2012
Annual Report
CONTENTS:
Financial Highlights 2012
Message to Shareholders
Management Discussion and Analysis Dated February 14, 2013
Consolidated Financial Statements
Annual Information Form Dated February 14, 2013
2
International Forest Products Limited
FINANCIAL HIGHLIGHTS
(in millions of dollars, except share and per share amounts)
2012
2011
Financial Summary
Sales
EBITDA (1)
Net earnings (loss)
Per Share Data
Net 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
Total shareholders’ equity
Invested capital (1)
Financial Ratios (%)
Net debt as a % of invested capital, adjusted (1)
Pre-tax return on total assets (1)
Notes:
1.
See Glossary for definition.
849.2
50.8
(8.7)
(0.16)
(0.16)
8.72
4.26
6.73
0.83
55.9
632.0
135.0
376.0
511.1
758.2
47.2
(13.5)
(0.25)
(0.25)
7.49
3.50
7.00
0.81
53.6
614.8
110.7
390.8
501.5
24.2%
(1.3%)
20.4%
(2.0%)
“With stronger markets and prices, Grand Forks rounding into shape and the Rayonier
acquisition closing on March 1st, we are optimistic about the prospects for 2013. Our goals,
however, extend beyond short-term prospects. Our ultimate goal is to become the most
profitable, valuable and respected lumber company in the world.”
Message to Shareholders – February 2013
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 improved in 2012 as the year progressed. More important, Interfor moved ahead
with a number of initiatives during the year which we believe will significantly enhance the value of the
Company in the years ahead.
Highlights for the year included:
Production and sales were up 7% and 10% respectively;
Earnings and cash flow improved; and
Strategic capital projects were completed at Adams Lake, Grand Forks and Castlegar
Subsequent to the end of the year, Interfor announced it had reached agreement to acquire Rayonier
Inc’s Wood Products Business in the U.S. Southeast. We also reached agreement with the members of
our lending syndicate to extend and expand our credit agreements.
These steps, along with others taken in prior years, have altered Interfor’s position in the industry and
will make the Company stronger and more profitable as the 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 would like to make to me
directly at duncan.davies@interfor.com.
INCREASED PRODUCTION AND SALES, HIGHER PRICES CONTRIBUTE TO IMPROVED
RESULTS
Interfor took advantage of its strong market position to increase production and sales activity in 2012.
For the year, production volumes were up 7% to 1.35 billion board feet from 1.26 billion board feet in
2011, representing a capacity utilization rate of approximately 82% for the year.
In the B.C. Interior, production was up 2% versus 2011 in spite of curtailments at both Adams Lake and
Grand Forks during the year to accommodate capital projects at those mills.
In the Pacific Northwest, production increased by 12% year-over-year as increases in timber harvesting
activity and higher lumber prices supported higher operating rates at each of the mills in that region.
On the B.C. Coast, production levels were up 12% versus 2011 in spite of reduced shifting in the latter
part of the year caused by log shortages which followed the extended summer fire closure.
Sales volumes kept pace with production during the year.
Lumber prices moved steadily upwards as the year progressed.
4
For the year, the Random Lengths Composite Index, which measures pricing levels for a basket of
products, increased from US$272 to US$322 as conditions in the U.S. housing market continued to
improve and volumes to offshore markets, particularly China, remained strong.
The commodity benchmark SPF 2x4 increased from US$255 in 2011 to US$299 and Hem-Fir studs
increased from US$285 to US$335 in 2012.
The Canadian dollar traded within a fairly narrow range in 2012, averaging US$1.00 versus US$1.01 in
2011.
In financial terms, the benefits of increased production and sales volumes and higher prices had a
positive impact on Interfor’s financial results.
Excluding one-time items and share-based compensation expense, Interfor reported net income of $3.7
million or $0.07 per share in 2012 on sales of $849.2 million compared with a loss of $5.8 million or $0.11
per share on sales of $758.3 million in 2011. EBITDA, reported on the same basis, was $60.5 million in
2012 versus $47.3 million in 2011.
One-time items and share-based compensation expense amounted to $12.4 million in 2012 versus $7.7
million in 2011.
All-in, Interfor reported a net loss of $8.7 million or $0.16 per share in 2012 compared with a loss of
$13.5 million or $0.25 per share in 2011.
CAPITAL PROJECTS COMPLETED AT ADAMS LAKE, GRAND FORKS AND CASTLEGAR
During 2012 Interfor continued to invest in high return and strategic capital projects which we believe will
generate significant benefits in the years ahead.
In September, a new kiln was commissioned at Adams Lake. This new kiln will help balance the
production and processing capacity at Adams Lake and reduce the amount of offsite processing required
to support the sawmill. Also, by adding a steam conditioning system, the new kiln will enable the mill to
meet stringent quality requirements on some of the product lines that were previously difficult to achieve
on site.
In December, the new line at Grand Forks commenced its start-up procedures.
The project at Grand Forks involved the installation of a new small log line and an automated lumber
grading system, utilizing similar technology to that installed at Adams Lake a few years ago.
The new line has ramped up very quickly and I’m able to report that it is now operating at full pro forma
from a productivity standpoint and exceeding pro forma on product quality and recovery.
At Castlegar, a series of smaller projects were completed in 2012 including the installation of an
automated lumber grading system and upgrades to the mill’s process control and optimization systems.
An upgrade to the edger at Castlegar originally planned for the fourth quarter of 2012 was re-scheduled
until early 2013 to allow our Capital Projects group to focus on the final stages of the Grand Forks
project.
5
RAYONIER ACQUISITION ANNOUNCED
Shortly after year-end Interfor announced agreement to acquire Rayonier Inc’s Wood Products Business
in the U.S. Southeast for $80 million including working capital.
The operations to be acquired include three sawmills with a combined annual capacity of 360 million
board feet of southern pine dimension lumber.
The acquisition is consistent with our strategy of adding capacity in attractive regional markets and will
bring Interfor’s total capacity to more than 2 billion board feet.
More important, the acquisition will establish a foothold for Interfor in the U.S. Southeast, a market we
have been looking to enter for many years, and where we believe more opportunities for growth exist.
The transaction will be financed from Interfor’s existing credit lines and is scheduled to close March 1st.
The transaction is expected to be accretive to earnings and cash flow from the outset.
BALANCE SHEET REMAINS STRONG; CREDIT LINES EXTENDED AND EXPANDED
At year-end, Interfor had net debt outstanding of $120.1 million compared with $100.3 million at the end
of 2011, representing a net debt to invested capital ratio of 24% versus 20% the year prior.
Maintaining a strong balance sheet has always been a key element of our management philosophy.
Subsequent to announcing the Rayonier transaction, Interfor reached agreement with the members of its
lending syndicate to increase the overall facility to $315 million and to extend its term by two years to
2017. All other terms of our credit lines remained substantially the same except for a reduction in
pricing.
LONG-STANDING BOARD MEMBERS ANNOUNCE RETIREMENT; TWO NEW MEMBERS
APPOINTED
Two members of our Board of Directors, Harold Kalke and Shaun Sullivan, announced recently that they
would not be standing for re-election at the Company’s Annual General Meeting in May.
Harold was elected to Interfor’s Board of Directors in July 2000. His knowledge of real estate markets
and keen observations regarding broad economic and social trends provided useful perspective for Board
discussion, especially during the global financial crisis in 2008-9.
Shaun joined Interfor’s Board on the completion of the Primex acquisition in May 2001 and has served
with distinction since that time. Shaun’s knowledge of the forest products industry and insights on public
policy and political issues has been extremely helpful, particularly during the 2001-6 period leading up to
the signing of the Softwood Lumber Agreement.
On behalf of our Board and senior management, I would like to extend my sincere thanks to both Harold
and Shaun for their contributions to our Company.
In anticipation of Harold and Shaun’s retirement, Scott Thomson, Executive Vice-President and Chief
Financial Officer of Talisman Energy Limited, and Andrew Mittag, President of Agrium Advanced
Technologies Limited, were appointed to the Board of Directors in October. Scott and Andrew bring a
wealth of experience in strategic planning and corporate development activities to the Board. Both will
stand for election at the Company’s upcoming AGM.
6
BUSINESS OUTLOOK IMPROVING
Positive signs are beginning to emerge in the U.S. and offshore laying the foundation for better market
conditions in 2013 and beyond.
Clear signs of recovery are evident in the U.S. housing market, the single biggest driver in lumber
consumption, and demand in key offshore markets such as China and Japan, have remained strong as
well.
The net result has been higher prices on most items during the first two months of the year. The
Random Lengths Composite Index is currently sitting at US$416, almost 20% above the fourth quarter of
2012 while SPF 2x4 is at US$390 and Hem-Fir studs are at US$425, up 16% and 18% respectively over
the same period. Concurrent with the increase in product prices, the duty on Canadian shipments to the
US has dropped to zero for January and February and will remain at zero for March as well. The
combination of higher prices and lower duties, if they continue, will have a significant positive impact on
Interfor’s profitability and cash flow in 2013.
VISION REMAINS INTACT
With stronger markets and prices, Grand Forks rounding into shape and the Rayonier acquisition closing
on March 1st, we are optimistic about the prospects for 2013.
Our goals, however, extend beyond short-term prospects.
Our ultimate goal is to become the most profitable, valuable and respected lumber company in the world.
I believe we have made significant progress towards this goal in recent years. That said, there is more to
do.
We have a number of plans on the drawing board for the next year that we believe will move us even
closer to that goal.
We’re convinced we’re on the right track and look forward to additional progress in 2013.
Thank you for your continued support.
Duncan K. Davies
President & Chief Executive Officer
February 2013
International Forest Products Limited
MANAGEMENT DISCUSSION AND ANALYSIS
Dated as of February 14, 2013
7
This Management’s Discussion and Analysis (“MD&A”) provides a review of Interfor’s financial performance for the year
ended December 31, 2012 relative to 2011, 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, 2012 and 2011 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 long term
incentive compensation expense (recovery), 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 2012”, “Acquisition of Rayonier’s
Wood Products Business”, “Strong Financial Position”, “Sales”, “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 2012 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 2012
North American lumber markets continued to improve in 2012 as positive economic signs began to emerge in
the U.S. and concerns over sovereign debt issues in Europe were stabilized, at least in part, by government
action. Activity levels in China and Japan improved as well as the year progressed. The net result was higher
prices for most products especially in the second half of the year. Interfor took advantage of the improving
market environment to increase operating rates with the combination of higher prices and increasing volumes
contributing to better financial results relative to 2011.
Markets and Pricing
In 2012, overall North American lumber market demand increased over 2011 as the U.S. economy continued to
improve through 2012 with rising GDP, employment and housing starts. The Canadian economy slowed
somewhat in terms of GDP in the second half of 2012, however employment showed slight improvements and
housing starts continued to show strength. Lumber shipments to China fell in the first nine months of 2012 but
began to recover in the fourth quarter of 2012. Supply constraints and the increase in North American demand
impacted prices positively, year over year. Random Lengths Framing Lumber Composite price averaged US
$322 per thousand board feet (mfbm) in 2012, up 18% over 2011.
8
Lumber
• Structural Lumber
The U.S. housing market continued to recover in 2012. 2012 U.S. housing starts are estimated to be
780,000 compared to 609,000 in 2011, a 28% year over year increase. Canadian housing starts continued
to grow at a slower pace with 2012 estimated to be 215,000 versus 2011 at 194,000 or an 11% year over
year increase. In addition, lean field inventories, offshore demand and reduced capacity due to mill fires
and closures contributed to an improved supply/demand relationship.
The Random Length average price for benchmark Western SPF 2x4 #2&Btr averaged US$299 per mfbm for
2012 compared to US$255 per mfbm in 2011. The benchmark SPF price for the fourth quarter of 2012 was
US$335 per mfbm and US$370 per mfbm for the month of December 2012.
US TOTAL HOME INVENTORY
Units: For sale at end of period
US HOUSING STARTS
Units: Millions
4,000
3,500
3,000
2,500
2,000
1,500
1.00
0.50
0.00
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2010 2011 2012
2010 2011 2012
BENCHMARK PRICE TRENDS
Western SPF (2 X 4 #2&Btr)
Units: US$ / Mfbm
450
350
250
150
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2011 2012
Source: Random Lengths, used with permission
Interfor Shipment Volumes to US and
China
m
b
f
M
225,000
200,000
175,000
150,000
125,000
100,000
75,000
50,000
25,000
-
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2011 2012
US China
• Cedar
In 2012, the mild winter, low inventories and continued strength in renovation markets resulted in prices
rising through the year, unlike 2011 when prices essentially remained flat. The increase in the Random
Length year-over-year average price for knotty Western Red Cedar 2x6 was US$15 per mfbm, with the
annual average price in 2012 at US$991 per mfbm compared to US$976 in 2011.
9
BENCHMARK PRICE TRENDS
CEDAR (WRC 2 X 6 RL KD)
Units: US$ / Mfbm
1100
1050
1000
950
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2011 2012
Source: Random Lengths, used with permission
•
Japan
In 2012, despite rising demand related to reconstruction efforts from 2011’s earthquake and tsunami and
an increase of 6% in Post & Beam housing starts, prices remained flat for the year. Building activity in
Japan is expected to increase further in 2013 in anticipation of a planned increase in the consumption tax
and increased momentum in reconstruction efforts related to the 2011 earthquake and tsunami.
BENCHMARK PRICE TRENDS
HEMLOCK (Sq 4-1/8" 13' JP)
Units: US$ / Mfbm
800
775
750
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2011 2012
Source: Random Lengths, used with permission
Logs and Residuals
Interfor log sales revenue in 2012 was up by 5% compared to 2011 with improved domestic log prices
offsetting lower export prices and export volumes for Canadian operations. Total Chips and other residual
products revenues had a negligible change year over year as increased chip volumes in 2012 were offset by
reduced prices.
Export Tax
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 tax rates:
10
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
The Option A export duty commenced 2012 at the 15% rate, but rising lumber prices dropped the tax to 5% or
10% rates for seven months in the year. December 2012’s rate was 10% and January and February 2013 were
set to nil.
In 2011, the Option A export charge remained at 15% all year.
On January 23, 2012, Canada and the U.S. signed a two year extension (from October 2013 to October 2015)
to the SLA.
Softwood Lumber Agreement Arbitration
In October 2010, the U.S. Trade Representative’s (“USTR”) 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. In January, 2011, the USTR filed for
arbitration.
On July 18, 2012, the arbitrator, the London Court of International Arbitration (“LCIA”), dismissed the U.S.
complaint in its entirety. Decisions by the LCIA are final and binding on both parties.
In April, 2012 the U.S. Lumber Coalition approached the USTR’s office with a complaint that the B.C.
government is undercharging B.C. coastal forest companies for timber harvested on Crown lands.
As this complaint is in the preliminary stages of investigation, the existence of any potential claim has not been
determined and no provision has been recorded in the consolidated financial statements as at December 31,
2012.
Acquisition of Rayonier’s Wood Products Business
On January 21, 2013, the Company reached an agreement to acquire the assets of Rayonier Inc.’s Wood
Products Business (“Rayonier Acquisition”) for US$73.9 million plus working capital. The transaction is
scheduled to close on March 1, 2013.
Rayonier’s Wood Products Business, headquartered in Baxley, Georgia, consists of three sawmills located in
Baxley, Swainsboro and Eatonton, Georgia, with a combined annual capacity of 360 million board feet of
southern pine dimension lumber. The acquisition is consistent with Interfor’s strategy of adding capacity in
attractive regional markets and will bring Interfor’s annual capacity to more than 2 billion board feet.
The acquisition will be financed from Interfor’s existing credit lines and is expected to be accretive from the
outset.
11
Debt Facility Modifications
On January 24, 2013, the Company obtained a financing commitment from its lenders to increase and extend its
syndicated credit facilties. The Revolving Term Line will increase from $200 million to $250 million, conditional
upon completion of the Rayonier Acquisition. The existing Operating Line remains unchanged. The financing is
scheduled to close on February 27, 2013.
The maturity dates of both the Operating Line and the Revolving Term Lines will be extended to a four year
term. All other terms remain substantially unchanged except for a reduction in pricing.
On January 24, 2013, the Company also obtained a financing commitment from a U.S. lender for a US$20 million
Operating Line (“U.S. Line”). The U.S. Line will be secured by accounts receivable and inventories of Interfor
U.S. Inc. (formerly Interfor Pacific Inc.), and have an initial term of two years.
Strong Financial Position
The Company maintained its financial strength through 2012, ending the year with net debt of $120.1 million or
24% of invested capital. In addition, cash flow from operations, after working capital changes, for the year
was positive $45.4 million.
At December 31, 2012 the Company had unused available credit and cash of $139.1 million.
The Company spent $60.8 million in capital improvements on its mills, logging roads, timber and intangibles in
2012. These investments will continue to enhance Interfor’s competitiveness productive capacity. The
Company continues to balance production against demand, while maintaining its focus on margin enhancement
and cost containment.
REVIEW OF OPERATING RESULTS
Selected Annual Financial Information
1
12
Previous Canadian
GAAP3
2009
2008
International Financial Reporting
Standards
2011
2012
2010
Sales
–Lumber²
–Logs
–Wood chips and other residual products
–Ocean freight and other4
Total Sales
Operating loss before restructuring costs and asset impairments²
Operating loss²
Net loss
Net loss per share – basic and diluted
Net earnings (loss), adjusted for certain one-time and other items2,5
Net earnings (loss) per share, adjusted for certain one-time and other
items – per share2
EBITDA9
Adjusted EBITDA2,9
Cash flow from operations per share6
Shares outstanding – end of period (millions)7
– weighted average (millions) 7
Average foreign exchange rate per US$1.008
Closing foreign exchange rate per US$1.008
(millions of dollars except share, per share and
foreign exchange rate amounts)
631.2
113.9
69.4
34.7
538.4
108.4
68.4
43.1
480.2
291.0
79.8
56.2
7.7
60.4
34.3
6.4
296.0
103.6
30.6
5.6
849.2
758.2
623.8
392.1
435.8
(1.9)
(2.4)
(8.7)
(0.16)
3.7
(4.7)
(5.3)
(13.5)
(0.25)
(5.8)
(5.6)
(7.2)
(5.2)
(0.11)
(3.2)
(44.1)
(48.5)
(23.9)
(0.51)
(29.5)
(34.9)
(69.8)
(55.4)
(1.18)
(19.9)
0.07
(0.11)
(0.07)
(0.63)
(0.42)
50.8
60.5
0.83
55.9
55.9
47.2
47.3
0.81
55.9
53.6
51.8
48.6
0.86
47.4
47.1
18.9
(0.8)
(0.46)
47.1
47.1
12.3
8.9
0.28
47.1
47.1
0.9996
0.9891
1.0303
1.1420
1.0660
0.9949
1.0170
0.9946
1.0510
1.2180
1
2
3
4
Tables may not add due to rounding.
The Company uses forward foreign exchange contracts which are designated as held for trading and are carried on the Statement of
Financial Position at fair value. Previously changes in fair value were recorded as an adjustment to Sales in Net earnings. Effective
January 1, 2012, the Company changed its accounting policy to align with the presentation adopted by companies in its peer group
and changes in fair value are now recorded in Other foreign exchange gain (loss) in Net earnings.
The policy has been applied on a retrospective basis and comparative information has been restated. There is no change to Net
earnings as a result of the adoption of this new policy.
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.
5
Net earnings (loss) adjusted for certain one-time and other items represents the net loss before restructuring costs, long term
incentive compensation expense (recovery), certain foreign exchange gains and losses, other income (expense), certain one-time
items and the effect of unrecognized tax assets.
Net earnings (loss), adjusted for certain one-time and other items is not a defined term under IFRS, and may not be comparable to
adjusted net earnings (loss) calculated by others. Net earnings (loss), adjusted for certain one-time and other items may be
calculated as follows:
13
Net loss
Add (deduct):
Restructuring costs, asset impairments and other costs
Long term incentive compensation expense (recovery)
Other foreign exchange (gains) losses
Other (income) expense
Other income of associate company
Income tax on adjustments
Deferred tax assets not recognized
Net loss, adjusted for certain one-time and other items
International Financial
Reporting Standards
Previous Canadian
GAAP3
2012
2011
2010
2009
2008
(millions of dollars)
(8.7)
(13.5)
(5.2)
(23.9)
(55.4)
0.5
10.1
(0.2)
(0.3)
-
0.0
2.4
3.7
0.6
0.4
0.0
(0.4)
-
0.0
7.0
(5.8)
1.6
2.0
(1.5)
0.0
(5.2)
0.0
5.1
(3.2)
4.4
3.2
2.3
(23.0)
-
0.0
7.4
(29.5)
34.9
(2.0)
(2.3)
(1.4)
-
(8.9)
15.2
(19.9)
6
7
8
9
Cash generated from (used in) operations before taking account of changes in operating working capital.
As at February 14, 2013, 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$1.00.
The Company discloses EBITDA as it is a measure used by analysts and Interfor’s management to evaluate the Company's
performance. As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others. In addition, as EBITDA
is not a substitute for net earnings, readers should consider net earnings in evaluating the Company's performance. Adjusted EBITDA
represents EBITDA adjusted for other income and other income of an associate company.
EBITDA and Adjusted EBITDA can be calculated from the statements of operations as follows:
Net loss
Add: Income taxes (recovery)
Finance costs
Depreciation, depletion and amortization
Other foreign exchange (gains) losses
Restructuring costs, asset impairments and other costs
EBITDA
Add (deduct)t:
Long term incentive compensation (expense) recovery
Other (income) expense
Other income of associate company
Adjusted EBITDA
International Financial
Reporting Standards
Previous Canadian
GAAP3
2012
2011
2010
2009
2008
(8.7)
0.5
6.3
52.4
(0.2)
0.5
50.8
10.1
(0.3)
-
60.5
(millions of dollars)
(13.5)
1.4
7.1
51.6
0.0
0.6
47.2
(5.2)
0.5
10.4
46.0
(1.5)
1.6
51.8
(23.9)
(9.9)
7.8
38.2
2.3
4.4
18.9
0.4
(0.4)
-
47.3
2.0
0.0
(5.2)
48.6
3.2
(23.0)
-
(0.8)
(55.4)
(11.0)
5.1
41.0
(2.3)
34.9
12.3
(2.0)
(1.4)
-
8.9
The definition of Adjusted EBITDA was changed in the fourth quarter, 2012 to include an adjustment for long term incentive
compensation expense (recovery). Prior periods have been restated to reflect this change.
Volume and Price Statistics
(million fbm)
(million fbm)
Lumber sales
Lumber production1
Log sales2
Log production2
Average selling price – lumber3
Average selling price – logs2
Average selling price – pulp chips ($/thousand fbm)
($/thousand fbm)
($/cubic metre)
(thousand cubic metres)
(thousand cubic metres)
14
2012
2011
2010
2009
2008
1,432
1,351
1,352
3,296
$441
$72
$44
1,301
1,264
1,356
3,408
$414
$72
$46
1,132
1,110
1,081
2,661
$424
$67
$40
668
661
919
1,295
$436
$61
$40
503
498
1,319
1,881
$588
$74
$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, 2012 to Year ended December 31, 2011
Interfor increased sales revenues, produced and sold more lumber and increased EBITDA year over year. The
Company recorded a net loss of $8.7 million, or $0.16 per share for 2012, as compared to a net loss of $13.5
million, or $0.25 per share in 2011.
Before restructuring costs, long term incentive compensation expense, certain foreign exchange gains (losses),
a change in unrecognized deferred tax assets (refer to Income Taxes) and certain one-time items, the
Company’s net earnings for 2012 was $3.7 million after-tax or $0.07 per share, as compared to a net loss of
$5.8 million after-tax, or $0.11 per share in 2011.
Long term incentive compensation expense (“LTIC”) was significantly higher in 2012, totaling $10.1 million or
$0.18 per share (2011 – $0.4 million or $0.01 per share) primarily due to an increase in the price of the
Company’s shares from $4.30 at December 31, 2011 to $7.99 at December 31, 2012.
EBITDA and Adjusted EBITDA for 2012 were $50.8 million and $60.5 million, respectively, compared to $47.2
million and $47.3 million for 2011.
Sales
Interfor’s 2012 sales revenues totaled $849.2 million compared to $758.2 million in 2011, a $91.0 million
improvement.
Average lumber sales prices for 2012 increased by $27 per mfbm or 7% over 2011 and lumber shipments
improved by 131 million board feet over 2011 in response to increased demand and higher prices in the North
American market. The improvement was driven by increased housing starts, repairs and renovations, lumber
supply interruptions and replenishment of lean field inventories. Also, mild winter weather experienced in the
first quarter and fourth quarter of 2012 contributed to the increase in North American demand.
Lumber shipments to China in 2012 dropped to 68% of 2011 levels, primarily due to oversupply from 2011
compounded by the Chinese government raising interest rates in the fall of 2011. However, demand was
stronger in the fourth quarter of 2012 and is expected to carry into 2013. China remained a significant market
for the Company, accounting for 18% of total lumber sales volume in 2012 (2011 - 29%).
Our 2012 Japan lumber shipments were essentially unchanged from 2011 levels at 9% of total sales volume.
However, shipments are expected to increase in 2013 with the ongoing reconstruction activity and scheduled
increases in consumption taxes in 2014 and 2015.
Log sales in 2012 increased by $5.5 million or 5% compared to 2011 due to North American price increases
offset in part by reductions in offshore export prices and volumes. Higher B.C. Coast log prices in 2012
reflected both improving lumber markets and reduced log availability due to fire restrictions on the B.C. Coast.
North American log revenues in 2012 accounted for 80% of log sales revenues compared to 74% in 2011.
15
Wood chips and other residual products revenues in 2012 were virtually unchanged from 2011 as higher
volumes from increased sawmill production were offset by lower chip prices due to weaker pulp and paper
markets.
Ocean freight and other revenues decreased by $8.4 million in 2012 compared to 2011 mainly due to lower
ocean freight of $4.4 million related to decreased break bulk volumes and lower contract services of $4.1
million.
Operations
In 2012 Interfor produced 1.35 billion fbm of lumber compared to 1.26 billion fbm in 2011. The increase in
production volume came from higher operating rates at a number of the Company’s mills, offset partly by a
reduction at Grand Forks due to downtime taken late in 2012 to complete the mill rebuild project.
B.C. Coastal 2012 log production decreased by 231 thousand cubic metres compared to 2011. This 13%
decrease was due mainly to reduced production from an extended fire season. B.C. Coastal log production unit
costs increased by 12% when compared to 2011 due mainly to higher helicopter logging costs.
B.C. Interior log production increased by 119 thousand cubic metres or 7% to meet higher operating rates and
inventory targets compared to 2011. B.C. Interior delivered log costs increased by 13% over 2011 mainly due
to higher hauling, stumpage and log purchase costs.
Log costs at most of the U.S. mills were up due to market log availability and weather. With reduced log
export demand, prices at Port Angeles decreased slightly compared to 2011.
In 2012, lumber manufacturing unit costs increased by 4% over 2011. The increase was due mainly to the
higher cost of logs in 2012 and the inclusion in 2011 of a $1.7 million business interruption insurance recovery.
Increased unit costs were mitigated in part by higher operating rates when compared to 2011.
The export tax paid in 2012 was virtually the same as in 2011. This was the result of year over year increase in
Canadian shipment volumes to the U.S. of 22%, which was offset by a lower average export tax rate in 2012
versus 2011. In the first five months of 2012 the export tax rate was 15% with the remaining months
fluctuating between 5% and 10%, while in 2011, the 15% export tax rate was paid all year.
Amortization of plant and equipment increased by $1.5 million in 2012 over 2011 or 5%, due to increased
operating rates.
Road amortization and depletion expense decreased year over year $0.6 million as a result of changes to
operating areas offset by increased helicopter logging in the B.C. Coast.
Corporate and Other
In 2012, Selling and Administrative costs remained relatively constant compared to 2011. LTIC was $10.1
million compared to $0.4 million in 2011 primarily due to an increase in the price of the Company’s shares in
2012.
Income Taxes
The Company recorded an income tax expense in 2012 of $0.5 million and increased its unrecognized deferred
tax asset by $2.4 million in relation to certain unused tax losses that are available to be carried forward against
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 asset in excess of its
deferred tax liabilities, except in limited circumstances.
The Company’s Canadian non capital loss carry forwards and U.S. net operating loss carry forwards totaling
$292 million (2011 - $241 million) expire between 2014 and 2032 and are available to reduce future taxable
income. The overall effective tax rate is significantly different from the Canadian statutory rate of 25% (2011 -
26.5%) due mainly to unrecognized deferred assets of $2.4 million (2011 - $7.0 million).
Net Loss
For the year ended December 31, 2012, Company recorded a net loss of $8.7 million or $0.16 per share
compared to a net loss of $13.5 million or $0.25 per share in 2011. The improved performance was a result of
increased prices and higher production volumes offset partly by the significant increase in LTIC.
16
Cash Flows
Operating Activities
The Company generated $46.6 million from operations, before changes in working capital, in 2012 as compared
to $43.6 million in 2011. Total cash generated from operations after changes in working capital was $45.4
million for the year, a significant increase from $28.4 million for 2011.
Higher North American shipments and sales prices, lower export taxes and higher operating rates improved
cash earnings for 2012.
Cash used in working capital in 2012 was $1.3 million compared to $15.2 million in 2011. In 2012, a shift from
export markets to meet North American demand resulted in increased accounts receivable of $3.8 million,
offsetting the impact of higher sales values and shipment volumes. Increased operating rates in 2012 and
increased B.C. Interior stumpage rates in the fourth quarter, 2012, contributed to increases in accounts payable
of $5.6 million.
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.
Throughout the year, the Company focused on optimizing inventory levels, matching production with export
and domestic demand, and purchasing logs and producing products that would provide positive margins.
Investing Activities
Cash capital expenditures totaled $60.8 million for 2012 (2011 - $36.2 million), with $27.8 million spent on
capital upgrades for the Grand Forks and Castlegar mills, $4.3 million on other high-return discretionary
projects, $7.8 million on other business maintenance expenditures, and $20.9 million on road construction and
timber licences.
The increase in capital spending over 2011 related primarily to the installation of a new small log line at Grand
Forks, and the installation of automated lumber grading systems at Grand Forks and Castlegar. All upgrades
were substantially completed in 2012, with the Grand Forks improvements completed six months ahead of
schedule and successfully started up in December, 2012. These expenditures were funded by net drawings of
$25.0 million on the Company’s Revolving Term Line and through cash generated by operations during 2012.
In January, 2011, by virtue of the withdrawal of all other partners in the Seaboard General Partnership (“SGP”),
Interfor acquired control of its net assets. Cash generated from investments in 2011 includes cash of $4.8
million received on acquisition of SGP.
Financing Activities
In 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. In addition, in the first half of 2011, several stock option
holders exercised their options generating $1.4 million in cash. The share issuance proceeds were used to
repay drawings under the Revolving Term Line in 2011. No shares were issued in 2012.
During 2012, Interfor drew funds on the Revolving Term Line primarily to fund the high-return discretionary
capital upgrades at Grand Forks and Castlegar. The Operating Line remained undrawn in 2011 and 2012, other
than for letters of credit. As at December 31, 2012 the unused available credit under these facilities totaled
$124.8 million and, combined with unrestricted cash of $14.3 million, gave the Company a total of $139.1
million of liquidity available. After deducting the Company’s drawings under its Revolving Term Line, the
Company ended 2012 with net debt of $120.1 million or 24% of invested capital.
FINANCIAL POSITION
Summary of Financial Position¹
17
Previous Canadian
GAAP4
2009
2008
International Financial Reporting
Standards
2011
2012
2010
(millions of dollars)
Current assets
Current liabilities
Working capital
Total assets
172.2
162.8
135.4
107.9
131.5
82.1
90.1
75.9
86.9
75.8
59.6
46.6
61.3
79.4
52.1
632.0
614.8
614.6
582.5
665.3
Total long-term liabilities and deferred income taxes
174.0
148.1
191.3
177.9
179.7
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
Pre-tax return on total assets2
Cash flow from operations as a percentage of total debt2
Equity per share
-
-
135.0
135.0
376.0
511.1
-
-
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
2.1
2.1
1.8
2.3
1.7
24.2%
20.4%
29.7%
28.2%
29.2%
(1.3)%
(2.0)%
(0.5)%
(9.0)%
(5.1)%
34.5%
39.4%
23.7%
(14.6)%
$6.73
$7.00
$7.34
$7.60
7.6%
$8.62
2012
2011
2010
(millions)
2009
2008
Weighted average shares outstanding for the year
55.9
53.6
47.1
47.1
47.1
Number of shares outstanding at year end:
Class A subordinate voting3
Class B common3
54.9
1.0
55.9
54.9
1.0
55.9
46.3
1.0
47.4
46.1
1.0
47.1
46.1
1.0
47.1
18
Re-investment of Cash
Cash flow from operations2
2012
2011
2010
2009
2008
(millions of dollars)
46.6
43.6
40.7
(21.6)
13.0
Cash generated from (used in) operating working capital
(1.3)
(15.2)
(10.9)
Proceeds on disposal of assets
0.5
0.3
1.3
26.4
37.0
0.7
5.1
Capital expenditures and acquisitions
(60.8)
(36.2)
(42.2)
(27.6)
(158.9)
1
2
3
4
Tables may not add due to rounding.
See Glossary in Annual Information Form for definition.
As at February 14, 2013, 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, 2012 totaled $15.0 million, an increase of $4.6 million over 2011.
Accounts receivable at December 31, 2012 were $47.4 million, compared to $44.0 million in 2011 primarily due
to increased lumber sales in the fourth quarter, 2012 as compared to the prior year, mitigated by a shift from
export markets to North America.
Lumber inventory levels at December 31, 2012 were $31.8 million, compared to $31.7 million in 2011, with an
increase of 14% in unit carrying values as a result of improved North American sales values. Lumber inventory
volumes declined by 12%, reflective of the shift in demand from export markets to North America.
Log inventory levels at December 31, 2012 were $59.8 million, compared to $59.4 million in 2011 with higher
market pricing reflected in higher unit carrying values. Log inventory volumes declined on the B.C. Coast due
to lower logging rates in the fourth quarter, 2012, and in the U.S. Pacific NorthWest due to the absence of a
log export program in 2012. These declines were more than offset by increases in the B.C. Interior with the
seasonal build up of logs prior to spring breakup and to meet higher consumption requirements, particularly at
Grand Forks.
Other investments and assets
The improvement in North American lumber sales prices supported higher bid prices for timber sales, resulting
in an increase in successful bids for longer term and economic fibre supply for the U.S. Pacific NorthWest
sawmills. Long term timber and other deposits increased by $2.0 million to $2.7 million as at December 31,
2012. Other investments and assets includes prepaid financing fees of $1.5 million (2011 - $2.2 million).
Property, Plant and Equipment, Timber Licences, Logging Roads, Bridges and Other Intangibles
The Company’s net book value of $441.6 million for property, plant and equipment, logging roads and bridges,
timber licences, and other intangible assets increased $6.8 million compared to 2011. Cash capital
expenditures were $60.8 million, of which $20.7 million related to investments in road building and the balance
of $40.1 million was for the capital upgrades at Grand Forks and Castlegar, equipment upgrades, maintenance
of operations, timber and intangibles. The stronger Canadian dollar at the end of 2012 compared to the end of
2011 resulted in a decrease 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 $52.4 million.
Current Liabilities
As at December 31, 2012, 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 of $5.2 million under its
Operating Line, with available credit of $59.8 million. The Company’s working capital ratio at December 31,
2012 was 2.1 to 1.
19
Accounts payable levels at December 31, 2012 were $70.6 million, an increase of $9.9 million over 2011. The
increase in trade accounts payables and provisions results from increased operating rates, increased B.C.
Interior stumpage rates, and a sharp rise in the share price impacting the current portion of long-term incentive
compensation.
The current portion of reforestation decreased by $3.3 million due to decreased B.C. log harvest in 2012 and
transfer of a $1.9 million obligation which had been classified as current in 2011.
Long-Term Liabilities
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.
At December 31, 2012, the Revolving Term Line was drawn by $105.0 million (2011 - $80.0 million), and by
US$30.2 million (2011 – US$30.2 million) revalued at the year-end exchange rate to $30.0 million (2011 - $30.7
million) for total drawings of $135.0 million (2011 - $110.7 million) and leaving an unused available line of
$65.0 million.
Overall, long-term liabilities excluding long-term debt increased by $1.5 million, due mainly to:
•
•
•
increases in employee future benefits of $1.4 million;
a rise in the share price driving increased long-term incentive compensation of $2.3 million; and
a revision to the estimated costs to remediate the landfill at the Castlegar sawmill site after an
environmental consultant undertook groundwater and other testing, reducing the environmental provision
by $1.3 million.
Liquidity and Capital Resources
As at December 31, 2012 the Company had working capital of $90.1 million (2011 - $86.9 million), available
operating and term lines of $124.8 million (2011 - $149.2 million) and unrestricted cash of $14.4 million (2011 -
$10.3 million).
On January 24, 2013, the Company obtained a financing commitment from its lenders to increase and extend its
syndicated credit facilties. The Revolving Term Line will increase from $200 million to $250 million, conditional
upon completion of the Rayonier Acquisition. The amount available under the existing Operating Line remains
unchanged. The financing is scheduled to close on February 27, 2013 and have a term of four years, extended
from July 28, 2015.
All other terms remain substantially unchanged except for a reduction in pricing.
On January 24, 2013, the Company also obtained a financing commitment from a U.S. lender for a US$20 million
Operating Line (“U.S. Line”). The U.S. Line will be secured by accounts receivable and inventories of Interfor
U.S. Inc. (formerly Interfor Pacific Inc.), and have an initial term of two years.
These resources, in addition to cash generated from operations, will be used to support our working capital
requirements, debt servicing commitments, and capital expenditures.
Interfor has had positive EBITDA for each of the past seven fiscal years, in spite of the difficult economic
climate for four of the most recent five years.
The Company believes that its cash flow and 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:
20
Trade 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
After 5
years
Total
$
57.6 $
0.6
135.0
28.6
30.4
1.9
(millions of dollars)
57.6 $
0.6
-
10.9
12.1
0.8
$
-
-
135.0
6.8
6.1
0.8
26.6
10.0
8.6
$
-
-
-
5.8
1.7
0.1
4.2
-
-
-
5.2
10.5
0.3
3.9
Total contractual obligations 1
$
280.8 $
91.9 $
157.4 $
11.8 $
19.8
1 Table may not add due to rounding.
Related Party Transactions
Lumber sales to a significant shareholder amounted to $1.1 million (2011 - $0.7 million).
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 and Note 19(c) in the Consolidated
Financial Statements. At December 31, 2012, the total of such instruments aggregated $23.0 million (2011 -
$18.5 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
In 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. In addition, several stock option holders exercised their
options generating $1.4 million in cash.
No shares were issued in 2012.
SELECTED QUARTERLY FINANCIAL INFORMATION 1
Quarterly Earnings Summary
2012
2011
21
Q1
Q4
(millions of dollars except share, per share and foreign exchange rate amounts)
Q3
Q2
Q4
Q1
Q3
Q2
Sales – Lumber2
– Logs
– Wood chips and other residual products
– Other
Total Sales
173.3
161.9
162.4
133.6
133.6
139.6
133.7
131.4
24.5
15.9
8.7
26.8
17.5
8.5
35.6
17.8
9.6
27.0
18.2
7.9
22.9
17.5
14.6
36.0
17.6
9.9
28.6
16.8
8.7
20.8
16.4
10.0
222.4
214.7
225.4
186.7
188.7
203.1
187.9
178.6
Operating earnings (loss) before restructuring costs and
asset impairments2
Operating earnings (loss) 2
Net earnings (loss)
(1.9)
(2.2)
(3.6)
2.5
2.4
1.1
2.9
2.8
0.3
(5.5)
(5.5)
(6.5)
(6.2)
(6.1)
(6.5)
3.9
4.2
0.0
(2.3)
(0.1)
(2.4)
(5.3)
(1.0)
(1.7)
Net earnings (loss) per share – basic and diluted
(0.06)
0.02
0.01
(0.12)
(0.12)
0.00
(0.10)
(0.04)
Net earnings (loss), adjusted for certain one-time and other
3.7
2.9
1.1
(3.9)
(2.8)
1.4
(6.3)
1.9
items2,3
Net earnings (loss), adjusted for certain one-time and other
0.07
0.05
0.02
(0.07)
(0.05)
0.03
(0.11)
0.04
items – per share2
EBITDA7
Adjusted EBITDA2,7
Cash flow from operations per share4
Shares outstanding – end of period (millions)5
– weighted average (millions)
Average foreign exchange rate per US$1.006
Closing foreign exchange rate per US$1.006
13.2
19.4
0.24
55.9
55.9
15.2
17.2
0.20
55.9
55.9
16.5
16.7
0.24
55.9
55.9
6.0
7.2
0.15
55.9
55.9
6.7
7.7
0.08
55.9
55.9
17.6
16.3
0.26
55.9
55.9
11.3
8.2
0.22
55.9
55.2
11.6
15.1
0.27
47.5
47.4
0.9914
0.9954
1.0104
1.0010
1.0230
0.9808
0.9680
0.9856
0.9949
0.9832
1.0181
0.9975
1.0170
1.0482
0.9645
0.9696
1
2
Tables may not add due to rounding.
The Company uses forward foreign exchange contracts which are designated as held for trading and are carried on the Statement of
Financial Position at fair value. Previously changes in fair value were recorded as an adjustment to Sales in Net earnings. Effective January
1, 2012, the Company changed its accounting policy to align with the presentation adopted by companies in its peer group and changes in
fair value are now recorded in Other foreign exchange gain (loss) in Net earnings.
The policy has been applied on a retrospective basis and comparative information has been restated. There is no change to Net earnings
as a result of the adoption of this new policy.
22
3
Net earnings (loss) adjusted for certain one-time and other items represents the net loss before restructuring costs, long term incentive
compensation expense (recovery), certain foreign exchange gains and losses, other income (expense) and the effect of unrecognized tax
assets.
Net earnings (loss), adjusted for certain one-time and other items is not a defined term under IFRS, and may not be comparable to
adjusted net earnings (loss) calculated by others. Net earnings (loss), adjusted for certain one-time and other items may be calculated as
follows:
Net earnings (loss)
Add (deduct):
Restructuring costs, asset impairments and other
costs (recovery)
Long term incentive compensation expense
(recovery)
Other foreign exchange (gains) losses
Other (income) expense
Income tax on adjustments
Deferred tax assets not recognized (recognized)
Net earnings (loss), adjusted for certain one-time
2012
2011
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
(3.6)
1.1
0.3
(millions of dollars)
(6.5)
(6.5)
0.0
(5.3)
(1.7)
0.3
6.2
(0.2)
0.0
0.0
1.0
0.1
2.3
(0.1)
(0.2)
0.0
(0.4)
0.1
0.2
0.5
(0.0)
0.0
0.0
-
(0.1)
(0.3)
0.1
1.3
0.9
(0.9)
(3.1)
(0.4)
(0.1)
0.0
1.8
(1.1)
0.0
0.0
3.9
2.5
(0.4)
0.0
0.6
(0.2)
(0.0)
0.0
2.2
0.8
3.5
(1.1)
(0.0)
0.0
0.3
and other items
3.7
2.9
1.1
(3.9)
(2.8)
1.4
(6.3)
1.9
4
5
6
7
Cash generated from operations before taking account of changes in operating working capital.
As at February 14, 2013, 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$1.00.
The Company discloses EBITDA as it is a measure used by analysts and Interfor’s management to evaluate the Company's performance.
As EBITDA is a non-GAAP measure, it may not be comparable to EBITDA calculated by others. In addition, as EBITDA is not a substitute
for net earnings, readers should consider net earnings in evaluating the Company's performance. Adjusted EBITDA represents EBITDA
adjusted for other income. EBITDA and Adjusted EBITDA can be calculated from the statements of operations as follows:
2011
2012
Net earnings (loss)
Add: Income taxes (recovery)
Finance costs
Depreciation, depletion and amortization
Other foreign exchange (gains) losses
Restructuring costs, asset impairments and other
costs (recoveries)
EBITDA
Add (deduct):
Long term incentive compensation expense
(recovery)
Other (income) expense
Adjusted EBITDA
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
(3.6)
0.0
1.5
15.1
(0.2)
1.1
0.0
1.6
12.4
(0.1)
(millions of dollars)
(6.5)
0.2
1.3
13.0
(1.1)
(6.5)
-
1.5
11.3
(0.4)
0.3
0.3
1.7
13.6
0.5
0.0
0.5
1.7
13.3
2.5
(5.3)
1.2
1.9
13.6
(0.2)
(1.7)
(0.4)
2.3
11.7
(1.1)
0.3
0.1
0.1
-
(0.1)
(0.3)
0.1
0.8
13.2
15.2
16.5
6.0
6.7
17.6
11.3
11.6
6.2
2.3
0.2
1.3
0.0
19.4
(0.2)
17.2
(0.0)
16.7
(0.1)
7.2
0.9
0.0
7.7
(0.9)
(3.1)
3.5
(0.4)
16.3
(0.0)
8.2
(0.0)
15.1
The definition of Adjusted EBITDA was changed in the fourth quarter, 2012 to include an adjustment for long term incentive compensation
expense (recovery). Prior periods have been restated to reflect this change.
23
Volume and Price Statistics
2012
2011
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Lumber sales
Lumber production
Log sales1
Log production1
Average selling price – lumber2
Average selling price – logs1
(million fbm)
(million fbm)
(thousand cubic
metres)
(thousand cubic
metres)
($/thousand fbm)
($/cubic metre)
Average selling price – pulp chips
($/thousand fbm)
384
347
267
366
350
345
363
333
379
320
323
361
318
294
310
336
313
430
334
325
314
313
332
301
748
817
840
892
795
1,002
796
816
$452
$442
$448
$418
$420
$415
$400
$419
$76
$39
$75
$43
$75
$46
$64
$48
$69
$51
$74
$48
$82
$44
$61
$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 started strong in the first quarter, 2011, with rapid growth in demand from export markets,
particularly China, offset by weak North American demand due to the languishing housing sector and record
low starts. Rates tapered marginally through the end of the third quarter, 2011, as China introduced measures
to cool its overheated housing market and U.S. demand remained weak. Demand from China stabilized
through 2012, and modest but steady recoveries in the U.S. housing market helped drive up domestic demand
and pricing through the end of 2012.
The volatility of the Canadian dollar also impacted results, given that historically over 75% of the Canadian
operation’s lumber sales are to U.S. and export markets and are priced in U.S. dollars. A weaker Canadian
dollar increases the lumber sales realizations in Canada, but increases 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 2011 or 2012, with one minor
exception in the fourth quarter, 2012.
Quarter 4, 2012 Compared to Quarter 4, 2011
Overview
The Company recorded a net loss of $3.6 million, or $0.06 per share, for the fourth quarter of 2012 compared
to a net loss of $6.5 million, or $0.12 per share in the fourth quarter, 2011. Before restructuring costs, long
term incentive compensation, certain foreign exchange gains (losses), certain other one-time items and the
effect of unrecognized tax assets, the Company’s net earnings for the fourth quarter, 2012 was $3.7 million, or
$0.07 per share, as compared to a net loss of $2.8 million, or $0.05 per share for the fourth quarter, 2011.
EBITDA and Adjusted EBITDA for the fourth quarter of 2012 were $13.2 million and $19.4 million, respectively,
compared to $6.7 million and $7.7 million, for the same period in 2011.
During the fourth quarter of 2012, lumber prices in the North American market continued their rise, with the
average price reported by Random Lengths for SPF 2x4 #2&Btr at US$335 per mfbm for the fourth quarter,
2012 as compared to US$238 per mfbm for the same quarter in 2011, and US$35 per mfbm higher than the
24
third quarter, 2012. Higher prices also drove lower export tax rates in the fourth quarter, 2012 vis-à-vis the
same quarter, 2011, positively impacting sales realizations.
The stronger average Canadian dollar in the fourth quarter, 2012, which appreciated by 3 cents relative to its
U.S. counterpart, had a negative impact on sales as compared to the same period, 2011.
Sales
The Company’s record lumber shipments achieved in the third quarter, 2012 were surpassed in the fourth
quarter, 2012 as the Company’s lumber sales volumes reached 384 million fbm, an improvement of 21% over
the fourth quarter, 2011. Increases reflect the stronger domestic demand driven by improved U.S. housing
starts which increased from an average of 678,000 units in the fourth quarter, 2011 to 898,000 units, or 32%
in the fourth quarter, 2012.
Fourth quarter, 2012 shipments to North America grew rapidly relative to the previous three quarters, 2012,
and exceeded shipments in the same quarter, 2011 by 30% in response to higher demand. Increases in
operating rates allowed the Company to also meet export demand, as shipments to export markets remained
constant in the fourth quarter, 2012 vis-à-vis the same quarter, 2011.
Improvements in average unit lumber sales values of $32 per mfbm, or 8%, in the fourth quarter, 2012 over
the respective period, 2011 reflects the higher North American pricing, supplemented by higher realizations in
China.
Log sales were up $1.6 million, or 7%, for the fourth quarter, 2012 despite a decline in B.C. log sales volumes
of 44,000 m3 or 14% over the same period in 2011. On the B.C. Coast, where the majority of log sales are
transacted, the price per cubic meter improved by 14% in the fourth quarter of 2012, compared to the same
period in 2011 reflecting tight supply as a result of an extended fire season, higher export volume and
improved log markets.
Compared to the same periods of 2011, pulp chip and other residuals revenues for the fourth quarter of 2012
were down $1.7 million, resulting from lower overall chip prices. Average chip prices for the fourth quarter,
2012 decreased by 22% over the same quarter, 2011, reflecting slower pulp markets and, in the U.S. Pacific
Northwest, decreases in export logs which increased the availability of fibre used in whole log chipping.
Operations
Production costs for the fourth quarter of 2012 increased by $22.6 million, or 13% compared to the same
quarter, 2011. The Company continued to achieve close to record lumber production, at 347 million fbm, an
18% improvement over the same quarter, 2011. Market driven increases in operating rates, supported by the
availability of economic fibre supply for the U.S. Pacific Northwest sawmills more than offset curtailments at the
Grand Forks sawmill for start-up of the new production line.
Unit cash conversion costs for the fourth quarter, 2012 remained constant as compared to the same period,
2011 despite improved operating rates, primarily due to the start-up costs related to the new production line at
Grand Forks. Unit costs of logs consumed increased 4% quarter-over-quarter for 2012 as compared to 2011,
resulting from higher log prices and higher logging, hauling and stumpage costs in the B.C. Interior, slightly
mitigated by reduced export pressure on the Olympic Peninsula which provided more affordable supply.
Compared to the same period in 2011, B.C. log production fell by 47,000 cubic metres or 6% as the B.C. Coast
continued to see hangover from the extended fire season.
Export taxes declined by $0.5 million for the fourth quarter, 2012 as compared to the same period, 2011
despite an increase of 6.5 million fbm, or 12%, in Canadian shipments to the U.S. As a result of the lift in
commodity lumber prices in the latter half of 2012, the export tax paid under the SLA declined to 5% for
October, 2012 and 10% for November and December, 2012, as compared to a 15% export tax rate in the
fourth quarter, 2011.
Depreciation of plant and equipment for the fourth quarter, 2012 increased by $0.8 million in comparison to the
same period in 2011, largely driven by increased operating rates.
Road amortization and depletion expense for the fourth quarter of 2012 increased by $1.3 million or 21%
compared to the same quarter, 2011 as a result of a shift on the B.C. Coast to logging on more difficult and
higher cost terrain.
25
Corporate and Other
Selling and administrative costs for the fourth quarter, 2012 remained constant compared to the same quarter,
2011. Fourth quarter, 2012 LTIC expense increased almost sevenfold over the fourth quarter, 2011, reflecting
changes in the estimated fair value of the share-based compensation plans. Though not a direct correlation,
the movement in the Company’s share price had the greatest impact on this expense, as reflected by increases
in the closing share price of 35% for the fourth quarter, 2012 (Quarter 4, 2011 – 8%).
Finance costs increased by $0.3 million for the fourth quarter, 2012, compared to the same period, 2011
resulting from an overall increase in average debt levels. Other foreign exchange gains (losses) fell $1.0 million
when compared to the fourth quarter, 2011 as volatility of the Canadian dollar and the timing, rates and
amount of forward foreign exchange contracts impact these gains and losses.
Other income for the fourth quarter of 2012 and 2011 was negligible, consisting primarily of minor surplus
equipment and scrap sales.
Income Taxes
The Company’s income tax expense, negligible for the fourth quarter, 2012 and 2011, excludes the benefit of
$1.0 million related to the reduction of certain unrecognized deferred income tax assets arising from loss carry-
forwards available to reduce future taxable income (Quarter 4, 2011 - $3.9 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, with one minor
exception.
Cash Flow
The Company generated cash of $13.4 million from operations, before changes in working capital, during the
fourth quarter, 2012, an improvement of $8.8 million over the fourth quarter, 2011. Higher domestic
shipments and North American sales prices, lower export taxes and higher operating rates drove cash earnings
for the fourth quarter, 2012.
Cash generated from operations, after changes in working capital, improved $10.7 million for the fourth
quarter, 2012, compared to the same period, 2011, reflecting the shift to domestic markets in 2012, lower
logging production and the curtailment of Grand Forks during start-up in the fourth quarter, 2012. Increased
export demand drove the build-up of inventory in the fourth quarter, 2011.
In the fourth quarter of 2012, funds drawn on the Revolving Term Line equalled funds repaid during the
quarter. In the fourth quarter, 2011 funds drawn from the Revolving Term Line exceeded repayments by $5.0
million, and were used to fund capital spending.
Cash capital expenditures for the fourth quarter, 2012 totalled $15.4 million, with $7.9 million spent on the
capital upgrades for the Grand Forks and Castlegar mills, $1.1 million on other high-return discretionary
projects, $1.7 million on other maintenance of operating capacity, and $4.8 million on road construction.
Comparable spending for the fourth quarter, 2011 of $9.0 million saw $2.2 million invested in high return
discretionary projects and $1.3 million on maintenance of operating capacity, with a further $5.4 million on
road construction.
The Company had cash of $15.0 million at December 31, 2012 and ended the quarter with net debt of $120.1
million or 24% of invested capital as compared to 20% at December 31, 2011, primarily as a result of the
sawmill rebuild at Grand Forks.
26
Controls and Procedures
As required by National 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, 2012. 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, 2012.
As required by National 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, 2012. 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, 2012.
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, 2012 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.
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 (“CCAA”). 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. The
Court granted the Company a security interest as a critical supplier on products purchased during the
restructuring process.
In June, 2012, Catalyst trade accounts receivable of $0.2 million related to pre-CCAA filing were written off. A
restructuring plan was approved by Catalyst’s creditors in June, 2012 and approved by the B.C. Supreme Court
in July, 2012. Catalyst emerged from creditor protection in September, 2012 and continues to meet its
obligations to the Company.
Historically, the Company has experienced minimal bad debts and this held true for 2012, despite the residual
impacts of the global economic downturn on customers, including Catalyst. Based on this past experience and
its detailed review of trade accounts receivable past due, a $0.1 million reserve (2011 - $0.1 million) 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
27
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.
Recoverability of Property, Plant and Equipment, Logging Roads and Bridges, Timber licences, Other Intangible
Assets, and Goodwill. Interfor’s assessment of recoverability of property, plant and equipment, logging roads,
bridges, timber licences and other intangible assets 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 cash generating 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 existence of any
impairment indicators. 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. The inflation rate applied to the model for years four through twenty represents the
published Bank of Canada consumer price index as at December 31, 2012.
Interfor assesses the recoverability of Property, Plant and Equipment, Logging Roads and Bridges, Timber
Licences and Other Intangible Assets whenever events or circumstances indicate that the carrying value may
not be recoverable. 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, 2012, 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.
28
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
sponsors three defined benefit plans for those hourly employees not covered by forest industry union plans and
for a small group of salaried employees. It also sponsors two post-retirement medical and life insurance plans.
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.
ACCOUNTING POLICY CHANGES
Change in Accounting Policy
The Company uses derivative forward exchange contracts and options which are designated as at fair value
through profit or loss and are carried on the Statement of Financial Position at fair value. Previously, changes
in fair value were recorded as an adjustment to Sales in Net earnings. Effective, January 1, 2012, the Company
changed its accounting policy to align with the presentation adopted by companies in its peer group and
changes in fair value are now recorded in Other foreign exchange gain (loss) in Net earnings.
The policy has been applied on a retrospective basis and comparative information has been restated. The
change had no effect on the comparative Statement of Financial Position.
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.
29
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.
Application of this standard will also impact the calculation of finance costs, resulting in an increase to
Production expense in the Statement of Earnings, which will be fully offset by an increase in Defined benefit
plan actuarial gains (losses) in the Statement of Comprehensive Income. Prior to this standard, the impact of
defined benefit plans on Net earnings included an interest cost on the obligation using the discount rate (based
on current bond yields), and a credit on the plan assets using the expected rate of return (based on long term
expected bond and equity returns). Under the new standard, the credit on plan assets will no longer recognize
the equity risk premium and will be based on the discount rate only.
This standard is in effect for accounting periods beginning on or after January 1, 2013.
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.
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 2012
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
$10.7 million increase in net income
Chips
$10 increase per unit1
$4.8 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 ability to secure a quality log supply matched to the sawmill’s requirements;
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
30
•
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 and through timber sale bids. 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 through timber sales or purchase agreements for its U.S. based mills, with a small
volume supplied 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
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 and options to effectively
hedge its net exposure. As at December 31, 2012, the Company has outstanding forward contract obligations
to sell a maximum of US$2.7 million at an average rate of CAD$0.9989 to the US$1.00, call option obligations
to sell a maximum of US$3.0 million at a rate of CAD$1.01 to the US$1.00 and put option obligations to buy a
maximum of CAD$6.1 million at a rate of CAD$1.01 to the US$1.00 during 2013. All foreign currency gains or
losses to December 31, 2012 have been recognized in Other foreign exchange gain (loss) in Net earnings and
the fair value of the foreign currency contracts has been recorded as an asset of $0.1 million in Trade accounts
31
receivable and other (2011 - $0.3 million asset fair value recorded in Trade accounts receivable and other).
Based on the Company’s net exposure to foreign currencies resulting from forward contracts in 2012, the
sensitivity of Interfor’s net earnings is as follows:
US$
$0.01 increase vs. CAD$
$2.0 million increase in net income
Japanese Yen 1¥ increase vs. US$
$0.1 million increase in net income
With poor U.S. housing starts and increased demand from China and other overseas markets, Interfor’s U.S.
operations grew their export sales significantly in 2011. In 2012, as U.S. housing starts and North American
prices started to improve, Interfor’s U.S. operations produced and sold products almost exclusively for the U.S.
market. All revenues and expenses are denominated in US$. All foreign currency denominated assets and
liabilities of the U.S. foreign operations with a U.S. dollar functional currency are translated at exchange rates in
effect at the Statement of Financial Position 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 previously recorded net unrealized gains
(losses) thereon in the Translation Reserve are reclassified to the Statement of Earnings.
The Company recorded a $2.9 million unrealized foreign exchange loss on translation of its U.S. operations with
a functional currency of $US (2011 - $2.7 million gain) to Other comprehensive income (loss) in 2012.
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 gains of $0.7 million (2011 - $0.7 million losses) have been recorded in Other comprehensive income
(loss) in 2012.
Cost of Debt Financing and Sensitivity
As at December 31, 2012 Interfor had drawn from its operating and term credit facilities of floating rate debt a
total of $135.0 million (2011 - $110.7 million), including letters of credit.
The Company’s operating and term credit facilities bear interest at the bank prime rate plus a premium, or, at
the Company's option, at rates for Bankers' Acceptances for CAD$ loans or at LIBOR for US$ loans, in all cases
depending upon a financial ratio.
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, 2012 being a liability of $0.1 million (measured based on Level 2 of the fair value hierarchy) has
been recorded in Trade accounts payable and accrued liabilities (2011 - $0.5 million in Trade accounts payable
and accrued liabilities) and a gain of $0.4 million (2011 - $0.5 million loss) has been recognized in Other
comprehensive income.
Based on the Company’s average debt level during 2012, the sensitivity of a 100 basis point increase in interest
rates would result in an approximate decrease of $0.5 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.
32
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, Lands and Natural Resource Operations 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 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 mountain 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 are based on a competitive market pricing system (“MPS”) that has been established for
both the coast and interior regions of B.C.
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 the 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.
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
33
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 24 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 are expected to continue to improve, albeit slowly. In the U.S. the housing market is
expected to continue to recover, China remains an important market for North American lumber and further
growth is expected. Building activity in Japan is expected to gain momentum in 2013 in anticipation of a
planned increase in the consumption tax and as a result of reconstruction efforts following the 2011 earthquake
and tsunami. Interest rates are forecasted to remain low and the Canadian dollar is expected to trade at close
to parity against the U.S. Dollar.
Interfor’s recently announced acquisition of the three Rayonier mills will add another 360 million board feet to
the Company’s production capacity. While the near term outlook is more positive than it has been for some
years, there are numerous challenges to the global economy that have the potential to undermine the
economic recovery. With this uncertainty in mind, Interfor intends to maintain its disciplined approach to
production, cost control, and inventory management while, at the same time, remaining alert to opportunities
to position the Company for long-term success.
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.
34
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 and Chief Financial Officer
February 14, 2013
International Forest Products Limited
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
35
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, 2012 and December 31, 2011, the consolidated statements of earnings, comprehensive
income, changes in equity and cash flows for the years ended December 31, 2012 and December 31,
2011, 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, 2012 and
December 31, 2011, and its consolidated financial performance and its consolidated cash flows for the
years ended December 31, 2012 and December 31, 2011 in accordance with International Financial
Reporting Standards.
KPMG LLP, Chartered Accountants
February 14, 2013
Vancouver, Canada
International Forest Products Limited
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
December 31, 2012 and 2011
36
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable and other
Inventories
Prepayments
Employee future benefits
Other investments and assets
Property, plant and equipment
Logging roads and bridges
Timber licences
Other intangible assets
Goodwill
Deferred income taxes
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable and provisions
Reforestation liability
Income taxes payable
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
Note
December 31
2012
December 31
2011
9
5
21
6
7
8
8
8
8
18
11
18
11
9
21
10
12
12
$
14,994
47,392
98,024
11,749
172,159
878
4,198
349,779
17,316
73,796
738
13,078
98
$
10,435
44,000
97,645
10,757
162,837
1,256
2,836
340,034
16,753
76,792
1,250
13,078
-
$ 632,040
$ 614,836
$
70,597
10,864
593
82,054
17,621
135,046
9,631
11,658
$
60,692
14,121
1,058
75,871
17,777
110,713
8,186
11,467
342,285
4,080
7,476
(7,818)
(132)
30,139
376,030
342,285
4,080
7,476
(4,929)
(503)
42,413
390,822
$ 632,040
$ 614,836
Commitments and contingencies (note 19); Subsequent events (note 26).
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
L. Sauder, Director
D.W.G. Whitehead, Director
International Forest Products Limited
Consolidated Statements of Earnings
(Expressed in thousands of Canadian dollars, except earnings per share amounts)
Years ended December 31, 2012 and 2011
Note
2012
2011
37
Sales
4
$ 849,196
$ 758,245
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 and roads
Restructuring costs and write-downs of plant and
and equipment and roads
Operating loss
Other earnings (expenses):
Finance costs
Other foreign exchange gain (loss)
Other income (expense)
Loss before income taxes
Income taxes:
Current
Deferred
Net loss
Net loss per share, basic and diluted
7
8
17
15
4
16
18
758,893
20,719
10,065
9,044
28,745
23,648
851,114
(1,918)
(529)
(2,447)
(6,324)
189
334
(5,801)
(8,248)
640
(182)
458
681,363
20,548
449
9,029
27,291
24,263
762,943
(4,698)
(580)
(5,278)
(7,094)
(25)
371
(6,748)
(12,026)
817
610
1,427
$
$
20
(8,706)
$ (13,453)
(0.16)
$
(0.25)
International Forest Products Limited
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian dollars, except earnings per share amounts)
Years ended December 31, 2012 and 2011
Net loss
Other comprehensive loss:
Foreign currency translation differences
Defined benefit plan actuarial losses
Loss in fair value of interest rate swaps
Income tax on other comprehensive loss
Note
2012
2011
$
(8,706)
$ (13,453)
21
25
18
(2,805)
(3,568)
371
(84)
(6,086)
2,632
(4,541)
(503)
250
(2,162)
Comprehensive loss
$ (14,792)
$ (15,615)
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, 2012 and 2011
38
Class A Share Class B Share Contributed
Surplus
Capital
Capital
Note
Translation
Reserve
Hedge
Reserve
Retained
Earnings
Total
Equity
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
18
18, 21
25
-
-
-
-
Contributions:
Share options exercised
12
Share issuance, net of share issue expenses and tax 12
1,370
55,553
Changes in ownership interests in investee:
Acquisition of subsidiary
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,068
-
2,717
-
-
-
-
-
-
-
$ 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
Net loss:
Other comprehensive loss:
Foreign currency translation differences, net of tax
Defined benefit plan actuarial losses, net of tax
Gain in fair value of interest rate swaps
18
18, 21
25
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(8,706)
(8,706)
(2,889)
-
-
-
-
371
-
(3,568)
-
(2,889)
(3,568)
371
Balance at December 31, 2012
$ 342,285
$ 4,080 $
7,476
$
(7,818)
$
(132)
$ 30,139
$ 376,030
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, 2012 and 2011
39
Cash provided by (used in):
Operating activities:
Net loss
Items not involving cash:
Note
2012
2011
$
(8,706)
$
(13,453)
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
Write-down (reversals) of plant, equipment, and roads 7,8
Unrealized foreign exchange losses
Other income
7
8
18
15
11
Cash generated from (used in) operating working capital:
Trade accounts receivable and other
Inventories
Prepayments
Trade accounts payable and accrued liabilities
Income taxes 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 subsidiary
Investments and other assets
7
8
8
3(a)(ii)
Financing activities:
Issuance of share capital, net of expenses
Interest payments
Additions to long-term debt
Repayments of long-term debt
12
9
9
28,745
23,648
458
6,324
(1,953)
(516)
(1,361)
164
150
(309)
46,644
(3,798)
(879)
(1,087)
5,592
(1,090)
45,382
(39,830)
(20,662)
(319)
537
-
(298)
(60,572)
-
(5,241)
82,000
(57,000)
19,759
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
(10)
4,559
10,435
$ 14,994
82
1,134
9,301
10,435
$
See accompanying notes to consolidated financial statements.
International Forest Products Limited
40
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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, 2012 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”) and were approved by the Board of Directors on
February 14, 2013.
(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) Liabilities for cash-settled share-based payment arrangements are measured at fair value;
and
(iii) 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.
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.
International Forest Products Limited
41
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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):
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.
Information about the use of management estimates that have the most significant effect on
the amounts recognized in the consolidated financial statements is included in the following
notes:
Note 3(e)
Inventories
Note 3(i)
Impairment of non-financial assets
Note 3(j)
Reforestation and other decommissioning liabilities
Note 8
Note 11
Roads and bridges, timber tenures, other intangible assets and goodwill
Reforestation liability
The critical judgement in applying accounting policies that has the most significant effect on
the amounts recognized in the consolidated financial statements is the determination of cash
generating units as discussed in Note 3(i).
3. Significant accounting policies:
The accounting policies set out below have been applied consistently to all periods presented in
these consolidated financial statements.
(a) Basis of consolidation:
These 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.
(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
42
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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 are consolidated from the date of change in control.
(b) Foreign currency:
(i) Foreign currency transactions:
Transactions in foreign currencies are 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. 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
43
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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 originate 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
44
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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 and
option 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 in Other foreign exchange gain (loss)
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
45
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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.
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 generally accepted accounting
principles, prior to adoption of IFRSs.
(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
46
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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
47
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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
48
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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
49
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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 income tax. Current tax and deferred
income 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 income 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 income 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 income tax
is not recognized for taxable temporary differences arising on the initial recognition of
goodwill.
Deferred income 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 income 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 income 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 income 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, 2012, and have not been applied in preparing
these consolidated financial statements. The following pronouncements are those that the
Company considers most significant and are not intended to be a complete list of new
pronouncements that may affect the 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.
International Forest Products Limited
50
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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):
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.
Application of this standard will also impact the calculation of finance costs, resulting in an
increase to Production expense in the Statement of Earnings, which will be fully offset by an
increase in Defined benefit plan actuarial gains (losses) in the Statement of Comprehensive
Income. Prior to this standard, the impact of defined benefit plans on Net earnings included
an interest cost on the obligation using the discount rate (based on current bond yields), and
a credit on the plan assets using the expected rate of return (based on long term expected
bond and equity returns). Under the new standard, the credit on plan assets will no longer
recognize the equity risk premium and will be based on the discount rate only.
This standard is in effect for accounting periods beginning on or after January 1, 2013.
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. Change in accounting policy:
The Company uses derivative forward exchange contracts and options which are designated as at
fair value through profit or loss and are carried on the Statement of Financial Position at fair
value. Previously, changes in fair value were recorded as an adjustment to Sales in Net earnings.
Effective, January 1, 2012, the Company changed its accounting policy to align with the
presentation adopted by companies in its peer group and changes in fair value are now recorded
in Other foreign exchange gain (loss) in Net earnings.
The policy has been applied on a retrospective basis and comparative information has been
restated. The following changes to historical financial statements have been made to reflect the
new policy:
As previously
Reported
Adjustment
Restated
Consolidated Statement of Earnings for the
Year ended December 31, 2011
Sales
Other foreign exchange gain (loss)
$
758,016 $
204
229 $
(229)
758,245
(25)
There are no changes to previously issued Statements of Financial Position as a result of this
change in accounting policy.
International Forest Products Limited
51
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
5. Inventories:
Logs
Lumber
Other
2012
2011
$ 59,772
31,833
6,419
$
59,412
31,729
6,504
$ 98,024
$
97,645
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, 2012 was $7,050,000
(2011 - $10,006,000).
6. Investments and other assets:
Timber deposits and other investments and deposits
Deferred financing fees, net of accumulated amortization
$
2,651
1,547
$
642
2,194
2012
2011
$
4,198
$
2,836
International Forest Products Limited
52
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
7. Property, plant and equipment:
Cost
Balance at December 31, 2010
Additions
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2011
Additions
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2012
Accumulated Depreciation
Balance at December 31, 2010
Depreciation
Disposals
Impairment (reversal)
Exchange rate movements
Balance at December 31, 2011
Depreciation
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2012
Net book value at
December 31, 2011
December 31, 2012
Land
35,022 $
36
-
-
56
35,114
8
-
-
(56)
35,066 $
$
$
Machinery and
Equipment
Buildings
Mobile
Equipment
Computer
Site
Equipment Improvements
61,760 $ 401,647 $
-
-
496
463
62,719
-
(1,286)
519
(456)
6
(2,872)
12,433
3,530
414,744
(172)
(26,127)
28,403
(3,466)
61,496 $ 413,382 $
Machinery and
Equipment
Buildings
13,615 $
759
(575)
793
61
15,871 $
145
-
1,098
177
32,002 $
296
-
986
190
14,653
303
(45)
845
(59)
15,697 $
Mobile
Equipment
33,474
17,291
-
706
-
-
4,736
1,218
(187)
(168)
38,023 $
19,047 $
Computer
Site
Equipment Improvements
$
22,443 $ 158,370 $
2,965
-
-
146
25,554
2,853
(1,270)
5
(144)
19,621
(2,802)
(423)
1,152
175,918
20,918
(26,029)
(5)
(1,113)
$
26,998 $ 169,689 $
11,045 $
762
(571)
-
36
11,272
964
(45)
-
(36)
12,155 $
10,803 $
1,457
-
-
147
12,407
1,442
-
-
(147)
13,702 $
14,662 $
2,072
-
-
95
16,829
2,222
-
-
(109)
18,942 $
Other
6,112 $
403
-
15
20
6,550
620
(980)
22
(20)
6,192 $
Projects in
Process
Total
3,684 $ 569,713
16,099
(3,462)
-
4,495
14,454
(15)
(15,821)
(2)
2,300
40,018
-
(35,743)
(7)
586,845
41,483
(28,438)
-
(4,419)
6,568 $ 595,471
Other
4,400
414
-
-
17
4,831
346
(969)
-
(2)
4,206
Total
$ 221,723
27,291
(3,373)
(423)
1,593
246,811
28,745
(28,313)
-
(1,551)
$ 245,692
$
35,114 $
35,066
37,165 $ 238,826 $
34,498
243,693
3,381 $
3,542
4,884 $
5,345
16,645 $
19,081
1,719 $
1,986
2,300 $ 340,034
349,779
6,568
The amount of borrowing costs capitalized in 2012 totals $447,000 (2011 - $nil) which was determined based on an estimate of the average interest costs
on borrowings of 5.6%. As at December 31, 2012, additions includes $1,653,000 in accrued contract costs (2011 - $nil).
International Forest Products Limited 53
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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 December 31, 2010
Additions
Disposals
Exchange rate movements
Balance at December 31, 2011
Additions
Disposals
Exchange rate movements
$
43,958 $
19,987
(15,669)
-
48,276
20,662
(16,189)
(5)
117,597 $
4,563 $
-
-
-
117,597
230
(1,547)
-
126
-
32
4,721
89
-
(32)
13,955
-
-
-
13,955
-
-
-
Balance at December 31, 2012
$
52,744 $
116,280 $
4,778 $
13,955
Roads and
Bridges
Timber
Licences
Other
Intangibles
Goodwill
Accumulated amortization
Balance at December 31, 2010
Amortization
Disposals
Exchange rate movements
Balance at December 31, 2011
Amortization
Disposals
Impairment
Exchange rate movements
$
26,895 $
20,297
(15,669)
-
31,523
19,826
(16,085)
164
-
37,443 $
2,840 $
3,362
-
-
40,805
3,226
(1,547)
-
-
604
-
27
3,471
596
-
-
(27)
877
-
-
-
877
-
-
-
-
877
Balance at December 31, 2012
$
35,428 $
42,484 $
4,040 $
Net book value at
December 31, 2011
December 31, 2012
$
16,753 $
17,316
76,792 $
73,796
1,250 $
738
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 2011 and 2012. 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 CWW CGU as at December 31, 2012, and December 31, 2011 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
54
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(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 14.7 percent (2011 – 14.5 percent) was applied in determining the
recoverable amount of the CWW CGU. 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 0.8 percent (2011 – 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:
2012
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
Unused portion of line
2011
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
Term
Line
$
65,000 $
65,000
-
200,000 $
200,000
135,046
5,190
59,810
-
64,954
Total
265,000
265,000
135,046
5,190
124,764
$
65,000 $
65,000
-
200,000 $
200,000
110,713
265,000
265,000
110,713
5,062
59,938
-
89,287
5,062
149,225
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.
The maturity date of the Operating Line is July 28, 2015. See also Subsequent events, note
26(b).
¹EBITDA represents earnings before interest, taxes, depletion and amortization.
International Forest Products Limited
55
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
9. Cash and borrowings (continued):
(b) Revolving Term Line (continued):
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.
The maturity date of the Revolving Term Line is July 28, 2015.
In 2012, the Company had net drawings of $25,000,000 on its Revolving Term Line.
As at December 31, 2012, the Revolving Term Line was drawn by US$30,200,000 (2011 –
US$30,200,000) revalued at the year-end exchange rate to $30,046,000 (2011 -
$30,713,000), and $105,000,000 (2011 - $80,000,000) for total drawings of $135,046,000
(2011 - $110,713,000), and leaving an unused available line of $64,954,000 (2011 -
$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
gains of $667,000 (2011 - $676,000 loss) arising on revaluation of the Non-Revolving Term
Line were recognized in Foreign currency translation differences in Other comprehensive
income.
See also Subsequent events, note 26(b).
Minimum principal amounts due on long-term debt within the next five years are follows:
2013
2014
2015
2016
2017
$ -
-
135,046
-
-
$ 135,046
(c) Cash and cash equivalents:
At December 31, 2012, the Company’s cash balances are restricted by $652,000 for
contractor holdback payments (2011 - $134,000 for outstanding letters of credit).
¹EBITDA represents earnings before interest, taxes, depletion and amortization.
International Forest Products Limited
56
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
10. Provisions and other liabilities:
2012
Restructuring
Road deactivation
Environmental
Cash-settled equity based compensation
Note
10(a),17
10(a)
10(a)
Share appreciation rights plan 10(b)
Total shareholder return plan
10(c)
Deferred share unit plan
10(d)
Deferred compensation payable
10(e)
Storm damage remediation funds
10(f)
Other
2011
Restructuring
Road deactivation
Environmental
Cash-settled equity based compensation
Note
10(a),17
10(a)
10(a)
Share appreciation rights plan 10(b)
Total shareholder return plan
10(c)
Deferred share unit plan
10(d)
Deferred compensation payable
10(e)
Storm damage remediation funds
10(f)
Other
$
Current
441
838
47
Non-current
16
$
3,169
785
$
4,773
2,688
294
2,281
337
900
1,223
1,634
3,791
-
507
533
Total
457
4,007
832
5,996
4,322
4,085
2,281
844
1,433
$
12,599
$ 11,658
$
24,257
$
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
The current portion of provisions and other liabilities is included in Trade accounts payable and
other accrued liabilities in the Statement of financial position.
(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
harvested, 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.
In 2012, the Company engaged an environmental consultant to undertake groundwater and
other testing at a landfill at its Castlegar sawmill site to update its assessment of potential
remediation costs. Based on the results of the testing undertaken, the Company revised its
estimate of the environmental provision and recorded a recovery of $1,321,000 in Production
costs.
International Forest Products Limited
57
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
10. Provisions and other liabilities (continued):
(a) Provisions (continued):
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 discount 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 December 31, 2010
Note
Provisions made during year 17
Expenditures made during year
Unwind of discount
Changes in estimated future expenditures
$
$
Restructuring Road deactivation
4,655
508
(617)
113
11
1,713
1,003
(1,857)
-
-
Balance at December 31, 2011
Provisions made during year 17
Expenditures made during year
Reversal of provision
during year
Unwind of discount
Changes in estimated future expenditures
17
859
724
(767)
(359)
-
-
4,670
412
(518)
(537)
67
(87)
$
Environmental
2,017
22
-
49
204
2,292
39
(110)
(68)
27
(1,348)
Balance at December 31, 2012
$
457
$
4,007
$
832
(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.
Details of the Company’s SAR Plan for the years ended December 31, 2012 and 2011 are:
2012
2011
Units
Outstanding, beginning of year 2,128,030
318,500
Granted
(262,400)
Exercised
(285,420)
Expired or cancelled
Weighted
average
strike price
$ 5.25
4.65
4.90
4.60
Units
1,958,180
306,500
(136,650)
-
Weighted
average
strike price
$ 5.01
5.94
3.39
-
Outstanding, end of year
1,898,710
$ 5.29
2,128,030
$ 5.25
Units exercisable, end of year
995,310
$ 5.83
1,204,930
$ 5.73
International Forest Products Limited
58
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
10. Provisions and other liabilities (continued):
(b) Share Appreciation Rights Plan (continued):
Weighted average fair value assumptions for grants made in 2012 and 2011 are as follows:
Risk-free interest rate
Expected life
Annualized volatility
Dividend rate
Termination rate
Grant date fair value
2012
1.7%
8.2 years
44%
0%
12%
$2.37
2011
3.1%
8.2 years
44%
0%
12%
$3.17
Details of units outstanding under the SAR Plan at December 31, 2012 are as follows:
Units exercisable
Number
outstanding,
December 31,
2012
221,850
779,300
761,060
136,500
Strike
price
$1.38
$3.40-$5.40
$6.01-$7.30
$8.02
Units outstanding
Weighted
average
remaining
unit life (yrs)
Weighted
average
strike price
$ 1.38
4.85
6.40
8.02
Number
exercisable,
December 31,
2012
104,450
274,800
479,560
136,500
Weighted
average
strike price
$ 1.38
5.05
6.63
8.02
6.1
7.3
3.9
4.1
1,898,710
$ 5.29
995,310
$ 5.83
The Company recorded a Long term incentive compensation expense in respect of the SAR
Plan of $4,395,000 (2011 – recovery of $742,000) for the year ended December 31, 2012.
(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.
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, 2012 are as follows:
Outstanding, beginning of year
Granted
Cancelled
2012
366,397
385,097
(88,543)
2011
-
366,397
-
Outstanding, end of year
662,951
366,397
International Forest Products Limited
59
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
10. Provisions and other liabilities (continued):
(c) Total shareholder return plan (continued):
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
2012
1.38%
3 years
47% to 56%
0.00%
0.00%
$1,231
2011
2.30%
3 years
43% to 78%
0.00%
0.00%
$1,623
The Company recorded Long term incentive compensation expense under the TSR Plan of
$3,567,000 (2011 – $1,610,000) for the year ended December 31, 2012.
(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.
The number of DSU’s outstanding at December 31, 2012 are as follows:
Units
Outstanding, beginning of year 458,821
46,004
Granted¹
2012
2011
Average
unit value
$ 4.20
5.21
Units
408,249
50,572
Average
unit value
$ 5.23
4.93
Outstanding, end of year
504,825
$ 8.09
458,821
$ 4.20
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 expense of $1,916,000 (2011 –
recovery of $456,000) for the year ended December 31, 2012 in respect of the DSU Plan.
¹Fair value at the date of the grant.
International Forest Products Limited
60
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
10. Provisions and other liabilities (continued):
(e) Deferred compensation payable:
TSR Plan awards for the former Chief Operating Officer for the three year periods which
matured on December 31, 2009 and December 31, 2011 were converted in March 2010 and
2012 respectively into long-term compensation payable. Valuation adjustments are made
monthly to the plan based on the rate of return of a referenced investment fund and
compensation expense of $187,000 (2011 - $37,000) was recorded as Long term incentive
compensation expense for the year ended December 31, 2012.
(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.
In 2011, 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, 2012 $844,000 (2011 - $1,152,000) of these provisions remain unspent.
11. 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.
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 expenditures
Transfer of obligation
Unwind of discount
Changes in estimated future reforestation expenditures
Consisting of:
Current reforestation liability
Long term reforestation liability
2012
$ 31,898
2011
27,110
$
10,847
(12,345)
(1,900)
360
(375)
12,998
(9,225)
-
545
470
$ 28,485
$
31,898
$ 10,864
17,621
$
14,121
17,777
$ 28,485
$
31,898
International Forest Products Limited
61
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
11. Reforestation liability (continued):
The total undiscounted amount of the estimated future expenditures required to settle the
reforestation obligation at December 31, 2012 is $28,601,000 (2011 - $33,282,000). 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.
12. Share capital:
(a) Share transactions:
Authorized capital at December 31, 2012 and 2011 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 2012 and 2011 were as follows:
Balance, December 31, 2010
Share issuance, net of share issue
expenses and tax
Shares issued on exercise of options
Number
Class A
46,337,676
Class B
Total
1,015,779 47,353,455
Amount
$ 289,442
8,222,500
287,000
- 8,222,500
287,000
-
55,553
1,370
Balance, December 31, 2011 and 2012 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.
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
Note
2012
7,476
$
$
acquisition of subsidiary
3(a)(ii)
-
2011
5,408
2,068
At December 31, 2012, 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.
$
7,476
$
7,476
International Forest Products Limited
62
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
12. Share capital (continued):
(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, 2012 and 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, 2012 and 2011
are as follows:
2012
2011
Weighted
average
exercise price
-
$
-
-
-
$
$
-
-
Weighted
average
exercise price
$ 4.77
-
4.77
-
Options
287,000
-
(287,000)
-
-
-
$
$
-
-
Options
-
-
-
-
-
-
Outstanding, beginning of year
Granted
Exercised
Expired or cancelled
Outstanding, end of year
Options exercisable, end of year
13. Depreciation, depletion and amortization:
Depreciation, depletion and amortization allocated by function are as follows:
Production
Selling and administration
2012
2011
$ 51,471
922
$
50,644
910
$ 52,393
$
51,554
14. Personnel expenses:
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
2012
2011
$ 100,743
$
91,242
21
21
10
5,671
3,716
4,778
157
10,065
8,848
5,132
3,257
4,557
338
449
8,785
$ 133,978
$ 113,760
International Forest Products Limited
63
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
15. Finance income and costs:
Recognized in Net earnings (loss):
Interest on borrowing
Unwind of discount on provisions
Amortization of prepaid finance costs
Recognized in Other comprehensive income (loss):
$
2012
(5,221)
(454)
(649)
$
2011
(5,608)
(707)
(779)
$
(6,324)
$
(7,094)
2012
2011
Effective portion of changes in fair value of interest rate swap
$
371
$
(503)
16. Other income:
Gain on disposal of surplus equipment, licenses and roads
Gain on lumber futures trading
$
2012
309
25
$
2011
184
187
$
334
$
371
17. Restructuring costs and write-downs of plant and equipment:
The Company recorded restructuring costs, and write-downs of plant and equipment and roads
consisting of the following:
Severance costs
Contractor buyout
Plant, equipment and road write-downs (reversal)
Other (recovery)
Note
10
10
7
10
$
2012
724
-
164
(359)
$
2011
265
840
(423)
(102)
$
529
$
580
Restructuring costs in 2012 included severance costs of $285,000 resulting from the early
retirement of hourly workers and $439,000 in management reorganizations resulting from the
implementation of the Company’s “Achieving Excellence” program.
In addition, the cancellation of cutting permits in 2012 gave rise to a recovery of previously
accrued restructuring of $359,000, partially offsetting a $164,000 impairment of related road
infrastructure.
During 2011, restructuring costs of $580,000 resulted from the buyout of a logging contractor’s
Bill 13 entitlements, 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.
International Forest Products Limited
64
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
18. Income taxes:
Income tax expense is as follows:
Current tax expense:
Current year
Adjustments for prior periods
Deferred income tax expense (recovery):
Origination and reversal of temporary differences
Changes in tax rates
Change in unrecognized deductible temporary differences
2012
2011
$
522
118
640
$
655
162
817
(2,612)
57
2,373
(182)
(6,370)
(24)
7,004
610
$
458
$
1,427
Income tax (expense) recovery recognized in Other comprehensive income is as follows:
Loss (gain) on hedge of net investment in foreign operation
Defined benefit plan actuarial losses
2012
(84)
-
(84)
$
$
2011
85
165
250
$
$
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
25% (2011 – 26.5%)
Unrecognized deferred income tax assets
Entities with different tax rates
Benefit of capital losses
Change in future tax rates and statutory and tax recovery
rate difference
Other
2012
2011
$
$
(2,062)
2,373
(3)
-
57
93
(3,187)
7,004
(1,315)
(1,064)
(24)
13
$
458
$
1,427
Unrecognized deferred income taxes:
The Company has unrecognized deferred income 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
loss carry-forwards totaling approximately $292,000,000 (2011 - $241,000,000) expire between
2014 and 2032, and are available to reduce future taxable income.
International Forest Products Limited
65
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
18. Income taxes (continued):
Although the Company expects to realize the full benefit of the loss carry-forwards and other
deferred income 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 income tax assets in excess of its deferred income tax liabilities, except in limited
circumstances. Deferred income tax assets are not recognized in respect of the following:
Losses carried forward
Deductible temporary differences
2012
$ 117,203
7,584
2011
$ 106,888
4,386
$ 124,787
$ 111,274
International Forest Products Limited
66
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
18. Income taxes (continued):
Recognized deferred income taxes:
December 31, 2012
Deferred income tax assets
Opening
Balance
Recognized in
Recognized
in Other
Income Tax Comprehensive
Income (loss)
Expense
Losses
Reserves
Tax credits
Defined benefit plan actuarial losses
Share issuance costs
Other
$ 42,228
12,818
938
788
668
2,319
$ 10,243
(424)
17
-
-
(904)
$
Deferred income tax liabilities
Capital assets
Loss (gain) on hedge of net
(59,581)
(8,750)
-
-
-
-
-
-
-
investment in foreign operation
(178)
-
(84)
Total
$
-
December 31, 2011
Deferred income tax assets
Opening
Balance
$
Recognized in
182
$
(84)
Recognized
in Other
Income Tax Comprehensive
Income (loss)
Expense
Acquired in
Business
Combination
Recognized in
Shareholders’
Equity
$
$
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
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 income 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
$ 52,471
12,394
955
788
668
1,415
(68,331)
(262)
$
98
Ending
Balance
$ 42,228
12,818
938
788
668
2,319
(59,581)
(178)
Total
$
-
$
(611)
$
250
$
(307)
$
668
$
-
International Forest Products Limited
67
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
19. 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:
2013
2014
2015
2016
2017
$
9,970
4,950
3,630
2,670
1,550
(b) Softwood Lumber Agreement:
In April, 2012 the U.S. Lumber Coalition approached the U.S. Trade Representative’s office
asserting that the B.C. government is undercharging B.C. Coastal forest companies for timber
harvested on Crown lands. As this complaint is in the very preliminary stages of investigation,
the existence of any potential claim has not been determined and no provision has been
recorded in the financial statements as at December 31, 2012.
(c) Surety Performance Bonds
The Company has posted $17,801,000 in surety performance bonds, with various expiry
dates extending through 2016.
(d) 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.
20. 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.
The reconciliation of the numerator and denominator is determined as follows:
2012
Weighted
average
number of
Net loss
Shares Per share
2011
Weighted
average
number of
Shares
Net loss
Per share
Basic and diluted
loss per share
$
(8,706)
55,863 $
(0.16)
$ (13,453)
53,611
$ (0.25)
There were no share options outstanding at December 31, 2012 (2011 – nil).
International Forest Products Limited
68
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
21. 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 2012, the pension expense for this plan is equal
to the Company’s contribution of $1,265,000 (2011 - $1,175,000).
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
2012, the pension expense is equal to the Company’s contribution of $46,000 (2011 -
$27,000).
Employees of Interfor U.S. Inc. (formerly 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 2012,
the pension expense for this plan is equal to the Company’s contribution of $730,000 (2011 -
$644,000).
(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 2012, the pension expense
for these plans is equal to the Company’s contribution of $2,358,000 (2011 - $2,119,000). 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, with a
portion of the commitments being secured by irrevocable letters of credit.
During 2012 the Company recorded an expense of $378,000 (2011 - $592,000) in respect of
these plans. The amounts accrued for defined contribution commitments is $4,423,000 (2011
- $4,339,000).
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
$
2012
294
4,129
$
2011
203
4,136
$
4,423
$
4,339
International Forest Products Limited
69
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
21. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans:
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.
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 most recent and the next scheduled actuarial valuations for funding purposes for the
significant pension plans are:
Adams Lake Pension Plan
CMSG Pension Plan
SSCL Plan
Most Recent Valuation
December 31, 2009
December 31, 2009
December 31, 2011
Next Scheduled Valuation
December 31, 2012
December 31, 2012
December 31, 2012
The results of the December 31, 2012 actuarial valuations will be received in 2013.
The Company has determined, that in accordance with statutory requirements of the plans
(such as minimum funding requirements), that 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, 2012 is $nil (2011 - $162,000).
International Forest Products Limited
70
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
21. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans (continued):
Pension Benefits
2012
2011
Other Post-retirement Benefits
2011
2012
Defined benefit obligation:
Beginning of year
Acquisitions
Service cost
Employee contributions
Interest cost
Benefit payments
Settlements
Actuarial loss
$
49,645 $
-
585
297
2,422
(2,691)
-
4,554
34,065 $
12,223
580
283
2,495
(2,505)
(290)
2,794
1,627 $
-
35
-
80
(104)
-
195
1,169
326
29
-
80
(95)
-
118
End of year
$
54,812 $
49,645 $
1,833 $
1,627
Plan assets:
$
Beginning of year
Acquisitions
Expected return on plan assets
Employer contributions
Employee contributions
Benefit payments
Settlements
Actuarial gain (loss)
48,516 $
-
2,965
1,791
297
(2,691)
-
1,019
33,536 $
13,882
2,899
2,231
283
(2,505)
(343)
(1,467)
- $
-
-
104
-
(104)
-
-
-
-
-
95
-
(95)
-
-
End of year
$
51,897 $
48,516 $
- $
-
The following summarizes the balances recognized on the Statement of Financial Position:
Pension Benefits
2012
2011
Other Post-retirement Benefits
2011
2012
Fair value of plan assets
Present value of unfunded
$
51,897 $
48,516 $
- $
-
obligations
447
Present value of funded obligations 54,365
(2,915)
Deficit
-
Effect of asset ceiling limit
471
49,174
(1,129)
(162)
1,833
-
(1,833)
-
1,627
-
(1,627)
-
Accrued obligation
$
(2,915) $
(1,291) $
(1,833) $
(1,627)
International Forest Products Limited
71
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
21. 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
2012
2011
Other Post-retirement Benefits
2011
2012
$
6,947 $
-
3,535
(162)
2,377 $
147
4,261
162
243 $
-
195
-
$
10,320 $
6,947 $
438 $
113
12
118
-
243
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
2012
878 $
Other Post-retirement Benefits
2011
-
- $
2012
2011
1,256 $
(74)
(3,719)
(74)
(2,473)
(50)
(1,783)
(50)
(1,577)
$
(2,915) $
(1,291) $
(1,833) $
(1,627)
Plan assets consist of:
Asset category
Equity securities
Debt securities
Other
Total
2012
2011
Percentage of plan assets
48%
48%
4%
53%
43%
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
$
2012
585 $
2,422
(2,965)
-
2012
Other Post-retirement Benefits
2011
29
80
-
-
35 $
80
-
-
2011
580 $
2,495
(2,899)
53
$
42 $
229 $
115 $
109
International Forest Products Limited
72
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
21. 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
2012
Defined benefit obligation as of December 31
2011
Other Post-retirement Benefits
2011
2012
Discount rate
Compensation increases¹
4.19%
3.39%
Pension expense
Discount rate
Expected return on plan assets
Compensation increases¹
4.88%
6.16%
3.39%
4.87%
3.39%
5.37%
6.31%
3.39%
4.25%
-
4.95%
-
-
4.94%
-
5.42%
-
-
¹Compensation increases only relate to the CMSG plan and the Seaboard plans.
For measurement purposes at December 31, 2012, the Company has assumed a 5.40%
health care cost trend in 2013 grading down to 4.27% in 2015 (2011 – 6.79% health care
cost trend in 2012 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%
89
1,341
Plus 1%
110 $
1,673
$
The overall expected long-term rate of return on assets is 6.16%. 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 2012 was $3,984,000 (2011 - $1,432,000).
Experience adjustments arising on plan liabilities in 2012 were $132,000 (2011 – $58,000)
and experience adjustments arising on plan assets in 2012 were $19,000 (2011 - $262,000).
The Company expects to pay contributions of $1,590,000 to its defined benefit plans in 2013.
22. 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)
$
2012
2,841
346
2,538
4,195
$
2011
3,305
344
1,230
(46)
$
9,920
$
4,833
International Forest Products Limited
73
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
22. 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
$
2012
6,419
2,556
5,582
$
2011
3,640
2,457
3,964
$ 14,557
$
10,061
(b) In 2012 the Company had lumber sales to a significant shareholder in the amount of
$1,069,000 (2011 - $748,000).
All transactions were conducted on a normal commercial basis, including terms and prices.
23. 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
Non-current assets by geographic location are as follows:
Canada
United States
2012
2011
$ 234,750
365,096
103,982
105,952
39,416
$ 214,876
263,395
137,421
98,088
44,465
$ 849,196
$ 758,245
2012
2011
$ 631,238
113,902
69,376
34,680
$ 538,367
108,413
68,355
43,110
$ 849,196
$ 758,245
2012
2011
$ 333,304
126,577
$ 315,343
136,656
$ 459,881
$ 451,999
International Forest Products Limited
74
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
24. Capital management:
The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and
market confidence and to sustain future development of the business. The Company 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 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.
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. These projects were substantially completed in
2012 with the installation of a new small log line and an automated lumber grading system at
Grand Forks and a series of high return projects including the installation of an automated lumber
grading system at the Castlegar sawmill to focus on increasing productivity and value extraction
at that mill.
There were no changes in the Company’s approach to capital management during 2012. 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.
25. Financial instruments:
(a) Fair value of financial instruments:
At December 31, 2012, the fair value of the Company's long-term debt and bank
indebtedness approximated its carrying value of $135,046,000 (2011 - $110,713,000). 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 foreign currency forward and option
contracts to manage exposure to fluctuations in foreign exchange rates and interest rate
swaps to manage exposure to changes in interest rates. The Company does not expect any
credit losses in the event of non-performance by counterparties as the counterparties are the
Company’s Canadian bankers, which are all highly rated.
International Forest Products Limited
75
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
25. Financial instruments (continued):
(b) Derivative financial instruments (continued):
As at December 31, 2012, the Company has outstanding foreign currency forward contract
obligations to sell a maximum of US$2,725,000 at an average rate of CAD$0.9989 to the
US$1.00, call option obligations to sell a maximum of US$3,000,000 at a rate of CAD$1.01 to
the US$1.00 and put option obligations to buy a maximum of CAD$6,060,000 at a rate of
CAD$1.01 to the US$1.00 during 2013. All foreign currency gains or losses to December 31,
2012 have been recognized in Other foreign exchange gain (loss) in Net earnings and the fair
value of these foreign currency contracts, being an asset of $134,000 (measured based on
Level 2 of the fair value hierarchy), has been recorded in Trade accounts receivable and other
(December 31, 2011 - $283,000 asset recorded in Trade accounts receivable and other
measured based on Level 2 of the fair value hierarchy).
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, 2012, being a liability of $133,000 (measured based on Level 2 of the fair
value hierarchy), has been recorded in Trade accounts payable and accrued liabilities
(December 31, 2011 - $503,000 liability recorded in Trade accounts payable and accrued
liabilities measured based on Level 2 of the fair value hierarchy) and a gain of $371,000
(December 31, 2011 - $503,000 loss) has been recognized in Other comprehensive income
for the year ending December 31, 2012.
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. At December 31, 2012 there were no outstanding lumber futures contracts and a
gain of $25,000 was recognized in Other income (expense) on completed contracts for the
year ended December 31, 2012 (December 31, 2011 - $187,000 gain).
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 gains of $667,000 in
2012 (2011 - $676,000 loss) have been recorded in Other comprehensive income.
(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.
International Forest Products Limited
76
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
25. Financial instruments (continued):
(d) Financial risk management (continued):
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 $91,000 was recorded as at
December 31, 2012 (2011 - $146,000) for specific trade receivables.
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 (“CCAA”).
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. The Court granted the Company a security interest as a critical supplier on
products purchased during the restructuring process.
In June, 2012, Catalyst trade accounts receivable of $150,000 related to pre-CCAA filing
were written off. A restructuring plan was approved by Catalyst’s creditors in June, 2012
and approved by the B.C. Supreme Court in July, 2012. Catalyst emerged from creditor
protection in September, 2012 and continues to meet its obligations to the Company.
International Forest Products Limited
77
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
25. Financial instruments (continued):
(d) Financial risk management (continued):
(i) Credit risk (continued):
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.
Guarantees
The Company did not provide any guarantees in 2012.
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:
2012
$ 15,974
17,586
6,286
4,600
2,946
$
2011
15,204
14,823
8,091
3,375
2,507
$ 47,392
$
44,000
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 and economic uncertainty in 2010 and 2011, Company
executives focused on cash management to ensure maintenance of adequate liquidity
and continued this discipline through 2012.
The Company also maintains a revolving Operating Line and a Revolving Term Line that
can be drawn on to meet financing needs.
International Forest Products Limited
78
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
25. Financial instruments (continued):
(d) Financial risk management (continued):
(ii) Liquidity risk (continued):
The estimated cash payments due in respect of contractual and legal obligations
including projected major capital improvements are summarized as follows: 1
Payments due by period
Up to
1 year
2-3
years
4-5
years
After 5
years
Total
Trade 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
$ 57,581
593
135,046
28,601
30,445
1,909
$ 57,581 $
593
-
10,864
12,117
761
- $
-
135,046
6,797
6,144
800
- $
-
-
5,766
1,703
77
-
-
-
5,174
10,481
271
26,620
9,970
8,580
4,220
3,850
Total obligations
$280,795 $ 91,886
$157,367 $ 11,766
$ 19,776
(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 and options to manage its currency risk from time to time, as described in Note
25(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, 2012, the Company has US$ drawings under its Revolving Term Line of
US$30,200,000 (2011 – 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.
International Forest Products Limited
79
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
25. Financial instruments (continued):
(d) Financial risk management (continued):
(iii) Market risk (continued):
As at December 31, the Company’s accounts receivable were denominated in the
following currencies (in thousands):
2012
Japanese ¥
CAD
USD
Accounts receivable
Accounts receivable held by foreign
17,389
14,882
79,471
subsidiaries with $US functional currency
8
14,841
-
2011
Accounts receivable
Accounts receivable held by foreign
17,397
CAD
16,256
29,723
USD
79,471
Japanese ¥
14,072
100,688
subsidiaries with $US functional currency
-
11,898
-
16,256
25,970
100,688
As at December 31, 2012, the domestic operations of the Company held cash and cash
equivalents of US$3,982,000 (2011 – US$3,008,000). Cash and cash equivalents held by
foreign subsidiaries totaled US$9,265,000 (2011 - US$6,125,000).
Based on the Company’s net exposure to foreign currencies as at December 31, 2012,
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
Based on the Company’s net exposure to foreign currencies as at December 31, 2012, 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
$0.01 increase vs CAD$
$1,271,000 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 in 2011, as described in Note 25(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 2012, the sensitivity of a 100 basis
point increase in interest rates would result in an approximate decrease of $472,000
(2011 - $424,000) 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.
International Forest Products Limited
80
Notes to Consolidated Financial Statements
Years ended December 31, 2012 and 2011
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
26. Subsequent events:
(a) Acquisitions:
On January 21, 2013, the Company reached an agreement to acquire three sawmills in
Georgia, U.S.A. from Rayonier Inc. (“Rayonier Acquisition”) for US$73,900,000 plus working
capital. The transaction is scheduled to close on March 1, 2013.
(b) Bank financing:
On January 24, 2013, the Company obtained a financing commitment from its lenders to
increase and extend its syndicated credit facilties. The Revolving Term Line will increase from
$200,000,000 to $250,000,000, conditional upon completion of the Rayonier Acquisition. The
existing Operating Line remains unchanged. The financing is scheduled to close on February
27, 2013 and have a term of four years, extended from July 28, 2015.
All other terms remain substantially unchanged except for a reduction in pricing.
On January 24, 2013, the Company obtained a financing commitment from a U.S. lender for a
a US$20,000,000 Operating Line (“U.S. Line”). The U.S. Line will be secured by accounts
receivable and inventories of Interfor U.S. Inc. (formerly Interfor Pacific Inc.), and have a term
of two years.
81
International Forest Products Limited
ANNUAL INFORMATION FORM
Dated as of February 14, 2013
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 2012 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
Interfor is a leading global supplier, with one of the most diverse lines of lumber products in 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 U.S. Inc.
(formerly 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.
82
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 significantly reduced demand for lumber and lower
prices 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 the year, combined with historically low
levels of U.S. housing starts and a stronger 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 stagnant
U.S. housing starts. A refocus on export markets, particularly China, provided alternate markets for
production and greater support for product prices, resulting in higher sales values and 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; improvements in
the operating structure at the Castlegar sawmill allowed that mill to resume production and contribute to
earnings. Operating earnings in the fourth quarter, 2010 were positive 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.
In January, 2011, the Company acquired full control of Seaboard. In April, 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 $57.6 million in April, 2011. The net proceeds of $54.9 million were initially used to reduce
debt levels. The Company also launched a new brand initiative to build the Company’s presence in the
marketplace and support future growth. At the end of 2011, the Company received Board approval for
capital upgrades at the Castlegar and Grand Forks sawmills.
2012
North American lumber markets continued to improve in 2012 as positive economic signs began to
emerge in the U.S. and concerns over sovereign debt issues in Europe were stabilized, at least in part, by
government action. Activity levels in China and Japan improved as well as the year progressed. The net
result was higher prices for most products especially in the second half of the year. Interfor took
advantage of the improving market environment to increase operating rates with the combination of
higher prices and increasing volumes contributing to better financial results relative to 2011.
In 2012, overall North American lumber market demand increased over 2011 as the U.S. economy
continued to improve through 2012 with rising GDP, employment and housing starts. The Canadian
economy, slowed somewhat in terms of GDP in the second half of 2012, however employment showed
slight improvements and housing starts continued to show strength. Lumber shipments to China fell in
83
the first nine months of 2012 but began to recover in the fourth quarter of 2012. Supply constraints and
the increase in North American demand impacted prices positively, year over year. Random Lengths
Framing Lumber Composite price averaged US $322 per thousand board feet (mfbm) in 2012, up 18%
over 2011.
Continued Strong Financial Position
The Company maintained its financial strength through 2012, ending the year with net debt of $120.1
million or 24% of invested capital. In addition, cash flow from operations, after working capital changes,
for the year was positive $45.4 million.
At December 31, 2012 the Company had unused available credit and cash of $139.1 million.
The Company spent $60.8 million in capital improvements on its mills, logging roads, timber and
intangibles in 2012. These investments will continue to enhance Interfor’s competitiveness productive
capacity. The Company continues to balance production against demand, while maintaining its focus on
margin enhancement and cost containment.
Outlook
Business conditions are expected to continue to improve, albeit slowly. In the U.S. the housing market is
expected to continue to recover, China remains an important market for North American lumber and
further growth is expected. Building activity in Japan is expected to gain momentum in 2013 in
anticipation of a planned increase in the consumption tax and as a result of reconstruction efforts
following the 2011 earthquake and tsunami. Interest rates are forecasted to remain low and the
Canadian dollar is expected to trade at close to parity against the U.S. Dollar.
Interfor’s recently announced acquisition of the three Rayonier mills will add another 360 million board
feet to the Company’s production capacity. While the near term outlook is more positive than it has been
for some years, there are numerous challenges to the global economy that have the potential to
undermine the economic recovery. With this uncertainty in mind, Interfor intends to maintain its
disciplined approach to production, cost control, and inventory management while, at the same time,
remaining alert to opportunities to position the Company for long-term success.
See our Management Discussion and Analysis for the year ended December 31, 2012, 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.
84
Interfor Sawmills - Capacity
(based on two-shift operation)
B.C. Interior:
Adams Lake:
Castlegar:
Grand Forks:
735 MMbf
350 MMbf DFir & SPF Dimension
225 MMbf DFir , Cedar & SPF Dimension
160 MMbf SPF & DFir
B.C. Coast:
Hammond:
Acorn:
325 MMbf
175 MMbf Cedar Specialty
150 MMbf Hem & DFir Japan/Specialty
U.S. Pac. NW:
Beaver:
Port Angeles:
Molalla:
Gilchrist:
650 MMbf
170 MMbf Hem & DFir, Dimension/Timbers
170 MMbf Hem & DFir Studs
180 MMbf DFir & Hem Studs
130 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.
85
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
B.C. Interior
Adams Lake (3)
Castlegar (4)
Grand Forks (4)
U.S. Pacific Northwest
Gilchrist
Molalla
Port Angeles
Beaver (5)
Total
Present
Rated
Capacity (1)
Number
of Shifts
(per day)
Years ended December 31
2012 2011
2010
2009
2008
(millions of board feet)
2
2
2
2
2
2
2
2
2
175
150
350
225
160
130
180
170
170
89
114
352
166
105
102
209
120
94
80
102
353
136
124
104
185
128
52
89
118
339
60
113
90
125
103
73
1,710
1,351
1,264
1,110
80
104
134
—
28
43
110
79
83
661
106
108
48
—
28
56
66
72
14
498
(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
9.0 million board feet for Hammond in 2012.
(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) Beaver was acquired September 30, 2008.
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, commenced a series of projects
to improve productivity and recovery at the mill, at a cost of $2.0 million.
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.
86
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 2007, 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.
The 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.
In 2012, the Company installed a new kiln for $2.9 million and commenced installation of a dust control
system at an estimated cost of $1.2 million.
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 503,000 m3. The mill manufactures kiln dried lumber for
the U.S. and Canadian construction markets as well as the housing market in Japan. Grand Forks cuts
75% SPF and 25% fir-larch. In 2006, the previous owner completed a modernization and upgrade of the
sawmill with a new planer mill 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. Construction started in late 2011
and was substantially completed in 2012, significantly ahead of schedule, with the new line commencing
start-up procedures in December, 2012. Including the expanded scope of enhancements approved in
2012, the Company spent a total of $20.1 million, and a further $4.2 million on an upgrade of the mill’s
log and lumber storage.
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 450,000 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, including the installation of an automated
lumber grading system focused on increasing productivity and value extraction. A total of $4.2 million
was spent on these projects in 2012.
87
U.S. Operations
Gilchrist
The Gilchrist mill is located in Gilchrist, Oregon on approximately 140 acres. 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. In late 2012, approval was given to install a state-of-the-art moulder
with a budget of US$4 million that will allow the mill to compete in the high-end board market, with
construction to start in 2013.
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.
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 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, including the construction of two dry
kilns and a planermill complex with grade optimization.
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.
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:
88
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
2012
Years ended December 311
2010
2011
(thousands of dollars)
2009
2008
$ 84,760
$ 64,412
$ 70,247
$ 40,886
$ 45,996
319,365
87,609
73,886
31,353
34,265
631,238
113,902
69,376
222,524
78,423
102,453
30,995
39,560
538,367
108,413
68,355
213,166
137,927
137,985
65,314
61,384
40,437
29,636
48,726
16,305
34,369
12,765
480,184
290,978
79,763
56,217
60,443
34,349
35,766
3,251
61,554
11,473
296,025
103,620
30,610
34,680
$849,196
43,110
$758,245
7,655
$623,819
6,356
$392,126
5,557
$435,812
1
The Company uses forward foreign exchange contracts which are designated as held for trading and are carried on the
Statement of Financial Position at fair value. Previously changes in fair value were recorded as an adjustment to Sales in Net
earnings. Effective January 1, 2012, the Company changed its accounting policy to align with the presentation adopted by
companies in its peer group and changes in fair value are now recorded in Other foreign exchange gain (loss) in Net earnings.
The policy has been applied on a retrospective basis and comparative information has been restated.
Lumber Sales
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:
Export, and North America. 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 recently opened an office in China. 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.
89
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 spruce, pine, fir, Douglas-
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
2013
Years ended December 31
2010 2009
2011
2012
90
2008
Allowable Annual Cut (1)
— Forest Licences
— Non Replaceable Forest Licences
— Tree Farm Licences
— Discretionary Annual Harvest Levels (2)
(thousands of cubic metres)
2,684
2,684
2,701
2,426
2,418
2,084
286
801
40
286
801
40
220
801
40
313
854
40
313
867
40
375
196
40
3,811
3,811
3,762
3,633
3,638
2,695
Log Production
— Coast
— Interior
Total Log Production
Log Purchases
Log Sales
1,526
1,770
3,296
1,757
1,651
3,408
1,522
1,139
1,081
1,754
214
127
2,661
1,295
1,881
1,156
1,133
1,349
795
448
1,352
1,356
1,081
919
1,319
(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 weighted to western hemlock with lesser volumes of
Douglas-fir and sitka spruce. In Molalla, Douglas-fir is the prominent species 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 is
harvested from second growth forests and the thinning of young stands from surrounding National
Forests. This volume is supplemented with purchases from industrial and non industrial private land.
The total 2013 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 2013
31%
62
7
100%
91
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).
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 Interior woodlands operations are located at Adams Lake, northeast of Kamloops, and
in the Kootenay region at Nakusp and Grand Forks. Woodlands harvesting activities are performed
entirely by independent logging contractors.
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, 2012, 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:
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
2012
—
—
—
—
Years ended December 31
2011
2010
2009
(thousands of dollars)
—
—
—
—
—
—
—
—
—
—
—
—
$39,688
231
20,892
60,811
$15,487
738
19,987
36,212
$10,720
169
31,398
42,287
$20,752
29
6,811
27,592
2008
$52,885
—
40,148
$93,033
$72,911
1,365
17,512
91,788
Total
$60,811
$36,212
$42,287
$27,592
$184,821
Our capital expenditures over the five years ended December 31, 2012 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.
92
HUMAN RESOURCES
In B.C., we directly employ approximately 980 people in our logging and manufacturing operations and
corporate offices. The United Steel Workers (“USW”) is the certified bargaining agent for
approximately 490 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 24 employees, and their collective agreement expires September 30,
2014.
In the U.S., we employ approximately 565 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 Corporate Policy Manual, including an Anti-Bribery and Anti-Corruption
Policy, Brand Use Policy, Code of Conduct, Compensation Policy, Disclosure Policy, Environment Policy,
Financial Reporting Policy, Harassment Policy, Health and Safety Policy, Information Technology Use
Policy, Insider Trading Policy, Social Media Policy and Whistleblower Policy. The Code of Conduct may be
found on SEDAR at www.sedar.com. The Environment and Health 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:
People are the foundation of our company.
Safety:
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
93
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 2012 were
comparable to 2011. Our Medical Incident Rate increased to 3.4 from 3.3 and our Lost Time Accident
frequency increased to 1.1 from 1.0 when compared to 2011.
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.
94
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.
95
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
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 2012 Interfor planted 10.6 million trees in B.C.
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, 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 audits found
that both the coast and interior operations were in full compliance with the SFI requirements. There were
no new non-conformances identified. In addition several ‘Good Practices’ and ‘New Opportunities for
Improvement’ pertaining to planning and operational activities were noted in both the Coastal and
Interior audits. 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, 2012 the certificate has been temporarily suspended pending resolution of
a Corrective Action Request item related to public participation.
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 the Ministry of Forests and Natural Resource Operations
Compliance and Enforcement Program in 2012.
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 2012 JSP focused considerable energy on
negotiations regarding how best to attain full implementation of EBM by March 2014.
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
preparation process. It is our desire to establish a working relationship with each of the FN groups where
we operate.
96
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 B.C. interior The greatest impact has been in the central interior region 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.
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 2012 a Management Review 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.
Mill Audits
Environmental compliance audits are carried out annually at each mill. In 2012 these audits were
completed by independent environmental consultants at 10 mill sites.
Regulatory Compliance
Interfor monitors its compliance with all applicable permits and environmental legislation. As at
December 31, 2012 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
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. All of the Company’s mills are in compliance with GHG emission regulations.
Energy Efficiency
Interfor performs various energy system audits at its mill sites to improve energy efficiency and to
compare alternative power systems. In 2012, the audits resulted in system improvements being made at
the Castlegar and Hammond mills. Further analysis on boiler use and different fuel sources were done
for our U.S. mills.
97
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 of 16,000 tonnes of carbon emissions. In 2012 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.
In 2012, Interfor produced a new “Responsibility Report” that describes the Company’s approach to
operating safe and sustainable operations. The report is available on our website.
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.
In 2012 Interfor commissioned more detailed environmental ground water sampling of the land fill. The
results from these tests were favourable, which resulted in the accrual amount being reduced to $0.6
million to cover any future environmental cleanup costs.
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.
98
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 on a poll
for each share held 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.
99
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.
the Controlling Shareholder Group or a Qualified Purchaser ceases to beneficially own more than 50%
of the issued and outstanding Multiple Voting Shares; or
b. 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 2012 (January 1, 2012 through December 31,
2012).
100
Month
January
February
March
April
May
June
July
August
September
October
November
December
Toronto Stock Exchange (TSX)
2012 Trading Volumes
Ticker: IFP.A
$ High
$ Low
4.89
4.78
5.55
4.89
4.83
5.10
5.30
5.90
6.04
6.50
7.36
8.72
4.26
4.26
4.60
4.39
4.28
4.50
4.88
5.10
5.57
5.86
6.23
7.10
Volume
1,714,239
3,007,331
1,237,983
862,471
1,924,082
1,901,252
1,395,947
788,809
1,750,198
2,517,912
3,144,086
8,536,755
TRANSFER AGENTS
The transfer agent for our Subordinate Voting Shares is Computershare Investor Services Inc. at its
principal offices in Vancouver, British Columbia.
101
DIRECTORS AND OFFICERS
Directors as of February 14, 2013
The following table sets out the Company’s directors as of February 14, 2013, 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
Director Since
Principal Occupations
From
To
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
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
ANDREW K. MITTAG
October 2012
E. LAWRENCE SAUDER
Vancouver, BC, Canada
April 1984
Senior Vice President, Agrium Inc. and President,
Agrium Advanced Technologies, a major retail
supplier of agricultural products and services, a
global wholesale producer and marketer of major
agricultural nutrients and industrial products
Chief Executive Officer
Sauder Industries Limited, a manufacturer and
distributor of building products
Chairman
Sauder Industries Limited
Chairman
Hardwoods Distribution Inc.
JOHN P. SULLIVAN
Vancouver, BC, Canada
May 2001
Corporate Director
L. SCOTT THOMSON
October 2012
Vice President
International Forest Products Limited
Executive Vice-President, Finance and Chief Financial
Officer, Talisman Energy Inc., a global upstream oil
and gas company
2005
Present
2010
Present
2007
Present
2008
Present
2003
Present
2001
2003
2008
Present
Executive Vice-President, Corporate Development
and Planning, Bell Canada Enterprises, Inc. and Bell
Canada
2006
2008
DOUGLAS W.G. WHITEHEAD
North Vancouver, BC, Canada
April 2007
Corporate Director
President and Chief Executive Officer
Finning International Inc., a distributor of Caterpillar
products and support services
102
2008
Present
2000
2008
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 10, 2013.
Committees of the Board
The Company currently has four Committees of the Board:
Audit Committee
Corporate Governance & Nominating Committee
Management Resources & Compensation Committee
Environment & Safety Committee
The members of each Committee are indicated below.
Audit
Committee
Management
Resources &
Compensation
Committee
Corporate
Governance &
Nominating
Committee
Environment
& Safety
Committee
Duncan K. Davies
Harold C. Kalke
Peter M. Lynch
Gordon H. MacDougall
James E. McMillan
Andrew K. Mittag
E. Lawrence Sauder
John P. Sullivan
L. Scott Thomson
X
X
X
x
X
Chair
X
X
X
X
Chair
X
X
X
Chair
X
Douglas W.G. Whitehead
Chair
X
Officers as of February 14, 2013
The following table sets out the Company’s officers as of February 14, 2013, their respective
municipalities of residence and their principal occupations for at least the last five years:
103
Name and
Municipality of Residence
Positions Held
DUNCAN K. DAVIES
Vancouver, BC, Canada
President & Chief Executive Officer
International Forest Products Limited
JOHN A. HORNING
West Vancouver, BC, Canada
Senior Vice President & 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 & Chief Forester
International Forest Products Limited
J. STEVEN HOFER
Bellingham, Washington, USA
Vice President, Sales & Marketing
International Forest Products Limited
General Manager, Sales & Marketing
Interfor U.S. Inc. (formerly Interfor Pacific Inc.)
MARILYN LOEWEN MAURITZ
Vancouver, BC, Canada
General Counsel & Corporate Secretary
International Forest Products Limited
General Counsel
International Forest Products Limited
MARK STOCK
North Vancouver, BC, Canada
Vice President, Human Resources
International Forest Products Limited
Vice President, Global Human Resources
Tree Island Industries Ltd.
From
To
2000
Present
2002
Present
2011
Present
2000
2011
2002
Present
2011
Present
2004
2011
2012
Present
2007
Present
2012
Present
2007
2012
SHAREHOLDINGS OF DIRECTORS AND OFFICERS
As at December 31, 2012, the directors and officers of the Company as a group owned, directly or
indirectly, or exercised control of or direction over 2,742,457 Subordinate Voting Shares representing
approximately 5.0% of the outstanding Subordinate Voting Shares and 1,011,895 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.
104
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.
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.
the integrity of the Company’s financial statements,
b. the financial reporting process,
c.
the systems of internal accounting and financial controls,
d. the professional qualifications and independence of the external auditors,
e.
the performance of the external auditors, risk management processes,
f.
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 2012 in conjunction with regularly scheduled Board meetings.
Composition of the Audit Committee
The Committee consists of 5 directors: Douglas W.G. Whitehead (Chair), Harold C. Kalke, Peter M.
Lynch, John P. Sullivan and L. Scott Thomson. 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. Douglas W.G. Whitehead (Chairman of the Audit Committee)
Mr. Whitehead is a Corporate Director. From 2000 to 2008, he was the President and Chief Executive
Officer of Finning International Inc. (“Finning”), a distributor of Caterpillar products and support services.
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
Chairman and director of Finning and a director of Belkorp Industries Inc., Inmet Mining Corporation and
KAL Tire. He is also a member of the Board of Directors of the Vancouver General Hospital and the
University of British Columbia Hospital Foundation.
105
Mr. Whitehead holds a Bachelor of Applied Sciences (Civil Engineering) from the University of British
Columbia and a Master of Business Administration from the University of Western Ontario.
Mr. Whitehead has served on the Committee since April 2009 and chaired the Committee since May 2012.
Mr. Harold C. Kalke
Mr. Kalke is the founder and President of Kalico Developments Ltd., a real estate development and
management company, since 1971. He has founded and operated several other companies in the real
estate development business and oil and gas sector. Mr. Kalke is a past Chairman of the Board of
Governors of the University of British Columbia.
Mr. Kalke holds a Bachelor of Science (Engineering) and a Masters of Business of Administration from the
University of Western Ontario.
Mr. Kalke has served on the Committee since April 2012.
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 Bachelor of Laws 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. John P. Sullivan
Mr. Sullivan is a Corporate Director. From 2001 to 2003, he was Vice President of the Company. He
joined the Company following the acquisition of Primex Forest Products Ltd. (“Primex”), where he was
Vice President, Corporate Development from 1987 to 2001. Prior to 1987, he held various management
positions at Primex. Over the past years, he has served on many boards including Primex, as well as
several federal crown and private companies.
Mr. Sullivan has served on the Committee since April 2012.
Mr. L. Scott Thomson
Mr. Thomson is currently Executive Vice-President, Finance and Chief Financial Officer of Talisman Energy
Inc., where he is responsible for finance, mergers and acquisitions, tax, treasury, investor relations,
information technology, marketing and planning and is a key advisor on Talisman’s current strategic
direction. Previously, he was Executive Vice President, Corporate Development and Planning, and Vice
President, Head of Mergers and Acquisitions at Bell Canada Enterprises Inc.
Mr. Thomson holds a Bachelor of Arts (Economics and Political Science) from Queen’s University and a
Masters of Business Administration (Finance and Accounting) from the University of Chicago.
Mr. Thomson has served on the Committee since November 2012.
106
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, 2012 and
December 31, 2011 were as follows:
Audit fees
Fees billed for professional services rendered by KPMG
Audit-related fees
Audit-related fees consist principally of fees for professional services rendered with respect
to audits of a defined benefit pension plan, subsidiary companies, and consultation related
to accounting issues.
Tax fees
Tax fees consist of fees for tax compliance services, professional services related to U.S.
cross border transfer pricing and sales tax and tax credit contingency fees which are based
on percentage of recoveries
Other fees
Advice regarding the application of International Financial Reporting Standards and
certifications (2011); assistance with defining business requirements for a new ERP system
selection, a related process re-design and certifications (2012)
TOTAL
CODE OF ETHICS
2012
2011
$423,000
$588,987
62,500
43,000
52,837
154,015
174,800
64,400
$713,137
$850,402
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, 2012.
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
General Counsel & 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.
107
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.
108
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.
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.
12.
Establish the mandate of the Auditor, including the annual engagement, audit plan, audit scope
and compensation for the audit services, subject to shareholder approval.
13.
Oversee the activities of the Auditor. The Auditor shall report directly to the Audit Committee.
14.
15.
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.
16.
Review the performance of the Auditor, including the relationship between the Auditor and
Management and the evaluation of the lead partner of the Auditor.
17.
Resolve disagreements between Management and the Auditor regarding financial reporting.
18.
Review material written communications between the Auditor and Management.
109
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.
110
GLOSSARY
“Adjusted EBITDA” EBITDA less other income, other income of associate company and long-term incentive
compensation expense.
“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.
“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.
DIRECTORS
D.W.G. Whitehead (Lead Director)
North Vancouver, 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
A.K. Mittag
Calgary, AB
111
OFFICERS
E.L. Sauder
Chairman
D.K. Davies
President & Chief Executive Officer
J.A. Horning
Senior Vice President & Chief Financial Officer
J.S. Hofer
Vice President, Sales & Marketing
M.W. Stock
Vice President, Human Resources
O.F. Schulte
Vice President, Coastal Operations
R.J. Slaco
Vice President & Chief Forester
E.L. Sauder (Chairman of the Board)
M.S. Loewen Mauritz
Vancouver, BC
J.P. Sullivan
Vancouver, BC
L. Scott Thomson
Calgary, AB
General Counsel & Corporate Secretary
112
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
EXPORT - 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: (604) 422-3251
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 DIVISION
(Sawmill)
Tel: (604) 465-5401
Fax: (604) 422-3221
20580 Maple Crescent
Maple Ridge, BC, Canada V2X 1B1