subordinated Voting Shares and by extending and modifying our syndicated credit facilities, which
resulted in a reduction in pricing. Also, positively impacting interest expense was the further strengthening of
the Canadian dollar.
Equity Income
At the beginning of 2011, the Company acquired 100% ownership of Seaboard and consolidated its activities
with the other operations of Interfor. In 2010, the Company recorded equity income of $11.4 million, which
included the gain on the disposals of Seaboard’s two vessels of $6.1 million offset by $0.9 million in one-time
expenses.
Income Taxes
In 2011, the Company recorded an income tax expense of $1.4 million and increased its deferred tax assets in
relation to certain unused tax losses that are available to carry forward against future taxable income by $7.0
million. For 2010, the increase in unrecognized deferred tax assets reduced the Company’s income tax
recovery by $5.1 million to a net expense of $0.5 million. Although the Company expects to realize the full
benefit of the loss carry-forwards and other deferred tax assets, due to the cyclical nature of the wood products
industry and the economic conditions over the last several years the Company has not recognized the benefit of
its deferred tax assets in excess of its deferred tax liabilities. The Company’s Canadian non-capital loss carry-
forwards and U.S. net operating loss carry-forwards, totaling approximately $241 million (2010 - $260 million),
expire between 2014 and 2031, and are available to reduce future taxable income.
The overall effective tax rate is significantly different from the Canadian statutory rate of 26.5% (2010 –
28.5%) mainly due to unrecognized deferred tax assets of $7.0 million (2010 - $5.1 million).
Net Loss
For the year ended December 31, 2011, the Company recorded a net loss of $13.5 million, $0.25 per share
compared to a net loss of $5.2 million, $0.11 per share, for the year ended December 31, 2010. We were able
to mitigate our net loss with our strategy of having a diversified market and the benefit of a diversified product
line. The Company continues to focus on maximizing shareholder value through product development, cost
control, effective cash management and strategic investments on our core assets.
Cash Flows
Operating Activities
In 2011, before working capital changes, cash generated from operations was $43.6 million, compared to $40.7
million in 2010. Total cash generated from operations after changes in working capital was $28.4 million for
the year, a slight decrease from $29.8 million for 2010.
Cash used in working capital in 2011 was $15.2 million compared to $10.9 million in 2010. In 2011, significant
increases in lumber production and a subsequent slowing of the market resulted in a lumber and log inventory
build-up of $25.6 million offset in part by decreases in accounts receivable of $3.2 million and increases in
accounts payable of $9.6 million. In 2010, we experienced increases in accounts receivable and inventory of
$13.5 million and $12.4 million respectively, offset in part by an increase in accounts payable of $15.2 million.
In general, 2011 sales volumes increased and prices decreased when compared to 2010. With the strong
Canadian dollar and reduced margins, the result was a reduction of $1.3 million of cash generated from
operations. Throughout the year, the Company has focused on optimizing inventory levels, and purchasing
logs and producing products that will provide positive margins.
Investing Activities
Capital expenditures totaled $36.2 million for 2011 (2010 - $42.2 million). In 2011, major discretionary
spending for equipment upgrades was higher by $5.5 million, while major maintenance, road and timber
18
spending was lower by $12.1 million, when compared to 2010. In 2010, there was a major acquisition of
timber tenure in the Kamloops region from Weyerhaeuser Company Limited, adding approximately 275,000
cubic meters of allowable annual cut to the B.C. Interior fibre supply.
Cash proceeds in 2011 from the sale of surplus equipment totaled $0.3 million while in 2010 proceeds from the
sale of non-core assets and final settlement compensation under the Forest Act for timber and other assets
totaled $1.3 million.
Cash of $4.8 million was received as a result of our acquisition of Seaboard.
Financing Activities
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A Subordinate Voting shares at a
price of $7.00 per share for net proceeds of $54.9 million. The closing of the Offering included the exercise in
full of the overallotment option of 1,072,500 shares by the Underwriters. In addition, in the first half of 2011,
several stock option holders exercised their options generating $1.4 million in cash.
On July 11, 2011 the Company extended and modified its syndicated credit facilities. The maturity date of the
Operating Line was extended from July 28, 2012 to July 28, 2015 and the maturity date of the Revolving Term
Line was extended from July 28, 2013 to July 28, 2015. All other terms and conditions of the lines remain
substantially unchanged except for a reduction in pricing.
During 2011, Interfor drew additional funds on the Revolving Term Line primarily to fund operating and
working capital requirements, and capital expenditures for equipment and road construction. The Operating
Line remained undrawn in 2011, other than for letters of credit. During the year, the Revolving Term Line was
paid down with funds generated from the operations and the share issuance proceeds. As at December 31,
2011 the unused available credit under these facilities totaled $149.2 million and, combined with cash of $10.4
million, gave the Company a total of $159.7 million of liquidity available.
On January 4, 2010, Seaboard General Partnership (“SGP”) declared an income distribution to its partners.
Interfor’s share was $3.1 million and was paid to the Company by way of setoff against the promissory note
payable to SGP. On July 30, 2010, SGP made another advance to its partners, with the Company’s share being
$6.9 million. A second advance of which the Company’s share was $8.8 million was received on December 30,
2010. Both advances were repaid by way of set-off against the promissory note payable on January 3, 2011
when SGP declared an income distribution to its partners.
During 2010 the Company drew US$35.0 million ($35.8 million) on its Revolving Term Line and repaid and
cancelled its U.S. dollar Non-Revolving Term Line. Interfor drew additional funds on the Revolving Term Line
primarily to fund the acquisition of the timber tenure from Weyerhaeuser and road construction.
At December 31, 2011, the Company had cash of $10.4 million. After deducting the Company’s drawings under
its Revolving Term Line, the Company ended the year with net debt of $100.3 million or 20.4% of invested
capital.
FINANCIAL POSITION
Summary of Financial Position¹
19
International
Financial Reporting
Standards
Previous Canadian GAAP4
2011
2010
2008
2007
2009
(millions of dollars)
Current assets
Current liabilities
Working capital
Total assets
162.8
135.4
107.9
131.5
158.3
75.9
86.9
75.8
59.6
46.6
61.3
79.4
52.1
50.0
108.3
614.8
614.6
582.5
665.3
545.9
Total long-term liabilities and deferred income taxes
148.1
191.3
177.9
179.7
67.6
Operating debt
Payable to investee company
Long-term debt
Total debt
Shareholders’ equity
Invested capital
Ratio and Investment Information¹
Current ratio
Net debt as a percentage of invested capital, adjusted2
Total debt as a percentage of invested capital
Return on average shareholders’ equity2
Return on average invested capital, adjusted2
Pre-tax return on total assets1
Cash flow from operations as a percentage of total debt2
Equity per share
-
-
110.7
110.7
390.8
501.5
-
15.7
156.0
171.7
347.5
519.2
-
3.1
144.5
147.6
358.0
505.6
30.6
3.7
137.4
171.7
406.2
577.9
-
-
34.7
34.7
428.3
463.0
2.1
1.8
2.3
1.7
20.4%
29.7%
28.2%
29.2%
22.1%
33.1%
29.2%
29.7%
3.2
1.9%
7.5%
(3.6)%
(1.1)%
(6.3)%
(13.3)%
(2.9)%
(1.9)%
0.2%
(3.4)%
(10.3)%
(3.5)%
(2.0)%
(0.5)%
(9.0)%
(5.1)%
(4.3)%
39.4%
23.7%
(14.6)%
7.6%
70.2%
$7.00
$7.34
$7.60
$8.62
$9.09
2011
2010
2009
(millions)
2008
2007
Weighted average shares outstanding for the year
53.6
47.1
47.1
47.1
47.6
Number of shares outstanding at year end:
Class A subordinate voting3
Class B common3
Re-investment of Cash
Cash flow from operations2
54.9
1.0
55.9
46.3
1.0
47.4
46.1
1.0
47.1
46.1
1.0
47.1
46.1
1.0
47.1
2011
2010
2009
2008
2007
(millions of dollars)
43.6
40.7
(21.6)
13.0
24.4
(70.3)
8.3
Cash generated from (used in) operating working capital
(15.2)
(10.9)
Proceeds on disposal of assets
0.3
1.3
26.4
37.0
0.7
5.1
Capital expenditures and acquisitions
(36.2)
(42.2)
(27.6)
(158.9)
(81.8)
1
2
Tables may not add due to rounding.
See Glossary in Annual Information Form for definition.
20
3
4
As at February 17, 2012, the numbers of shares outstanding by class are: Class A Subordinate Voting shares – 54,847,176 Class B
Common shares – 1,015,779, Total – 55,862,955.
Years are not restated for IFRS
Current Assets
Cash on hand and deposits at December 31, 2011 totaled $10.4 million, an increase of $1.1 million over 2010.
Accounts receivable at December 31, 2011 were $44.0 million, compared to $46.0 million in 2010 primarily due
to lower lumber export accounts receivable outstanding at the end of the fourth quarter, 2011.
Lumber inventory levels at December 31, 2011 were $31.7 million, compared to $27.4 million in 2010. Lumber
inventory volumes increased by 18% resulting from the additional production volumes from the B.C. Interior
and U.S. mills to meet export demand.
Log inventory levels at December 31, 2011 were $59.4 million, compared to $39.1 million in 2010, due to
higher log costs, the B.C. Interior seasonal build up of logs prior to spring breakup and overall higher volumes
to support the higher operating rates and increased log consumption at our mills.
Investments in Associate Company, Other Investments and Assets
In 2011, the Company’s investments in associate company, other investments and assets decreased by $15.2
million to $1.9 million, primarily due to SGP declaring an income distribution on January 3, 2011 which was paid
by way of set-off against the note payable. On January 5, 2011, all other partners in the SGP withdrew and the
Company became the sole owner of Seaboard. SGP was wound-up on January 7, 2011 and continued
operations as Seaboard which is wholly owned by Interfor. Its accounts have been included in the consolidated
financial statements of the Company from the date of acquisition of control. As at December 31, 2011, Interfor
had a pension asset of $1.3 million which includes a $1.1 million Seaboard pension asset, resulting in an
increase of $0.8 million over 2010.
Property, Plant and Equipment, Timber Licences, Logging Roads, Bridges and Other Intangibles
The Company’s net book value of $434.8 million for property, plant and equipment, timber, logging roads, and
other intangible assets decreased $12.1 million compared to 2010. Capital expenditures were $36.2 million, of
which $20.0 million related to investments in road building and the balance of $16.2 million was for equipment
upgrades, maintenance of operations, timber and intangibles. The stronger Canadian dollar at the end of 2011
compared to the end of 2010 resulted in an increase in our U.S. capital assets of $2.9 million due to foreign
currency revaluations. Offsetting the investments in capital assets were amortization and depletion expense of
$51.6 million, and various minor disposals and a reversal of an impairment charge.
Current Liabilities
As at December 31, 2011, the Company had an Operating Line of $65.0 million. Drawings under this line are
subject to borrowing base calculations dependent upon accounts receivable, inventories and certain accounts
payable. At year end, the Company had no borrowings other than letters of credit under its Operating Line,
and its unused available Operating Line was $59.9 million, after outstanding letters of credit of $5.1 million.
The Company’s working capital ratio at December 31, 2011 was 2.1 to 1.
Accounts payable levels at December 31, 2011 were $60.7 million, an increase of $10.6 million over 2010. The
increase in trade accounts payables and other accruals results from increased operating rates, particularly from
logging activities in B.C and log purchases in the U.S. The current portion of reforestation also increased by
$4.3 million due to increased B.C. log harvest in 2011.
Income tax payable at December 31, 2011 was $1.1 million, an increase of $0.8 million over 2010; the increase
was primarily due to tax payable for our wholly owned subsidiary, Interfor Japan Ltd.
Long-Term Liabilities
At July 11, 2011 the Company extended and modified its syndicated credit facilities. In January, 2010 the
Company’s Revolving Term Line was increased from $150 million to $200 million.
The Revolving Term Line bears interest at rates based on bank prime plus a premium, depending upon a
financial ratio or, at the Company's option, at rates for Bankers' Acceptances or LIBOR based loans.
21
At December 31, 2011, the Revolving Term Line was drawn by $80.0 million (2010 - $126.0 million), and by
US$30.2 million (2010 – US$30.2 million) revalued at the year-end exchange rate to $30.7 million (2010 - $30.0
million) for total drawings of $110.7 million (2010 - $156.0 million) and leaving an unused available line of
$89.3 million.
Overall, long-term liabilities excluding long-term debt increased by $2.1 million, due mainly to increases in
pensions of $2.4 million, reforestation of $0.5 million and other items of $0.4 million offset by a decrease of
$1.2 million in long-term incentive compensation due to the reclassification to current liabilities.
Liquidity and Capital Resources
As at December 31, 2011 the Company had available working capital of $86.9 million (2010 - $59.6 million),
operating and term lines of $149.2 million (2010 - $104.2 million) and cash of $10.4 million.
The Revolving Term Line was increased to $200 million in January 2010 and the maturity dates of the
Operating Line and the Revolving Term Line were both extended to July 28, 2015.
On April 8, 2011 the Company closed a public offering of Class A Subordinate Voting shares for net proceeds of
$54.9 million.
These resources, in addition to cash generated from operations, will be used to support our working capital
requirements, debt servicing commitments, and capital expenditures.
The Company has announced its Kootenay Optimization Plan totaling $24.0 million of capital to be spent at our
Grand Forks and Castlegar mill (spending to occur over 2012 and 2013).
Interfor has had positive EBITDA for each of the past six fiscal years, in spite of the difficult economic climate
over the last four years. In addition, Interfor showed positive Operating Earnings in the first and third quarters
of 2011, as well as in the fourth quarter of 2010.
The Company believes that its existing credit lines will be sufficient to satisfy the funding of operating and
capital requirements for the foreseeable future.
Summary of Contractual Obligations
The payments due in respect of contractual and legal obligations including projected major capital
improvements are summarized as follows:
Accounts payable and accrued liabilities
Income taxes payable
Long-term debt
Reforestation liability
Provisions and other liabilities
Pension solvency payments
Operating leases and
contractual commitments
Payments due by period
Up to
1 year
2-3
years
4-5
years
(millions of dollars)
52.7 $
1.1
-
14.1
7.4
0.8
$
-
-
-
7.5
6.8
1.5
$
-
-
110.7
5.1
1.7
0.1
$
Total
52.7 $
1.1
110.7
32.0
25.5
2.7
47.9
27.1
14.3
3.5
After 5
years
-
-
-
5.3
9.5
0.3
3.0
Total contractual obligations 1
$
272.4 $
103.1 $
30.0 $
121.1 $
18.2
1 Table may not add due to rounding.
Related Party Transactions
Lumber sales to a significant shareholder amounted to $0.7 million (2010 - $0.8 million).
In 2010, shipping services provided by Seaboard totaled $7.0 million and the Company provided management
and other support services to Seaboard totaling $0.5 million. In January, 2011 Seaboard became a wholly
owned subsidiary of Interfor and its accounts were included in the consolidated financial statements of the
22
company from the date of change in control and all intercompany transactions have been eliminated.
These transactions were conducted on a normal commercial basis, including terms and prices and did not result
in any ongoing contractual or other commitments.
Off-Balance Sheet Arrangements
The Company has off-balance sheet arrangements which include letters of credit and surety performance
bonds, primarily for timber sales. These are more fully described in Note 9(a) and Note 20(d) in the
Consolidated Financial Statements. At December 31, 2011, the total of such instruments aggregated $18.5
million (2010 - $12.9 million). Off-balance sheet arrangements have not had, and are not reasonably likely to
have, any material impact on the Company’s current or future financial condition, results of operations or cash
flows.
Summary of Issuance of Shares
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A Subordinate Voting shares at a
price of $7.00 per share for net proceeds of $54.9 million. The closing of the Offering included the exercise in
full of the overallotment option of 1,072,500 shares by the Underwriters. In addition, several stock option
holders exercised their options generating $1.4 million in cash.
SELECTED QUARTERLY FINANCIAL INFORMATION 1
Quarterly Earnings Summary
2011
2010
23
Q1
Q4
(millions of dollars except share, per share and foreign exchange rate amounts)
Q3
Q2
Q1
Q4
Q3
Q2
Sales – Lumber
– Logs
– Wood chips and other residual products
– Other
Total Sales
134.9
136.7
134.0
132.5
137.5
113.1
123.7
107.6
22.9
17.5
14.6
36.0
17.6
9.9
28.6
16.8
8.7
20.8
16.4
10.0
20.6
15.7
2.4
21.9
14.0
2.4
19.8
13.3
1.0
17.4
13.2
1.7
190.0
200.2
188.2
179.7
176.3
151.5
157.9
139.9
Operating earnings (loss) before restructuring costs and
asset impairments
Operating earnings (loss)
Net earnings (loss)
(5.0)
(4.9)
(6.5)
1.0
1.3
0.0
(2.0)
(2.1)
(5.3)
1.0
0.2
(1.7)
1.5
1.5
0.8
(2.0)
(2.5)
1.4
(0.9)
(2.0)
(3.5)
(2.4)
(2.5)
(3.8)
Net earnings (loss) per share – basic and diluted
(0.12)
0.00
(0.10)
(0.04)
0.02
0.03
(0.07)
(0.08)
Net earnings (loss), adjusted for certain one-time and other
items4
Net earnings (loss), adjusted for certain one-time and other
items – per share4
EBITDA5
Adjusted EBITDA5
Cash flow from operations per share2
Shares outstanding – end of period (millions)3
– weighted average (millions)
(2.5)
(0.5)
(2.9)
(0.5)
0.5
(1.1)
(0.6)
(2.2)
(0.04)
(0.01)
(0.05)
(0.01)
0.01
(0.02)
(0.01)
(0.05)
7.9
8.0
0.08
55.9
55.9
14.7
14.3
0.26
55.9
55.9
11.6
11.6
0.22
55.9
55.2
12.8
12.7
0.27
47.5
47.4
14.6
14.5
0.22
47.4
47.2
15.3
10.6
0.18
47.1
47.1
13.7
13.3
0.25
47.1
47.1
10.0
10.0
0.21
47.1
47.1
Average foreign exchange rate per US$1.00
1.0230
0.9808
0.9680
0.9856
1.0131
1.0395
1.0283
1.0401
Closing foreign exchange rate per US$1.00
1.0170
1.0482
0.9645
0.9696
0.9946
1.0290
1.0646
1.0158
1
2
3
4
5
Tables may not add due to rounding.
Cash generated from operations before taking account of changes in operating working capital.
As at February 17, 2012, the numbers of shares outstanding by class are: Class A Subordinate Voting shares – 54,847,176 Class B
Common shares – 1,015,779, Total – 55,862,955.
Net earnings (loss), adjusted for certain one-time and other items represents net earnings (loss) before restructuring costs, foreign
exchange gains and losses, other income (expense), certain one-time items and the effect of unrecognized tax assets.
The Company discloses EBITDA as it is a measure used by analysts and Interfor’s management to evaluate the Company's performance.
As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others. In addition, as EBITDA is not a substitute
for net earnings, readers should consider net earnings in evaluating the Company's performance. Adjusted EBITDA represents EBITDA
adjusted for other income and other income of the investee company. EBITDA and Adjusted EBITDA can be calculated from the
statements of operations as follows:
Net earnings (loss)
Add: Income taxes (recovery)
Finance costs
Depreciation, depletion and amortization
Other foreign exchange (gains) losses
Restructuring costs, asset impairments and other
2011
2010
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
(6.5)
0.2
1.3
13.0
0.1
0.0
0.5
1.7
13.3
(0.5)
(millions of dollars)
0.8
(0.5)
2.5
11.7
0.2
(1.7)
(0.4)
2.3
11.7
0.1
(5.3)
1.2
1.9
13.6
0.1
1.4
(0.2)
2.6
11.0
0.1
(3.5)
1.0
2.8
12.3
0.1
(3.8)
0.2
2.6
11.1
-
costs(recoveries)
(0.1)
(0.3)
0.1
0.8
-
0.5
1.1
-
EBITDA
Deduct:
Other income (expense)
Other income of associate company
Adjusted EBITDA
7.9
14.7
11.6
12.8
14.6
15.3
13.7
10.0
-
-
8.0
0.4
-
14.3
-
-
11.6
-
-
12.7
(0.3)
0.4
14.5
(0.1)
4.8
10.6
0.4
-
13.3
-
-
10.0
24
Volume and Price Statistics
2011
2010
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Lumber sales
Lumber production
Log sales1
Log production1
Average selling price – lumber2
Average selling price – logs1
(million fbm)
(million fbm)
(thousand cubic
metres)
(thousand cubic
metres)
($/thousand fbm)
($/cubic metre)
Average selling price – pulp chips
($/thousand fbm)
318
294
310
336
313
430
334
325
314
313
332
301
321
303
292
277
272
289
270
277
262
264
258
239
795
1,002
796
816
794
595
624
648
$424
$407
$401
$423
$428
$408
$459
$408
$69
$51
$74
$48
$82
$44
$61
$40
$64
$42
$73
$40
$68
$37
$64
$40
1 B.C. operations
2 Gross sales before duties and export taxes
Quarterly trends normally reflect the seasonality of the Company’s operations. Logging operations are seasonal
due to a number of factors including weather, ground conditions and fire season closures. Generally, the
Company’s B.C. Coastal logging divisions experience higher production levels in the latter half of the first
quarter, throughout the second and third quarters and in the first half of the fourth quarter. Logging activity in
the B.C. Interior is generally higher in the first half of the first quarter, slows during spring thaw and increases
in the third and fourth quarters. Sawmill operations are less seasonal than logging operations but are
dependent on the availability of logs from logging operations, including those from suppliers. In addition, the
market demand for lumber and related products is generally lower in the winter due to reduced construction
activity, which increases during the spring, summer and fall.
Operating rates increased in the first quarter, 2010, as lumber prices rose in response to increased North
American demand and a temporary supply/demand imbalance. During the same period off-shore demand
increased, particularly from China, with rapid export market growth through the remaining quarters of 2010
and the first half, 2011 and leveling off for the balance of 2011.
The volatility of the Canadian dollar also impacted results, given that historically over 75% of the Canadian
operation’s lumber sales are to export markets and priced in U.S. dollars. A strong Canadian dollar reduces the
lumber sales realizations in Canada, but reduces the impact of losses in U.S. operations when converted to
Canadian dollars. No deferred tax assets arising from loss carry-forwards were recognized during 2010 or
2011.
In the first quarter, 2011 the Company acquired complete control of SGP. It was wound up in early January,
2011 but continued operations as Seaboard and its accounts were consolidated from the date of change in
control on January 5, 2011. Other sales revenues include the ocean freight revenues of Seaboard.
Quarter 4, 2011 Compared to Quarter 4, 2010
Overview
The Company recorded a net loss of $6.5 million, or $0.12 per share, for the fourth quarter of 2011 compared
to net earnings of $0.8 million, or $0.02 per share in the fourth quarter of 2010. Before restructuring costs,
foreign exchange gains (losses), other one-time items and a tax valuation allowance, the Company’s net loss
for the fourth quarter, 2011 was $2.5 million after-tax or $0.04 per share, as compared to a net income of $0.5
million after-tax, or $0.01 per share for the fourth quarter, 2010.
EBITDA and Adjusted EBITDA for the fourth quarter of 2011 were $7.9 million and $8.0 million, respectively,
compared to $14.6 million and $14.5 million, for the comparable quarter in 2010.
During the fourth quarter of 2011, lumber prices in the North American market decreased significantly
compared to 2010. The average price reported by Random Lengths for SPF 2x4 #2&Btr was US$238 per mfbm
for the fourth quarter, 2011 compared to US$269 per mfbm for the same quarter in 2010 and compared to
25
US$246 per mfbm in the third quarter, 2011. The Canadian dollar was weaker this quarter, which had a
positive effect on revenues priced in U.S. dollars, as compared to the same quarter in 2010.
The Company focused on reducing lumber inventories through to the end of the fourth quarter, 2011; however
inventories ended the year higher than in 2010. Generally, mill productivity rates were up during the quarter,
however curtailments were taken at some the mills.
Sales
For the fourth quarter of 2011, total sales revenues were $190.0 million which represented an 8% increase
over the same quarter in 2010.
For the fourth quarter, 2011, lumber sales volumes were 318 million fbm and revenues were $134.9 million.
This is a 1% decrease in volume and a 2% decrease in revenues compared to the same period in 2010.
Interfor increased shipments to the U.S. and Japan in the fourth quarter of 2011, offset by reductions of
shipments to China and Canada when compared to the same quarter in 2010. In the fourth quarter, 2011
Interfor’s lumber sales values decreased by $4 per mfbm or 1% compared to 2010. In the fourth quarter, 2011
the Canadian dollar depreciated by 1 cent relative to its U.S. counterpart, when compared to the average of the
same quarter in 2010.
Log sales were up $2.4 million, or 11%, for the fourth quarter, 2011 as sales volumes increased by 18,000 m3
or 6% over the same period in 2010. On the B.C. Coast, where the majority of log sales are transacted, the
price per cubic meter improved by 10% in the fourth quarter of 2011, compared to the same period in 2010
reflecting higher export volumes and improved log markets.
Compared to the same periods of 2010, pulp chip and other residuals revenues for the fourth quarter of 2011
were up $1.8 million, resulting from higher overall chip prices. Average chip prices for the fourth quarter, 2011
increased by 20% even though pulp prices were lower over the same quarter, 2010. Chip price increases in the
U.S. were enhanced by the weaker Canadian dollar in the fourth quarter, 2011 versus same period in 2010.
Other revenues for the fourth quarter, 2011 are mainly from Seaboard at $10.8 million; in 2010, Seaboard
results were reported as equity income.
Operations
For the fourth quarter of 2011, production volumes decreased by 9 million fbm or 3% compared to the same
quarter, 2010. Production costs for the fourth quarter of 2011 increased $19.6 million or 13%, which includes
$11.5 million of costs related to Seaboard, compared to the same period in 2010. Lumber production, in
general, decreased mainly due to curtailments and/or reduced operating rates at many of our mills due to high
log costs during the quarter. In the fourth quarter 2011, the Peninsula mills were curtailed due to log supply
issues. Although there were lower total operating hours, higher productivity rates and lumber recoveries
minimized the decrease in overall production volume when compared to the same quarter in 2010.
Overall unit manufacturing costs per mfbm were higher in the fourth quarter of 2011, when compared to 2010
due to higher log costs. Log costs per mfbm during the fourth quarter, 2011 versus the same quarter last year
were driven up on the B.C. Coast due to higher depletion and road amortization costs, and at the U.S. mills due
to higher market price of purchased logs and the weaker Canadian dollar. Fibre supply for the Peninsula mills
remains tight and prices high due to local demands and competition from the export log market. In the B.C.
Interior, log consumption unit costs were lower due to overall lower delivered log cost and higher lumber
recoveries compared to previous year’s quarter. The B.C. Coast conversion unit costs this quarter, 2011 were
higher compared to same quarter, 2010 due to lower production volumes and operating hours mainly due to
log mix and maintenance at our Hammond mill. In the U.S., the unit conversion costs at the Washington mills
were slightly higher due to lower production volumes and at the Oregon mills were lower due to higher
production volumes. At the B.C. Interior mills, unit conversion costs were down due to higher productivity rates
and production volumes.
Compared to the same quarter in 2010, B.C. log production remained flat overall with Coastal woodlands
harvesting slightly less volume and the Interior harvesting slightly more volume, due mainly to the Castlegar
mill operating more hours and at increased productivity rates offset in part, by the reduction of Grand Fork’s
head rig capacity.
26
Corporate and Other
Selling and administrative costs for the fourth quarter, 2011 increased by $1.0 million compared to the same
quarter, 2010 primarily as a result of increased sales and export market administrative staff to support sales
and marketing initiatives. LTIC expense is impacted by the change in the Company’s share price and showed
an expense of $0.9 million for the fourth quarter, 2011.
Compared to the same period, 2010, Canadian shipments to the U.S. for the fourth quarter, 2011 decreased by
4.2 million fbm, or 7%, which resulted in a decrease in export taxes of $0.2 million as the tax rate for both
periods remained at 15%.
Amortization of plant and equipment for the fourth quarter in 2011 decreased by $0.6 million in comparison to
the same period in 2010 due to the lower total operating hours at our manufacturing facilities.
Road amortization and depletion expense for the fourth quarter of 2011 increased by $1.9 million or 42%
compared to the same quarter, 2010 as a result of changes in areas being logged and a significant reduction in
heli-logging activity on the B.C. Coast, and increased harvesting in the Interior.
Finance Costs, Other Foreign Exchange Gain (loss), Other Income
Fourth quarter, 2011, interest expense was reduced by $1.0 million compared to same period in 2010, due to
the lower rates of the renegotiated Revolving Term Line and the lower average balance outstanding in the
quarter; this was partially offset by a weaker Canadian dollar in fourth quarter 2011. Other foreign exchange
gains (losses) were negligible for both years.
Other income was negligible in the fourth quarter, 2011 compared to an expense of $0.3 million for the fourth
quarter, 2010 from the disposal of surplus equipment and roads. In the fourth quarter, 2010, the Company
reported equity participation in the earnings of Seaboard of $1.7 million. Seaboard’s results are consolidated in
2011.
Income Taxes
The Company recorded an income tax expense of $0.2 million in the fourth quarter of 2011 as compared to a
$0.5 million recovery in the comparative period of 2010. The unrecognized deferred tax assets in relation to
unused tax losses that are available to carry forward against future taxable income were increased by $3.9
million (fourth quarter, 2010 – decreased by $0.3 million). Although the Company expects to realize the full
benefit of the loss carry-forwards and other deferred tax assets, due the cyclical nature of the forest products
industry and the economic conditions over the last several years, the Company has not recognized the benefit
of its deferred tax assets in excess of its deferred tax liabilities.
Cash Flow
Cash generated by the Company from operations, after changes in working capital, was $3.9 million for the
fourth quarter of 2011, compared to cash generated of $5.4 million for the fourth quarter of 2010. Net
earnings for the fourth quarter 2011 was $7.2 million lower than the same period in 2010, which resulted in
quarterly cash from operations of $4.6 million in 2011 compared to $10.6 million in 2010.
In the fourth quarter of 2011, funds were drawn from the Revolving Term Line for operating and capital
requirements, which were partially repaid during the quarter. In the fourth quarter, 2010 the Company
received an $8.8 million advance from Seaboard which it used to pay down a portion of its Revolving Term
Line.
Capital expenditures on plant and equipment for the fourth quarter, 2011 were $3.5 million, of which $2.2
million was on high return discretionary projects and $1.3 million on maintenance of operating capacity.
Spending on road construction totaled $5.4 million. Comparable spending for the fourth quarter, 2010 of $8.9
million was divided evenly between high return discretionary and maintenance projects, and road construction.
The Company had cash of $10.4 million at December 31, 2011 and ended the quarter with net debt of $100.3
million or 20.4% of invested capital.
27
Controls and Procedures
As required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators, Interfor carried
out an evaluation of the design and effectiveness of the Company’s disclosure controls and procedures as of
December 31, 2011. The evaluation was carried out under the supervision of, and with the participation of the
Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”). Based on the evaluation, the CEO and
CFO concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2011.
As required by Multilateral Instrument 52-109 issued by the Canadian Securities Administrators, Interfor carried
out an evaluation of the design and effectiveness of the Company’s internal controls over financial reporting
(“ICFR”) as of December 31, 2011. The evaluation was carried out within the COSO framework and under the
supervision of, and with the participation of the CEO and the CFO. Based on the evaluation, the CEO and CFO
concluded that the Company’s ICFR were effective as of December 31, 2011.
The CEO and CFO acknowledge responsibility for the design of ICFR, and confirm that there were no changes
in these controls that occurred during the most recent interim period ended December 31, 2011 which
materially affected, or are reasonably likely to materially affect, the Company’s ICFR.
Critical Accounting Estimates
Valuation of Accounts Receivable. Interfor regularly reviews the collectability of its accounts receivable and
records an allowance for doubtful accounts based on its best estimate of any potentially uncollectible accounts.
Consideration is given to current economic conditions and specific customer circumstances to determine the
amount of any bad debt expenses to be recorded.
The Company’s exposure to credit risk is dependent upon individual characteristics of each customer. Each
new customer is assessed for creditworthiness before standard payment and delivery terms and conditions are
offered, with such review encompassing any external ratings, and bank and other references. Purchase limits
are established for each customer, and are regularly reviewed. In some cases, where customers fail to meet
the Company’s benchmark creditworthiness, the Company may choose to transact with the customer on a
prepayment basis.
All North American sales are conducted under standard industry terms. All log and lumber sales outside of the
North American markets are either insured to 90% of their value by the Export Development Corporation or
letters of credit or are prepaid in advance of shipment.
The Company regularly reviews the collectability of its accounts receivable and establishes an allowance for
doubtful accounts based on its best estimate of any potentially uncollectible accounts. Historically, the
Company has experienced minimal bad debts and this held true for 2011, despite the impacts of the global
economic downturn. Based on this past experience and its detailed review of trade accounts receivable past
due, a reserve of $0.1 million (2010 - negligible) was set up for specific trade receivables.
Although Interfor has not experienced any significant bad debt expenses in prior periods, declines in the
economy could result in collectability concerns. Accounts receivable balances for individual customers could
potentially be material at any given time.
Valuation of Inventories. Interfor values its lumber inventories at the lower of cost and net realizable value on
a specific product basis. Log inventories are valued at the lower of cost and net realizable value on a specific
boom or sort basis. Other inventories consist primarily of seedlings, spare parts, and supplies and are recorded
at the lower of cost and replacement cost. The unit net realizable value for lumber inventories and Coastal log
inventories is determined by reference to the average sales values by specific product in the period immediately
following the reporting date. The unit realizable value for Interior and U.S. log inventories is determined by
reference to the value of the projected lumber and residual outturns. The unit cost for lumber is based on a
three month moving average actual cost, lagged by one month and adjusted for unusual items. The unit cost
for Coastal logs is based on a twelve month moving average actual cost and for Interior logs is based on a
three month moving average actual cost, both lagged by one month and adjusted for unusual items. The unit
cost for U.S. logs is based on actual specific cost. Instances where net realizable value is lower than cost result
in a charge to operating earnings in the period. Downward movements in commodity prices could result in a
material write-down of inventory at any given time.
28
Recoverability of Property, Plant and Equipment, Logging Roads, Timber and Goodwill. Interfor’s assessment of
recoverability of property, plant and equipment, timber and logging roads is made with reference to projections
of future cash flows to be generated by its operations. The assessment of recoverability of goodwill is also
made with reference to projections of future cash flows to be generated by the related reporting unit. In both
cases the projected cash flows are discounted to estimate the fair value of the related assets.
The Company conducts a review of external and internal sources of information to assess for any indications of
impairment. External factors include adverse changes in expected future prices, costs and other market and
economic factors. Internal factors include changes in the expected useful life of the asset or changes to the
planned capacity of the asset.
Key assumptions used are based on industry sources, including Forest Economic Advisors, LLC and Resources
Information Systems Inc., as well as management estimates. Assumptions encompass lumber and residual
chip sales prices, applicable foreign exchange rates, operating rates of the assets, raw material and conversion
costs, the level of sales to the U.S. from Canada, the export tax rate, future capital required to maintain the
assets in their current operation condition, and other items.
There is a high degree of uncertainty in such assumptions and, as such, any significant change in assumptions
could result in a conclusion that the carrying value of these assets could not be recovered, which could
necessitate a material charge against operating earnings.
Appropriate discount rates are determined by reference to current market conditions, specific company factors
and asset specific factors.
Interfor assesses the recoverability of Property, Plant and Equipment, and Timber and Logging Roads at each
reporting date. Goodwill is tested for impairment annually, and whenever events or changes in circumstances
indicate that an impairment may exist. The Company assessed the recoverability of these assets as at
December 31, 2011, and concluded that there were no impairments.
Reforestation and Other Forestry-related Liabilities. Crown legislation requires the Company to complete
reforestation activities on its forest and timber tenures. Accordingly, Interfor records the estimated cost of
reforestation as the timber is cut, and includes these expenses in the cost of current production. The estimate
of future reforestation costs is based on detailed prescriptions of reforestation as prepared by Registered
Professional Foresters employed or contracted by the Company. Considerations include the specifics of the
areas logged and the treatments prescribed for those areas, as well as the timing and success rates of the
planned activities. Estimates of reforestation liability could be materially impacted by forest fires, wildlife
grazing, unfavourable weather conditions, changing legislative requirements and standards, or inaccurate
projections, which could result in a charge against operating earnings.
The Company also has a legal obligation to deactivate certain roads constructed and used to access timber
once that access is no longer required. Accordingly, Interfor also accrues the cost of road deactivation as the
related timber is cut, including those expenses in the cost of current production. The estimate of future road
deactivation cost is based on comprehensive plans prepared by Professional Foresters and Engineers employed
by Interfor and includes such considerations as road structure and terrain. Estimates of road deactivation
liability could be materially impacted by unfavourable terrain, changing legislative requirements and standards,
or inaccurate projections, which could result in a charge against operating earnings.
Each of these estimates is reviewed regularly on an ongoing basis.
Environmental Obligations. Environmental expenditures that relate to an existing condition caused by past
operations are charged as current production costs once existence of a liability and costs of rehabilitation
efforts can be reasonably determined. Interfor engages independent third party experts to assist in
determining the existence of environmental liabilities, appropriate prescriptions for treatment and related costs.
Estimates of environmental obligations could be materially impacted by a number of factors including incorrect
or incomplete problem definition and identification of treatments, or inaccurate cost projections. Incorrect
estimates could result in a material charge against operating earnings.
Pension and Other Post-retirement Benefits. Interfor sponsors various defined contribution pension plans
available, based on eligibility requirements, to all Canadian salaried and all U.S. employees. The Company
29
sponsors three defined benefit plans for those hourly employees not covered by forest industry union plans. It
also sponsors a post-retirement medical and life insurance plan.
The Company retains independent actuarial consultants to value the defined pension benefit obligations, the
post retirement medical and life insurance obligations and related plan asset values. Actuarial assumptions
used in the valuation of obligations and values include assumptions of the discount rate used in calculations of
net present value of obligations, expected rates of return on plan assets to be used to fund obligations, and
assumed rates of increase for employee compensation and health care costs. Actual experience can vary
materially from estimates and could result in a material charge against operating earnings as well as
necessitate a current cash funding requirement.
Income Taxes. The Company’s provision for income taxes, both current and deferred, is based on various
judgments, assumptions and estimates including the tax treatment of transactions recorded in the Company’s
consolidated financial statements. Interfor records provisions for federal, provincial and foreign taxes based on
the respective tax rules and regulations in the jurisdictions in which the Company operates. Due to the number
of variables associated with the judgments, assumptions and estimates, and differing tax rules and regulations
across the multiple jurisdictions, the precision and reliability of the resulting estimates are subject to
uncertainties and may change as additional information becomes known.
Income tax assets and liabilities, both current and deferred, are measured according to the income tax
legislation that is expected to apply when the asset is realized or the liability settled. Deferred income tax
assets and liabilities are comprised of the tax effect of temporary differences between the carrying amount and
tax basis of assets and liabilities, tax loss carry forwards and tax credits. Assumptions underlying the
composition of tax assets and liabilities include estimates of future results of operations and the timing of the
reversal of temporary differences as well as the tax rates and laws in the applicable jurisdictions at the time of
the reversal. The composition of income tax assets and liabilities is reasonably likely to change from period to
period due to the uncertainties surrounding these assumptions.
NEW ACCOUNTING POLICIES AND ACCOUNTING POLICY CHANGES
Convergence with International Financial Reporting Standards
Effective January 1, 2011 Canadian publicly listed entities were required to prepare their financial statements in
accordance with IFRS. Due to the requirement to present comparative financial information, the effective
transition date was January 1, 2010.
While IFRS uses a conceptual framework similar to Canadian Generally Accepted Accounting Principles
(“GAAP”), there are significant differences on recognition, measurement, and disclosures. The Company
identified a number of key areas impacted by changes in accounting policies, including: property, plant, and
equipment; impairment of assets; provisions, including reforestation liabilities and other decommissioning
obligations; share-based payments; employee future benefits; and deferred income taxes.
Note 28 to the consolidated financial statements provides more detail on key Canadian GAAP to IFRS
differences, accounting policy decisions and IFRS 1, First-Time Adoption of International Financial Reporting
Standards optional exemptions for significant or potentially significant areas that have had an impact on
Interfor’s financial statements on transition to IFRS or may have an impact in future periods.
IFRS Transitional Impact on Equity
As a result of the policy choices selected and changes required under IFRS, Interfor has recorded an increase in
equity of $3.4 million as at the date of transition, January 1, 2010. The table below outlines adjustments to
equity on adoption of IFRS on January 1, 2010 and December 31, 2010 for comparative purposes¹:
30
Equity under Canadian GAAP
Transition election to fair value property
Employee future benefits
Decommissioning liabilities
Share based compensation
Equity participation in associate’s income
Deferred income taxes
Total IFRS adjustments to equity
Equity under IFRS
¹ Table may not add due to rounding
IFRS Impact on Comprehensive Income
January 1
2010
December 31
2010
$
$
(millions of dollars)
358.0
15.7
(6.9)
(2.8)
(2.1)
(0.9)
0.3
3.4
347.3
15.7
(9.0)
(3.3)
(2.2)
(1.1)
-
0.2
$
361.4
$
347.5
The following is a summary of the adjustments to Comprehensive Income for the year ended December 31,
2010 under IFRS:¹
Comprehensive loss under Canadian GAAP
Profit adjustments
Employee future benefits
Decommissioning liabilities
Share based compensation
Equity participation in associate’s income²
Plant and equipment²
Deferred income taxes
Total IFRS adjustments to net earnings
Other comprehensive income adjustments
Employee future benefits – actuarial gains (losses)
Equity participation in associate’s employee future benefits
Deferred income taxes
Total other comprehensive income adjustments
Year ended
December 31, 2010
(millions of dollars)
$
(11.6)
0.4
(0.5)
(0.1)
-
-
(0.9)
(1.3)
(2.5)
(0.1)
0.6
(2.0)
Comprehensive income (loss) under IFRS
$
(14.8)
¹ Table may not add due to rounding
² Due to rounding, amount appears to have no impact
IFRS Impact on Cash Flow Statement
The only impact of IFRS on the Statement of Cash Flows is in the presentation of cash interest paid as a
financing activity. Under previous Canadian GAAP, cash interest paid was included as an operating activity.
As a result, this presentation change will increase the cash flows from operating activities and reduce cash
flows from financing activities in future periods by the equivalent amount. For the year ended December 31,
31
2010 operating cash flows increased by $8.9 million compared to Canadian GAAP, with cash flow from financing
activities reduced by the same amount. There is no impact on cash and cash equivalents as a result of this
presentation change.
IFRS Impact on Financial Statement Presentation
The transition to IFRS has resulted in numerous presentation changes in the financial statements. The
significant changes are summarized as follows:
• Other intangible assets include software licences. These licences were previously included in Property,
plant and equipment;
• The Statement of Financial Position presents additional disclosure of balances separately including
employee future benefits assets and provisions and the investment in associate company;
•
•
Finance costs include interest on debt, accretion expense for decommissioning provisions, and amortization
of prepaid financing costs. Accretion was previously included in Production costs. Amortization of prepaid
financing costs was previously included in Depletion and amortization of timber, roads and other; and
Interest paid is presented as a financing activity in the Statement of Cash Flows, as previously described.
The above changes are reclassifications within the financial statements and have no impact on net earnings or
equity.
IFRS Impact on Key Performance Measures
The transition to IFRS did not significantly impact the Company’s financial covenants and key ratios that have
an equity component.
IFRS Impact on Controls and Information Systems
A review of the Company’s information systems and the day-to-day accounting processes and controls was
carried out during the IFRS conversion project and no significant impacts were identified. No significant
changes to computer systems were required and no changes which materially affect, or are reasonably likely to
materially affect, the Company’s controls are required. To ensure the effectiveness of the key monitoring
controls under IFRS, additional training has been performed in relation to the specific impacts of IFRS on the
Company’s financial policies and statements.
New Accounting Policy – Derivative Financial Instruments, Interest Rate Swaps
On August 25, 2011, the Company entered into two interest rate swaps and designated these financial
instruments as cash flow hedges. The intent of these swaps is to convert floating-rate interest expense to
fixed-rate interest expense based on BA CDOR. As these derivatives are designated as the hedging instrument
in a cash flow hedge of fluctuations in market interest rates associated with specific drawings under the
Revolving Term Line, the effective portion of changes in the fair value of the derivative is recognized in Other
comprehensive income (loss) and presented in the Hedging reserve in Equity. Any ineffective portion of the
changes in the fair value of the derivative is recognized immediately in Net earnings (loss).
Future Accounting Policy Changes
IFRS 9, Financial Instruments, replaces the multiple classification and measurement models in IAS 39, Financial
Instruments: Recognition and Measurement, with a single model that has only two classification categories:
amortized cost and fair value. This standard is in effect for accounting periods beginning on or after January 1,
2015, with earlier adoption permitted.
IAS 19, Employee Benefits, was revised to eliminate the option to defer recognition of gains and losses, known
as the “corridor method”, and to enhance disclosure requirements for defined benefit plans. As the Company
did not choose the corridor method in accounting for its defined benefit plans, there is no impact on its financial
statements as a result of the elimination of this option. This standard is in effect for accounting periods
beginning on or after January 1, 2013, with earlier adoption permitted.
As at the reporting date, no assessment has been made of the impact of the standard on the Company’s
financial statements other than the effect of the elimination of the corridor method.
32
The standard-setting bodies that set IFRS have significant ongoing projects that could impact the IFRS
accounting policies selected. Specifically, it is anticipated that there will be additional new or revised IFRS or
IFRIC standards in relation to financial instruments and leases currently on the International Accounting
Standards Board agenda.
RISKS AND UNCERTAINTIES
Pricing
Interfor’s operating results are affected by fluctuations in the selling prices for lumber, logs and wood chips.
Product selling prices are, in turn, affected by such factors as the general level of economic activity in the
markets in which Interfor sells its products, interest rates, construction activity (in particular, housing starts in
the United States, Canada, Japan and China), and log and chip supply/demand relationships. Interfor’s
financial results may be significantly affected by changes in the selling prices of its products. Based on 2011
levels of operations, a $10 change in the Company’s average selling price of its products would impact net
earnings as follows:
Lumber
$10 increase per thousand fbm
$9.8 million increase in net income
Chips
$10 increase per unit1
$4.4 million increase in net income
Interfor sells chips in either volumetric units (VU’s or GPU’s - B.C. Coastal operations) or bone dry units (BDU’s - B.C. Interior and
1
Pacific Northwest operations).
Competition
The markets for the Company’s products are highly competitive on a global basis and producers compete
primarily on the basis of price. In addition, a majority of Interfor’s lumber production is sold in markets where
Interfor competes against many producers of approximately the same or larger capacity. Some of Interfor’s
competitors have greater financial resources than the Company and a number are, in certain product lines,
lower cost producers than Interfor.
Factors which affect the Company’s competitive position include:
•
•
•
•
•
•
•
the foreign exchange rate;
the cost of labour;
the costs of harvesting or purchasing logs;
the quality of its products and customer service;
the ability to secure space on vessels for overseas shipments and on trucks and railcars for North
American shipments;
the cost of export taxes payable on sales to the U.S.; and
its ability to maintain high operating rates and thus lower manufacturing costs.
If the Company is unable to successfully compete on a global basis, its financial condition could suffer.
Availability of Log Supply
The log requirements of Interfor’s mills are met using logs harvested from its timber tenures, by long-term
trade and purchase agreements and by purchases on the open market. Logs produced but unsuitable for use
in Interfor’s mills are either traded for suitable logs or sold on the open market. Operating at normal capacity,
the Company’s Canadian mills generally purchase less than 50% of their log requirements either through
purchase agreements or on the open market. The Company relies almost entirely on purchased fibre for its
U.S. based mills, with some logs provided by the Company’s Canadian coastal logging operations for the
sawmills located on the Olympic Peninsula. As a result, fluctuations in the price, quality or availability of log
supply can have a material effect on Interfor’s business, financial position, results of operations and cash flow.
Additionally, in order to ensure uninterrupted access to logs harvested from its timber tenures in Canada,
Interfor must also focus on the continuous development of road networks. This encompasses an integrated
plan by foresters, engineers and logging operations personnel to identify future logging areas and develop the
33
engineering for roads. Interfor expects to fund its ongoing road development through the cash generated from
operations and through utilization of its existing bank facilities.
Use of Financial and Other Instruments
From time to time, the Company employs financial instruments, such as interest rate swaps and foreign
currency forward and option contracts, to manage exposure to fluctuations in interest rates and foreign
exchange rates. The Company also trades lumber futures to manage price risk. The Company’s policy is not to
use derivatives for trading or speculative purposes. The risk management strategies and relationships are
formally documented and assessed on a regular, ongoing basis to ensure derivatives are effective in offsetting
changes in fair values or cash flows of hedged items.
The counter-parties for all derivative contracts except lumber futures are the Company’s Canadian bankers who
are highly-rated and, hence, the risk of credit loss on the instruments is mitigated.
Lumber futures are traded through a well established financial services firm with a long history of providing
trading, exchange and clearing services for commodities and foreign currencies. As trading activities are closely
monitored by senior management and restricted including a maximum number of outstanding contracts at any
point in time the risk of credit loss on these instruments is considered low.
Currency Exchange Sensitivity
The Company’s Canadian operations ordinarily sell approximately 75% of their lumber into export markets, with
the majority of these sales denominated in foreign currency, predominantly US$ and a small amount in
Japanese Yen. While the Canadian operations also incur some US$ denominated expenses, primarily for ocean
freight and other transportation, and equipment operating leases, the majority of expenses are incurred in
CAD$.
An increase in the value of the CAD$ relative to the US$ would reduce the amount of revenue in CAD$ realized
by the Company from lumber sales made in US$. This would reduce the Company’s operating margin and the
cash flow available to fund operations. As a result, any such increase in the value of the CAD$ relative to the
US$ could have a material adverse effect on the Company’s business, financial condition, results of operations
and cash flows.
The Company actively manages its currency exchange risk for fluctuations in US$ and Japanese Yen by
identifying opportunities from time to time to enter into foreign exchange contracts to effectively hedge its net
exposure. As at December 31, 2011, the Company has outstanding obligations to sell a maximum of US$16.3
million at an average rate of CAD$1.0334 to the US$1.00, sell Japanese ¥90.0 million at an average rate of
¥75.65 to the US$1.00 and buy a maximum of US$2.0 million at an average rate of CAD$1.01775 to the
US$1.00 during 2011. All foreign currency gains or losses to December 31, 2011 have been recognized in the
Statement of Operations and the fair value of the foreign currency contracts has been recorded as an asset of
$0.3 million in accounts receivable (2010 - $0.5 million asset fair value recorded in accounts receivable and a
negligible liability in accounts payable).
Based on the Company’s net exposure to foreign currencies resulting from forward contracts in 2011, the
sensitivity of Interfor’s net earnings is as follows:
US$
$0.01 increase vs. CAD$
$1.9 million increase in net income
Japanese Yen 1¥ increase vs. US$
$0.1 million increase in net income
Until 2010, Interfor’s U.S. operations produced and sold products almost exclusively for the U.S. market, but
with the poor U.S. housing starts and increased demand from China and other overseas markets there has
been sizable growth in export sales in the last two years. All revenues and expenses are denominated in US$.
All foreign currency denominated assets and liabilities of the U.S. foreign operations with a U.S. dollar
functional currency is translated at exchange rates in effect at the balance sheet date. Revenues and expenses
are translated at the average rates for the period. Unrealized gains and losses arising upon translation of net
foreign currency investment positions in U.S. dollar functional currency foreign operations, together with any
gain or losses arising from hedges of those net investment positions to the extent effective, are credited or
charged to net change in unrealized foreign currency translation gains (losses) in the Statement of
Comprehensive Income. Upon sale, reduction or substantial liquidation of an investment position, the
34
previously recorded net unrealized gains (losses) thereon in the Translation Reserve are reclassified to the
Statement of Operations.
The Company recorded a $2.7 million unrealized foreign exchange gain on translation of its U.S. operations
with a functional currency of $US (2010 - $7.6 million loss) to Other comprehensive income (loss) in 2011.
On October 1, 2008, the Company designated the US$30.2 million drawn under its Revolving Term Line for the
acquisition of its Beaver operations as a hedge against its investment in its U.S. operations. Unrealized foreign
exchange loss of $0.7 million (2010 - $1.7 million gain) have been recorded in Other comprehensive income
(loss) in 2011.
In 2010, in conjunction with the amendments to its credit facilities on January 15, 2010, the Company drew
US$35.0 million ($35.8 million) on its Revolving Term Line and repaid and cancelled its U.S. dollar Non-
Revolving Term Line. Upon repayment of the loan, the foreign exchange gain of $1.0 million realized on
repayment of the Non-Revolving Term Line was recognized in Other foreign exchange gain (loss) on the
Statement of Operations. The Company subsequently drew a further $36.7 million and repaid the drawings of
US$35.0 million used to repay the Non-Revolving Term Line, realizing a foreign exchange loss of $0.9 million
which was recognized in Other foreign exchange gain (loss) on the Statement of Operations in 2010.
Cost of Debt Financing and Sensitivity
As at December 31, 2011 Interfor had drawn from its operating and term credit facilities of floating rate debt a
total of $110.7 million (2010 - $160.8 million), including letters of credit.
The Company’s operating and term credit facilities bear interest at the bank prime rate plus a premium, or, at
the Company's option, at rates for Bankers' Acceptances for CAD$ loans or at LIBOR for US$ loans, in all cases
depending upon a financial ratio. The lines are subject to certain financial covenants including a minimum
working capital requirement, a maximum ratio of total debt to total capitalization, and a minimum net worth
requirement.
On August 25, 2011, the Company entered into two interest rate swaps, each with notional value of $25 million
and maturing July 28, 2015. Under the terms of the swaps the Company pays an amount based on a fixed
annual interest rate of 1.56% and receives a 90 day BA CDOR which is recalculated at set interval dates. The
intent of these swaps is to convert floating-rate interest expense to fixed-rate interest expense. As these
interest rate swaps have been designated as cash flow hedges the fair value of these interest rate swaps at
December 31, 2011 being a liability of $0.5 million (measured based on Level 2 of the fair value hierarchy) has
been recorded in Trade accounts payable and accrued liabilities and a charge of $0.5 million has been
recognized in Other comprehensive income.
Based on the Company’s average debt level during 2011, the sensitivity of a 100 basis point increase in interest
rates would result in an approximate decrease of $0.4 million in net earnings.
Regulatory Issues
Interfor’s operations are subject to extensive provincial, state, federal or other laws and regulations that apply
to most aspects of our business activities. Where applicable, Interfor is required to obtain approvals, permits
and licences for its operations as a condition to operate.
From time to time the changes in government policy or regulation may impact the company’s operations. Until
the details of all such changes are announced and implemented, the full impact of these changes on the
Company’s production, costs, financial position and results of operations cannot be determined.
Allowable Annual Cut (“AAC”)
Interfor holds cutting rights in B.C. that represent an AAC of approximately of 3.77 million cubic meters. Of this
amount 3.5 million cubic meters is in the form of replaceable tenures. The remaining portion is held in non-
replaceable tenures (timber Licences and non-replaceable forest licences) that will expire over time.
The AAC is regulated by the Ministry of Forests and Range and subject to periodic reviews that assess and then
make determinations to set harvesting rates for each tenure. Many factors affect the AAC such as timber
35
inventory, operable land base, growth rates, regulations, forest health, land use and environmental and social
considerations.
Reductions in Interfor’s AAC from any new protected areas are subject to compensation, once these areas have
been formally removed. Currently there are no compensation claims outstanding.
The amount of timber available for harvest in the B.C. Southern Interior is expected to remain high for the next
five years as a consequence of an accelerated harvest to address the impact from the pine beetle epidemic.
The overall timber supply is expected to be reduced in the B.C. Interior once the surplus of dead pine is no
longer useable. The changes in AAC will vary by location as determined by the provincial Chief Forester.
Aboriginal Issues
Aboriginal groups have claimed aboriginal title and rights over substantial portions of British Columbia, including
areas where Interfor’s forest tenures are situated, creating uncertainty as to the status of competing property
rights. The Federal and Provincial governments have been seeking to negotiate settlements with aboriginal
groups throughout British Columbia in order to resolve aboriginal rights and title claims. In addition, the
governments have entered, and may continue to enter, into interim measures agreements with aboriginal
groups. Any interim measures agreements or settlements that may result from the treaty process may involve
a combination of cash, resources, grants of conditional rights to resources on public lands and rights of self
government. The impact of aboriginal claims or treaty settlements on Interfor’s forest tenures or the amounts
of compensation to Interfor, if any, cannot be estimated at this time.
The courts have also established that the Crown has a duty to consult with aboriginal groups and where
appropriate accommodate aboriginal interests. However, questions of responsibility and appropriateness of
balancing interests will continue to evolve as the parties try to address these long standing complex issues. In
British Columbia the Province has initiated a New Relationship process with First Nations that is intended to
improve the functional relationship between the Crown and aboriginal groups prior to treaty settlement. The
Province and First Nations groups on the B.C. Coast have signed Reconciliation Protocols that provides a shared
decision making process for resource and land use, as well as new forest sector opportunities. These
agreements overlap portions of Interfor’s Coastal tenures. The agreement will be assessed and monitored in
the years ahead to determine the extent of any implications on those operations.
Stumpage Fees
Stumpage is the fee the Crown charges companies to harvest timber from Crown land. Stumpage payments
for a harvesting area is based on a competitive market pricing system (MPS) that has been established for both
the coast and interior regions of B.C..
Amending the stumpage system is complex and the subject of discussion involving, among other things, lumber
trade agreements between Canada and the United States. The primary variable in MPS is log pricing
established through open market bidding for standing timber. In addition to bid prices, there are a number of
operational and administrative factors that go into determining an individual stumpage rate for each cutting
permit.
On July 1, 2010 The Ministry of Forests and Range implemented changes to the interior market pricing system
in response to the Mountain Pine Beetle (“MPB”) epidemic. These changes included the introduction of stand as
a whole pricing with cruise based billing for MPB damaged timber. The impact of these changes is to increase
the overall market sensitivity to pricing of MPB damaged timber. These changes in the pricing system are
consistent with Canada’s obligation under the 2006 SLA.
On October 8, 2010, the U.S. Department of Commerce informed Canada that it was requesting consultations
under the SLA agreement with respect to current and past pricing of MPB damaged timber. On January 18,
2011 U.S. Trade Representative’s office filed for arbitration under the provisions of the Softwood Lumber
Agreement over its concern that the Province of B.C. is charging too low a price for certain timber harvested on
public lands in the B.C. Interior. The arbitration will be conducted by the LCIA. The Company believes that B.C.
and Canada are complying with their obligations under the SLA.
36
In August, 2011 the U.S. Trade Representative filed a detailed statement of claim with the LCIA and Canada
delivered its response in November, 2011. A hearing before the arbitration panel is expected to take place in
early 2012 with a final decision expected by the end of 2012.
As the arbitration process is still in its early stages, the existence of any potential claim has not been
determined and no provision has been recorded in the financial statements as at December 31, 2011.
Periodic changes in the British Columbia government’s administrative policy can affect the market price for
timber and the viability of individual logging operations. There can be no assurance that current changes or
future changes will not have a material impact on stumpage rates.
Environment
Interfor has incurred, and will continue to incur, costs to minimize environmental impact, prevent pollution and
for continuous improvement of its environmental performance. Interfor may discover currently unknown
environmental problems or conditions relating to its past or present operations, or it may be faced with
unforeseen environmental liability in the future. This may require site or other remediation costs to maintain
compliance or correct violations of environmental laws and regulations or result in governmental or private
claims for damage to person, property or the environment, which could have a material adverse effect on
Interfor’s financial condition and results of operations.
Labour Disruptions
The Company’s Acorn, Hammond, Grand Forks, and Castlegar sawmill employees are members of the Canadian
United Steelworkers’ Union (“USW”) union. The collective agreement with the Southern Interior USW
agreement (Grand Forks and Castlegar) has an expiry date of June 30, 2013 while the USW agreement for the
B.C. Coast (Acorn and Hammond) expires on June 15, 2014. The Company also has 18 employees in the B.C.
Interior who are members of the Canadian Marine Service Guild, and their collective agreement expires
September 30, 2014.
Production disruptions resulting from walkouts or strikes by unionized employees could result in lost production
and sales, which could have a material adverse impact on the Company’s business. The Company believes that
its current labour relations are stable and does not anticipate any related disruptions to its operations in the
foreseeable future.
OUTLOOK
Business conditions have improved in recent weeks with a more positive tone in the US and higher activity
levels in China. That said, the global economic environment remains uncertain. Interfor expects to maintain
operating rates at current levels or above for the next few quarters but will remain alert to activity level in order
to keep inventory levels in balance.
Considerable attention is being devoted to the Grand Forks and Castlegar capital projects with a goal of
completing construction by the end of the first quarter of 2013 rather than the budgeted completion at the end
of the third quarter of 2013.
The Canadian dollar is expected to trade close to par against the U.S. dollar.
With the prospect of continuing challenges in the North American markets, the Company continues its
disciplined approach to production, inventory management and capital spending and looks to continuing to
build its relationships with the emerging export markets.
ADDITIONAL INFORMATION
Additional information relating to the Company and its operations can be found on its website at
www.interfor.com and in the Annual Information Form and on SEDAR at www.sedar.com. Interfor’s trading
symbol on the Toronto Stock Exchange is IFP.A.
37
International Forest Products Limited
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of International Forest Products Limited (Interfor) is responsible for preparing
the accompanying consolidated financial statements. The financial statements were prepared in
accordance with International Financial Reporting Standards and are necessarily based in part on
management’s best estimates and judgements. The financial information included elsewhere (in the
Statutory Reports) is consistent with that in the consolidated financial statements.
Interfor maintains a system of internal accounting control which management believes provides
reasonable assurance that financial records are reliable and form a proper basis for preparation of
financial statements. The internal accounting control process includes communications to employees
of Interfor’s standards for ethical business conduct.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for
financial reporting and internal controls. The Board exercises this responsibility through its Audit
Committee, the members of which are neither officers nor employees of Interfor. The Committee
meets periodically with management and the independent Auditors to satisfy itself that each group is
properly discharging its responsibilities and to review the consolidated financial statements and the
independent Auditors’ report. The Company’s Auditors have full and free access to the Audit
Committee. The Audit Committee reports its findings to the Board of Directors for consideration in
approving the consolidated financial statements for issuance to the shareholders. The Committee also
makes recommendations to the Board with respect to the appointment and remuneration of the
Auditors.
The consolidated financial statements have been examined by the independent Auditors, KPMG
LLP and their report follows.
Duncan K. Davies
John A. Horning
President and Chief Executive Officer
Senior Vice President, Chief Financial Officer and
Corporate Secretary
February 17, 2012
38
International Forest Products Limited
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Shareholders
We have audited the accompanying consolidated financial statements of International Forest Products
Limited (the “Company”) which comprise the consolidated statements of financial position as at
December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated statements of
comprehensive income, changes in equity and cash flows for the years ended December 31, 2011
and December 31, 2010, and notes, comprising a summary of significant accounting policies and
other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on our judgment, including
the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, we consider internal control
relevant to the Company’s preparation and fair presentation of the consolidated financial statements
in order to design audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of International Forest Products Limited as at December 31, 2011,
December 31, 2010 and January 1, 2010, and its consolidated financial performance and its
consolidated cash flows for the years ended December 31, 2011 and December 31, 2010 in
accordance with International Financial Reporting Standards.
KPMG LLP, Chartered Accountants
February 17, 2012
Vancouver, Canada
International Forest Products Limited
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
December 31, 2011 and 2010 and January 1, 2010
December 31
2011
December 31
2010
Note
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable and other
Income taxes recoverable
Inventories
Prepayments
Employee future benefits
Investment in associate company
Other investments and assets
Property, plant and equipment
Logging roads and bridges
Timber licences
Other intangible assets
Goodwill
Asset classified as held for sale
9
$
19
5
22
6
6
7
8
8
8
8
7
10,435
44,000
-
97,645
10,757
162,837
1,256
-
2,836
340,034
16,753
76,792
1,250
13,078
-
$
9,301
45,961
-
71,762
8,334
135,358
515
16,074
2,636
347,990
17,063
80,154
1,723
13,078
-
39
$
January 1
2010
(note 28)
3,802
32,951
230
60,159
7,777
104,919
972
7,855
1,164
370,994
16,485
67,010
2,255
13,078
3,424
$ 614,836
$ 614,591
$ 588,156
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable and accrued liabilities
12
Reforestation liability
19
Income taxes payable
10
Payable to associate company
$
Reforestation liability
Long-term debt
Employee future benefits
Provisions and other liabilities
Equity:
Share capital:
Issued and fully paid:
Class A subordinate voting shares
Class B common shares
Contributed surplus
Translation reserve
Hedge reserve
Retained earnings
12
9
22
11
13
13
60,692
14,121
1,058
-
75,871
17,777
110,713
8,186
11,467
342,285
4,080
7,476
(4,929)
(503)
42,413
390,822
$
$
50,053
9,785
230
15,738
75,806
17,325
156,037
5,815
12,158
285,362
4,080
5,408
(7,646)
-
60,246
347,450
38,482
6,772
-
3,096
48,350
16,588
144,525
5,428
11,856
284,500
4,080
5,408
-
-
67,421
361,409
Commitments and contingencies (note 20); Subsequent events (note 27).
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
$ 614,836
$ 614,591
$ 588,156
E.L. Sauder, Director
G.H. MacDougall, Director
International Forest Products Limited
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian dollars, except earnings per share amounts)
Years ended December 31, 2011 and 2010
40
Sales
Costs and expenses:
Production
Selling and administration
Long term incentive compensation
Export taxes
Depreciation of plant and equipment
Depletion and amortization of timber, roads and other
Operating loss before restructuring costs
and write-downs of plant and equipment
Restructuring costs and write-downs of plant and
and equipment
Operating loss
Other earnings (expenses):
Finance costs
Other foreign exchange gain (loss)
Other income (expense)
Equity in earnings of associate company
Loss before income taxes
Income taxes:
Current
Deferred
Net loss
Other comprehensive loss:
Foreign currency translation differences
Defined benefit plan actuarial losses
Equity share of associate company’s
defined benefit plan actuarial losses
Loss in fair value of interest rate swaps
Income tax on other comprehensive loss
Comprehensive loss
Net loss per share:
Basic and diluted
Note
2011
2010
(note 28)
$ 758,016
$ 625,618
7
8
18
16
17
4,6
19
22
26
19
681,363
20,548
449
9,029
27,291
24,263
762,943
(4,927)
(580)
(5,507)
(7,094)
204
371
-
(6,519)
(12,026)
817
610
1,427
556,551
17,508
1,966
7,427
27,475
18,521
629,448
(3,830)
(1,578)
(5,408)
(10,441)
(280)
(25)
11,431
685
(4,723)
60
410
470
(13,453)
(5,193)
2,632
(4,541)
-
(503)
250
(2,162)
(7,433)
(2,490)
(115)
-
410
(9,628)
$ (15,615)
$ (14,821)
21
$
(0.25)
$
(0.11)
See accompanying notes to consolidated financial statements.
International Forest Products Limited
Consolidated Statements of Changes in Equity
(Expressed in thousands of Canadian dollars, except earnings per share amounts)
Years ended December 31, 2011 and 2010
41
Class A Share Class B Share Contributed
Surplus
Capital
Capital
Note
Translation
Reserve
Hedge
Reserve
Retained
Earnings
Total
Equity
Balance at January 1, 2010
28
$ 284,500
$
4,080
$
5,408
$
Net loss:
Other comprehensive loss:
Foreign currency translation differences, net of tax
Defined benefit plan actuarial losses, net of tax
Equity in associate company’s defined
19
19, 22
benefit plan actuarial losses
Contributions:
Share options exercised
22
13
-
-
-
-
862
-
-
-
-
-
-
-
-
-
-
$
-
-
(7,646)
-
-
-
Balance at December 31, 2010
285,362
4,080
5,408
(7,646)
Net loss:
Other comprehensive loss:
Foreign currency translation differences, net of tax
Defined benefit plan actuarial losses, net of tax
Loss in fair value of interest rate swaps
19
19, 22
26
-
-
-
-
Contributions:
Share options exercised
13
Share issuance, net of share issue expenses and tax 13
1,370
55,553
Changes in ownership interests in investee:
Acquisition of subsidiary
4
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,068
-
2,717
-
-
-
-
-
-
-
-
-
-
-
-
-
$ 67,421
$ 361,409
(5,193)
(5,193)
-
(1,867)
(7,646)
(1,867)
(115)
(115)
-
862
60,246
347,450
(13,453)
(13,453)
-
-
(503)
-
(4,376)
-
2,717
(4,376)
(503)
-
-
-
-
-
1,370
55,553
(4)
2,064
Balance at December 31, 2011
$ 342,285
$
4,080
$
7,476
$
(4,929)
$
(503)
$ 42,413
$ 390,822
See accompanying notes to consolidated financial statements.
International Forest Products Limited
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2011 and 2010
42
Cash provided by (used in):
Operating activities:
Net loss
Items not involving cash:
Note
2011
2010
(note 28)
$ (13,453)
$
(5,193)
Depreciation of plant and equipment
Depletion and amortization of timber, roads and other
Income tax expense
Finance costs
Other assets
Reforestation liability
Other liabilities and provisions
4,6
Equity in earnings of associate company
Write-down (reversals) of plant, equipment, and roads 7,8
Unrealized foreign exchange losses (gains)
Other expense (income)
7
8
19
16
12
Cash generated from (used in) operating working capital:
Trade accounts receivable and other
Inventories
Prepayments
Trade accounts payable and accrued liabilities
Income taxes refunded (paid)
Investing activities:
Additions to property, plant and equipment
Additions to logging roads
Additions to timber and other intangible assets
Proceeds on disposal of property, plant and equipment
Cash received on acquisition of subisidary
Investments and other assets
Financing activities:
Issuance of share capital, net of expenses
Interest payments
Funds from promissory note payable to associate
Additions to long-term debt
Repayments of long-term debt
7
8
8
17
4
13
10
9
9
27,291
24,263
1,427
7,094
238
(90)
(2,761)
-
(423)
191
(184)
43,593
3,191
(25,613)
(1,698)
9,588
(622)
28,439
(16,099)
(19,987)
(126)
273
4,846
(921)
(32,014)
56,256
(5,629)
-
100,000
(146,000)
4,627
Foreign exchange gain (loss) on cash and cash equivalents held
in a foreign currency
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
82
1,134
9,301
$ 10,435
See accompanying notes to consolidated financial statements.
27,475
18,521
470
10,441
(5)
(670)
287
(11,431)
809
(71)
25
40,658
(13,461)
(12,423)
(551)
15,161
396
29,780
(10,745)
(16,261)
(15,218)
1,325
-
(4,383)
(45,282)
862
(8,881)
15,738
125,819
(112,534)
21,004
(3)
5,499
3,802
9,301
$
International Forest Products Limited
43
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
1. Nature of operations:
International Forest Products Limited and its subsidiaries (the “Company” or “Interfor”) produce
wood products in British Columbia and in the U.S. Pacific Northwest for sale to markets around
the world.
The Company is a publicly listed company incorporated under the Business Corporations Act
(British Columbia) with shares listed on the Toronto Stock Exchange. Its head office, principal
address and records office are located at Suite 3500, 1055 Dunsmuir Street, Vancouver, British
Columbia, Canada, V7X 1H7.
The consolidated financial statements of the Company as at and for the year ended December
31, 2011 comprise the Company and its subsidiaries.
2. Statement of Compliance:
(a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRSs”). These are the Company’s first annual consolidated
financial statements prepared in accordance with IFRSs and IFRS 1 First-time Adoption of
International Financial Reporting Standards has been applied.
An explanation of how the transition to IFRSs has affected the reported financial position,
financial performance and cash flows of the Company is provided in Note 28.
These consolidated financial statements were approved by the Board of Directors on February
17, 2012.
(b) Basis of measurement:
The consolidated financial statements have been prepared on the historical cost basis except
for the following material items in the Statement of Financial Position:
(i) Derivative financial instruments are measured at fair value
(ii) Long-term debt is measured at fair value at inception and at amortized cost thereafter;
(iii) Liabilities for cash-settled share-based payment arrangements are measured at fair value;
and
(iv) The employee benefit assets and liabilities are recognized as the net of the fair value of
the plan assets and the present value of the defined benefit obligations on a plan by plan
basis.
(c) Functional and presentation currency:
These consolidated financial statements are presented in Canadian dollars, which is the
parent company’s functional currency. Certain of the Company’s subsidiaries have a
functional currency of the U.S. dollar and are translated to Canadian dollars. All financial
information presented in Canadian dollars has been rounded to the nearest thousand except
per share amounts.
(d) Use of estimates and judgements:
The preparation of the consolidated financial statements in conformity with IFRSs requires
management to make judgements, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may differ
from these estimates.
International Forest Products Limited
44
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
2. Statement of Compliance (continued):
(d) Use of estimates and judgements (continued):
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimates are revised and in
any future periods affected.
Significant areas requiring the use of management estimates relate to the determination of
restructuring, reforestation, road deactivation, environmental and tax obligations, share-
based compensation, recoverability of assets, rates for depreciation, depletion and
amortization, and determination of fair values of assets and liabilities acquired in business
combinations and impairment analysis of non-financial assets including goodwill.
3. Significant accounting policies:
The accounting policies set out below have been applied consistently to all periods presented in
these consolidated financial statements and in preparing the opening IFRS statement of financial
position at January 1, 2010 for the purposes of the transition to IFRSs, unless otherwise
indicated.
(a) Basis of consolidation:
These condensed consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries from their respective dates of acquisition or incorporation. All
intercompany balances, transactions and unrealized income and expenses arising from
intercompany transactions have been eliminated on consolidation.
(i) Business combinations:
For business acquisitions on or after January 1, 2010, the Company measures goodwill at
the acquisition date as the fair value of the consideration transferred including any non-
controlling interest less the fair value of the identifiable assets acquired and liabilities
assumed, all measured as of the acquisition date. When the excess is negative, a
bargain purchase gain is recognized immediately in net earnings. Transaction costs,
other than those associated with the issue of debt or equity securities, are expensed as
incurred.
As part of its transition to IFRSs, the Company elected not to restate those business
combinations that occurred prior to January 1, 2010. In respect of acquisitions prior to
January 1, 2010, goodwill represents the amount recognized under the Company’s
previous accounting framework, Canadian generally accepted accounting principles
(“GAAP”).
(ii) Investment in associate companies:
Investments over which the Company is able to exert significant influence but not control
are accounted for on the equity basis and are recognized initially at cost. The
consolidated financial statements include the Company’s share of the profit or loss and
other comprehensive income of equity-accounted investees, after adjustments to align
the accounting policies with those of the Company, from the date that significant
influence commences until the date that it ceases.
International Forest Products Limited
45
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
3. Significant accounting policies (continued):
(a) Basis of consolidation (continued):
(ii) Investment in associate companies (continued):
Until January 5, 2011, the Company held 60% of the outstanding common shares of
Seaboard Shipping Company Ltd. (“SSCL”) with the remaining common shares held by
other British Columbia forestry companies. Although the Company owned over 50% of
the common shares of SSCL, the shareholders had entered into agreements that limited
the Company’s ability to control SSCL’s strategic decisions. In addition, net earnings of
SSCL were distributed based on a percentage of shipments of product by the
shareholders and not based on common share ownership. The Company accounted for
its investment in SSCL using the equity method with the investment adjusted for earnings
of SSCL based on the Company’s percentage of earnings as determined based on its
shipment percentage and decreased for distributions made by SSCL.
On January 5, 2011 Seaboard became a wholly owned subsidiary of the Company and its
accounts were consolidated from the date of change in control.
(b) Foreign currency:
(i) Foreign currency transactions:
Transactions in foreign currencies are effectively translated to the respective functional
currency at exchange rates at the transaction date. Monetary assets and liabilities
denominated in foreign currencies are revalued at each reporting date. Non-monetary
assets and liabilities denominated in foreign currencies measured at historical cost are
translated using the transaction date exchange rate.
Foreign currency gains or losses arising on revaluation are recognized in Net earnings.
Where revaluations relate to trade accounts receivable those foreign currency gains or
losses are adjusted to sales revenue; where revaluations relate to trade accounts payable
those foreign currency gains or losses are adjusted to production costs.
(ii) Foreign operations:
Certain of the Company’s subsidiaries have a functional currency of the U.S. dollar.
Revenues and expenses denominated in foreign currencies are translated to Canadian
dollars at average rates for the period, which approximate the transaction date.
Foreign currency denominated assets and liabilities are translated into Canadian dollars at
exchange rates in effect at the reporting date. Since January 1, 2010, related unrealized
gains and losses are included in Foreign currency translation differences in Other
comprehensive income and in the Translation reserve in equity.
Unrealized foreign exchange gains and losses residing in the Translation reserve will be
released to net earnings upon the reduction of the net investment in foreign operations
through the sale, reduction or substantial liquidation of an investment position.
Foreign exchange gains or losses arising from a monetary item receivable from a foreign
operation, the settlement of which is neither planned nor likely in the foreseeable future
and which in substance is considered to form part of the net investment in the foreign
operation, are recognized
in Other
comprehensive income and presented in the Translation reserve in equity.
in Foreign currency translation differences
International Forest Products Limited
46
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
3. Significant accounting policies (continued):
(b) Foreign currency (continued):
(iii) Hedge of net investment in a foreign operation:
Financial liabilities denominated in foreign currencies are from time to time designated as
a hedge of the Company’s investments in foreign operations.
Foreign currency differences arising on the re-translation of a financial liability designated
as a hedge of a net investment in a foreign operation are recognized in Foreign currency
translation differences in Other Comprehensive Income to the extent that the hedge is
effective and presented in the Translation Reserve in equity. To the extent that the
hedge is ineffective, such differences are recognized in Other foreign exchange gain
(loss) in net earnings.
When the Company terminates the designation of the hedging relationship and
discontinues its use of hedge accounting any accumulated unrealized foreign exchange
gains and losses remain in the Translation reserve. Unrealized foreign exchange gains
and losses arising subsequent to termination of the designation of the hedge relationship
are recorded in Other foreign exchange gain (loss) in net earnings. When the hedged
net investment is disposed of, the relevant amount in the Translation reserve is
reclassified to Net earnings as part of the gain or loss on disposal.
(c) Financial instruments:
(i) Non-derivative financial instruments:
Non-derivative financial instruments are comprised of cash and cash equivalents, trade
and other receivables, trade accounts payable and accrued liabilities, provisions, and
loans and borrowings including long-term debt. The Company recognizes receivables,
payables and loans on the date that they are originated at fair value plus any direct
transaction costs. All other financial assets are recognized initially on the trade date at
which the Company becomes party to the contractual provisions of the instrument.
Cash and cash equivalents comprise cash on deposit and short-term interest bearing
securities with maturities at their purchase date of three months or less. Cash and cash
equivalents and trade and other receivables are designated as loans and receivables are
initially measured at fair value plus any direct transactions costs and thereafter at
amortized cost using the effective interest rate method, less any impairment losses.
Trade payables and accrued liabilities, provisions, and loans and borrowings including
long-term debt are designated as other financial liabilities and are initially measured at
fair value and thereafter at amortized cost using the effective interest rate method.
There are no financial instruments classified as available-for-sale or held-to-maturity.
(ii) Derivative financial instruments:
The Company at times uses derivative financial instruments for economic hedging
purposes in the management of foreign currency exposures. Foreign exchange exposure
to foreign currency receipts and related receivables, primarily U.S. currency, is managed
through the use of foreign exchange forward contracts and options.
International Forest Products Limited
47
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
3. Significant accounting policies (continued):
(c) Financial instruments (continued):
(ii) Derivative financial instruments (continued):
The Company has chosen not to designate its derivative forward foreign exchange
contracts as hedges. These derivative financial instruments are designated as held for
trading and, consequently, are carried on the Statement of Financial Position at fair
value, with changes in fair value being recorded as an adjustment to Sales in Net
earnings.
The Company also trades lumber futures in managing price risk and which are designated
as held for trading with changes in fair value being recorded in Other income (expense)
in Net earnings. Trading activities are closely monitored and restricted including a
maximum number of outstanding contracts outstanding at any point in time.
The Company at times holds derivative interest rate swaps to hedge its interest rate risk
exposures and may designate these financial instruments as the hedging instrument in a
cash flow hedge of fluctuations in market interest rates associated with specific drawings
under its long-term debt. The effective portion of changes in the fair value of the
derivative are recognized in Other comprehensive income and presented in the Hedging
Reserve in equity. Any ineffective portion of changes in the fair value of the derivative is
recognized immediately in Net earnings.
The risk management strategies and relationships are formally documented and assessed
on a regular, on-going basis.
(iii) Share capital:
Common shares are classified as equity. Incremental costs directly attributable to the
issue of common shares and share options are recognized as a deduction from equity,
net of any tax effects.
(d) Cash and cash equivalents:
Cash consists of cash on deposit and short-term interest bearing securities with maturities at
their purchase date of three months or less.
(e) Inventories:
Lumber inventories are valued at the lower of cost and net realizable value on a specific
product basis. Cost is determined as the weighted average of cost of production on a three
month rolling average, lagged by one month and adjusted for exceptional costs, as in the
case of a curtailment.
Log inventories are valued at the lower of cost and net realizable value on a specific boom
basis where logs are in boom form, or in aggregate on a species and sort basis where the
logs do not exist in boom form. Cost for internally produced log inventories is determined as
the weighted average cost of logging on a twelve month rolling average on the B.C. Coast
and on a three month rolling average in the B.C. Interior. For both areas, costs are lagged by
one month and adjusted for exceptional costs, as in the case of a curtailment. Log
inventories purchased from external sources are costed at acquisition cost. Net realizable
value of logs is based on either replacement cost or, for logs which have been committed to
processing into lumber, on estimated net realizable value after taking into consideration costs
of completion and sale.
Other inventories consist primarily of supplies which are recorded at lower of cost and
replacement cost.
International Forest Products Limited
48
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
3. Significant accounting policies (continued):
(f) Property, plant and equipment:
Property, plant and equipment are recorded at cost or deemed cost less accumulated
depreciation and accumulated impairment losses. Depreciation on machinery and equipment
is provided on the basis of hours operated relative to the asset’s lifetime estimated operating
hours. Depreciation on all other assets is provided on a straight-line basis (ranging from
2.5% to 33%) over the estimated useful lives of the assets.
Depreciation methods, useful lives and residual values are reviewed annually and adjusted if
appropriate.
Maintenance costs are recorded as expenses during the period as incurred, with the
exception of programs that extend the useful life of the asset or increase its value, which are
then capitalized.
As part of its transition to IFRSs, the Company elected to measure a property at its
Hammond sawmill site at its fair value and use that fair value as its deemed cost at the date
of transition, January 1, 2010 (note 28).
Borrowing costs directly attributable to the acquisition, construction or production of
qualifying assets, which are assets that necessarily take a substantial period of time to get
ready for their intended use, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use.
(g) Logging roads and bridges:
Logging roads and bridges are recorded at cost less accumulated amortization and
accumulated impairment losses. Road and bridge amortization is computed on the basis of
timber cut relative to available timber.
Amortization methods, useful lives and residual values are reviewed annually and adjusted if
appropriate.
(h) Intangible assets:
(i) Timber licences:
Timber licences are recorded at cost less accumulated depletion and accumulated
impairment losses. Timber licence depletion is computed on the basis of timber cut
relative to available timber. Tree farm and forest licences are depleted on a straight-line
basis over 40 years. Amortization rates are reviewed annually to ensure they are aligned
with estimates of remaining economic useful lives of the associated intangible assets.
(ii) Goodwill:
Goodwill is measured at cost less accumulated impairment losses. See note 3(a) for the
policy on measurement of goodwill at initial recognition. In respect of acquisitions prior
to January 1, 2010, goodwill is included on the basis of its deemed cost, which represents
the amount recognized under previous Canadian GAAP.
(iii) Other intangible assets:
Other intangible assets are recorded at cost less accumulated amortization and
accumulated impairment losses. Amortization on other intangible assets is provided on a
straight-line basis over five years being the estimated useful lives of the assets.
Amortization rates are reviewed annually to ensure they are aligned with estimates of
remaining economic useful lives of the associated intangible assets.
International Forest Products Limited
49
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
3. Significant accounting policies (continued):
(i) Impairment of non-financial assets:
At each reporting date, the Company assesses its non-financial assets to determine whether
there are any indications of impairment. Impairment tests are carried out annually for
goodwill.
The Company conducts a review of external and internal sources of information to assess for
any indications of impairment. External factors include adverse changes in expected future
prices, costs and other market and economic factors. Internal factors include changes in the
expected useful life of the asset or changes to the planned capacity of the asset.
Key assumptions used are based on industry sources, including Forest Economic Advisors, LLC
and Resources Information Systems Inc., as well as management estimates. Assumptions
encompass lumber and residual chip sales prices, applicable foreign exchange rates,
operating rates of the assets, raw material and conversion costs, the level of sales to the U.S.
from Canada, the export tax rate, future capital required to maintain the assets in their
current operation condition, and other items.
If any indication of impairment exists, an estimate of the asset’s recoverable amount is
calculated. The recoverable amount is determined as the higher of the fair value less direct
costs to sell for the asset and the asset’s value in use. If the carrying amount of the asset
exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to
net earnings to reduce the carrying amount in the Statement of Financial Position to its
recoverable amount.
Fair value is determined as the amount that would be obtained from the sale, net of direct
selling costs, of the asset in an arm’s length transaction between knowledgeable and willing
parties.
Value in use is determined as the present value of the estimated future cash flows expected
to arise from the continued use of the asset in its present form and its eventual disposal.
Value in use is determined by applying assumptions specific to the Company’s continued use
of the asset and does not take into account future capital enhancements.
In testing for indications of impairment and performing impairment calculations, assets are
considered as collective groups, referred to as cash generating units (“CGUs”). CGUs are the
smallest identifiable group of assets, liabilities and associated goodwill that generate cash
inflows that are largely independent of the cash inflows from other assets or groups of
assets. Impairment losses recognized for a CGU are first allocated to reduce the carrying
amount of goodwill, if any, assigned to the CGU, and then to reduce the carrying amounts of
the other assets in the CGU on a pro-rata basis.
Impairment assessments are based on a range of estimates and assumptions, including
lumber and chip sales prices, operating rates of the assets, raw material and conversion
costs, sales volumes, the level of export taxes, and an appropriate discount rate. The
Company has analyzed external data in determining appropriate assumptions.
For non-financial assets other than goodwill, impairments previously recognized may be
reversed if the internal and external factors and estimates that led to the initial recognition of
an impairment in a prior period indicate that the loss has decreased or no longer exists. An
impairment loss is reversed if the recoverable amount exceeds the current carrying amount.
The reversal is only to a maximum of the carrying amount that would have been recorded
had the impairment loss not been recognized originally. An impairment loss for goodwill is
not reversed.
International Forest Products Limited
50
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
3. Significant accounting policies (continued):
(j) Reforestation and other decommissioning provisions:
Forestry legislation in British Columbia requires the Company to incur the cost of reforestation
on its forest, timber and tree farm licences and to deactivate logging roads once harvesting is
complete and access is no longer required. Accordingly, the Company records the fair value
of the costs of reforestation and road deactivation in the period in which the timber is cut,
with the fair value of the liability determined with reference to the present value of estimated
future cash flows.
Provisions are measured at the expected value of future cash flows, discounted to their
present value and determined according to the probability of alternative estimates of cash
flows occurring for each operation. The measurement under IAS 37, Provisions, Contingent
Liabilities and Contingent Assets, is based on best estimate and can be based on internal or
external costs, depending upon which is most likely. Significant judgements and estimates
are involved in forming expectations of future activities and the amount and timing of the
associated cash flows. Those expectations are formed based on existing regulatory
requirements and the expertise of Registered Professional Foresters and Engineers employed
or contracted by the Company. Examples of considerations include the specifics of the areas
logged and the treatments prescribed for those areas, as well as the timing and success rates
of the planned activities in terms of reforestation; and road structure and terrain for road
deactivation.
Discount rates reflect the risks specific to the decommissioning provision. Adjustments are
made to decommissioning provisions each period for changes in the timing or amount of cash
flows, changes in the discount rate and the unwinding of the discount. As such, the discount
rate reflects the current risk-free rate given that risks are incorporated into the future cash
flow estimates.
In periods subsequent to the initial measurement, changes in the liability resulting from the
passage of time are recognized as Finance costs and revisions to fair value calculations are
recognized as Production costs in Net earnings as they occur.
(k) Environmental costs:
Environmental expenditures are expensed or capitalized depending upon their future
economic benefit. Expenditures that prevent future environmental contamination are
capitalized as plant and equipment. Expenditures that relate to an existing condition caused
by past operations are expensed. Liabilities are recorded when rehabilitation efforts are likely
to occur and the costs can be reasonably estimated.
Provisions are measured at the expected value of future cash flows, discounted to their
present value and determined according to the probability of alternative estimates of cash
flows using a current pre-tax rate that reflects the risks specific to the liability. The
unwinding of the discount is recognized as a Finance cost in Net earnings.
(l) Employee benefits:
The estimated costs for defined benefit pensions and other post-retirement benefits provided
to employees by the Company are accrued using actuarial methods and assumptions,
including Management’s best estimates of the discount rate, future investment earnings,
salary escalation, and health care costs.
The defined benefit obligation, and the associated annual cost of accruing benefits for the
defined benefit pension plans and other post-retirement benefits is calculated using the
projected unit credit method.
For the purpose of calculating the expected return on plan assets, those assets are valued at
fair value.
International Forest Products Limited
51
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
3. Significant accounting policies (continued):
(l) Employee benefits (continued):
Actuarial gains and losses arise from actual experience being different from the assumptions,
or changes in actuarial assumptions used to determine the defined benefit obligation.
Actuarial gains and losses are recognized in Retained earnings through Other comprehensive
income in the year they arise.
For defined contribution plans, pension expense is the amount of contributions the Company
is required to make in respect of services rendered by employees, the Company has no legal
or constructive obligation to pay further amounts. Plans administered by the government are
treated as defined contribution plans as is the industry-wide unionized employees’ pension
plan.
(m) Equity-settled share based compensation:
The Company has a Share Option Plan and follows the fair value method of accounting for
share options. Compensation expense is recorded for share options over the vesting period
based on the estimated fair market value of the option at the date of grant with a
corresponding increase to contributed surplus. In accordance with IFRS 2, Share-based
Payment, no compensation cost has been recognized for share options granted prior to
November 7, 2002. No share options have been granted after November 7, 2002.
(n) Cash-settled share based compensation:
The Company has a Share Appreciation Rights (“SAR”) Plan, a Deferred Share Unit (“DSU”)
Plan and a Total Shareholder Return (“TSR”) Plan for directors, officers and certain other
eligible employees. The TSR Plan was modified in 2011 to allow for the issuance of
Performance Share Units (“PSUs”). The Company follows the fair value method of accounting
for SARs, DSUs, and TSRs.
Compensation expense is recorded for SARs over the vesting period based on the estimated
fair value of the SARs at the date of grant. Fair value is measured using a Black-Scholes
option pricing model and is adjusted to reflect the number of SARs expected to vest.
Compensation expense is recorded for DSUs at the time of the grant, as the DSU Plan allows
for immediate vesting, based on the fair value at the date of the grant.
Compensation expense is recorded for TSRs over the performance period based on the
estimated fair value of the TSRs at the date of the grant. Fair value is measured using a
combination of call options which are valued using a Black-Scholes pricing model.
The fair value of the SARs, DSUs, and TSRs are subsequently measured at each reporting
date with any changes in fair value reflected in the Long-term incentive compensation in net
earnings. Liabilities are recorded in Trade accounts payable and accrued liabilities and in
Other liabilities on the Statement of Financial Position.
(o) Sales revenue:
The Company recognizes sales to external customers when the product is shipped and title
passes. Sales are recorded on a gross basis, before freight, wharfage and handling costs,
and export taxes.
(p) Finance income and costs:
Finance income comprises net interest income on funds invested.
Finance costs comprise net interest expense on borrowings, the unwinding of the discount on
decommissioning provisions, the amortization of prepaid finance costs and other related
transaction costs.
International Forest Products Limited
52
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
3. Significant accounting policies (continued):
(q) Income tax:
Income tax expense comprises current and deferred tax. Current tax and deferred tax are
recognized in profit or loss except to the extent that it relates to a business combination, or
items recognized directly in equity or in other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the
year, using tax rates enacted or substantively enacted at the reporting date, and any
adjustment to tax payable in respect of previous years.
Deferred tax is recognized in respect of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for taxation
purposes. Deferred tax is not recognized for the following temporary differences: 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, and differences relating to investments in
subsidiaries and jointly controlled entities to the extent that it is probable that they will not
reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable
temporary 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 if there is a
legally enforceable right to offset current tax liabilities and assets, and they relate to income
taxes levied by the same tax authority on the same taxable entity, or on different tax entities,
but they intend to settle current tax liabilities and assets on a net basis or their tax assets
and liabilities will be realized simultaneously.
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.
(r) Earnings per share:
Basic earnings per share are computed by dividing Net earnings by the weighted average
shares outstanding during the reporting period. Diluted earnings (loss) per share is
determined by adjusting the Net earnings and the weighted average shares outstanding
during the reporting period for the effects of all dilutive potential common shares, which
comprise share options granted.
(s) New standards and interpretations not yet adopted:
A number of new standards, and amendments to standards and interpretations, are not yet
effective for the year ended December 31, 2011, and have not been applied in preparing
these consolidated financial statements.
IFRS 9, Financial Instruments, replaces the multiple classification and measurement models in
IAS 39, Financial Instruments: Recognition and Measurement, with a single model that has
only two classification categories: amortized cost and fair value. This standard is in effect for
accounting periods beginning on or after January 1, 2015, with earlier adoption permitted.
IAS 19, Employee Benefits, was revised to eliminate the option to defer recognition of gains
and losses, known as the “corridor method”, and to enhance disclosure requirements for
defined benefit plans. As the Company did not choose the corridor method in accounting for
its defined benefit plans, there is no impact on its financial statements as a result of the
elimination of this option. This standard is in effect for accounting periods beginning on or
after January 1, 2013, with earlier adoption permitted.
International Forest Products Limited
53
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
3. Significant accounting policies (continued):
(s) New standards and interpretations not yet adopted (continued):
As at the reporting date, no assessment has been made of the impact of these standards on
the Company’s financial statements other than the effect of the elimination of the corridor
method.
4. Acquisition:
On January 5, 2011, all other partners in the Seaboard General Partnership (“SGP”) withdrew with
the exception of Interfor. SGP was wound-up on January 7, 2011 and continues shipping
operations as Seaboard Shipping Company Limited (“Seaboard”), which became a wholly-owned
subsidiary of Interfor. Seaboard’s accounts are included in the consolidated financial statements
of the Company from the date of change in control.
This acquisition has been accounted for using the purchase method. At the date of change in
control the identifiable assets acquired and liabilities and residual equity assumed were recorded
at fair value based on management’s best estimates and allocated as follows:
Note
Assets acquired:
Cash
Other current assets
Employee future benefits
Liabilities assumed:
Current trade accounts payable and accrued liabilities
Income taxes payable
Employee future benefits
Deferred income taxes
Residual equity assumed:
Contributed surplus
Withdrawing partners’ share of actuarial losses recognized through
Other comprehensive income
22
22
13
$
4,846
1,950
1,659
8,455
(4,792)
(630)
(326)
(307)
(2,068)
4
Previous carrying value of investment in associate
$
336
There was no cash consideration paid and the net assets acquired were equal to the existing
interest in Seaboard at the date of change in control.
For the year ended December 31, 2011 Seaboard contributed $39,875,000 in sales revenue and
$2,298,000 in net earnings.
International Forest Products Limited
54
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
5. Inventories:
Logs
Lumber
Other
2011
2010
January 1, 2010
$
59,412
31,729
6,504
$ 39,107
27,353
5,302
$
31,011
24,301
4,847
$
97,645
$ 71,762
$
60,159
Inventory expensed in the period includes production costs, depreciation of plant and equipment,
and depletion and amortization of timber, roads and other. The inventory write-down to record
inventory at the lower of cost and net realizable value at December 31, 2011 was $10,006,000
(2010 - $6,253,000).
6. Investments and other assets:
Seaboard General Partnership
Other investments and deposits
Deferred financing fees,
net of accumulated amortization
$
2011
-
642
2,194
2010
January 1, 2010
$ 16,074
524
$
7,855
562
2,112
602
$
2,836
$ 18,710
$
9,019
On January 3, 2011 SGP made a distribution to the partners, of which the Company’s share was
$15,738,000. In accordance with equity accounting, the distributions were recorded as a
reduction of the investment. On January 5, 2011, upon withdrawal of all other partners in SGP,
Seaboard became a wholly-owned subsidiary of Interfor and its accounts are included in the
consolidated financial statements of the Company from the date of change in control.
International Forest Products Limited
55
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
7. Property, plant and equipment:
Cost
Balance at January 1, 2010
Additions
Disposals
Transfers
Transfers from held for sale
Exchange rate movements
Balance at December 31, 2010
Additions
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2011
Accumulated Depreciation
Balance at January 1, 2010
Depreciation
Disposals
Impairment (reversal)
Exchange rate movements
Balance at December 31, 2010
Depreciation
Disposals
Impairment (reversal)
Exchange rate movements
Balance at December 31, 2011
Net book value at
January 1, 2010
December 31, 2010
December 31, 2011
Land
Machinery and
Equipment
Buildings
Mobile
Equipment
Computer
Site
Equipment Improvements
$
31,738 $
63,081 $ 416,891 $
-
-
-
3,424
(140)
35,022
36
-
-
56
35,114 $
96
(579)
324
-
(1,162)
61,760
-
-
496
463
519
(10,410)
3,434
-
(8,787)
401,647
6
(2,872)
12,433
3,530
62,719 $ 414,744 $
Machinery and
Equipment
Buildings
$
20,211 $ 150,461 $
$
3,083
(579)
-
(272)
22,443
2,965
-
-
146
18,969
(9,329)
485
(2,216)
158,370
19,621
(2,802)
(423)
1,152
$
25,554 $ 175,918 $
13,458 $
523
(225)
-
-
(141)
15,859 $
469
(58)
-
-
(399)
30,836 $
1,021
-
607
-
(462)
13,615
759
(575)
793
61
14,653 $
Mobile
Equipment
15,871
32,002
145
296
-
-
1,098
986
177
190
17,291 $
33,474 $
Site
Computer
Equipment Improvements
10,454 $
842
(157)
-
(94)
11,045
762
(571)
-
36
11,272 $
9,078 $
2,104
(58)
-
(321)
10,803
1,457
-
-
147
12,407 $
12,879 $
1,947
-
-
(164)
14,662
2,072
-
-
95
16,829 $
Other
5,902 $
201
-
59
-
(50)
6,112
403
-
15
20
6,550 $
Other
3,907
530
-
-
(37)
4,400
414
-
-
17
4,831
Projects in
Process
Total
219 $ 577,984
10,745
(11,272)
-
3,424
(11,168)
7,916
-
(4,424)
-
(27)
3,684
14,454
(15)
(15,821)
(2)
569,713
16,099
(3,462)
-
4,495
2,300 $ 586,845
Total
$ 206,990
27,475
(10,123)
485
(3,104)
221,723
27,291
(3,373)
(423)
1,593
$ 246,811
$
31,738 $
35,022
35,114
42,870 $ 266,430 $
39,317
37,165
243,277
238,826
3,004 $
2,570
3,381
6,781 $
5,068
4,884
17,957 $
17,340
16,645
1,995 $
1,712
1,719
219 $ 370,994
347,990
340,034
3,684
2,300
International Forest Products Limited 56
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
8. Roads and bridges, timber tenures, other intangible assets and goodwill:
Cost
Roads and
Bridges
Timber
Licences
Other
Intangibles
Goodwill
Balance at January 1, 2010
Additions
Disposals
Impairment
Exchange rate movements
Balance at December 31, 2010
Additions
Disposals
Exchange rate movements
$
41,730 $
16,261
(13,681)
(310)
(42)
43,958
19,987
(15,669)
-
101,718 $
4,500 $
15,879
-
-
-
117,597
-
-
-
143
-
-
(80)
4,563
126
-
32
13,955
-
-
-
-
13,955
-
-
-
Balance at December 31, 2011
$
48,276 $
117,597 $
4,721 $
13,955
Roads and
Bridges
Timber
Licences
Other
Intangibles
Goodwill
Accumulated amortization
Balance at January 1, 2010
Amortization
Disposals
Impairment
Exchange rate movements
Balance at December 31, 2010
Amortization
Disposals
Exchange rate movements
$
25,245 $
15,143
(13,480)
14
(27)
26,895
20,297
(15,669)
-
34,708 $
2,245 $
2,735
-
-
-
37,443
3,362
-
-
643
-
-
(48)
2,840
604
-
27
877
-
-
-
-
877
-
-
-
877
Balance at December 31, 2011
$
31,523 $
40,805 $
3,471 $
Net book value at
January 1, 2010
December 31, 2010
December 31, 2011
$
16,485 $
17,063
16,753
67,010 $
80,154
76,792
2,255 $
1,723
1,250
13,078
13,078
13,078
For the purpose of impairment testing, all goodwill is attributable to the Coastal Whitewood cash-
generating unit (“CWW CGU”). The recoverable amount of the CWW CGU for impairment
assessment was based on its value in use and was determined by discounting the future cash
flows generated from the continuing use of the unit for a period of twenty years. The cash flows
were projected based on past experience, actual operating results and the 5-year business plan in
both 2010 and 2011. Due to the cyclical nature of the forest industry, cash flows for a further 15
years were extrapolated based on an average trend year.
The recoverable amount of the CGU as at December 31, 2011, December 31, 2010 and January
1, 2010 was determined to be higher than the related carrying amount and no impairment has
been recognized.
Key assumptions used are based on industry sources, including Forest Economic Advisors, LLC
and Resources Information Systems Inc., as well as management estimates. These assumptions
include lumber and residual chip sales prices, applicable foreign exchange rates, operating rates
of the assets, raw material and conversion costs, the level of sales to the U.S. from Canada, the
export tax rate and the future capital required to maintain the assets in their current operating
condition.
International Forest Products Limited
57
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
8. Roads and bridges, timber tenures, other intangible assets and goodwill (continued):
A pre-tax discount rate of 14.5 percent (2010 – 14.3 percent) was applied in determining the
recoverable amount of the unit. The discount rate was estimated with the assistance of
investment bankers, past experience, and the industry average weighted average cost of capital.
An inflation rate of 2.3 percent is applied to the model for years four through twenty.
The values assigned to key assumptions represent management’s assessment of future trends in
the forest industry and are based on both external sources and internal historical data.
9. Cash and borrowings:
$
$
$
2011
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
Unused portion of line
2010
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
Unused portion of line
January 1, 2010
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
Unused portion of line
(a) Operating Line:
Operating
Line
Revolving Non-Revolving
Term
Line
Term
Line
65,000 $
65,000
-
200,000 $
200,000
110,713
5,062
59,938
-
89,287
65,000 $
65,000
-
200,000 $
200,000
156,037
4,756
60,244
-
43,963
Total
265,000
265,000
110,713
5,062
149,225
- $
-
-
-
-
- $
-
-
265,000
265,000
156,037
-
-
4,756
104,207
65,000 $
61,926
-
150,000 $
150,000
107,740
36,785 $
36,785
36,785
251,785
248,711
144,525
4,997
56,929
-
42,260
-
-
4,997
99,189
The Canadian operating line of credit (“Operating Line”) may be drawn in either CAD$ or US$
advances, and bears interest at bank prime plus a margin or, at the Company’s option, at
rates for Bankers’ Acceptances or LIBOR based loans plus a margin, and in all cases
dependent upon a financial ratio of total debt divided by twelve months’ trailing EBITDA¹.
Borrowing levels under the line are subject to a borrowing base calculation dependent on
certain accounts receivable and inventories.
The Operating Line is secured by a general security agreement which includes a security
interest in all accounts receivable and inventories, charges against timber tenures, and
mortgage security on sawmills. The Operating Line is subject to certain financial covenants
including a minimum working capital requirement, a maximum ratio of total debt to total
capitalization and a minimum net worth calculation.
¹EBITDA represents earnings before interest, taxes, depletion and amortization.
International Forest Products Limited
58
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
9. Cash and borrowings (continued):
(a) Operating Line (continued):
On July 11, 2011, the Company amended its Operating Line and the maturity date was
extended to July 28, 2015. All other terms and conditions of the Operating Line remained
substantially unchanged except for a reduction in pricing.
(b) Revolving Term Line:
The Revolving Term Line may be drawn in either CAD$ or US$ advances, and bears interest
at bank prime plus a margin or, at the Company’s option, at rates for Bankers’ Acceptances
or LIBOR based loans plus a margin, and in all cases dependent upon a financial ratio of total
debt divided by twelve months’ trailing EBITDA¹.
The Revolving Term Line is secured by a general security agreement which includes a
security interest in all accounts receivable and inventories, charges against timber tenures,
and mortgage security on sawmills. The term line is subject to certain financial covenants
including a minimum working capital requirement, a maximum ratio of total debt to total
capitalization and a minimum net worth calculation.
On July 11, 2011, the Company amended its Revolving Term Line and the maturity date was
extended to July 28, 2015. All other terms and conditions of the Revolving Term Line
remained substantially unchanged except for a reduction in pricing.
In 2011, the Company had net drawings of $8,900,000 on its Revolving Term Line after using
proceeds of $54,900,000 received on the issuance of 8,222,500 Class A Subordinate Voting
shares on April 8, 2011 to reduce debt levels.
As at December 31, 2011, the Revolving Term Line was drawn by US$30,200,000 (December
31, 2010 – US$30,200,000) revalued at the year-end exchange rate to $30,713,000
(December 31, 2010 - $30,037,000), and $80,000,000 (December 31, 2010 - $126,000,000)
for total drawings of $110,713,000 (December 31, 2010 - $156,037,000), and leaving an
unused available line of $89,287,000.
The US$30,200,000 drawing under the Revolving Term Line has been designated as a hedge
against the Company’s investment in its U.S. operations and unrealized foreign exchange
losses of $676,000 (2010 - $1,703,000 gain) arising on revaluation of the Non-Revolving
Term Line were recognized
in Other
comprehensive income.
in Foreign exchange translation differences
(c) Non-Revolving Term Line
At January 1, 2010, the U.S. dollar Non-Revolving Term Line (“Non-Revolving Term Line”)
was fully drawn at US$35,000,000 and was revalued to $36,785,000. In conjunction with
amendments to its credit facilities on January 10, 2010 the Company fully repaid and
cancelled the Non-Revolving Term Line.
Minimum principal amounts due on long-term debt within the next five years are follows:
2012
2013
2014
2015
2016
$ -
-
-
110,713
-
$ 110,713
¹EBITDA represents earnings before interest, taxes, depletion and amortization.
International Forest Products Limited
59
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
9. Cash and borrowings (continued):
(d) Other:
On January 5, 2011 the Company acquired full control of Seaboard (note 4). Seaboard had
demand facilities with a Canadian bank which were secured by a general assignment of
account receivable, inventory and insurance. The demand lines (“Seaboard lines”) could be
drawn in either CAD$ or US$ and bore interest at either the bank prime rate plus a margin
for CAD$ borrowings or the U.S. base rate plus a margin for $US borrowings. Borrowing
levels under the Seaboard lines were subject to a borrowing base calculation dependent upon
certain accounts receivable.
On September 29, 2011 both Seaboard lines were cancelled and the related security was
released.
At December 31, 2011 the Company’s cash balances are restricted by the amount of
Seaboard’s outstanding letters of credit of $134,000.
10. Payable to associate company:
On July 30, 2010, SGP made an advance to its partners, with Interfor’s share of the advance
being $6,896,000. SGP made a second advance to its partners, and Interfor received $8,842,000
on December 30, 2010. The Company signed unsecured promissory notes in respect of each of
these advances, payable on demand on or before January 3, 2011 and non-interest bearing until
January 3, 2011 and bearing interest at the rates of 4.5% thereafter for the July 30, 2010
advance and 4.0% per annum thereafter for the remaining advance.
On January 3, 2011, SGP declared an income distribution to its partners, of which the Company’s
share of $15,738,000 was received by way of setoff against the promissory note payable to SGP.
International Forest Products Limited
60
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
11. Provisions and other liabilities:
2011
Restructuring
Road deactivation
Environmental
Cash-settled equity based compensation
Note
11(a),18
11(a)
11(a)
Share appreciation rights plan 11(b)
Total shareholder return plan
11(c)
Deferred share unit plan
11(d)
Deferred compensation payable
11(e)
Storm damage remediation funds
11(f)
Other
$
Current
347
1,211
162
Non-current
512
$
3,459
2,130
$
1,418
2,385
914
-
676
68
508
1,549
1,014
1,307
476
512
Total
859
4,670
2,292
1,926
3,934
1,928
1,307
1,152
580
$
7,181
$ 11,467
$
18,648
2010
Restructuring
Road deactivation
Environmental
Cash-settled equity based compensation
11(a),18
11(a)
11(a)
Note
$
Current
1,103
816
161
Non-current
610
$
3,839
1,856
$
Share appreciation rights plan 11(b)
Total shareholder return plan
11(c)
Deferred share unit plan
11(d)
Deferred compensation payable
11(e)
Storm damage remediation funds
11(f)
Other
2,312
-
873
-
-
14
790
2,324
1,262
1,241
-
236
Total
1,713
4,655
2,017
3,102
2,324
2,135
1,241
-
250
$
5,279
$ 12,158
$
17,437
January 1, 2010
Restructuring
Road deactivation
Environmental
Cash-settled equity based compensation
Note
11(a),18
11(a)
11(a)
Share appreciation rights plan 11(b)
Total shareholder return plan
11(c)
Deferred share unit plan
11(d)
Deferred compensation payable
11(e)
Storm damage remediation funds
11(f)
Other
$
Current
1,475
725
252
Non-current
1,578
$
3,838
1,927
$
1,928
-
592
-
-
88
667
2,305
1,189
-
-
352
Total
3,053
4,563
2,179
2,595
2,305
1,781
-
-
440
$
5,060
$ 11,856
$
16,916
The current portion of provisions and other liabilities is included in Trade accounts payable and
other accrued liabilities in the Statement of financial position.
International Forest Products Limited
61
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
11. Provisions and other liabilities (continued)
(a) Provisions:
Forestry legislation in British Columbia requires the Company to deactivate logging roads
once harvesting is complete and access is no longer required. Accordingly, the Company
records the fair value of the costs of road deactivation in the period in which the timber is
cut, with the fair value of the liability determined with reference to the present value of
estimated future cash flows.
Environmental provisions are made when rehabilitation efforts are likely to occur and the
costs can be reasonably estimated. The environmental provision relates primarily to
obligations assumed in 2008 upon acquisition of the Castlegar sawmill.
Provisions are measured at the expected value of future cash flows, discounted to their
present value and determined according to the probability of alternative estimates of cash
flows using a current pre-tax rate that reflects the risks specific to the liability. The
unwinding of the discount is recognized as a Finance cost in Net earnings (loss).
Balance at January 1, 2010
Note
Provisions made during year 18
Expenditures made during year
Reversal of provision during year
Unwind of discount
Changes in estimated future expenditures
$
$
Restructuring Road deactivation
4,563
402
(340)
-
129
(99)
3,053
1,093
(2,433)
-
-
-
$
Environmental
2,179
-
(192)
(105)
54
81
Balance at December 31, 2010
Provisions made during year 18
Expenditures made during year
Unwind of discount
Changes in estimated future expenditures
1,713
1,003
(1,857)
-
-
4,655
508
(617)
113
11
2,017
22
-
49
204
Balance at December 31, 2011
$
859
$
4,670
$
2,292
(b) Share Appreciation Rights Plan:
Awards under the Share Appreciation Rights Plan (“SAR Plan”) have been granted to
directors, officers and senior managers of the Company. The vesting of the SARs occurs at a
rate of 40% two years after granting and 20% per annum thereafter. SARs expire ten years
after the date of the grant. The SAR Plan uses notional units that are valued based on the
Company’s common share price on the Toronto Stock Exchange. The units are exercisable
for cash and recorded as liabilities. Under the SAR Plan, awards will be expensed over the
vesting periods based on the estimated fair value of the SARs at the date of grant. Fair value
is measured using a Black-Scholes option pricing model and is adjusted to reflect the number
of SARs expected to vest. Fair value of the SARs is subsequently measured at each reporting
date with any change in fair value resulting in a change in the measure of the compensation
for the award and will be amortized over the remaining vesting periods.
International Forest Products Limited
62
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
11. Provisions and other liabilities (continued):
(b) Share Appreciation Rights Plan (continued):
Details of the Company’s SAR Plan for the years ended December 31, 2011 and 2010 are as
follows:
2011
2010
Units
Outstanding, beginning of year 1,958,180
306,500
Granted
(136,650)
Exercised
-
Expired or cancelled
Weighted
average
strike price
$ 5.01
5.94
3.39
-
Units
1,732,580
290,000
-
(64,400)
Weighted
average
strike price
$ 5.01
4.73
-
3.70
Outstanding, end of year
2,128,030
$ 5.25
1,958,180
$ 5.01
Units exercisable, end of year
1,204,930
$ 5.73
1,110,580
$ 5.88
Weighted average fair value assumptions for grants made in 2011 and 2010 are as follows:
Risk-free interest rate
Expected life
Annualized volatility
Dividend rate
Termination rate
Grant date fair value
2011
3.1%
8.2 years
44%
0%
12%
$3.17
2010
3.0%
8.2 years
45%
0%
12%
$2.55
Details of units outstanding under the SAR Plan at December 31, 2011 are as follows:
Units exercisable
Number
outstanding,
December 31,
2011
259,650
837,560
887,320
143,500
Strike
price
$1.38
$3.40-$5.21
$6.01-$7.30
$8.02
Units outstanding
Weighted
average
remaining
unit life (yrs)
Weighted
average
strike price
$ 1.38
4.75
6.40
8.02
Number
exercisable,
December 31,
2011
73,050
427,260
589,820
114,800
Weighted
average
strike price
$ 1.38
4.65
6.60
8.02
7.2
4.9
4.5
5.1
2,128,030
$ 5.25
1,204,930
$ 5.73
The Company recorded a Long term incentive compensation recovery in respect of the SAR
Plan of $742,000 (2010 – expense of $506,000) for the year ended December 31, 2011.
(c) Total shareholder return plan:
In 2003, the Company introduced a Total Shareholder Return Plan (“TSR Plan”) for certain
key executives. Under the TSR Plan prior to 2011, the Company will pay compensation to the
TSR Plan members if the compound annual growth rate of the Company’s share price
exceeds 5% per annum over a three year period. The amount of compensation payable
varies with the amount of the compound annual growth rate to a maximum of 15% per
annum, the member’s salary and a target award amount.
International Forest Products Limited
63
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
11. Provisions and other liabilities (continued):
(c) Total shareholder return plan (continued):
Effective January 1, 2011, the Company modified the TSR Plan to allow for the issuance of
Performance Share Units (“PSUs”). Under the terms of the plan a participant will receive a
target number of PSUs based on a target award divided by the value of the Company’s Class
“A” Subordinate Voting shares at the effective date of the grant. The number of PSUs which
will ultimately vest will be in a range from 50% to 150% of the original grant based on total
shareholder return over the performance period.
The number of PSU’s outstanding at December 31, 2011 are as follows:
Outstanding, beginning of year
Granted
2011
-
366,397
2010
not applicable
not applicable
Outstanding, end of year
366,397
not applicable
Compensation expense is recorded for the TSR Plan over the performance period based on
the estimated fair value of the TSR Plan payable at the date of the grant. The fair value of
the TSR Plan payable is subsequently measured at each measurement date with any changes
in fair value reflected in Long term incentive compensation expense in Net earnings (loss).
Fair value of the TSR Plan, including the grants with PSUs, is measured using a combination
of call options which are valued using a Black-Sholes pricing model with weighted average
assumptions for grants as follows:
Risk-free interest rate
Expected life
Annualized volatility
Dividend rate
Termination rate
Grant date fair value
2011
2.30%
3 years
43% to 78%
0.00%
0.00%
$1,623
2010
1.89%
3 years
49 to 53%
0.00%
0.00%
$910
The Company recorded Long term incentive compensation expense under the TSR Plan of
$1,610,000 (2010 – $1,234,000) for the year ended December 31, 2011.
(d) Deferred Share Unit Plan:
In January 2004, the Company introduced a DSU Plan for Directors and senior officers of the
Company. The Plan, which allows for immediate vesting, is intended to provide a better link
between share performance and compensation for the participants, in that DSU’s either
increase or decrease in value in a direct relationship with the Company’s Class “A”
Subordinate Voting shares.
Participants in the TSR Plan may elect, subject to the approval of the Company’s Board of
Directors, to receive their award in DSU’s at the end of any performance period. In respect
of the guaranteed 2009 TSR award, the Board exercised its discretion and required the award
to be converted in March 2010 into a long-term payable account under the Deferred Share
Unit Plan.
DSU’s may also be granted directly to Directors or senior employees of the Company at the
discretion of the Board and Directors may also elect to take DSU’s as payment of their annual
retainer.
International Forest Products Limited
64
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
11. Provisions and other liabilities (continued):
(d) Deferred Share Unit Plan (continued):
The number of DSU’s outstanding at December 31, 2011 are as follows:
Units
Outstanding, beginning of year 408,249
50,572
Granted
Outstanding, end of year
458,821
2011
2010
Average
grant value
$ 4.93
Units
361,465
46,784
408,249
Average
grant value
$ 4.94
Changes to share values subsequent to issuance of awards will result in adjustments to the
compensation accrual and Long term incentive compensation expense in Net earnings (loss).
The Company recorded a Long term incentive compensation recovery of $456,000 (2010 –
expense of $124,000) for the year ended December 31, 2011 in respect of the DSU Plan.
(e) Deferred compensation payable:
Under the TSR Plan, a minimum target award was guaranteed for the Chief Operating Officer
irrespective of the actual compound growth rate for the three year period which concluded
December 31, 2009. The guaranteed target award matured on December 31, 2009 and was
converted in March 2010 into a long-term compensation payable. Valuation adjustments are
made monthly to the plan based on a referenced investment fund and compensation expense
of $37,000 (2010 - $102,000) was recorded as Long term incentive compensation expense
for the year ended December 31, 2011.
(f) Storm damage remediation funds:
In the latter half of September 2010, heavy rains and strong winds on northern Vancouver
Island and the B.C. Central Coast triggered mudslides, road washouts and flooding and
caused bridge and culvert damage. Certain losses relating to the 2010 storm damage were
covered by insurance and in June, 2011 the Company settled with its insurers for recovery of
qualifying expenditures, net of the insurance deductible for total proceeds of $4,836,000.
The Company recorded business interruption insurance recoveries of $2,714,000 as a
reduction in Production costs in Net earnings (loss), applied $525,000 against amounts
previously set up as a receivable for costs already incurred and the remainder of $1,576,000
was set up as a provision for future remediation on roads and bridges. Under the terms of
the insurance settlement, the insurance proceeds must be used for remediation.
As at December 31, 2011 $1,152,000 of these provisions remain unspent.
12. Reforestation liability:
The Company has an obligation to reforest areas harvested under various timber rights. The
obligation is incurred as logging occurs and the fair value of the liability for reforestation is
determined with reference to the present value of estimated future cash flows required to settle
the obligation.
International Forest Products Limited
65
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
12. Reforestation liability (continued):
Changes in the reforestation liability for the years ended December 31 are as follows:
Reforestation liability, beginning of year
Reforestation expense on current logging and
market logging agreements
Reforestation liability on acquisition of timber tenure
Reforestation expenditures
Unwind of discount
Changes in estimated future reforestation expenditures
Consisting of:
Current reforestation liability
Long term reforestation liability
2011
$ 27,110
2010
23,360
$
12,998
-
(9,225)
545
470
8,663
804
(6,260)
604
(61)
$ 31,898
$
27,110
$ 14,121
17,777
$
9,785
17,325
$ 31,898
$
27,110
The total undiscounted amount of the estimated future expenditures required to settle the
reforestation obligation at December 31, 2011 is $33,282,000 (2010 - $29,490,000). The
reforestation expenditures are expected to occur over the next one to fifteen years and have
been discounted at the long term risk-free interest rate of 2%. Reforestation expense resulting
from obligations arising from current logging are included in Production costs for the year and
expense related to the unwinding of the discount is included in Finance costs.
13. Share capital:
(a) Share transactions:
Authorized capital at December 31, 2011 and 2010 consists of:
100,000,000 Class A subordinate voting shares without par value
1,700,000 Class B common shares without par value
5,000,000 preference shares without par value
Share transactions during 2011 and 2010 were as follows:
Number
Balance, December 31, 2009
Shares issued on exercise of options
Balance, December 31, 2010
Share issuance, net of share issue
expenses and tax
Shares issued on exercise of options
Class A
46,101,476
236,200
Class B
Total
1,015,779 47,117,255
236,200
-
Amount
$ 288,580
862
46,337,676
1,015,779 47,353,455
289,442
8,222,500
287,000
- 8,222,500
287,000
-
55,553
1,370
Balance, December 31, 2011
54,847,176
1,015,779 55,862,955
$ 346,365
The first 13-1/3¢ per share per annum of dividends to common shareholders declared are
paid on the Class A shares. Any additional dividends must be declared in equal per share
amounts on the Class A and B shares.
International Forest Products Limited
66
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
13. Share capital (continued):
(a) Share transactions (continued):
The Class B shares (carrying ten votes per share) are exchangeable into Class A shares
(carrying one vote per share) at any time at the option of the holder or, under certain
conditions which will result in the automatic conversion of the Class B shares into Class A
shares, on the basis of one Class A share for one Class B share.
On April 8, 2011 the Company closed a public offering of 8,222,500 Class A Subordinate
Voting shares at a price of $7.00 per share for gross proceeds of $57,557,000 less transaction
costs of $2,671,000 to net cash proceeds of $54,886,000.
Changes in contributed surplus were as follows:
Contributed surplus, beginning of year
Addition to contributed surplus upon
acquisition of subsidiary
Note
4
$
2011
5,408
2,068
2010
5,408
$
-
$
7,476
$
5,408
At December 31, 2011, Class A shares are reserved for possible future issuance as follows:
(i) 1,015,779 Class A shares are reserved for the conversion of Class B shares; and
(ii) 1,631,740 Class A shares are reserved for possible issuance pursuant to the share option
plan.
(b) Share option plan:
The Company had an employee share option plan for its key employees and directors. The
vesting of the options occurs at a rate of 40% two years after granting and 20% per annum
thereafter. Options expire ten years after the date of the grant. There were no options
outstanding at December 31, 2011. No share options have been granted after November 7,
2002.
Details of the Company’s share option plan for the years ended December 31, 2011 and 2010
are as follows:
2011
2010
Weighted
average
exercise price
$ 4.77
-
4.77
-
Options
287,000
-
(287,000)
-
Weighted
average
exercise price
$ 4.44
-
3.65
4.85
Options
751,340
-
(236,200)
(228,140)
-
-
$
$
-
-
287,000
$ 4.77
287,000
$ 4.77
Outstanding, beginning of year
Granted
Exercised
Expired or cancelled
Outstanding, end of year
Options exercisable, end of year
International Forest Products Limited
67
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
14. Depreciation, depletion and amortization:
Depreciation, depletion and amortization allocated by function is as follows:
Production
Selling and administration
15. Personnel expenses:
2011
2010
$ 50,644
910
$
44,973
1,023
$ 51,554
$
45,996
Wages and salaries
Government administered pensions and
unemployment insurance
Workers’ compensation insurance
Contributions to defined contribution plans
Expenses related to defined benefit plans
Cash-settled share-based payment transactions
and other long term compensation expense
Medical, dental, group insurance and other
Note
2011
2010
$ 86,871
$
78,817
22
22
11
5,141
3,270
4,557
338
449
8,630
4,372
2,978
4,230
354
1,873
7,007
$ 109,256
$
99,631
16. Finance income and costs:
Recognized in Net earnings (loss):
Interest on borrowing
Unwind of discount on provisions
Amortization of prepaid finance costs
$
2011
(5,608)
(707)
(779)
$
2010
(8,525)
(787)
(1,129)
$
(7,094)
$ (10,441)
Recognized in Other comprehensive income (loss):
Foreign currency translation differences for foreign operations
Effective portion of changes in fair value of interest rate swap
Income tax (expense)
$
2011
2,632
(503)
85
$
2010
(7,433)
-
(213)
$
2,214
$
(7,646)
International Forest Products Limited
68
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
17. Other income (expense):
Gain (loss) on disposal of surplus equipment and licences
Gain on settlement of timber takeback
Gain on lumber futures trading
Other
$
2011
184
-
187
-
$
2010
(201)
376
-
(200)
$
371
$
(25)
In 2011, the Company generated $273,000 in proceeds from the minor disposals of surplus
equipment and a timber licence and resulted in a gain of $184,000. Trading in lumber futures
derivative contracts generated a further gain of $187,000.
In 2010, the Company received further compensation under the Forest Act for timber, roads and
bridges resulting from the 2006 legislated takeback of certain logging rights on the B.C. Coast
which, combined with minor disposals of surplus equipment and roads, resulted in proceeds of
$1,325,000 and a net loss of $25,000.
18. Restructuring costs and write-downs of plant and equipment:
The Company recorded restructuring costs, and write-downs of plant and equipment consisting of
the following:
Plant and equipment write-down (reversal)
Contractor buyout
Severance costs
Other (recovery)
Note
7
11
11
11
$
2011
(423)
840
265
(102)
$
2010
485
-
1,093
-
$
580
$
1,578
Restructuring costs of $580,000 resulted from the buyout of a logging contractor’s Bill 13
entitlements during 2011, reversal of a write-down for an asset previously considered impaired,
severance costs related to early retirement of hourly workers, and a revision of a previous
estimate for an onerous contract.
During 2010 the Company restructured certain of its manufacturing operations and revised
certain of its previous estimates resulting in severance costs of $1,093,000. The Company also
recorded $485,000 in asset write-downs as it determined certain assets were impaired.
International Forest Products Limited
69
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
19. Income taxes:
Income tax expense is as follows:
Current tax expense:
Current year
Adjustments for prior periods
Deferred tax expense:
Origination and reversal of temporary differences
Changes in tax rates
Change in unrecognized deductible temporary differences
2011
2010
$
655
162
817
$
36
24
60
(6,370)
(24)
7,004
610
(5,119)
422
5,107
410
$
1,427
$
470
Income tax recoveries recognized in Other comprehensive loss is as follows:
Loss (gain) on hedge of net investment in foreign operation
Defined benefit plan actuarial losses
2011
85
165
250
$
$
2010
(213)
623
410
$
$
International Forest Products Limited
70
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
19. Income taxes (continued):
The reconciliation of income taxes at the statutory rate to the income tax expense is as follows:
Income tax recovery at the statutory rate of
26.5% (2010 – 28.5%)
Unrecognized deferred tax assets
Non-taxable income of investments accounted for by
the equity method
Entities with different tax rates
Benefit of capital losses
Non-taxable portion of capital gains
Change in future tax rates and statutory and tax recovery
rate difference
Other
2011
2010
$
(3,187)
7,004
$
(1,346)
5,107
-
(1,315)
(1,064)
-
(24)
13
(3,258)
(599)
-
(148)
422
292
$
1,427
$
470
Unrecognized deferred taxes:
The Company has unrecognized deferred tax assets in relation to certain deductible temporary
differences and unused tax losses that are available to carry forward against future taxable
income. The Company’s Canadian non-capital loss carry-forwards and U.S. net operating losses
carry-forwards totaling approximately $241,000,000 (2010 - $260,000,000) expire between 2014
and 2031, and are available to reduce future taxable income.
Although the Company expects to realize the full benefit of the loss carry-forwards and other
deferred tax assets, due to the cyclical nature of the wood products industry and the economic
conditions over the last several years, the Company has not recognized the benefit of its deferred
tax assets in excess of its deferred tax liabilities. Deferred tax assets not recognized are shown
as follows:
Unrecognized deferred tax assets:
Losses carried forward
Other deductible temporary differences
2011
2010
$ 35,284
1,097
$
27,635
-
$ 36,381
$
27,635
International Forest Products Limited
71
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
19. Income taxes (continued):
Recognized deferred taxes:
December 31, 2011
Deferred tax assets
Opening
Balance
Recognized in
Recognized
in Other
Income Tax Comprehensive
Income (loss)
Expense
Acquired in
Business
Combination
Recognized in
Shareholders’
Equity
Losses
Reserves
Tax credits
Defined benefit plan actuarial losses
Share issuance costs
Other
$ 52,654
12,215
2,520
623
-
1,791
$ (10,426)
910
(1,582)
-
-
528
$
Deferred tax liabilities
Capital assets
Loss (gain) on hedge of net
(69,540)
9,959
investment in foreign operation
(263)
-
-
-
-
165
-
-
-
85
$
-
(307)
-
-
-
-
-
-
$
-
-
-
-
668
-
-
-
Ending
Balance
$ 42,228
12,818
938
788
668
2,319
(59,581)
(178)
Total
$
-
December 31, 2010
Deferred tax assets
Opening
Balance
$
Recognized in
(611)
$
250
Recognized
in Other
Income Tax Comprehensive
Income (loss)
Expense
$
(307)
$
668
$
-
Acquired in
Business
Combination
Recognized in
Shareholders’
Equity
Losses
Reserves
Tax credits
Defined benefit plan actuarial losses
Other
$ 45,288
10,070
2,779
-
2,110
$
7,366
2,145
(259)
-
(319)
$
Deferred tax liabilities
Capital assets
Loss (gain) on hedge of net
(60,197)
(9,343)
$
-
-
-
623
-
-
Investment in foreign operation
(50)
-
(213)
Total
$
-
$
(410)
$
410
$
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
Ending
Balance
$ 52,654
12,215
2,520
623
1,791
(69,540)
(263)
$
-
International Forest Products Limited 72
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
20. Commitments and contingencies:
(a) Operating leases and contractual obligations:
The Company is obligated under various operating leases and contracts requiring minimum
annual payments in each of the next five years as follows:
2012
2013
2014
2015
2016
$
15,770
7,490
3,060
1,840
1,650
In October 2011 the Board of Directors approved a $24 million capital plan to upgrade the
Company’s Grand Forks and Castlegar sawmills with construction commencing in late 2011.
Contracts entered into as at December 31, 2011 totaling $7,668,000 in respect of these
projects are expected to be settled in 2012.
(b) Softwood Lumber Agreement:
On January 18, 2011 U.S. Trade Representative’s office filed for arbitration under the
provisions of the Softwood Lumber Agreement ("SLA") over its concern that the Province of
British Columbia ("B.C.") is charging too low a price for certain timber harvested on public
lands in the B.C. Interior. The arbitration will be conducted by the London Court of
International Arbitration (“LCIA”). The Company believes that B.C. and Canada are
complying with their obligations under the SLA.
In August, 2011 the U.S. Trade Representative filed a detailed statement of claim with the
LCIA and Canada delivered its initial response in November, 2011. A hearing before the
arbitration panel is expected to take place in early 2012 with a final decision expected by the
end of 2012.
As the U.S. arbitration request is still in preliminary stages the existence of any potential
claim has not been determined and no provision has been recorded in the financial
statements as at December 31, 2011.
(c) Storm damage:
In September 2011 heavy rains and strong winds on the B.C. mainland coastal and inlet
areas resulted in mudslides and debris torrents with some logging areas impacted by road
washouts and bridge and culvert damage. Due to the remoteness and magnitude of the
areas impacted the Company has been unable to fully assess the extent of the damage and
its related costs.
(d) Surety Performance Bonds
The Company has posted $13,462,000 in surety performance bonds, with various expiry
dates extending through 2016.
(e) Other contingencies:
The Company is subject to a number of claims arising in the normal course of business in
respect of which either an adequate provision has been made or for which no material
liability is expected.
21. Net earnings per share:
Net earnings per share is based on the earnings attributable to shareholders and a weighted
average number of shares outstanding for the year. Diluted net earnings per share is based on
profit attributable to shareholders and a weighted average number of shares outstanding for the
year adjusted for the dilutive effects of share options.
International Forest Products Limited
73
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
21. Net earnings per share (continued):
The reconciliation of the numerator and denominator is determined as follows:
2011
Weighted
average
number of
Net loss
Shares Per share
2010
Weighted
average
number of
Shares
Net loss
Per share
$ (13,453)
-
53,611 $
-
(0.25)
-
$
(5,193)
-
47,134
7*
(0.11)
-
$ (13,453)
53,611 $
(0.25)
$
(5,193)
47,134
$ (0.11)
Basic loss
per share
Share options
Diluted loss
per share
*Where the addition of share options to the total shares outstanding has an anti-dilutive impact on
the diluted earnings (loss) per share calculation, those share options have not been included in
the total shares outstanding for purposes of the calculation of diluted earnings (loss) per share.
There were no share options outstanding at December 31, 2011.
22. Employee future benefits and other post-retirement plans:
The Company maintains a number of savings and retirement plans that are available to
employees that meet certain eligibility requirements.
(a) Defined contribution plans:
In Canada, salaried employees of the Company are provided with the opportunity of making
voluntary contributions based on a percentage of an employee’s earnings to a Registered
Retirement Savings Plan (“RRSP”). The Company matches employees’ RRSP contributions
with contributions to a Deferred Profit Sharing Plan (“DPSP”) with the employee’s future
retirement benefits based on these contributions along with investment earnings on the
contributions.
For the DPSP, the Company’s funding obligations are satisfied upon making cash
contributions to an employee’s account. For 2011, the pension expense for this plan is equal
to the Company’s contribution of $1,175,000 (2010 - $1,107,000).
Certain eligible employees of the Canadian Merchant Services Guild (“CMSG”) are required to
make contributions based on a percentage of earnings into a defined contribution plan. For
2011, the pension expense is equal to the Company’s contribution of $27,000 (2010 -
$8,000).
Employees of Interfor Pacific Inc. and Cedarprime Inc., the Company’s U.S. operating
subsidiaries, contribute a percentage of their earnings to a 401(k) plan which the Company
matches and which vest immediately. The Company’s funding obligations are satisfied upon
making cash contributions to an employee’s account. For 2011, the pension expense for this
plan is equal to the Company’s contribution of $644,000 (2010 - $589,000).
In 2005, contributions based on a discretionary profit sharing allocation were replaced with
the matching component. Previous contributions under profit sharing allocation component
continue to vest in years two through six of employment at a rate of 20% per annum.
International Forest Products Limited
74
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
22. Employee future benefits and other post-retirement plans (continued):
(b) Unionized employees’ pension plan:
The Company contributes to an industry-wide benefit plan for unionized employees based on
a predetermined amount per hour worked by an employee. For 2011, the pension expense
for these plans is equal to the Company’s contribution of $2,119,000 (2010 - $1,882,000). As
there is insufficient information available to enable the Company to account for this plan as a
defined benefit plan, the plan has been accounted for as a defined contribution plan. The
Company’s liability is limited to its contributions.
(c) Senior management supplementary pension plans:
The Company provides supplementary pension benefits to certain members of its senior
management in the form of a notional extension to the DPSP in Canada and the 401(k) plan
in the U.S. These commitments are not funded but are fully accrued by the Company (note
9), with a portion of the commitments being secured by irrevocable letters of credit.
During 2011 the Company recorded an expense of $592,000 (2010 - $644,000) in respect of
these plans. The amounts accrued for defined contribution commitments is $4,339,000 (2010
- $3,945,000).
The accrued liabilities are included in the Company’s Statement of Financial Position as
follows:
Trade accounts payable and other accruals
Employee future benefits obligation
(d) Defined benefit plans:
$
2011
277
4,062
$
2010
289
3,656
$
4,339
$
3,945
The Company and the non-union hourly employees at the Adams Lake operations make
contributions to a defined benefit pension plan that provides pension benefits upon
retirement. The plan entitles a retired employee to receive monthly payments based on a
schedule of defined benefit accruals for different periods of service.
The Company makes contributions to a defined benefit pension plan that provides pension
benefits to certain eligible employees of the CMSG upon retirement. The plan provides a
retired employee a monthly payment based on a percentage of their average earnings at
retirement, and their years of service. In addition, the Company provides post retirement
medical and life insurance benefits to certain eligible CMSG retirees.
The Company maintains a non-contributory defined benefit pension plan for a former senior
executive.
The Company makes contributions to a defined benefit pension plan that provides pension
benefits to the eligible employees of SSCL upon retirement. The plan provides a retired
employee a monthly payment based on a percentage of their final average salary at
retirement, and their years of service. In addition, the Company provides post retirement life
insurance benefits to eligible SSCL retirees. Specified individuals at SSCL also receive a
supplemental pension upon retirement based on a percentage of final average earnings at
retirement, and years of service.
International Forest Products Limited
75
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
22. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans (continued):
The Company measures its defined benefit obligations and the fair value of plan assets for
accounting purposes as at December 31 of each year. The Company has determined, that in
accordance with statutory requirements of the plans (such as minimum
funding
requirements), that, with the exception of the SSCL pension plan, the present value of
refunds or reductions in future contributions is not lower than the balance of the total fair
value of the plan assets less the total present value of obligations.
The decrease in the defined benefit asset as a result of the asset ceiling limit at December
31, 2011 is $162,000 (2010 : $nil).
Pension Benefits
Note
2011
2010
Other Post-retirement Benefits
2010
2011
$
4
Defined benefit obligation:
Beginning of year
Acquisitions
Service cost
Employee contributions
Interest cost
Benefit payments
Settlements
Actuarial loss
34,065 $
12,223
580
283
2,495
(2,505)
(290)
2,794
30,593 $
-
368
219
2,046
(2,113)
-
2,952
1,169 $
326
29
-
80
(95)
-
118
1,025
-
21
-
64
(54)
-
113
End of year
$
49,645 $
34,065 $
1,627 $
1,169
Plan assets:
$
4
Beginning of year
Acquisitions
Expected return on plan assets
Employer contributions
Employee contributions
Benefit payments
Settlements
Actuarial gain (loss)
33,536 $
13,882
2,899
2,231
283
(2,505)
(343)
(1,467)
30,457 $
-
2,145
2,253
219
(2,113)
-
575
- $
-
-
95
-
(95)
-
-
End of year
$
48,516 $
33,536 $
- $
-
-
-
54
-
(54)
-
-
-
The following summarizes the balances recognized on the Statement of Financial Position:
Pension Benefits
2011
2010
Other Post-retirement Benefits
2010
2011
Fair value of plan assets
Present value of unfunded
$
48,516 $
33,536 $
- $
-
obligations
471
Present value of funded obligations 49,174
(1,129)
Deficit
(162)
Effect of asset ceiling limit
480
33,585
(529)
-
1,627
-
(1,627)
-
1,169
-
(1,169)
-
Accrued obligation
$
(1,291) $
(529) $
(1,627) $
(1,169)
International Forest Products Limited
76
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
22. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans (continued):
The actuarial losses recognized in Retained earnings through Other comprehensive income
are as follows:
Cumulative amount,
beginning of year
Acquisitions
Actuarial losses
Effect of asset ceiling limit
Cumulative amount,
end of year
Pension Benefits
2011
2010
Other Post-retirement Benefits
2010
2011
$
2,377 $
147
4,261
162
- $
-
2,377
-
113 $
12
118
-
$
6,947 $
2,377 $
243 $
-
-
113
-
113
The Company’s accrued benefit assets (liabilities) are included in the Company’s Statement of
Financial Position as follows:
Employee future benefits asset $
Trade accounts payable and
other accrued liabilities
Employee future benefits obligation
Pension Benefits
2011
1,256 $
Other Post-retirement Benefits
2010
-
- $
2011
2010
515 $
-
(2,547)
-
(1,044)
(50)
(1,577)
(50)
(1,119)
$
(1,291) $
(529) $
(1,627) $
(1,169)
Plan assets consist of:
Asset category
Equity securities
Debt securities
Other
Total
2011
2010
Percentage of plan assets
63%
37%
0%
48%
48%
4%
100%
100%
The Company’s net expense for the defined benefit plans has been recognized in Production
expense in Net earnings (loss) as follows:
Pension Benefits
Current service cost
Interest cost
Expected return on plan assets
Settlement loss
$
2011
580 $
2,495
(2,899)
53
2011
Other Post-retirement Benefits
2010
21
64
-
-
29 $
80
-
-
2010
368 $
2,046
(2,145)
-
$
229 $
269 $
109 $
85
International Forest Products Limited
77
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
22. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans (continued):
Actuarial assumptions used in accounting for the Company maintained benefit plans
(expressed as weighted averages) are:
Pension Benefits
2011
Defined benefit obligation as of December 31
2010
Other Post-retirement Benefits
2010
2011
Discount rate
Compensation increases¹
4.87%
3.39%
Pension expense
Discount rate
Expected return on plan assets
Compensation increases¹
5.37%
6.31%
3.39%
5.50%
3.25%
6.25%
7.00%
3.25%
4.94%
-
5.42%
-
-
5.50%
-
6.25%
-
-
¹Compensation increases only relate to the CMSG plan and the Seaboard plans.
For measurement purposes at December 31, 2011, the Company has assumed a 6.79%
health care cost trend in 2012 grading down to 4.27% in 2015 (2010 – 7.35% health care
cost trend in 2011 grading down to 4.27% in 2015).
A one percentage point increase in assumed healthcare cost trend rates would have the
following effects:
Health Care Trend Rate
Effect on aggregate service and interest cost
Effect on defined benefit obligation
Minus 1%
10
137
Plus 1%
11 $
149
$
The overall expected long-term rate of return on assets is 6.31%. The expected long term
rate of return is based on market conditions at the calculation date and each plan’s asset mix.
The actual return on plan assets in 2011 was $1,432,000 (2010 - $2,720,000).
Experience adjustments arising on plan liabilities in 2011 were $58,000 (2010 - $161,000)
and experience adjustments arising on plan assets in 2011 were $262,000 (2010 - $757,000).
The Company expects to pay contributions of $1,699,000 to its defined benefit plans in 2012.
23. Related party transactions:
(a) Key management personnel compensation:
Key management personnel are comprised of the Company’s directors and executive officers.
The remuneration of key management personnel, including directors, was as follows:
Salary and short-term employee benefits
Post-employment benefits
Other long-term benefits
Share-based compensation expense (recovery)
$
2011
3,305
344
1,230
(46)
$
2010
3,032
344
1,336
303
$
4,833
$
5,015
International Forest Products Limited
78
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
23. Related party transactions (continued):
(a) Key management personnel compensation (continued):
Obligations in relation to key management personnel, including directors, is as follows:
Trade accounts payable and
accrued liabilities
Employee benefits obligation
Provisions and other liabilities
$
2011
3,640
2,457
3,964
2010
January 1, 2010
$
1,490
2,145
4,933
$
1,282
1,879
3,587
$
10,061
$
8,568
$
6,748
(b) In 2011 the Company had lumber sales to a significant shareholder in the amount of
$748,000 (2010 - $751,000).
In 2010 shipping services provided by Seaboard totaled $7,005,000. Management and other
support services to Seaboard totaled $500,000 in 2010 and lumber sales totaled $148,000.
In January 2011 Seaboard became a wholly owned subsidiary of the Company and its
accounts were included in the consolidated financial statements of the Company from the
date of change in control and all intercompany transactions have been eliminated.
All transactions were conducted on a normal commercial basis, including terms and prices.
24. Segmented information:
The Company manages its business as a single operating segment, solid wood. The Company
harvests and purchases logs which are sorted by species, size and quality and then either
manufactured into lumber products at the Company’s sawmills, or sold. Substantially all
operations are located in British Columbia, Canada and the Pacific Northwest, U.S.A.
The Company sells to both foreign and domestic markets as follows:
Canada
United States
China/Taiwan
Japan
Other export
Sales by product line are as follows:
Lumber
Logs
Wood chips and other by products
Ocean freight and other
2011
2010
$ 214,876
263,166
137,421
98,088
44,465
$ 171,113
244,625
79,625
80,856
49,399
$ 758,016
$ 625,618
2011
2010
$ 538,138
108,413
68,355
43,110
$ 481,983
79,763
56,217
7,655
$ 758,016
$ 625,618
International Forest Products Limited
79
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
24. Segmented information (continued):
Non-current assets by geographic location are as follows:
Canada
United States
25. Capital management:
2011
2010
$ 315,343
136,656
$ 336,790
142,443
$ 451,999
$ 479,233
The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and
market confidence and to sustain future development of the business. The Company monitors
the return on average invested capital, which it defines as net earnings plus after tax interest cost
divided by the average of opening and closing invested capital comprised of the total of bank
indebtedness, long-term debt and shareholders’ equity.
The Company seeks to maintain a balance between the higher returns that might be possible
with the leverage afforded by higher borrowing levels and the security afforded by a sound
capital position. The Company’s target is to create value for its shareholders over the long-term
through increases in share value.
In 2010 and 2011, as the economy recovered from the sharp downturn of 2009 and export
markets offered growth opportunities the Company reassessed its capital spending programs and
approved some capital spending on discretionary projects in addition to expenditures related to
maintenance of operating capacity and increased expenditures on road construction.
In 2010, the Company also acquired a timber tenure in the B.C. Interior from Weyerhaeuser
Company Limited, securing approximately 275,000 cubic metres of allowable annual cut to its
interior fibre supply.
The Company closed a public offering of 8,222,500 Class A Subordinate Voting shares at a price
of $7.00 per share for net cash proceeds of $54,886,000 in early April, 2011. Proceeds were
initially used to reduce the Company’s debt levels, and subsequently for investments in capital.
In October 2011 the Board of Directors approved a $24 million capital plan to upgrade the
Company’s Grand Forks and Castlegar sawmills.
The plan involves the installation of a new small log line at Grand Forks to replace the existing
two-line facility, along with funds to complete the installation of an automated lumber grading
system. Construction commenced in late 2011 and is expected to be complete by mid 2013.
The investment at Castlegar, which totals $5 million, consists of a series of high return projects
including the installation of an automated lumber grading system focused on increasing
productivity and value extraction at that mill.
There were no changes in the Company’s approach to capital management during 2011. Under
its debt financing agreement, the Company cannot exceed a total debt to total capitalization ratio
of 45%, with total debt defined as the total of bank indebtedness, including letters of credit, and
long-term debt, net of cash and cash equivalents and total capitalization defined as total debt
plus Shareholders’ Equity. The financial covenants under the debt financing agreement also carry
a minimum working capital and a minimum net worth requirement.
The Company is in compliance with all of its debt covenants and expects to remain in compliance.
International Forest Products Limited
80
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
26. Financial instruments:
(a) Fair value of financial instruments:
At December 31, 2011, the fair value of the Company's long-term debt and bank
indebtedness approximated its carrying value of $110,713,000 (2010 - $156,037,000). The
fair values of other financial instruments approximate their carrying values due to their short-
term nature.
(b) Derivative financial instruments:
The Company employs financial instruments, such as interest rate swaps and foreign
currency forward and option contracts, to manage exposure to fluctuations in interest rates
and foreign exchange rates. The Company does not expect any credit losses in the event of
non-performance by counter parties as the counterparties are the Company’s Canadian
bankers, which are highly rated.
As at December 31, 2011, the Company has outstanding obligations to sell a maximum of
US$16,300,000 at an average rate of CAD$1.0334 to the US$1.00, sell Japanese ¥90,000,000
at an average rate of ¥75.65 to the US$1.00 and buy US$2,000,000 at an average rate of
CAD$1.01775 to the US$1.00 during 2012. All foreign currency gains or losses to December
31, 2011 have been recognized in the Net earnings (loss) and the fair value of these foreign
currency contracts has been measured based on Level 2 of the fair value hierarchy and
recorded as an asset of $283,000 in Trade accounts receivable and other (2010 - $492,000
asset fair value recorded in Trade accounts receivable and other and $18,000 liability
recorded in Trade accounts payable and accrued liabilities and measured based on Level 2).
Foreign exchange losses on forward contracts for the year ended December 31, 2011 total
$229,000 (2010 - $1,799,000 gain) and have been classified to Sales in Net earnings (loss).
On August 25, 2011, the Company entered into two interest rate swaps, each with a notional
value of $25,000,000 and maturing July 28, 2015. Under the terms of the swaps the
Company pays an amount based on a fixed annual interest rate of 1.56% and receives a 90
day BA CDOR which is recalculated at set interval dates. The intent of these swaps is to
convert floating-rate interest expense to fixed-rate interest expense. As these interest rate
swaps have been designated as cash flow hedges the fair value of these interest rate swaps
at December 31, 2011 being a liability of $503,000 (measured based on Level 2 of the fair
value hierarchy) has been recorded in Trade accounts payable and accrued liabilities and a
charge of $503,000 has been recognized in Other comprehensive income.
During 2011 the Company also traded lumber futures to manage price risk and which were
designated as held for trading with changes in fair value recorded in Other income (expense)
in Net earnings (loss). At December 31, 2011 there were no outstanding lumber futures
contracts and a gain of $187,000 was recognized in Other income (expense) on completed
contracts for the year ended December 31, 2011.
Lumber futures are traded through a well established financial services firm with a long
history of providing trading, exchange and clearing services for commodities and foreign
currencies. As trading activities are closely monitored by senior management and restricted
including a maximum number of outstanding contracts at any point in time the risk of credit
loss on these instruments is considered low.
(c) Hedge of investment in foreign operations:
On October 1, 2008, the Company designated the US$30,200,000 funds drawn under its
Revolving Term Line for the acquisition of its Beaver operations as a hedge against its
investment in its foreign U.S. operations. Unrealized foreign exchange losses of $676,000 in
2011 (2010 - $1,703,000 gain) have been recorded in Other comprehensive income.
International Forest Products Limited
81
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
26. Financial instruments (continued):
(d) Financial risk management:
Financial instrument assets include cash and cash equivalents, deposits and accounts
receivable. Cash and cash equivalents and deposits and accounts receivable are designated
as loans and receivables and measured at amortized cost.
Financial instrument liabilities include bank indebtedness, accounts payable and other accrued
liabilities, long-term debt, and certain other long-term liabilities. All financial liabilities are
designated as other liabilities and are initially measured at fair value plus any direct
transaction costs and subsequently at amortized cost using the effective interest method.
There are no financial instruments classified as available-for-sale or held-to-maturity.
The use of financial instruments exposes the Company to credit, liquidity and market risk.
The Board of Directors has 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 the
Company’s activities. Through its standards and procedures, management has developed a
control environment in which employees are clear on roles and obligations and management
regularly monitors compliance with its risk management policies and procedures.
(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, and arises primarily from the
Company’s receivables from customers and from cash and cash equivalents.
Accounts receivable
The Company’s exposure to credit risk is dependent upon individual characteristics of
each customer. Each new customer is assessed for creditworthiness before standard
payment and delivery terms and conditions are offered, with such review encompassing
any external ratings, and bank and other references. Purchase limits are established for
each customer, and are regularly reviewed. In some cases, where customers fail to meet
the Company’s benchmark creditworthiness, the Company may choose to transact with
the customer on a prepayment basis.
All North American sales are conducted under standard industry terms. All lumber sales
outside of the North American markets are either insured as to 90% of receivable
amounts by the Export Development Corporation or are secured by irrevocable letters of
credit.
The Company regularly reviews the collectability of its accounts receivable and
establishes an allowance for doubtful accounts based on its best estimate of any
potentially uncollectible accounts. Historically, the Company has managed its credit
tightly and experienced minimal bad debts, despite the impacts of the global economic
downturn and the growth in export markets. Based on this past experience and its
detailed review of trade accounts receivable past due which were considered
uncollectible, a reserve in respect of doubtful accounts of $146,000 was recorded (2010 -
$4,000) for specific trade receivables.
Deposits
The Company limits it exposure to credit risk by only investing in liquid securities and only
with counterparties that have a high credit rating. As such, management does not
expect any counterparty to fail to meet its obligations.
International Forest Products Limited
82
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
26. Financial instruments (continued):
(d) Financial risk management (continued):
(i) Credit risk (continued):
Guarantees
The Company did not provide any guarantees in 2011.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure for
receivables in North America. As log and lumber sales outside of the North American
markets are insured by the Export Development Corporation to 90% or secured by
irrevocable letters of credit, credit exposure for these sales is limited.
Accounts receivable carrying value at the reporting date by geographic region were:
Canada
United States
Japan
China/Taiwan
Other
(ii) Liquidity risk:
2011
$ 15,204
14,823
8,091
3,375
2,507
$
2010
15,418
13,259
6,057
7,268
3,959
$ 44,000
$
45,961
Liquidity risk is the risk that the Company will not be able to meet its financial obligations
as they fall due. The Company ensures, as far as possible, that it will always have
sufficient liquidity to meet obligations when due and monitors cash flow requirements
daily and projections weekly. Weekly debt graphs are reviewed by senior management
to monitor cash balances and debt line utilizations. Given the global economic downturn
experienced through most of 2009, Company executives focused on cash management to
ensure maintenance of adequate liquidity and continued this discipline through 2011.
The Company also maintains a revolving Operating Line and a Revolving Term Line that
can be drawn on to meet financing needs.
The estimated cash payments due in respect of contractual and legal obligations
including projected major capital improvements are summarized as follows:
Payments due by period
Up to
1 year
2-3
years
4-5
years
After 5
years
Total
Accounts payable and
accrued liabilities
Income taxes payable
Long-term debt
Reforestation liability
Provisions and other liabilities
Pension solvency payments
Operating leases and expected
capital commitments
$ 52,665
1,058
110,713
31,958
25,459
2,670
$ 52,665 $
1,058
-
14,121
7,440
761
- $
-
-
7,452
6,782
1,522
- $
-
110,713
5,085
1,699
77
-
-
-
5,300
9,538
310
47,859
27,072
14,277
3,490
3,020
Total obligations
$272,382 $103,117 $ 30,033
$121,064 $ 18,168
International Forest Products Limited
83
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
26. Financial instruments (continued):
(d) Financial risk management (continued):
(iii) Market risk:
Market risk is the risk that changes in market prices, such as foreign exchange rates,
interest rates and equity prices, will affect the Company’s income or the value of its
holdings of financial instruments. The objective of market risk management is to manage
and control market risk exposures within acceptable parameters, while optimizing the
return on risk.
Currency risk
The Company is exposed to currency risk on cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities and long-term debt that are
denominated in a currency other than the respective functional currencies of the
Company’s domestic and foreign operations, primarily Canadian (CAD) and U.S. dollars
(USD), but also the Euro, Sterling and Yen. The Company uses forward exchange
contracts to manage its currency risk from time to time, as described in Note 26(b),
Derivative financial instruments. Daily, the Company assesses its foreign exchange
exposure by reviewing outstanding contracts, pending order files and working capital
denominated in foreign currencies.
At December 31, 2011, the Company has US$ drawings under its Revolving Term Line of
US$30,200,000 (2010 – US$30,200,000). The US$ drawings under this Line have been
designated as a hedge against the investment in the Company’s net investment in its U.S.
operations.
As at December 31, the Company’s accounts receivable were denominated in the
following currencies (in thousands):
2011
Japanese ¥
USD
CAD
Accounts receivable
Accounts receivable held by foreign
16,256
14,072
100,688
subsidiaries with $US functional currency
-
11,898
-
2010
Accounts receivable
Accounts receivable held by foreign
16,256
25,970
100,688
CAD
USD
Japanese ¥
17,351
17,938
44,335
subsidiaries with $US functional currency
-
10,480
-
17,351
28,418
44,335
As at December 31, 2011, the domestic operations of the Company held cash and cash
equivalents of US$3,008,000 (2010 – US$6,171,000) and no bank indebtedness (2010 -
$nil). Cash and cash equivalents held by foreign subsidiaries totaled US$6,125,000 (2010
- US$564,000).
Based on the Company’s net exposure to foreign currencies as at December 31, 2011,
including USD denominated cash held in deposits and cash equivalents and USD
denominated long-term debt and other USD denominated financial instruments, the
sensitivity of the USD balances to the Company’s net annual earnings is as follows:
U.S. Dollar
$0.01 increase vs CAD$
$negligible decrease in net income
International Forest Products Limited
84
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
26. Financial instruments (continued):
(d) Financial risk management (continued):
(iii) Market risk: (continued):
Based on the Company’s net exposure to foreign currencies as at December 31, 2011, in
respect of its net investment in U.S. subsidiaries, the sensitivity of the USD balances to
the Company’s Other comprehensive income (loss) is as follows:
U.S. Dollar
$0.01 increase vs CAD$
$2,016,000 decrease in OCI
Interest rate risk
The Company reduced its exposure to changes in interest rates on borrowings by
entering into two interest rate swaps, as described in Note 26(b) Derivative financial
instruments. These agreements mature on July 28, 2015. The intent of these swaps is
to convert floating-rate interest expense to fixed-rate interest expense.
Based on the Company’s average debt level during 2011, the sensitivity of a 100 basis
point increase in interest rates would result in an approximate decrease of $424,000
(2010 - $1,135,000) in net annual earnings.
Other market price risk
The Company does not enter into commodity contracts other than to meet the
Company’s expected usage and sale requirements and such contracts are not settled net.
27. Subsequent events:
(a) Softwood Lumber Agreement extension
On January 23, 2012, the federal governments of Canada and the United States announced a
two year extension of the 2006 Softwood Lumber Agreement to October 2015.
(b) Significant customer enters into creditor protection
On January 31, 2012, Catalyst Paper Corporation (“Catalyst”) announced that the company
and certain of its subsidiaries had obtained an Initial Order from the Supreme Court of British
Columbia under the Companies’ Creditors Arrangement Act. Catalyst is the primary buyer of
Interfor’s chips on the B.C. Coast, under long-term purchase contracts. Catalyst is also a
purchaser of Interfor’s pulp logs and other residuals.
Catalyst has indicated that the operations of the Catalyst and its subsidiaries are intended to
continue as usual, and obligations to employees and suppliers during the restructuring
process are expected to be met in the ordinary course.
All trade accounts receivable outstanding as at December 31, 2011 have been collected in
2012 and therefore no allowance was provided.
As at February 17, 2012 the trade accounts receivable at risk for non-payment total
$439,000.
The outcome of Catalyst’s restructuring and any potential impact to the Company cannot be
determined at this point. The Court has granted Interfor a security interest as a critical
supplier on all current and future products purchased from Interfor.
International Forest Products Limited
85
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
28. Explanation of transition to IFRSs:
As stated in note 2 (a), these are the Company’s first annual consolidated financial statements
prepared in accordance with IFRSs.
The accounting policies set out in note 3 have been applied in preparing the financial statements
for the year ended December 31, 2011, the comparative information presented in these financial
statements for the year ended December 31, 2010 and in the preparation of an opening IFRS
Statement of Financial Position at January 1, 2010 (the Company’s date of transition).
In preparing its opening IFRS Statement of Financial Position, the Company has adjusted
amounts reported previously in financial statements prepared in accordance with Canadian GAAP.
An explanation of how the transition from previous GAAP to IFRSs has affected the Company’s
financial position, financial performance and cash flows is set out in the following tables and the
notes that accompany the tables.
Index to the notes to the reconciliations
Presentation reclassifications:
(a) Deferred taxes
(b) Investment in associate company
(c) Employee future benefits
(d) Other intangible assets
(e) Reforestation liability, current
(f) Finance costs
(g) Interest paid
First-time adoption elections and changes due to IFRS:
(h) Currency translation differences
(i) Employee future benefits
(j) Investment in associate company
(k) Property, plant and equipment
(l) Borrowing costs
(m) Decommissioning provisions
(n) Share-based payments
(o) Business combinations
(p) Income taxes
(q) Retained earnings
International Forest Products Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
86
28. Explanation of transition to IFRSs (continued):
Reconciliation of equity:
(thousands of Canadian dollars)
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable and other
Income taxes recoverable
Inventories
Prepayments
Deferred tax assets
Employee future benefits
Investment in associate company
Other investments and assets
Property, plant and equipment
Logging roads and bridges
Timber licences
Other intangible assets
Goodwill
Asset classified as held for sale
Note
Previous
IFRSs
IFRSs
GAAP Reclassify Adjustment
IFRSs
Previous
IFRSs
IFRSs
GAAP Reclassify Adjustment
IFRSs
January 1, 2010
December 31, 2010
a
c, i
b, j
b, c
d, k
$
3,802 $
32,951
230
60,159
7,777
2,974
107,893
-
-
-
-
-
(2,974)
(2,974)
- $
-
-
-
-
-
-
3,802
32,951
230
60,159
7,777
-
104,919
$
9,301 $
45,961
-
71,762
8,334
3,627
138,985
-
-
-
-
-
(3,627)
(3,627)
- $
-
-
-
-
-
-
9,301
45,961
-
71,762
8,334
-
135,358
-
-
6,998
8,775
(6,026)
(920)
17,060
(15,896)
-
972
7,855
1,164
-
-
8,054
(7,539)
515
17,124
(1,050)
16,074
28,618
(25,982)
-
2,636
357,501
(2,255)
15,748
370,994
333,989
(1,723)
15,724
347,990
16,485
67,010
-
-
d
-
2,255
13,078
3,424
-
-
-
-
-
-
-
16,485
67,010
2,255
13,078
3,424
17,063
80,154
-
-
-
1,723
13,078
-
-
-
-
-
-
-
-
17,063
80,154
1,723
13,078
-
$ 582,451 $
(3,097) $
8,802 $ 588,156
$ 611,887 $
(4,431) $
7,135 $ 614,591
International Forest Products Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
87
28. Explanation of transition to IFRSs (continued):
Reconciliation of equity:
(thousands of Canadian dollars)
Liabilities and Equity
Current liabilities:
Trade accounts payable and accrued liabilities
Reforestation liability
Income taxes payable
Payable to associate company
Note
Previous
IFRSs
IFRSs
GAAP Reclassify Adjustment
IFRSs
Previous
IFRSs
IFRSs
GAAP Reclassify Adjustment
IFRSs
January 1, 2010
December 31, 2010
e, n $ 43,510 $
e
-
-
3,096
46,606
(6,772) $
6,772
-
-
-
1,744 $ 38,482
6,772
-
3,096
48,350
-
-
-
1,744
$ 58,267 $
-
230
15,738
74,235
(9,785) $
9,785
-
-
-
1,571 $ 50,053
9,785
230
15,738
75,806
-
-
-
1,571
Reforestation liability
Long-term debt
m
14,724
144,525
-
-
1,864
16,588
15,017
-
144,525
156,037
-
-
2,308
17,325
-
156,037
Employee future benefits
c, i
-
4,583
845
5,428
-
4,348
1,467
5,815
Provisions and other liabilities
c, m, n
15,316
(4,706)
1,246
11,856
15,695
(5,152)
1,615
12,158
Deferred income taxes
a, p
3,286
(2,974)
(312)
-
3,627
(3,627)
-
-
Equity:
Share capital
Class A subordinate voting shares
Class B common shares
Contributed surplus
Reserves
Retained earnings
284,500
4,080
5,408
(24,855)
88,861
-
-
-
24,855
(24,855)
-
-
-
-
3,415
284,500
4,080
5,408
-
67,421
h
h, q
285,362
4,080
5,408
(32,501)
84,927
-
-
-
24,855
(24,855)
-
-
-
-
174
285,362
4,080
5,408
(7,646)
60,246
357,994
-
3,415
361,409
347,276
-
174
347,450
$ 582,451 $
(3,097) $
8,802 $ 588,156
$ 611,887 $
(4,431) $
7,135 $ 614,591
International Forest Products Limited
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
88
28. Explanation of transition to IFRSs (continued):
Reconciliation of comprehensive income (loss):
Year ended December 31, 2010
Sales
Costs and Expenses:
Production
Selling and administration
Long term incentive compensation expense
Export taxes
Depreciation of plant and equipment
Depletion and amortization of timber, roads and other
Operating earnings (loss) before restructuring costs
Restructuring costs
Operating earnings (loss)
Finance costs
Interest expense on long-term debt
Other interest expense
Other foreign exchange loss
Other expense
Equity in earnings of associate company
Loss before income taxes
Income taxes (recovery):
Current
Deferred
Net loss
Other comprehensive loss:
Foreign currency translation differences
Defined benefit plan actuarial losses
Equity share of associate’s defined benefit plan actuarial losses
Income tax recovery (expense) on other comprehensive losses
Total comprehensive loss for the period
Net loss per share, basic and diluted
Note
f, i, k, m
n
f
f
f
f
j
p
i
j
p
Previous
IFRSs
IFRSs
GAAP Reclassify Adjustment
$ 625,618 $
- $
IFRSs
- $ 625,618
557,122
17,508
1,873
7,427
28,117
19,008
631,055
(5,437)
1,578
(7,015)
-
(7,944)
(581)
(280)
(25)
11,446
2,616
(4,399)
60
(525)
(465)
(3,934)
(7,433)
-
-
(213)
(7,646)
$ (11,580) $
(0.08) $
$
(787)
-
-
-
(642)
(487)
(1,916)
1,916
-
1,916
(10,441)
7,944
581
-
-
-
(1,916)
-
216
-
93
-
-
-
309
(309)
-
(309)
-
-
-
-
-
(15)
(15)
(324)
556,551
17,508
1,966
7,427
27,475
18,521
629,448
(3,830)
1,578
(5,408)
(10,441)
-
-
(280)
(25)
11,431
685
(4,723)
-
-
-
-
-
935
935
(1,259)
60
410
470
(5,193)
-
-
-
-
-
- $
- $
(7,433)
-
(2,490)
(2,490)
(115)
(115)
410
623
(1,982)
(9,628)
(3,241) $ (14,821)
(0.11)
(0.03) $
International Forest Products Limited
89
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
28. Explanation of transition to IFRSs (continued):
Presentation reclassifications:
(a) Deferred taxes:
Under Canadian GAAP deferred taxes are split between current and non-current components
on the basis of either the underlying asset or liability or the expected reversal of items not
related to an asset or liability.
Under IFRS deferred tax assets and liabilities are classified as non-current.
Consequently, current deferred tax assets under Canadian GAAP have been reclassified
against non-current deferred tax liabilities to conform to IFRS requirements.
(b) Investment in associate company:
Under Canadian GAAP separate disclosure of investments accounted for on the equity basis is
required but may be disclosed in either the financial statements or the notes to the financial
statements.
Under IAS 1, Presentation of Financial Statements, investments accounted for using the
equity method must be disclosed separately in the Statement of Financial Position.
The Company’s investment in an associate company has been reclassified from Other
investments and assets as a separate line item on the Statement of Financial Position to
conform to IFRS requirements.
(c) Employee future benefits:
Employee benefit plan assets and obligations have been reclassified from Other investments
and assets and Provisions and other liabilities to highlight items where there has been a
significant transitional IFRS adjustment in accordance with IFRS 1, First-time Adoption of
International Financial Reporting Standards.
(d) Other intangible assets, net of accumulated amortization:
Under IAS 38, Intangible Assets, computer software acquired or developed for use meets the
definition of an intangible asset and is therefore reclassified from Property, plant and
equipment on the Statement of Financial Position.
(e) Reforestation liability, current:
IAS 1, Presentation of Financial Statements, requires the separate disclosure of provisions,
where significant. Consequently, the current portion of reforestation liability has been
reclassified from Trade accounts payable and other accrued liabilities.
(f) Finance costs:
Under IFRS 7, Financial Instruments: Disclosures, interest expense on borrowings, the
unwinding of the discount on provisions (accretion expense), the amortization of prepaid
financing costs and other related transaction costs are disclosed as finance costs.
Under Canadian GAAP, interest expense on borrowings was disclosed separately, accretion
expense was included in Production costs and the amortization of prepaid financing costs
were included in Depletion and amortization of timber, roads and other.
To comply with IFRS, these items have been reclassified to Finance costs on the Statement of
Comprehensive Income.
International Forest Products Limited
90
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
28. Explanation of transition to IFRSs (continued):
Presentation reclassifications:
(g) Interest paid:
Cash flows relating to interest paid have been classified as financing activities in the
Statement of Cash Flows. Under Canadian GAAP these were classified under operating
activities.
First-time adoption elections and changes due to IFRS:
(h) Currency translation differences:
Retrospective application of IFRS would require the Company to determine cumulative
currency translation differences in accordance with IAS 21, The Effects of Changes in Foreign
Exchange Rates, from the date a foreign subsidiary was formed or acquired. IFRS 1, First-
time Adoption of International Financial Reporting Standards, permits cumulative translation
gains and losses to be reset to zero at the transition date. The Company elected to reset all
cumulative translation gains and losses to zero in the opening retained earnings at January 1,
2010.
The impact on the Statement of Financial Position is summarized as follows:
Reserve increase
Reduction in retained earnings
(i) Employee future benefits:
Jan. 1, 2010
Dec. 31, 2010
$ 24,855
$ (24,855)
$
24,855
$ (24,855)
IFRS 1 provides the option to retrospectively apply the corridor approach under IAS 19,
Employee Benefits, for the recognition of actuarial gains and losses, or to recognize all
cumulative gains and losses deferred under Canadian GAAP in opening retained earnings as
at the transition date. The Company elected to recognize all cumulative actuarial gains and
losses that existed at its transition date of January 1, 2010 in opening retained earnings for
all of its employee benefit plans.
Under Canadian GAAP actuarial gains and losses that arise in calculating the present value of
the defined benefit obligations and the fair value of plan assets are recognized on a
systematic and consistent basis subject to a minimum required amortization based on a
“corridor” approach. The corridor was 10% of the greater of the accrued benefit obligation at
the beginning of the year and the fair value of plan assets at the beginning of the year. The
unamortized net actuarial gains and losses in excess of the corridor is amortized as a
component of pension expense on a straight-line basis over the expected average remaining
service life of active participants. Actuarial gains and losses below the 10% corridor are
deferred.
Under IFRS the Company elected to recognize all actuarial gains and losses immediately in
Other comprehensive income without recycling to the income statement in subsequent
periods. As a result, actuarial gains and losses are not amortized to the income statement
but rather are recorded directly to other comprehensive income at the end of each period.
Consequently, the Company adjusted its pension expense to remove the amortization of
actuarial gains and losses.
Under Canadian GAAP when a defined benefit plan gives rise to an accrued benefit asset, a
provision is recognized for any excess of the accrued benefit asset over the expected future
benefit. The accrued benefit asset is presented in the Statement of Financial Position net of
the provision. A change in the provision is recognized in earnings for the period in which the
change occurs.
International Forest Products Limited
91
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
28. Explanation of transition to IFRSs (continued):
(i) Employee future benefits (continued):
IFRS also limits the recognition of the net benefit asset under certain circumstances to the
amount that is recoverable. Since the Company has elected to recognize all actuarial gains
and losses in Other comprehensive income, changes in the provision are recognized in other
comprehensive income in the period in which the change occurs. The Company did not have
a provision in respect of its benefit assets for any of the periods presented.
The impact on the Statement of Financial Position was:
Employee future benefit assets decrease
Employee future benefit obligations increase
Related tax effect
Reduction in retained earnings
Jan. 1, 2010
Dec. 31, 2010
$
$
(6,026)
(845)
1,718
(5,153)
$
$
(7,539)
(1,467)
2,251
(6,755)
The impact on the Statement of Comprehensive Income was:
Production expense decrease
Other comprehensive loss:
Defined benefit plan actuarial losses
Reduction to comprehensive income before income taxes
(j) Investment in associate company:
Year ended
Dec. 31, 2010
(355)
$
2,490
2,135
$
In applying the equity method of accounting for an investment in an associate company both
Canadian GAAP and IFRS require the accounting policies of the associate entity to be
consistent with those of the parent company. As such, the employee defined benefit asset of
the associate company has been adjusted to reflect the same policies as described in Note 28
(i) for employee future benefits and the Company has reflected its proportionate share of the
associate’s after-tax adjustments to earnings and comprehensive income.
The impact on the Statement of Financial Position was:
Investment in associate decrease
Reduction in retained earnings
Jan. 1, 2010
Dec. 31, 2010
$
$
(920)
(920)
$
$
(1,050)
(1,050)
The impact on the Statement of Comprehensive Income was:
Equity in losses
Other comprehensive loss:
Equity share of associate’s defined benefit plan actuarial losses
Reduction to comprehensive income before income taxes
Year ended
Dec. 31, 2010
15
$
115
130
$
International Forest Products Limited
92
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
28. Explanation of transition to IFRSs (continued):
First-time adoption elections and changes due to IFRS (continued):
(k) Property, plant and equipment:
IFRS 1 allows a company to elect to measure an item of property, plant and equipment at the
date of transition at its fair value and use that fair value as its deemed cost at that date. The
Company identified a property at its Hammond sawmill site which it elected to use fair value
as its deemed cost. As at January 1, 2010 the fair value of the property was estimated to be
$16,320,000 with a historical cost of $572,000.
In addition, the Company reversed certain costs related to the transfer of equipment from
one sawmill site to another which, under previous GAAP, qualified for capital treatment, but
under IFRS do not.
The impact on the Statement of Financial Position was:
Property, plant and equipment increase
Related tax effect
Increase in retained earnings
Jan. 1, 2010
Dec. 31, 2010
$ 15,748
(1,969)
$ 13,779
$
$
15,724
(1,963)
13,761
The impact on the Statement of Comprehensive Income was:
Production expense increase
Reduction to comprehensive income before income taxes
(l) Borrowing costs:
Year ended
Dec. 31, 2010
24
24
$
$
IAS 23, Borrowing Costs, requires an entity to capitalize the borrowing costs for qualifying
assets for which the commencement date for capitalization is on or after January 1, 2009.
Early adoption is permitted. IFRS 1 contains an exemption allowing companies to apply this
standard to assets for which the commencement date is the later of January 1, 2009 and the
date of transition. The Company elected to take this IFRS 1 exemption and, therefore,
borrowing costs prior to January 1, 2010 are expensed.
(m) Decommissioning provisions:
The Company’s logging activities give rise to obligations for reforestation and deactivation of
logging roads. In addition, the Company has also recognized some environmental provisions.
Provisions are measured at the expected value of future cash flows, discounted to their
present value and determined according to the probability of alternative estimates of cash
flows occurring for each operation. Canadian GAAP requires the provision to be measured at
fair value based on the amount a third party would charge for performing the remediation
work. The measurement under IAS 37, Provisions, Contingent Liabilities and Contingent
Assets, is based on “best estimate”. The best estimate calculation can be based on internal
or external costs, depending upon which is most likely.
International Forest Products Limited
93
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
28. Explanation of transition to IFRSs (continued):
First-time adoption elections and changes due to IFRS (continued):
(m) Decommissioning provisions:
Discount rates used under Canadian GAAP for decommissioning provisions (known as asset
retirement obligations under Canadian GAAP) are based on the Company’s credit-adjusted
risk-free rate. Adjustments are made to decommissioning provisions for changes in the
timing or amount of the cashflows and the unwinding of the discount. Changes in estimates
that decrease provisions are discounted using the discount rate applied upon initial
recognition of the liability; changes in estimates that increase the provision are discounted
using the current discount rate.
Discount rates used under IFRS reflect the risks specific to the decommissioning provision.
Adjustments are made to decommissioning provisions each period for changes in the timing
or amount of cash flows, changes in the discount rate and the unwinding of the discount. As
such, the discount rate reflects the current risk-free rate given that risks are incorporated into
the future cash flow estimates.
The impact on the Statement of Financial Position was:
Reforestation liability, non-current increase
Provisions and other liabilities increase
Related tax effect
Reduction in retained earnings
Jan. 1, 2010
Dec. 31, 2010
$
$
(1,864)
(915)
695
(2,084)
$
$
(2,308)
(1,018)
832
(2,494)
The impact on the Statement of Comprehensive Income was:
Production expense increase
Reduction to comprehensive income before income taxes
(n) Share-based payments:
Year ended
Dec. 31, 2010
547
547
$
$
The Company has granted certain cash-settled share-based payments to certain employees.
The Company accounted for these share-based payment arrangements by reference to their
intrinsic value under Canadian GAAP.
Under IFRSs the related liability has been adjusted to reflect the fair value of the outstanding
cash-settled share-based payments. The fair value is estimated by applying an option pricing
model and until the liability is settled the fair value of the liability is remeasured at each
reporting date, with changes in fair value recognized as the awards vest. Additionally, IFRS
requires an estimate of the number of awards expected to vest, which is revised if
subsequent information indicates that actual forfeitures are likely to differ from the estimate.
As a result, the Company adjusted expenses associated with cash-settled share-based
payments to reflect the changes of the fair values of these awards.
The impact on the Statement of Financial Position was:
Trade accounts payable and accrued liabilities increase
Provisions and other liabilities increase
Related tax effect
Reduction in retained earnings
Jan. 1, 2010
Dec. 31, 2010
$
$
(1,744)
(331)
519
(1,556)
$
$
(1,571)
(597)
542
(1,626)
International Forest Products Limited
94
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
28. Explanation of transition to IFRSs (continued):
First-time adoption elections and changes due to IFRS (continued):
(n) Share-based payments (continued):
The impact on the Statement of Comprehensive Income was:
Long term incentive compensation expense
Reduction to comprehensive income before income taxes
(o) Business combinations:
Year ended
Dec. 31, 2010
93
93
$
$
IFRS 1 provides the option to apply IFRS 3, Business Combinations, retrospectively or
prospectively from the date of transition of January 1, 2010. The retrospective basis would
require restatement of all business combinations that occurred prior to the transition date.
The Company elected not to retrospectively apply IFRS 3 to business combinations that
occurred prior to its transition date and such business combinations have not been restated.
Any goodwill arising on such business combinations prior to the transition date has not been
adjusted from the carrying value previously determined under Canadian GAAP as a result of
applying these exemptions.
(p) Income taxes:
Due to the cyclical nature of the wood products industry and the economic conditions over
the last several years, the Company has not recognized the benefit of deferred tax assets in
excess of deferred tax liabilities under Canadian GAAP or IFRS.
The above changes had the following impact on deferred income tax liabilities based on a tax
rate of 25 percent:
Employee future benefits
Property, plant and equipment
Decommissioning provisions
Share-based payments
Reduction of deferred income tax assets for
loss carry-forwards not recognized
Reduction to deferred income tax liability and
increase in retained earnings
Jan. 1, 2010
Dec. 31, 2010
$
1,718
(1,969)
695
519
$
2,251
(1,963)
832
542
(651)
(1,662)
$
312
$
-
The impact on the Statement of Comprehensive Income was:
Deferred income tax expense increase
Income tax recovery on other comprehensive losses
Reduction to comprehensive income
Year ended
Dec. 31, 2010
935
(623)
312
$
$
International Forest Products Limited
95
Notes to Consolidated Financial Statements
Years ended December 31, 2011 and 2010
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
28. Explanation of transition to IFRSs (continued):
First-time adoption elections and changes due to IFRS (continued):
(q) Retained earnings:
The above changes had the following impact on retained earnings:
Employee future benefits
Investment in associate company
Property, plant and equipment
Decommissioning provisions
Share-based payments
Tax reduction of deferred income tax assets for
loss carry-forwards not recognized
Reduction in retained earnings due to IFRS adjustments
Reclassifications due to IFRS
Currency translation adjustments
Reduction in retained earnings
Jan. 1, 2010
Dec. 31, 2010
$
(5,153)
(920)
13,779
(2,084)
(1,556)
(651)
3,415
$
(6,755)
(1,050)
13,761
(2,494)
(1,626)
(1,662)
174
(24,855)
$ (21,440)
(24,855)
$ (24,681)
The impact on the Statement of Comprehensive Income was:
Production expense
Employee future benefits
Decommissioning provisions
Property, plant and equipment
Long term incentive compensation expense
Equity in earnings of associate company reduction
Deferred income tax expense
Increase to net loss
Other comprehensive loss increase:
Defined benefit plan actuarial losses
Equity share of associate’s defined benefit plan actuarial losses
Income tax recovery on other comprehensive losses
Increase in other comprehensive loss
Increase in comprehensive loss
Year ended
Dec. 31, 2010
$
$
(355)
547
24
216
93
15
935
1,259
2,490
115
(623)
1,982
3,241
96
International Forest Products Limited
ANNUAL INFORMATION FORM
Dated as of February 17, 2012
FORWARD LOOKING INFORMATION
This report contains forward-looking statements. Forward-looking statements are statements that
address or discuss activities, events or developments that the Company expects or anticipates may occur
in the future. Forward-looking statements are included in the description of areas which are likely to be
impacted by the description of future cash flows and liquidity under the headings. These forward-looking
statements reflect management’s current expectations and beliefs and are based on certain assumptions
including assumptions as to general business and economic conditions in the U.S. and Canada, as well as
other factors management believes are appropriate in the circumstances. Such forward-looking
statements are subject to risks and uncertainties and no assurance can be given that any of the events
anticipated by such statements will occur or, if they do occur, what benefit the Company will derive from
them. A number of factors could cause actual results, performance or developments to differ materially
from those expressed or implied by such forward-looking statements, including those matters described
in the 2011 annual Management’s Discussion and Analysis under “Risks and Uncertainties” and in
Interfor’s current Annual Information Form. Accordingly, readers should exercise caution in relying upon
forward-looking statements and the Company undertakes no obligation to publicly revise them to reflect
subsequent events or circumstance, except as required by law.
DESCRIPTION OF THE BUSINESS
We are one of the Pacific Northwest’s largest producers of quality wood products for sale to markets
around the world. We have operations in British Columbia (“B.C.”), Washington and Oregon, including
two sawmills in the Coastal region of B.C., three in the B.C. Interior, two in Washington and two in
Oregon. We also operate a value-added remanufacturing facility in Washington.
Our Company was incorporated under the Company Act (British Columbia) on May 6, 1963. On
December 1, 1979 we amalgamated with our subsidiary, Whonnock Forest Products Limited. On January
1, 1988 we changed our name from Whonnock Industries Limited to International Forest Products
Limited. On February 10, 2006 we transitioned under the Business Corporations Act (British Columbia).
Our head office as well as our registered and records offices are located at Suite 3500, 1055 Dunsmuir
Street, Vancouver, British Columbia, V7X 1H7.
In this document, a reference to the “Company”, “Interfor”, “we” or “our” means International Forest
Products Limited and its predecessors and all our subsidiaries. Our major subsidiary, Interfor Pacific Inc.,
owns and operates our U.S. sawmills. It is wholly owned and is incorporated in the State of Washington.
Other wholly owned subsidiaries whose operations are described below are CEDARPRIME Inc.
(incorporated in the State of Washington), Interfor Sales & Marketing Ltd. (incorporated in British
Columbia) and Interfor Japan Ltd. (incorporated in British Columbia). Effective January 5, 2011,
Seaboard Shipping Company Limited (“Seaboard”) became a wholly owned subsidiary of Interfor.
HISTORY AND RECENT DEVELOPMENT OF THE BUSINESS
Our business originated in the 1930’s with a sawmill in Whonnock, about 48 kilometres east of Vancouver
B.C. Since that time, we have made significant investments to expand, upgrade and diversify our
production facilities and timber base through capital programs and the acquisition of manufacturing
plants and timber resources from other companies.
97
2008
2008 was one of the most difficult periods experienced in the lumber industry in recent history. The
unprecedented turmoil in financial markets along with the lowest level of U.S. housing starts in over 50
years had a significant impact on the Company’s results.
In July 2008, following a prolonged curtailment, the Company permanently closed its Queensboro sawmill
division, located in New Westminster, B.C. The property was sold in the third quarter of 2009 for gross
proceeds of $30.1 million.
During the course of 2008, we acquired the Castlegar, B.C. and Grand Forks, B.C. sawmills, related
timber harvesting rights and other related assets from Pope and Talbot, Inc., and acquired the Beaver
and Forks sawmill, planer mill and inventories on the Olympic Peninsula, WA from Portac, Inc.
2009
2009 saw extremely weak North American markets continue to challenge the lumber industry. The
turbulence in financial markets, particularly in the first half of 2009, combined with the historically low
levels of U.S. housing starts and strengthening Canadian dollar had a significant impact on the Company’s
results.
Important 2009 accomplishments included the completion and impressive ramp-up of the new Adams
Lake sawmill, a return to positive EBITDA for the final two quarters of 2009, and a continued strong
financial position.
2010
2010 provided many opportunities and successes for Interfor, despite the challenges faced with
continued stagnant U.S. housing starts. A refocus on export markets, particularly China, provided
alternate markets for slower U.S. demand, added upward pressure on North American pricing resulting in
higher sales values, and supported increased operating rates.
Important accomplishments in 2010 included the acquisition of a timber tenure in the Kamloops region
from Weyerhaeuser Company Limited to support the increased fibre requirements of the Adams Lake
sawmill; increase in lumber and log exports to take advantage of demand from China; operating structure
improvements at the Castlegar sawmill which allowed the mill to restart and contribute to 2010 earnings;
and a return to positive operating earnings in the fourth quarter, 2010 for the first time since 2006.
2011
Overseas markets, particularly China, continued their growth in 2011 helping to offset weak North
American demand and providing some stability for pricing. The Company’s sales focus has been on
developing and maintaining strong relationships in export markets to continue diversification of lumber
markets.
Important accomplishments in 2011 included:
• Closing a public offering of 8,222,500 Class “A” Subordinate Voting shares at a price of $7.00 per
share for gross proceeds of $57.6 million in April, 2011. The net proceeds of $54.9 million were
initially used to reduce debt levels;
• The extension of the Company’s credit facilities to 2015;
• The acquisition of the balance of Seaboard;
• The highest level of sales revenues since 2006; and
•
Launched a new brand initiative to build the Company’s presence in the marketplace and support
future growth.
98
Continued Strong Financial Position
The Company has continued to maintain a strong financial position in 2011. Interfor ended 2011 with
net debt of $100.3 million (20.4% of invested capital), down $46.5 million from 2010, primarily as a
result of the share issuance in April, 2011, which generated net proceeds of $54.9 million.
On July 11, 2011, the Company amended its Operating Line and its Revolving Term Line, extending the
maturity dates to July 28, 2015. All other terms and conditions of the Operating Line and Revolving Term
Line remained substantially unchanged except for a reduction in pricing.
In late 2011, Interfor announced a $24 million capital plan to upgrade the Company’s Grand Forks and
Castlegar sawmills.
Outlook
Business conditions have improved in recent weeks with a more positive tone in the US and higher
activity levels in China. That said, the global economic environment remains uncertain. Interfor expects
to maintain operating rates at current levels or above for the next few quarters but will remain alert to
activity level in order to keep inventory levels in balance.
Considerable attention is being devoted to the Grand Forks and Castlegar capital projects with a goal of
completing construction by the end of the first quarter of 2013 rather than the budgeted completion at
the end of the third quarter of 2013.
The Canadian dollar is expected to trade close to par against the U.S. dollar.
With the prospect of continuing challenges in the North American markets, the Company continues its
disciplined approach to production, inventory management and capital spending and looks to continuing
to build its relationships with the emerging export markets.
See our Management Discussion and Analysis for the year ended December 31, 2011, a copy of which is
available from SEDAR at www.sedar.com.
MANUFACTURING
We operate nine sawmills and one remanufacturing plant in B.C., Washington and Oregon. These
operations produce a wide range of products for sale in North American and offshore markets. The
products range from commodity structural lumber through to specialty products, such as exterior decking
and siding, machine stress rated products, industrial timbers and a wide range of appearance grade
items.
99
Interfor Sawmills - Capacity
(based on two-shift operation)
B.C. Interior:
Adams Lake:
Castlegar:
Grand Forks:
700 MMbf
325 MMbf DFir & SPF Dimension
225 MMbf DFir, Cedar & SPF Dimension
150 MMbf SPF & DFir
B.C. Coast:
Hammond:
Acorn:
315 MMbf
165 MMbf Cedar Specialty
150 MMbf Hem & DFir Japan/Specialty
U.S. Pac. NW:
Beaver:
Port Angeles:
Molalla:
Gilchrist:
635 MMbf
170 MMbf Hem & DFir, Dimension/Timbers
165 MMbf Hem & DFir Studs
180 MMbf DFir & Hem Studs
120 MMbf Pines, DFir, White Fir Dimension/Specialty
The mills are capable of cutting logs of various species and grades ranging in diameter from 4 inches to
80 inches. Many of our manufacturing facilities have recently been upgraded and modified to improve the
matching of timber resources with customers' lumber requirements.
In addition to improving our manufacturing capability through upgrades, we have increased our efficiency
and geographic diversity and expanded our capacity through recent additions of sawmills in Washington
and B.C. These acquisitions also enabled us to expand our business while closing sawmills for which
upgrades would not have represented a viable investment.
100
Rated capacity and production of lumber, by mill, for each of the periods specified, is set out in the
following table:
Sawmills
B.C. Coast
Hammond (2)
Acorn (2)
B.C. Interior
Adams Lake (3)
Castlegar (4)
Grand Forks (4)
U.S. Pacific Northwest
Gilchrist (5)
Molalla (6)
Port Angeles (5)
Beaver (7)
Sawmills Closed or Sold
Queensboro (8)
Total
Present
Rated
Capacity (1)
Number
of Shifts
(per day)
Years ended December 31
2011 2010 2009 2008 2007
(millions of board feet)
2
2
2
2
2
2
2
2
2
165
150
325
225
150
120
180
165
170
80
102
353
136
124
104
185
128
52
89
118
339
60
113
90
125
103
73
—
—
1,650
1,264
1,110
80
104
134
—
28
43
110
79
83
—
661
106
108
48
—
28
56
66
72
14
—
498
96
108
206
—
—
127
151
129
—
38
855
(1) Based on two shifts per day and 250 operating days per year.
(2) Volumes include lumber custom-cut at third party facilities under the direction of Hammond management amounting to
8.0 million board feet for Hammond in 2011.
(3) The old Adams Lake sawmill was closed during 2008. The new Adams Lake sawmill began production in April 2009.
(4) Castlegar and Grand Forks were acquired on April 30, 2008. Volumes reported are Interfor only. Castlegar was curtailed
until July, 2010. Grand Forks was curtailed from February to September 2009, inclusive.
(5) Gilchrist and Port Angeles were acquired on September 1, 2004.
(6) Molalla was acquired on May 31, 2005.
(7) Beaver was acquired September 30, 2008.
(8) Queensboro (formerly Western Whitewood) was curtailed indefinitely in December 2007 and permanently closed in July,
2008 and the site was sold in August, 2009.
B.C. Coast Operations
Hammond
The Hammond operation is located on the Fraser River in Maple Ridge, B.C. The facility is focused on
western red cedar and supplies siding, decking, fascia and timbers for both offshore and North American
markets. The facility consists of a three-line sawmill, a planer mill and dry kilns. In late 2010 and early
2011, the Company spent $2.6 million on a quad upgrade and in 2011, the Company started a $2.0
million capital upgrade.
Acorn
The Acorn operation is located on leased land in Delta, B.C. The facility consists of a log dewatering and
merchandizing system, a sawmill, a planer mill and dry kilns. The sawmill specializes in sizes and grades
of lumber for use in Japanese traditional housing made primarily from hemlock and Douglas-fir logs.
101
B.C. Interior Operations
Adams Lake
Adams Lake is located near Kamloops, B.C. The mill manufactures kiln-dried lumber for the U.S. and
Canadian construction markets as well as for offshore markets. Adams Lake has the capability to cut
Douglas-fir as well as spruce-pine-fir (“SPF”), western red cedar, and hemlock. In 2006 and 2007 we
spent $32.1 million on an energy system, new hog and barker and infrastructure improvements to
facilitate further growth and cost savings.
In 2007, to complete the overall plan for the site, the Company commenced the construction of a new
sawmill at Adams Lake. Construction was completed on time at a cost of $100.3 million. The first line
was commissioned in December 2008, had an extremely successful start-up and commenced full
operation on April 20, 2009 on a one-shift basis, and has steadily increased operating hours and
productivity since. This mill has a two-shift capacity of 325 MMbf.
The new mill has been specifically designed to match the current and future timber resource in the area
and to address the challenges of sawing timber affected by the Mountain Pine Beetle. The mill
incorporates proven technology that materially improved the operating efficiency and cost structure of
the Adams Lake operation.
In 2010, Interfor acquired a timber tenure in the Kamloops region from Weyerhaeuser Company Limited
to support the increased fibre requirements of the Adams Lake sawmill, adding approximately 275,000
m³ of allowable annual cut.
In 2011, Interfor completed installation of a $3.1 million automated lumber grading system at the site.
Grand Forks
Our Grand Forks mill was acquired April 30, 2008 as part of our purchase of Pope and Talbot’s southern
B.C. assets. The mill is located in the southern interior of B.C. on a 75 acre site. We also acquired
timber tenures with an allowable annual cut of 502,000 m3. The two line mill manufactures kiln dried
lumber for the U.S. and Canadian construction markets as well as the housing market in Japan. Grand
Forks cuts 60% SPF and 40% fir-larch. In 2006, the previous owner completed a modernization and
upgrade of the sawmill with a new planermill and two new thermal oil kilns.
In late 2011, Interfor approved the installation of a new small log line to replace the existing two-line
facility and the installation of an automated lumber grading system, budgeted at $19 million.
Construction started in late 2011 and is expected to be complete in early 2013.
Castlegar
Our Castlegar facilities were acquired April 30, 2008 as part of our purchase of Pope and Talbot’s
southern B.C. assets. In addition to timber tenures with an allowable annual cut of 491,000 m3, the
facility includes a sawmill, dry kilns and planer and manufactures fir-larch, SPF, cedar and hemlock
dimension lumber. The operation includes a complete transportation system for moving logs on Arrow
Lake. The operation of the mill was curtailed from February, 2008 through June, 2010 due to poor
market conditions and an unfavourable cost structure. Marked improvements to the cost structure
through changes in the operating configuration achieved with the support of the mill’s employees and
other local stakeholders allowed the mill to restart in July, 2010.
In late 2011, Interfor approved a series of high return projects budgeted at $5 million including the
installation of an automated lumber grading system focused on increasing productivity and value
extraction. Construction started in late 2011 and will be completed in 2012.
102
U.S. Operations
Gilchrist
The Gilchrist mill is located in Gilchrist, Oregon on approximately 140 acres. In 2001 the previous owner
completed modernization of the facility to efficiently convert small diameter logs. The mill primarily
processes lodgepole pine, ponderosa pine and white fir to produce a wide range of specialty and
dimension lumber products. The mill has an on-site cogeneration plant to produce electricity for its own
use as well as steam for its dry kilns. At this location, we own and operate a short line railroad to
connect to a mainline for shipment of lumber and chips and to deliver logs to the mill. In 2005 and 2006
we installed six new dry kilns at a cost of US$5.7 million to replace obsolete kilns and increase drying
capacity.
Port Angeles
The Port Angeles mill is situated in Port Angeles, Washington on a 64 acre site near a major highway and
waterways which are convenient for shipping lumber and chips as well as for receiving logs at the mill.
The mill primarily processes hemlock and Douglas-fir logs to produce stud dimension lumber for the U.S.
market but is also capable of producing metric sizes for export. In 2005, we modified the dry kilns at a
cost of US$1.1 million to increase drying capacity. We also installed a new planer grade optimizer,
trimmer and sorter at a cost of US$5.0 million to increase planer capacity and significantly reduce planing
costs. In 2006 and 2007, we constructed a new primary saw line at a cost of US$18.3 million to increase
recovery and lumber production. In October 2007, we installed a new log merchandiser, planer and
planer infeed at a total cost of US$5.8 million.
Beaver
The Beaver sawmill consists of a single line 20’ dimension sawmill on a 45 acre owned site originally
constructed in 1991 by Portac Inc. We acquired the assets on September 30, 2008. The boiler, dry kilns,
and planermill are situated approximately 15 kilometres south of the sawmill on a 29 acre site leased
from the City of Forks. The operation is 75 kilometres west of our Port Angeles facility and is a strong
strategic fit with that operation. The mill has traditionally produced hemlock, Douglas-fir and spruce
products for domestic markets. Recently we have added some export products to complement the
domestic programs.
Molalla
The Molalla mill was acquired in May 2005. It is located in Molalla, Oregon approximately 50 kilometres
southeast of Portland. The mill primarily processes hemlock and Douglas-fir logs to produce stud
dimension lumber for the U.S. market. The mill’s machine centres were fully optimized by the previous
owners. A number of infrastructure improvements were undertaken in 2005 and 2006 at a cost of
US$5.8 million. In 2006, we also completed the construction of two dry kilns for US$2.4 million and a
new planermill complex with grade optimization for US$10.3 million.
Cedarprime
CEDARPRIME Inc. is located on leased premises in Sumas, Washington approximately one kilometre
south of the Canada/U.S. border. The plant has a siding line, chop line, planing and finger-jointing
equipment as well as access to on-site dry kilns enabling it to produce 20 million board feet of finger-
jointed and cut-stock products for both offshore and North American markets.
103
SALES, MARKETING AND COMPETITIVE POSITION
The markets for the Company’s products are highly competitive on a global basis and producers compete
primarily on the basis of price. In addition, a majority of Interfor’s lumber production is sold in markets
where Interfor competes against many producers of approximately the same or larger capacity. Some of
Interfor’s competitors have greater financial resources than the Company and a number may be, in
certain product lines, lower cost producers than Interfor.
The following table shows our lumber sales by geographic area and total sales by product line for the
past five years:
2011
2010
Years ended December 31
2009
(thousands of dollars)
2008
2007
Lumber
— Canada
— U.S.A
— Japan
— China
— Other export
Offshore transportation and handling
Logs
Wood chips and other residuals
Ocean freight, contract services
and other
Total sales
Lumber Sales
$64,412
$ 70,247
$ 40,886
$ 45,996
$ 76,909
222,295
214,965
135,576
139,394
78,423
102,453
30,995
39,560
538,138
108,413
68,355
65,314
61,384
40,437
29,636
48,726
16,305
34,369
12,765
481,983
288,627
79,763
56,217
60,443
34,349
35,766
3,251
61,554
11,473
297,434
103,620
30,610
241,398
46,237
282
57,873
11,769
434,468
118,571
50,260
43,110
$758,016
7,655
$625,618
6,356
$389,775
5,557
$437,221
7,709
$611,008
Lumber is similar to many other commodities in that demand is cyclical. Factors such as interest rates,
exchange rates, freight rates, government tariff and import policies, and demand for housing affect the
demand for lumber. In recent years, the residential repair and remodeling market in North America has
become a significant consumer of lumber and has lessened the impact of fluctuations in new housing
starts. In order to diminish the impact of rapid cyclical changes in any one market, we strategically
target worldwide markets and maintain product diversification. The Company has a particular customer
and product base in various countries, providing us with a diversified sales profile, including targeting the
rapidly growing Wood Frame Construction market in China. Product and market diversification is
particularly important for B.C. Coast producers where the variability inherent in the log resource produces
a much wider spectrum of product sizes and quality than is the case in the B.C. Interior or U.S. Pacific
Northwest (the “PNW”). A continuing priority for us is to develop products and markets that more fully
realize the potential for higher grades, special dimensions and value-added items.
Lumber sales and marketing activities are organized into two sales groups to leverage global expertise: i)
Export and ii) North American Sales Groups. Interfor Japan Ltd., with an office in Tokyo, has developed
niche markets and has increased sales directly to end users. We also have an office in France to serve
Continental Europe and Middle East markets and will be opening an office in China in early 2012. The
major market for our cedar lumber continues to be North America where markets are serviced through a
combination of regional wholesale distributors and direct retail sales. Gains have been made, however, in
diversifying cedar sales into offshore markets in Europe, China, Japan, and Australia. North American
dimension and stud lumber produced in Canada and the U.S. is sold out of our office in Bellingham,
Washington to leverage our market expertise and to provide a more diverse customer base for the
Canadian mills in terms of geographic and market sectors.
104
Log Sales
We purchase and sell logs in order to obtain the appropriate size, grade, and species of log to suit market
conditions and each mill’s cutting preferences. We buy or trade logs through agreements and open
market transactions and sell logs that are either unsuitable for cutting or in excess of our manufacturing
requirements.
Wood Chips and Other Residuals Sales
As a by-product of lumber production, our sawmills produce wood chips and other residuals. Essentially
all of our wood chips produced in B.C. are sold under short and long-term contracts to pulp producers.
In general, wood chips produced on the B.C. Coast are sold at prices related to current Northern
Bleached Softwood Kraft (“NBSK”) pulp prices, while the wood chips produced in the B.C. Interior are
sold at current market prices for chips. Chips from our Washington and Oregon operations are sold to
pulp producers or fibre board manufacturers under short-term arrangements.
DISTRIBUTION
We use various modes of surface transportation to deliver our lumber products. Shipments to export
markets are made in container and breakbulk vessels while shipments of lumber within North America are
made by truck and rail. The majority of breakbulk shipments are carried by Seaboard International
Shipping Company Limited (Barbados) which is a wholly-owned subsidiary of Seaboard. In January, 2011
Seaboard became a wholly-owned subsidiary of Interfor. Chips and logs are normally delivered by tug
and barge or by truck. In Gilchrist, Oregon, and in Grand Forks, B.C., we own short line railroads that
connect to Class 1 railroads for shipping lumber and chips.
TIMBER SUPPLY
British Columbia
The Province of British Columbia (the “Crown”) owns about 95% of the timberlands from which the
majority of timber is harvested. The remaining 5% of timberland is private land which is primarily
located on Vancouver Island and held by a few large industrial forest landowners.
The Province provides for the use of Crown forest land through the granting of various forms of timber
tenures. These tenure agreements provide timber harvesting rights in exchange for management
obligations and stumpage fees payable to the Crown.
Our timber supply needs are met by a combination of internal logs harvested from our own timber
tenures, long-term trade and supply agreements, and by purchases on the open market. When
operating at normal capacity, our mills in B.C. would require approximately one-third of their log supply
from external sources.
We hold various Forest Licence (“FL”), Tree Farm Licence (“TFL”) and Timber Licence (“TL”) tenures that
currently provide for an allowable annual cut (“AAC”) of approximately of 3.8 million cubic metres (“m3”).
The majority of Interfor’s tenures are long-term (15 and 25 year) renewable agreements that are
generally replaced every five years.
On the Coast, we harvest a variety of species consisting primarily of western hemlock, amabilis fir,
western red cedar and Douglas-fir. In the Interior, the species mix consists of SPF, Douglas-fir, fir-larch
and cedar. The harvest is derived from both old growth and second growth stands. Whereas one-third of
the harvest currently comes from second growth stands on the coast, this amount is expected to increase
significantly over the next several decades.
The following table shows our AAC under our FL and TFL tenures and other cutting rights and the volume
of timber harvested under our FLs and TFLs and other cutting rights in each region for the periods
specified. They also show the volume of purchases and sales during that period.
B.C. Operations
2012
Years ended December 31
2009 2008
2010
2011
105
2007
Allowable Annual Cut (1)
— Forest Licences
— Non Replaceable Forest Licences
— Tree Farm Licences
— Discretionary Annual Harvest Levels (2)
(thousands of cubic metres)
2,684
2,701
2,426
2,418
2,084
2,105
286
801
40
220
801
40
313
854
40
313
867
40
375
196
40
155
262
40
3,811
3,762
3,633
3,638
2,695
2,562
Log Production
— Coast
— Interior
Total Log Production
Log Purchases
Log Sales
1,757
1,651
3,408
1,522
1,139
2,661
1,081
1,754
1,655
214
127
112
1,295
1,881
1,767
1,131
1,343
794
447
1,316
1,356
1,081
919
1,319
1,223
(1) AAC status at the beginning of each year (includes a provision for non-recoverable fibre).
(2) Volumes not included in AAC.
U.S. Pacific Northwest
Timber supply in the PNW is sourced from a broad distribution of forest land ownership (forest industrial
lands; small private landowners; and State and Federal lands). These sources represent a long-term
supply base from which mills purchase their timber supply. About 70% of the log supply in the PNW
comes from land that is owned by industrial and small private landowners, while the remainder is sourced
from State, Federal and tribal lands.
Our timber supply requirements in Washington are heavily weighted to western hemlock with smaller
volumes of Douglas-fir and sitka spruce. In Molalla, the specie mix is weighted to Douglas-fir with smaller
volumes of western hemlock and white fir. Both the Washington mills and Molalla depend on private
industrial landowners and small private landowners for the majority of their supply. This timber is
supplemented with State, Federal, and tribal volumes in the case of the Washington mills.
In Gilchrist, log purchases consist primarily of lodgepole pine, ponderosa pine and white fir that have
come from second growth harvesting and the thinning of young stands from surrounding National
Forests.
The total 2012 log supply requirement for the mills in the U.S. is projected to be supplied from various
sources, estimated to be as follows:
U.S. Pacific Northwest Operations
State and Federal Lands
Industrial Lands
Private Lands
Expected Sources of Timber 2012
45%
42
13
100%
Forestry and Logging in B.C.
Forest and timber harvesting operations on Crown land in B.C. are regulated under the B.C.
Government’s Forest and Range Practices Act (British Columbia) and the Forest Act (British Columbia).
106
The Government is responsible for setting the AAC, approving forest development plans and cutting
permits, determining the stumpage system and managing compliance and enforcement.
Our Company is required to manage forest resources under our tenures in accordance with the
requirements of the applicable laws and regulations. Forest management of our tenures is guided by a
team of forest professionals that are engaged in a wide array of activities such as resource planning,
forest development, road building and harvesting, reforestation, forest protection and environmental
certification.
We pay stumpage to the Province for timber harvested on Crown land according to market pricing
systems in place on the Coast and in the Interior. In addition the Crown charges an annual rent based
on the AAC for each licence to cover general administration and fire preparedness.
Our Coastal logging operations are widely dispersed in primarily remote locations between Vancouver and
Prince Rupert. Our woodlands harvesting activities are performed entirely by independent logging
contractors.
Our Interior woodlands operations are located at Adams Lake, northeast of Kamloops, and in the
Kootenay region at Nakusp and Grand Forks.
Logging operations are seasonal due to a number of factors including weather, ground conditions and fire
season closures. These and other factors are described in the Selected Quarterly Financial Information
section of our Management Discussion and Analysis for the year ended December 31, 2011, a copy of
which is available on SEDAR at www.sedar.com.
CAPITAL EXPENDITURES
Our acquisitions and capital expenditures on sawmill and logging operations and timber holdings are as
shown in the following table:
2011
Years ended December 31
2010
2009
2008
2007
Acquisitions
Land, buildings, equipment and
other intangibles
— Manufacturing
— Forestry and logging
Logging roads and timber
Other capital expenditures
Land, buildings, equipment and
other intangibles
— Manufacturing and other
— Forestry and logging
Logging roads and timber
(thousands of dollars)
—
—
—
—
—
—
—
—
$52,885
—
—
—
—
—
40,148
—
—
—
$93,033
—
$15,487
738
19,987
36,212
$10,720
169
31,398
42,287
$20,752
29
6,811
27,592
$72,911
1,365
17,512
91,788
$47,948
130
28,340
76,418
Total
$36,212
$42,287
$27,592
$184,821
$76,418
Our capital expenditures over the five years ended December 31, 2011 were financed through internally
generated funds, through our bank lines and through proceeds generated from share issuances and the
sale of surplus land,logging and manufacturing assets.
107
HUMAN RESOURCES
In B.C., we directly employ approximately 940 people in our logging and manufacturing operations and
corporate offices.
The United Steel Workers (“USW”) is the certified bargaining agent for
approximately 470 of these people. The agreement with the USW for the B.C. Coast has an expiry date
of June 15, 2014, while the Southern Interior USW agreement expires on June 30, 2013. The Canadian
Marine Service Guild represents 21 employees, and their collective agreement expires September 30,
2014.
In the U.S., we employ approximately 490 employees in our sawmill and remanufacturing operations in
Washington and Oregon and in our office located in Bellingham, Washington.
Our employees are governed by a Policy Manual, including a Code of Conduct, Environment Policy, Health
and Safety Policy, Disclosure Policy, Whistleblower Policy, Financial Reporting Policy, Internet, Email and
Computer Use Policy, Compensation Policy, and Insider Trading Policy. The Code of Conduct may be
found on SEDAR at www.sedar.com. The Environment and Safety Policies are described below.
Employees are also protected by a Privacy Policy. Our employees, management and directors have
adopted the following Core Values:
Core Values
We will conduct ourselves with honesty, integrity and professionalism.
• People:
• Safety:
People are the foundation of our business.
Safety is a prerequisite for work.
• Environment:
Environmental integrity must be maintained in everything we do.
• Customers:
Customers pay our way.
• Shareholders:
Returns to our shareholders facilitate investment, employment, and
public benefits.
We Are Responsible For Our Own Success
108
HEALTH AND SAFETY
Our Health and Safety Policy embodies our commitment to the health, safety and well-being of all
employees.
Our Board approved the policy and established a committee of the Board to monitor these safety
commitments. The Environment and Safety Committee of the Board (“E&S Committee”) is mandated to
monitor the implementation and maintenance of our policy of ongoing commitment to health and safety
values and principles with continuous operational improvement. The E&S Committee ensures that our
management develops, implements and maintains a comprehensive safety program.
Safety is a core value for us. We maintain an active and comprehensive safety program at each of our
operations.
We continued to make good progress at each of our operations and our injury metrics in 2011 were
comparable to 2010. Our Medical Incident Rate remained at 3.3 and our Lost Time Accident frequency
decreased to 1.0 from 1.1 when compared to 2010.
Health and Safety Policy
Health and Safety is the uncompromised right and responsibility of all employees.
• We will integrate Health and Safety into our business with the knowledge that all accidents
are preventable.
• We will hold all levels of management accountable for providing a safe work environment
and enforcing safe work practices, including timely follow-up of safety incidents.
• We will train all employees to identify hazards and to protect themselves and fellow workers.
• We will hold all employees and contractors working for Interfor accountable for following
safe work practices and reporting unsafe acts and conditions.
• We will use audits to measure and improve our Health and Safety performance.
• We will actively involve our employees in effective Safety programs.
• We will operate in compliance with Health and Safety Regulations.
• We will monitor and report regularly on our Health and Safety performance.
International Forest Products Limited is committed to the health, safety, and well being of all
employees.
109
THE ENVIRONMENT
Our Environment Policy embodies our commitment to responsible stewardship of the environment. Our
Board approved the policy and established a committee of the Board to monitor our commitment to
principles, values and policies on environmental matters.
We are committed to responsible stewardship of the environment.
Environment Policy
• We will minimize environmental impact, prevent pollution and strive for continuous
improvement of our environmental performance.
• We will operate in compliance with all applicable laws pertaining to the environment.
• We will regularly review our practices and procedures to monitor and report on
environmental performance.
• We will provide training for employees and contractors in environmentally responsible work
practices.
• We will manage our forest resources in a sustainable manner that is environmentally
appropriate, socially beneficial and economically viable.
• We will promote the use of our wood products as a good choice for the environment.
Corporate Environment Oversight
Management has implemented an environmental compliance program. We maintain an Environmental
Management System (“EMS”) for all of our woodlands and manufacturing facilities. The EMS provides a
structure for identifying, addressing and managing environmental issues. Audits are performed regularly
in both the woodlands and manufacturing operations to verify its effectiveness.
We are a global leader in environmental management through the application of science–based
principles, collaborative approaches, sustainable forest practices and independent certifications. We were
a recipient of the 2000 Millennium Business Award from the United Nations Environmental Programme
and the International Chamber of Commerce, a co-recipient of World Wildlife Fund’s Gift to the Earth
award in 2007 and a recipient of an SFI Conservation Leadership award in 2009 for a partnership with
Aboriginal people along British Columbia’s Pacific Coast.
Additional information about our environmental work, audit summaries and Responsibility Report is
available on our website at www.interfor.com.
Woodlands
Environmental Management Systems
Environmental Management Systems are in place for both Coastal Woodlands and Interior Woodland
Operations. These systems are modeled after ISO 14001 Standards and provide a framework for
continual improvement in our environmental management and for forest management.
Sustainable Forest Management
Sustainable forestry meets present day needs without compromising the ability to meet the needs of
future generations. Sustainable forestry integrates the reforesting, stand tending and harvesting of trees
with conservation of soil, air and water quality, biological diversity, wildlife and aquatic habitat, recreation
and visual aesthetics.
The Company employs professional foresters to prepare detailed harvest and reforestation plans that
integrate information from a variety of resource assessments. Interfor achieves its reforestation
110
obligations by preparing site specific plans for each area harvested. Using a combination of planting with
ecologically appropriate species and natural regeneration, each hectare harvested is restocked within a
set time frame. In 2011 Interfor planted 7.8 million trees - more than 2 trees for every tree harvested.
Forest Management Certification
To provide our customers and stakeholders with added assurance of Interfor’s superior performance in
sustainable forest management, Interfor has achieved independent third party certification on 100 per
cent of our woodlands operations.
The Company maintains two Sustainable Forestry Initiative (“SFI”) forest management certifications:
B.C. Coastal Woodlands Operations, and B.C. Interior Operations namely Adams Lake, Grand Forks and
Castlegar.
In preparation for the external audits, five internal audits were conducted by Company personnel. The
audit protocol included both an office document review and a field review of selected harvesting,
planning and silviculture activities. Action plans were developed to address a handful of minor issues.
The internal audit reports and action plans were made available to the external auditor.
Annual external audits were conducted by KPMG Performance Registrar Inc. (“KPMG”). The interior audit
included recently acquired tenures in the Grand Forks and Castlegar operations. A number of ‘Good
Practices’ pertaining to planning and operational activities were noted in both the coastal and interior
audits. In addition, three minor non-conformances (“NCs”) were recorded in the two external audits.
Two of the minor NCs related to fuel handling procedures and the third minor NC related to training for
species at risk management. Action plans to address the NCs were prepared and submitted to KPMG for
approval and have been implemented. Public summary reports of the external audits have been
prepared by KPMG and are posted on our Company website.
Interfor also has Forest Stewardship Council (“FSC”) forest management certification on its tenures in the
mid-coast Timber Supply Area as part of group certification held by Coast Forest Conservation Initiative
(“CFCI”). As of December 31, 2011 ten Corrective Action Requests remained open on the certificate.
Regulatory Compliance
Interfor’s operations are subject to extensive provincial, state, federal or other laws and regulations that
apply to most aspects of our business activities. Where applicable, Interfor is required to obtain
approvals, permits and licenses for its operations as a condition to operate.
There were no new incidents reported from Ministry of Forests and Natural Resource Operations
Compliance and Enforcement Program in 2011. In addition, four open case files from previously reported
incidents were closed in 2011. Two had no further action taken - one resulted in a warning ticket being
issued and one related to Wildlife Tree Patch reserves on old 2007 planning that resulted in a $2,500
fine.
Coast Forest Conservation Initiative
Interfor continues to be a member of the CFCI – a collaborative effort of five B.C. forest product
businesses committed to finding new approaches to forest conservation and management in B.C.’s
Central and North Coast.
CFCI collaborates with the Rainforest Solution Project (a group of environmental organizations namely
Forest Ethics, Greenpeace and the Sierra Club, B.C. Chapter) in a forum known as the Joint Solutions
Project (“JSP”). JSP works with the B.C. Government and First Nations on strategic items related to the
implementation of ecosystem based management (“EBM”).
In 2011 JSP focused considerable energy on a project exploring how the EBM rules could be applied to
achieve low risk to ecological integrity while allowing for a sustainable wood-flow to support human well
being.
First Nations
First Nations (“FN”) groups have claimed aboriginal title and rights over substantial portions of British
Columbia. Interfor tenures overlap with the traditional territories of 57 different FN groups. The
Company notifies each FN group prior to development activities as part of the Forest Stewardship Plan
111
preparation process. It is our desire to establish a working relationship with each of the FN groups where
we operate.
Examples of formalized agreements with FN signed in 2011 include a formal Information Sharing Protocol
with five FN from the Nanwakolas Council Society detailing the review of operational plans and a
Memorandum of Understanding with the Wuikinuxv Nation covering a wide range of forestry issues.
Interfor supports the efforts to establish a New Relationship initiative between the Province and FN
groups prior to treaty settlement. In late 2011 the Province and five FN from the Nanwakolas Council
Society on the B.C. coast signed a Reconciliation Protocol that provides a shared decision making process
for resource and land use, as well as new forest sector opportunities. This agreement overlaps a portion
of Interfor’s Central Coast and northern Vancouver Island tenures. The agreement will be assessed and
monitored in the years ahead to determine the extent of any implications on those operations.
Mountain Pine Beetle
The Mountain Pine Beetle (“MPB”) infestation has resulted in the mortality of a significant portion of the
mature pine trees in the interior of B.C.. The greatest impact has been in the central interior where there
is a high percentage (over 60%) of pine in the forest. These areas will also see the greatest reductions
in timber supply once the shelf life of the dead pine trees is exceeded in the next 5 to 10 years.
Interfor operations in the southern interior have a much lower percentage of pine (less than 30%) and
are less affected by the MPB, both in terms of mortality and the impact on future timber supply.
Harvesting the dead pine trees is a priority for the operations as part of a salvaging and recovery
process. The longer term timber supply impacts of the MPB are not expected to have a significant impact
on the Company’s operating areas.
Climate Change
The affects of climate change on forest ecosystems is not well understood. The Company monitors the
current research being done by the Province and will modify practices as appropriate as part of our
sustainable forest management plans.
The ability to manage carbon stocks through sequestration and carbon storage on long lived wood
products may provide new opportunities to the forest sector. In 2011 the Company actively supported
the B.C. Forest Sector Climate Action Steering Committee, and the establishment of a Forest Carbon
Offset Initiative for the Kamloops TSA.
Continual Improvement
Interfor’s approach to managing the environment involves the process of continual improvement. Each
year a formal Management Review of the Company’s program and performance is done by senior
Company representatives. In 2011 a MR was completed for both the coast and interior operations.
Manufacturing
Environmental Management System
We maintain an EMS for all of our manufacturing facilities. Each manufacturing business unit is
responsible for compliance and ensuring the EMS is functioning as intended.
Audits
Internal audits are carried out annually at each mill. Action plans are developed and implemented by the
management team at each mill. In 2011 audits were completed at all Company operations.
Regulatory Compliance
Interfor monitors its compliance with all applicable permits and environmental legislation. As at
December 31, 2011 Interfor was in compliance with all regulatory permits.
Chain of Custody (CoC) and Responsible Purchasing
Interfor maintains Chain-of-Custody (“CoC”) certification at certain mills that tracks certified logs coming
from sustainably managed forests through the manufacturing process. Interfor’s Canadian mills are
112
certified to both SFI and PEFC CoC Standards. The coastal B.C. mills are also certified to FSC CoC
Standards. The CoC certificates are subject to annual third party audits.
Green House Gas Emissions
Reporting regulations for Green House Gas (“GHG”) emissions are currently being implemented in both
Canada and the U.S. In B.C. none of our mills exceeded the 10,000 tonnes per year reporting threshold.
In the U.S. we have two mills in Oregon that exceeded the 10,000 tonnes per year reporting threshold.
All of the Company’s mills are in compliance with GHG emission regulations.
Carbon Reductions
At the Adams Lake sawmill a biomass-fired energy system had been installed to provide heat for lumber-
drying and space-heating. The system replaced the reliance on liquefied natural gas and equates to an
annual reduction 16,000 tonnes of carbon emissions. In 2011 the Company successfully completed a
verification of the carbon savings and received an offset credit from the Pacific Carbon Trust.
Best Practices
All mills have programs in place to recycle used oil, oil filters, steel wire, strapping, old equipment,
batteries, cardboard, paper and fluid containers. Each year thousands of liters of used oil and several
tonnes of used steel are recovered and recycled.
A capital foreshore project at Hammond was completed in 2011. Work involved piling and riprap to
secure the riverbank, petroleum handling equipment and camera inspections of yard drainage structures.
A program to recover bundling wire and sunken logs from the foreshore at the Acorn Mill was
implemented in 2011. Implementing this program facilitated the approval of dredging permits from
Environment Canada.
Environmental Liabilities
Site Rehabilitation
As part of the Pope and Talbot purchase agreement in 2008 a $1.1 million accrual was set up to address
a potential future liability for the environmental cleanup of the Castlegar Mill foreshore and landfill site.
There were no planned activities or expenses charged to the accrual in 2011.
RESEARCH AND DEVELOPMENT
We contribute to and participate in industry research organizations that have made numerous technical
developments beneficial to us in areas such as sawing technology, drying techniques, and anti-sapstain
applications. We also are committed to applied research and development in the areas of environment,
health and safety, forest management and product and market development. We also conduct product
and market research on our own in Canada and the U.S.
113
CAPITAL STRUCTURE
The authorized share structure of the Company consists of:
• 100,000,000 Class “A” Subordinate Voting shares without par value (“Subordinate Voting
Shares”);
• 1,700,000 Class “B” Common shares without par value (“Multiple Voting Shares”); and
• 5,000,000 Preference shares without par value issuable in series with such special rights and
restrictions as the Directors of the Company may determine before issue thereof (“Preference
Shares”).
The Subordinate Voting Shares and Multiple Voting Shares are referred to as “Equity Shares”.
Subordinate Voting Shares
The holders of Subordinate Voting Shares are entitled to non-cumulative preferential dividends of 13 1/3
cents per annum for each share in priority to any dividends paid on the Multiple Voting Shares and to
further participate, share for share with the Multiple Voting Shares, in any dividends paid on the Equity
Shares for any fiscal year after 13 1/3 cents per share has been paid or set aside for payment on the
Subordinate Voting Shares. The holders of Subordinate Voting Shares are entitled to one vote for each
share and the holders of the Subordinate Voting Shares are entitled, as a class, to elect one member of
the Board and if there are no Multiple Voting Shares outstanding, are entitled to elect the entire Board
except in certain circumstances where the holders of Preference Shares are entitled to elect two
Directors.
The provisions relating to the Subordinate Voting Shares may not be varied unless sanctioned by a
special resolution of the holders of the Subordinate Voting Shares and the Multiple Voting Shares voting
together and by separate resolutions of the respective holders of the Subordinate Voting Shares and the
Multiple Voting Shares, the special resolution and separate resolutions in each case requiring a majority
of three-fourths of the votes cast.
In the event of liquidation, dissolution or winding-up of the Company or any other distribution of its
assets, holders of Subordinate Voting Shares are entitled to declared and unpaid dividends prior to the
holders of the Multiple Voting Shares and thereafter to participate, share for share, with the Multiple
Voting Shares, subject to all rights of the holders of Preference Shares.
Multiple Voting Shares
The holders of Multiple Voting Shares are entitled to participate, share for share, with the Subordinate
Voting Shares, in any dividends paid for any fiscal year after 13 1/3 cents has been provided for payment
on the Subordinate Voting Shares. The holders of Multiple Voting Shares are entitled to ten votes on a
poll for each share held and the holders of Multiple Voting Shares are entitled, as a class, to elect all
members of the Board except one member to be elected by the holders of the Subordinate Voting
Shares, as a class, and, in certain circumstances, two Directors to be elected by the holders of Preference
Shares.
In the event of liquidation, dissolution, or winding-up of the Company or any distribution of its assets,
holders of Multiple Voting Shares are entitled after payment of any declared and unpaid dividends on the
Subordinate Voting Shares to participate, share for share, with the Subordinate Voting Shares, subject to
all rights of the holders of Preference Shares.
Any holder of Multiple Voting Shares is entitled at any time to exchange his Multiple Voting Shares for
Subordinate Voting Shares on a share for share basis without adjustment for any unpaid dividends.
The provisions relating to the Multiple Voting Shares may not be varied unless sanctioned by a special
resolution of the holders of the Subordinate Voting Shares and the Multiple Voting Shares voting together
and by separate resolutions of the respective holders of the Subordinate Voting Shares and the Multiple
Voting Shares, the special resolution and separate resolutions in each case requiring a majority of three-
fourths of the votes cast.
114
In the event of any subdivision, consolidation, or conversion of either Subordinate Voting Shares or
Multiple Voting Shares, an appropriate adjustment is to be made in the rights and conditions attaching to
the Subordinate Voting Shares and the Multiple Voting Shares to preserve the benefits conferred on the
holders of each class.
Rights on Take-Over Bids and Conversion of Multiple Voting Shares
Any transfer of a Multiple Voting Share:
a. by any of W.L. Sauder’s executors, administrators, or other trustee or legal representative with
respect to his personal estate, members of his immediate family, their descendants and controlled
companies (collectively the “Controlling Shareholder Group”) to any person other than another
member of the Controlling Shareholder Group or a person (the “Qualified Purchaser”) who is
acquiring a majority of the outstanding Multiple Voting Shares and who makes an offer to purchase
all outstanding Subordinate Voting Shares, Preference Shares, and Multiple Voting Shares at an
equivalent price; or
b. by a Qualified Purchaser to any person other than another Qualified Purchaser,
will result in the automatic conversion of the Multiple Voting Shares into Subordinate Voting Shares.
The Multiple Voting Shares will be automatically converted into Subordinate Voting Shares if:
a.
b.
the Controlling Shareholder Group or a Qualified Purchaser ceases to beneficially own more than 50%
of the issued and outstanding Multiple Voting Shares; or
the Controlling Shareholder Group or a Qualified Purchaser ceases to beneficially own equity shares
carrying at least 9.2 million votes, subject to adjustments upon: (i) the subdivision, consolidation, or
reclassification of any outstanding equity shares, or (ii) the issue of equity shares by way of a stock
dividend other than an ordinary course stock dividend.
Preference Shares
The Preference Shares of each series rank on a parity with the Preference Shares of every other series,
and are entitled to preference over the Equity Shares and over any other shares ranking junior to the
Preference Shares with respect to payment of dividends and the distribution of assets of the Company in
the event of liquidation, dissolution, or winding-up of the Company.
MARKET FOR SECURITIES OF THE COMPANY
The Subordinate Voting Shares are listed on the Toronto Stock Exchange under the symbol IFP.A. The
following table sets out the market price ranges and trading volumes for the Subordinate Voting Shares
on the Toronto Stock Exchange for each month during 2011 (January 1, 2011 through December 31,
2011).
115
Month
January
February
March
April
May
June
July
August
September
October
November
December
Toronto Stock Exchange (TSX)
2011 Trading Volumes
Ticker: IFP.A
$ High
$ Low
6.24
6.08
7.49
7.22
5.88
5.46
5.48
4.93
4.45
4.34
4.16
4.35
5.18
5.57
5.00
5.66
5.07
4.38
4.80
3.86
3.65
3.50
3.80
3.75
Volume
2,912,378
1,057,884
5,579,055
3,304,994
2,614,025
1,401,129
1,062,535
946,436
1,733,332
2,051,520
1,275,737
1,415,333
TRANSFER AGENTS
The transfer agent for our Subordinate Voting Shares is Computershare Investor Services Inc. at its
principal offices in Vancouver, British Columbia.
116
DIRECTORS AND OFFICERS
Directors as of February 17, 2012
The following table sets out the Company’s directors as of February 17, 2012, their respective
municipalities of residence, principal occupations within the past five years and the period during which
each director has served as a director.
Name and
Municipality of Residence
LAWRENCE I. BELL (Lead Director)
Vernon, BC, Canada
Director Since
April 1998
Principal Occupations
Corporate Director
Non-executive Chairman
British Columbia Hydro and Power Authority
DUNCAN K. DAVIES
Vancouver, BC, Canada
November 1998
President and Chief Executive Officer
International Forest Products Limited
HAROLD C. KALKE
West Vancouver, BC, Canada
July 2000
President and Founder
Kalico Developments Ltd., a real estate development
and management company
PETER M. LYNCH
Toronto, ON, Canada
October 2006
Corporate Director
Executive Vice President and Director
Grant Forest Products Inc. (and its predecessor), a
producer of OSB and engineered wood products
From
2007
To
Present
2003
2007
2000
Present
1971
Present
2010
Present
1993
2010
GORDON. H. MacDOUGALL
West Vancouver, BC, Canada
February 2007
Vice Chairman and Director
Connor, Clark & Lunn Investment Management Ltd.,
an asset management firm
2007
Present
Partner
Connor, Clark & Lunn Investment Management
Partnership
1996
2006
J. EDDIE McMILLAN
Pensacola, Florida, USA
October 2006
Independent Business Consultant
2002
Present
Executive Vice President – Wood Products Group
Willamette Industries, Inc., a forest products
company
1998
2002
E. LAWRENCE SAUDER
Vancouver, BC, Canada
April 1984
Non-Executive Chairman
International Forest Products Limited
Chief Executive Officer
Sauder Industries Limited, a manufacturer and
distributor of building products
Chairman
Sauder Industries Limited
Non-executive Chairman
Hardwoods Distribution Inc.
Non-executive Vice Chairman
International Forest Products Limited
JOHN P. SULLIVAN
Vancouver, BC, Canada
May 2001
Corporate Director
Vice President
International Forest Products Limited
DOUGLAS W.G. WHITEHEAD
North Vancouver, BC, Canada
April 2007
Non-Executive Chairman
Finning International Inc., a distributor of Caterpillar
products and support services
2008
Present
2010
Present
2007
Present
2008
Present
2004
2008
2003
Present
2001
2003
2008
Present
President and Chief Executive Officer
Finning International Inc.
2000
2008
117
To our knowledge, only one of the Company’s directors has in the last 10 years been an officer or
director of a company that, while the person was acting in that capacity, was subject to bankruptcy or
similar proceedings or securities regulatory sanctions described in National Instrument 51-102 Continuous
Disclosure Obligations. From 1993 to 2010, Mr. Lynch was an executive director of Grant Forest Products
Inc. (“Grant Forest”). On June 25, 2009, Grant Forest filed and obtained protection under the
Companies’ Creditors Arrangement Act in order to restructure its business affairs.
The term of office for all current directors will end on the day of the next Annual General Meeting of the
Company’s shareholders. The next Annual General Meeting is scheduled for May 3, 2012.
Committees of the Board
The Company currently has 4 Committees of the Board of Directors: Audit Committee, the Corporate
Governance & Nominating Committee, the Management Resources & Compensation Committee and the
Environment & Safety Committee. The members of each Committee are indicated below.
Audit
Committee
Management
Resources &
Compensation
Committee
Lawrence I. Bell
Duncan K. Davies
Harold C. Kalke
Peter M. Lynch
x
x
Gordon H. MacDougall
Chair
James E. McMillan
E. Lawrence Sauder
John P. Sullivan
x
x
x
Douglas W.G. Whitehead
x
Chair
Corporate
Governance &
Nominating
Committee
x
Environment
& Safety
Committee
x
Chair
x
x
Chair
x
118
Officers as of February 17, 2012
The following table sets out the Company’s officers as of February 17, 2012, their respective
municipalities of residence and their principal occupations for at least the last five years:
Name and
Municipality of Residence
Positions Held
DUNCAN K. DAVIES
Vancouver, BC, Canada
President and Chief Executive Officer
International Forest Products Limited
From
To
2000
Present
JOHN A. HORNING
West Vancouver, BC, Canada
Senior Vice President, Chief Financial Officer and Corporate Secretary
International Forest Products Limited
2007
Present
Senior Vice President and Chief Financial Officer
International Forest Products Limited
OTTO F. SCHULTE
Black Creek, BC, Canada
Vice President, Coastal Operations
International Forest Products Limited
Vice President, Coastal Woodlands
International Forest Products Limited
RICHARD J. SLACO
Delta, BC, Canada
Vice President and Chief Forester
International Forest Products Limited
STEPHEN D.A. WILLIAMS
North Vancouver, BC, Canada
Vice President, Finance and Administration
International Forest Products Limited
Vice President and Corporate Treasurer
International Forest Products Limited
J. STEVEN HOFER
Bellingham, Washington, USA
Vice President, Sales & Marketing
International Forest Products Limited
General Manager, Sales & Marketing
Interfor Pacific Inc.
SHAREHOLDINGS OF DIRECTORS AND OFFICERS
2002
2007
2011
Present
2000
2011
2002
Present
2010
Present
2006
2010
2011
Present
2004
2011
As at December 31, 2011, the directors and officers of the Company as a group owned, directly or
indirectly, or exercised control of or direction over 2,808,157 Subordinate Voting Shares representing
approximately 5.12% of the outstanding Subordinate Voting Shares and 1,011,735 Multiple Voting Shares
representing approximately 99.6% of the outstanding Multiple Voting Shares. In respect of the
foregoing, the outstanding Multiple Voting Shares are owned by Sauder Industries Limited. Sauder
Industries Limited is indirectly owned in part by Mr. Sauder, the non-executive Chairman of the Company.
Mr. Sauder controls or directs the exercise of the voting rights attached to the voting securities of the
Company held by Sauder Industries Limited with respect to routine matters such as the election of
directors and appointment of auditors.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Since the commencement of our most recently completed financial year, and for the three most recently
completed financial years, no director or executive officer of the Company, no person or company that is
the direct or indirect beneficial owner of, or who exercises control or direction over, more than 10% of
the Company’s voting securities or any associate or affiliate of such persons, has had any material
interest in any transaction involving the Company.
LEGAL PROCEEDINGS
We are not a party to, and our property is not the subject of, any material legal proceedings which are
currently in place or which we know to be contemplated.
119
INTEREST OF EXPERTS
KPMG LLP are the external auditors of the Company and have confirmed that they are independent with
respect to the Company within the meaning of the Rules of Professional Conduct of Institute of Chartered
Accountants of British Columbia and the applicable rules and regulations thereunder.
AUDIT COMMITTEE INFORMATION
The Audit Committee Terms of Reference
The Audit Committee (the "Committee") is appointed by the Board to assist the Board in fulfilling its
oversight responsibility relating to:
a.
b.
c.
d.
e.
f.
the integrity of the Company’s financial statements,
the financial reporting process,
the systems of internal accounting and financial controls,
the professional qualifications and independence of the external auditors,
the performance of the external auditors, risk management processes,
financial plans,
g. pension plans, and
h. compliance by the Company with ethics and legal and regulatory requirements.
The Committee’s Terms of Reference, attached as Appendix “A” to this Annual Information Form, sets out
its responsibilities and duties.
The Committee met 4 times in 2011 in conjunction with regularly scheduled Board meetings.
Composition of the Audit Committee
The Committee consists of 4 directors: Gordon H. MacDougall (Chair), Lawrence I. Bell, Peter M. Lynch
and Douglas W.G. Whitehead. Each Committee member is independent and financially literate in
compliance with Multilateral Instrument 52-110 – Audit Committees.
Relevant Education and Experience
The following is a brief summary of the education and experience of each member of the Committee that
is relevant to the performance of his responsibilities as a member of the Committee, including any
education or experience that has provided the member with an understanding of the accounting
principles used by the Company to prepare its annual and interim financial statements.
Mr. Gordon H. MacDougall
Mr. MacDougall is the Chairman of the Committee. Mr. MacDougall is Vice Chairman and Partner of
Connor, Clark & Lunn Investment Management Ltd., an asset management firm. From 1996 to 2006, he
was a Partner at Connor, Clark & Lunn Investment Management Partnership and Director, Head of
Portfolio Strategy Team and Head of Client Solutions Team of Connor, Clark & Lunn Investment
Management Ltd. He previously served as lead director for Intrawest Corporation. Mr. MacDougall is
currently the Chairman and director of the Vancouver Foundation.
He holds a CFA from the University of Virginia, a MBA from the University of Pittsburgh and a B.Comm. in
Finance from Sir George Williams University (now Concordia University).
Mr. MacDougall has served on the Committee since April 2007 and chaired the Committee since April
2009.
120
Mr. Lawrence I. Bell
Mr. Bell is a Corporate Director. In addition to being a director of the Company, he is a director of
Goldcorp Inc., Capstone Mining, Silver Wheaton Corp. and Matrix Asset Management Inc. Mr. Bell is a
fellow of the Institute of Corporate Directors. From 2003 until his retirement in 2007, Mr. Bell served as
the non-executive Chairman of British Columbia Hydro and Power Authority. From 2001 to 2003, he was
Chairman and Chief Executive Officer of British Columbia Hydro and Power Authority. He has also served
as the Chairman of the Canada Line (Rapid Transit Project), Chairman of the Board of Governors of the
University of British Columbia, Chairman and President of the Westar Group and Chief Executive Officer
of Vancouver City Savings Credit Union. In addition, he has served on the boards of a number of private
and public companies, including Kimber Resources Inc., B.C. Gas, Canadian Hunter and Miramar Mining
Corporation, and as a trustee of Hardwoods Distribution Income Fund. In the British Columbia public
sector, Mr. Bell has served as Deputy Minister of Finance and Secretary to the Treasury Board.
Mr. Bell holds a M.A. in Economics and has received numerous awards for his public service.
Mr. Bell has served on the Committee since April 2009.
Mr. Peter M. Lynch
Mr. Lynch is a Corporate Director. From 1993 to 2010, he was the Executive Vice President and a
director of Grant Forest Products Inc. (and its predecessor), a producer of OSB and engineered wood
products. Prior thereto, he practiced law.
Mr. Lynch holds a LL.B from Osgoode Law School and is a member of the Law Society of Upper Canada,
the Canadian Bar Association and the Ontario Bar Association.
Mr. Lynch has served on the Committee since April 2009.
Mr. Douglas W.G. Whitehead
Mr. Whitehead is currently the Chairman of Finning International Inc. (“Finning”), a distributor of
Caterpillar products and support services. From 2000 to 2008, he was the President and Chief Executive
Officer of Finning. Prior to joining Finning, Mr. Whitehead held a number of senior executive positions
with Fletcher Challenge Canada, including President and Chief Executive Officer, Senior Vice President
and Chief Operating Officer and Vice President of the Crown Packaging Division. Mr. Whitehead is also
currently a director of Ballard Power Systems Inc., Belkorp Industries, Inmet Mining Corporation and Kal
Tire. Over the years, he has served as director of Terasen Inc., Fletcher Challenge Canada, Finlay Forest
Industries and Timberwest Forest Limited.
Mr. Whitehead holds a MBA from the University of Western Ontario and a B.Sc. in Engineering from the
University of British Columbia.
Mr. Whitehead has served on the Committee since April 2009.
121
AUDIT FEES
The Committee annually recommends the appointment of the Company’s external auditors and approves
the annual audit plan and compensation of the external auditors for all audit, audit related and non-audit
services. In the case of non-audit services, the services and compensation is approved by the Committee
before the services commence.
KPMG LLP, Chartered Accountants, Vancouver, are the independent auditors of the Company. Fees paid
or accrued to KPMG LLP for audit and other services for the years ended December 31, 2011 and
December 31, 2010 were as follows:
Total audit fees
Audit-related fees (1)
Tax fees (2)
All other fees
TOTAL
2011 Fees
2010 Fees
588,987
43,000
154,015
64,400
850,402
451,000
9,300
266,678
50,500
777,478
(1) Audit-related fees consist principally of fees for professional services rendered with respect to audits of a defined benefit
pension plan, subsidiary companies, and advice and assistance related to accounting issues.
(2) Tax fees consist of fees for tax compliance services, professional services related to U.S. cross border transfer pricing and
sales tax.
CODE OF ETHICS
We have adopted a code of ethics that applies to our directors, officers and employees. A copy of the
code, entitled “Code of Conduct”, can be found on our website at www.interfor.com.
ADDITIONAL INFORMATION
Additional information relating to the Company, including directors’ and officers’ remuneration and
indebtedness, principal holders of the Company’s securities and securities authorized for issuance under
equity compensation plans, is contained in the Company’s Information Circular.
Additional financial information about the Company is provided in the Company’s financial statements and
Management’s Discussion and Analysis for the year ended December 31, 2011.
Copies of the documents referred to above are available on the SEDAR website at www.sedar.com and
may also be obtained upon request from:
International Forest Products Limited
Corporate Secretary
3500-1055 Dunsmuir Street
Vancouver, British Columbia,
Canada, V7X 1H7
Telephone: 604 689 6800
Facsimile: 604 689 6825
E-mail: info@interfor.com
Additional information relating to the Company may be found on the SEDAR website at www.sedar.com.
122
Appendix “A”
AUDIT COMMITTEE
Terms of Reference
PURPOSE
The Audit Committee has been established by the Board and under powers delegated to it by the Board
is mandated to oversee the accounting and financial reporting processes of the Company and audits of its
financial statements in accordance with the Board’s objectives.
COMPOSITION AND TERM OF OFFICE
1.
2.
3.
4.
The Audit Committee shall consist of four or more Directors.
All members of the Audit Committee shall be independent within the meaning of Multilateral
Instrument 52-110-Audit Committees.
All members must be financially literate or become financially literate within a reasonable period
following appointment and at least one member should have accounting or related expertise.
The Chairman of the Audit Committee along with other Audit Committee members will be
appointed annually by the Board following the AGM to hold office until the next AGM, unless the
member becomes unable to serve or is removed by the Board. A casual vacancy may be filled
and additional members may be appointed at any time by the Board to hold office until the next
AGM.
5.
A quorum shall consist of a simple majority.
DUTIES AND RESPONSIBILITIES
The Audit Committee shall perform the following functions, as well as any other functions specifically
authorized by the Board:
General
1.
2.
3.
Schedule regular meetings and meet, at a minimum, four times per year. Extraordinary meetings
may be called by any member of the Audit Committee or at the request of the Chairman of the
Board.
Appoint a Secretary who shall record the proceedings of the Audit Committee’s meetings.
Report to the Board activities and recommendations, if any, requiring Board approval.
Financial Disclosure, Risk Management and Internal Controls
4.
Review the following documents before the public disclosure of same by the Company, and, if
appropriate, recommend approval by the Board of the Company’s:
(a)
(b)
(c)
annual and quarterly financial statements;
Management’s Discussion and Analysis; and
annual and interim earnings press releases.
The review will involve direct discussions with Management and the Company’s external auditor
(the “Auditor”), including an opportunity for an in-camera meeting with the Auditor independent
of Management.
123
Review and approve the disclosures required by applicable securities laws to be included in the
Company’s Annual Information Form and Management Information Circular relating to the Audit
Committee and audit and non-audit services and fees.
Review the process for certification of the interim and annual financial statements by the CEO
and Chief Financial Officer (“CFO”) and the certification made by the CEO and CFO.
Review all news releases announcing financial results, containing financial information based on
unreleased financial results or non-GAAP financial measures or providing earnings guidance,
forward-looking financial information and future-oriented financial information or financial
outlooks before the public disclosure of same by the Company.
Review financial information contained in any prospectus, take-over bid circular, issuer bid
circular, rights offering circular and any other document that the Audit Committee is to review
before the public disclosure of same by the Company, and, if appropriate, recommend approval
by the Board.
Review matters related to internal controls over financial reporting of the Company and ensure
the Company has adequate procedures in place in respect thereof. Ensure that the necessary
measures are taken to follow up suggestions from the Auditor’s reports.
Review the principal risks of the Company and ensure that an effective risk management strategy
is in place.
5.
6.
7.
8.
9.
10.
Review the Company’s derivatives policies and activities, including details of exposures to banks
and other counterparties.
External Auditor
11.
12.
13.
14.
15.
16.
17.
18.
Review and recommend to the Board the appointment of the Auditor to be nominated for the
purposes of preparing or issuing an Auditor’s report and performing other audit, review or attest
services for the Company.
Establish the mandate of the Auditor, including the annual engagement, audit plan, audit scope
and compensation for the audit services, subject to shareholder approval.
Oversee the activities of the Auditor. The Auditor shall report directly to the Audit Committee.
Directly communicate and meet with the Auditor, with and without Management present, to
discuss the results of their examinations.
Review the independence of the Auditor, any rotation of the partners assigned to the audit in
accordance with applicable laws and professional standards, the internal quality control findings
of the Auditor’s firm and peer reviews.
Review the performance of the Auditor, including the relationship between the Auditor and
Management and the evaluation of the lead partner of the Auditor.
Resolve disagreements between Management and the Auditor regarding financial reporting.
Review material written communications between the Auditor and Management.
124
Non-Audit Services
19.
Pre-approve non-audit services. The Audit Committee may delegate to one or more of its
members the authority to pre-approve non-audit services. The pre-approval of non-audit
services by any member to whom authority has been delegated shall be presented to the
Committee at its first scheduled meeting following such pre-approval.
Company Policies
20.
21.
Satisfy itself that adequate procedures are in place for the review of the public disclosure of
financial information extracted or derived from the Company’s financial statements and
periodically assess the adequacy of those procedures.
Establish and periodically review the policies and procedures for the receipt, retention and
treatment of complaints received by the Company regarding accounting, internal accounting
controls or auditing matters, and the confidential, anonymous submissions by the employees of
the Company regarding questionable accounting or auditing matters.
22.
Review and approve the Company’s hiring policies regarding partners, employees and former
partners and employees of the former and present Auditor.
Insurance
23.
Review the Company’s insurance programs, including the Company’s directors’ and officers’
insurance coverage, and make recommendations for their renewal or replacement.
AUTHORITY
1.
2.
The Audit Committee is authorized to engage any outside advisor it deems necessary to carry out
its duties and responsibilities and to arrange payment of the advisor’s compensation by the
Company.
The Audit Committee may, at the request of the Board or at its own initiative, investigate such
other matters as it considers appropriate in furtherance of the Audit Committee’s purpose.
125
GLOSSARY
“Adjusted EBITDA” EBITDA less other income and other income of associate company.
“Allowable Annual Cut (AAC)” The average annual volume of timber which the holder of a licence from the
Province of British Columbia may harvest on Crown land under the licence in a five-year control period.
“Bone Dry Unit (BDU)” A unit of measurement for wood chips and other sawmill by-products, being equal to 2,400
pounds.
“Cash flow from operations” Cash generated from operations before considering changes in operating working
capital.
“Custom cutting” An arrangement under which a mill contracts to cut logs owned by a customer into products of
specifications defined by the customer.
“EBITDA” Earnings before finance costs, income taxes, depreciation, depletion, amortization, restructuring costs,
other foreign exchange gains and losses, and write-downs of plant and equipment and other non-financial assets.
“Forest Licence” Replaceable, volume-based timber cutting rights for a specific volume of Crown timber within a
Timber Supply area.
“Invested Capital” The total of bank indebtedness, short term advances from the Seaboard partnership, long-term
debt and shareholders’ equity.
“Invested Capital, adjusted” Invested Capital less cash, deposits and short term advances from the Seaboard
partnership.
“m³” A measure of one cubic metre of solid wood, British Columbia metric scale, as determined under the Forest Act,
equal to 35.3 cubic feet of solid wood.
“Mfbm” or “Mbf” One thousand foot board measure equal to one thousand square feet of lumber, one inch thick.
“Net debt” Total Debt less cash, deposits and short term advances from the Seaboard partnership.
“Pre-tax return on total assets” Earnings (loss) before taxes, restructuring costs, other foreign exchange gains
and losses, and write-downs of plant and equipment and other non-financial assets, and Other income divided by
closing total assets.
“Return on average Invested Capital, adjusted” Net earnings (loss) plus after tax finance cost divided by the
average of opening and closing Invested Capital, adjusted.
“Return on average shareholders’ equity” Net earnings (loss) divided by the average of opening and closing
shareholders’ equity.
“Silviculture” The art and science of controlling the establishment, growth, composition, health and quality of
forests.
“Stumpage” A charge assessed by the provincial government on all Crown timber harvested.
“Sustained yield (sustainable log supply)” The yield that a forest area can produce on an ongoing basis without
impairment of the long-term productivity of the land.
“Timber Licence” Non-replaceable, area based, Crown timber cutting rights.
“Total Debt” The total of bank indebtedness, short-term advances from the Seaboard partnership, long-term debt.
“Tree Farm Licence” A renewable 25-year licence to manage a forest area to yield an annual harvest on a
sustainable basis.
“Value-added product” A commodity or other product that has been further processed to increase financial value.
“Volumetric unit” A unit of measurement for wood chips and other sawmill by-products, being equal to 200 cubic
feet. A volumetric unit represents between 60% and 85% of the chips in a Bone Dry Unit, depending on the species.
“Whitewood” Includes the Coastal species hemlock, Balsam Fir, Douglas-fir and spruce; the term whitewood is used
on British Columbia Coast to differentiate the above species from Red Cedar and Yellow Cedar.
126
OFFICERS
E.L. Sauder
Chairman
D.K. Davies
President and Chief Executive Officer
J.A. Horning
Senior Vice President, Chief Financial Officer and
Corporate Secretary
S.D.A. Williams
Vice President, Finance and Administration
O.F. Schulte
Vice President, Coastal Operations
R.J. Slaco
Vice President and Chief Forester
J.S. Hofer
Vice President, Sales & Marketing
DIRECTORS
L.I. Bell (Lead Director)
Vernon, BC
D.K. Davies
Vancouver, BC
H.C. Kalke
West Vancouver, BC
P.M. Lynch
Toronto, ON
G.H. MacDougall
West Vancouver, BC
J.E. McMillan
Pensacola, Florida
E.L. Sauder (Chairman of the Board)
Vancouver, BC
J.P. Sullivan
Vancouver, BC
D.W.G. Whitehead
North Vancouver, BC
127
OPERATIONS &
LOCATIONS – US
BEAVER DIVISION
(Sawmill)
Tel: (360) 327-3377
Fax: (360) 327-3563
P.O. Box 38
200673 Highway 101 West
Beaver, WA 98305
BEAVER DIVISION
(Planermill)
Tel: (360) 374-4374
Fax: (360) 374-4331
P.O. Box 2299
143 Sitkum-Solduc Road
Forks, WA 98331
GILCHRIST DIVISION
(Sawmill)
Tel: (541) 433-2222
Fax: (541) 433-9581
P.O. Box 638
#1 Sawmill Road
Gilchrist, OR 97737
MOLALLA DIVISION
(Sawmill)
Tel: (503) 829-9131
Fax: (503) 829-5481
15555 S. Hwy. 211
Molalla, OR 97038
PORT ANGELES DIVISION
(Sawmill)
Tel: (360) 457-6266
Fax: (360) 457-1486
243701 Highway 101 West
Port Angeles, WA 98363
CEDARPRIME INC.
A Subsidiary of International
Forest Products Limited
(Remanufacturing)
Tel: (360) 988-2120
Fax: (360) 988-2126
601C West Front Street
Sumas, WA 98295
CORPORATE INFORMATION
STOCK EXCHANGE
Class “A” shares listed on
The Toronto Stock Exchange
Symbol: IFP.A
AUDITORS
KPMG LLP, Vancouver, BC
TRANSFER AGENT
Computershare Investor Services Inc.
Vancouver, BC and
Toronto, ON
MEDIA CONTACT
(604) 689-6800
CORPORATE OFFICE
Tel: (604) 689-6800
Fax: (604) 688-0313
P.O. Box 49114
3500-1055 Dunsmuir Street
Vancouver, BC, Canada V7X 1H7
BELLINGHAM OFFICE
Tel: (360) 788-2299
Fax: (360) 788-2290
2211 Rimland Drive, Suite 220
Bellingham, Washington 98226
SALES & MARKETING
NORTH AMERICA – CEDAR
Tel: (604) 422-3470
Fax: (604) 422-3244
600-2700 Production Way
Burnaby, BC, Canada V5A 4X1
NORTH AMERICA – WHITEWOOD
Tel: (360) 788-2200
Fax: (360) 788-2210
2211 Rimland Drive, Suite 220
Bellingham, WA 98226
INTERNATIONAL
WHITEWOOD & CEDAR
Tel: (604) 422-3468
Fax: (604) 422-3250
600-2700 Production Way
Burnaby, BC, Canada V5A 4X1
JAPAN
Tel: 03 5641 2351
Fax: 03 5641 2383
Kasahara Bldg. 6F, 1-7-7
Nihonbashi, Ningyocho, Chuo-ku
Tokyo, Japan 103-0013
EUROPE
Tel: +33 2 40 32 05 25
Fax: +33 2 40 32 02 25
ZI Cheviré
7 rue de l’Houmaille
44340 BOUGUENAIS France
OPERATIONS &
LOCATIONS – CANADA
ACORN DIVISION
(Sawmill)
Tel: (604) 581-0494
Fax: (604) 581-5757
9355 Alaska Way
Delta, BC, Canada V4C 4R7
ADAMS LAKE DIVISION
(Sawmill and Woodlands)
Tel: (250) 679-3234
Fax: (250) 679-3545
9200 Holding Road
Chase, BC, Canada V0E 1M2
CASTLEGAR DIVISION
(Sawmill)
Tel: (250) 365-4400
Fax: (604) 422-3252
P.O. Box 3728
2705 Arrow Lakes Drive
Castlegar, BC, Canada V1N 3W4
CASTLEGAR DIVISION
(Woodlands)
Tel: (250) 265-3741
Fax: (250) 265-6111
P.O. Box 2000
442 Highway 6 West
Nakusp, BC, Canada V0G 1R0
COASTAL FIBRE SUPPLY
Tel: (604) 422-3400
Fax: (604) 422-3452
600-2700 Production Way
Burnaby, BC, Canada V5A 4X1
COASTAL WOODLANDS DIVISION
Tel: (250) 286-1881
Fax: (250) 286-3412
1250A Ironwood Street
Campbell River, BC, Canada V9W 6H5
GRAND FORKS DIVISION
(Sawmill and Woodlands)
Tel: (250) 443-2400
Fax: (604) 422-3253
P.O. Box 39
570 68th Ave.
Grand Forks, BC, Canada V0H 1H0
HAMMOND CEDAR DIVISION
(Sawmill)
Tel: (604) 465-5401
Fax: (604) 422-3221
20580 Maple Crescent
Maple Ridge, BC, Canada V2X 1B1