2013
Annual Report
CONTENTS
Financial Highlights
2013 Message to Shareholders
Management’s Discussion and Analysis dated February 13, 2014
Consolidated Financial Statements
Annual Information Form dated February 13, 2014
pg
3
4
8
29
78
FINANCIAL HIGHLIGHTS
(in millions of dollars, except share and per share amounts)
3
Financial Summary
Sales
Adjusted EBITDA (1)
Net earnings (loss)
Per Share Data
Net earnings (loss) per common share
- basic and diluted
Price range per share
High
Low
Net book value per share
Operating 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)
2013
2012
Re-stated (2)
1,105.2
134.0
42.2
849.2
59.9
(9.5)
0.73
13.92
7.82
8.17
2.14
57.7
824.1
145.5
515.1
655.9
(0.17)
8.72
4.26
6.73
0.83
55.9
632.0
135.0
376.0
496.1
Financial Ratios (%)
Net debt as a % of invested capital, adjusted (1)
Pre-tax return on total assets (1)
21.5%
5.3%
24.2%
(1.4%)
Notes:
(1) See Glossary on page 103 for definition.
(2) See Note 4 of Notes to Consolidated Financial Statements for description of restatement.
“2013 was a year of significant progress for Interfor. Better business
conditions along with the gains from strategic decisions taken in recent years
resulted in the best year for the Company since 2006.”
Message to Shareholders – February 2014
For further highlights, please see the 2013 Message to Shareholders and
Management’s Discussion and Analysis on the following pages.
4
OVERVIEW
2013 MESSAGE TO SHAREHOLDERS
2013 was a year of significant progress for Interfor. Better business conditions along with
the gains from strategic decisions taken in recent years resulted in the best year for the
Company since 2006.
Highlights for the year included:
• Record production and sales volumes;
• Significantly improved earnings;
• Excellent start-up and results from Grand Forks rebuild;
• Growth in the U.S. Southeast;
• Additional timber acquired in the B.C. Interior;
• Successful equity and fixed rate debt issues; and
• Elimination of dual class share structure.
Subsequent to the end of the year, Interfor announced it had reached agreement to acquire
Tolleson Lumber Company in the U.S. Southeast, adding to the platform established in that
region in 2013. The Tolleson transaction, when completed, will increase Interfor’s total
production capacity to more than 2.6 billion board feet, placing the Company in the top five
lumber producers in North America. More important, it will set the stage for increased
profitability and additional growth in the years ahead.
I invite you to review the material covered in the next few pages and later in this report and
to form your own views on our progress. Please feel free to forward any comments you
have to me directly at duncan.davies@interfor.com.
RECORD PRODUCTION AND SALES VOLUMES AND HIGHER PRICES
CONTRIBUTE TO IMPROVED RESULTS
Interfor continued to ramp up production and sales activity in 2013.
For the year, lumber production was up 28% to 1.73 billion board feet from 1.35 billion
board feet in 2012, with the Company’s operations in B.C. and the U.S. Pacific Northwest
accounting for 84% of total production and the mills acquired during the year in the U.S.
Southeast accounting for the balance.
Sales volumes, including agency and wholesale activities, were up from 1.43 billion board
feet in 2012 to 1.76 billion board feet last year.
Product prices followed a pattern similar to that experienced in 2012 with strong prices in
the first quarter of the year followed by a fairly significant correction in the second quarter
as demand in both the domestic and export markets waned. Prices reached their low point
for the year in June before recovering slowly, regaining a degree of momentum in the fourth
quarter as activity levels in North America improved and offshore markets resumed buying.
For the year, the Random Lengths Composite Index, which measures pricing levels for a
basket of products, increased from US$322 in 2012 to US$384 in 2013.
In financial terms, the benefits of increased production and sales volumes and higher prices
had a positive impact on Interfor’s financial results in 2013.
For the first time in the Company’s history, sales revenue exceeded $1 billion, coming in
slightly above $1.1 billion for the year, compared with $849 million in 2012.
Message to Shareholders
____________________
5
Net earnings amounted to $42.2 million or $0.73 per share in 2013 versus a loss of $9.5
million or $0.17 per share in 2012.
EBITDA reported before one-time items and share-based compensation expense totaled
$134.0 million versus $59.9 million a year earlier.
STRATEGIC INITIATIVES MAKE IMPORTANT CONTRIBUTIONS
Interfor has invested actively in recent years to enhance the Company’s strategic position
and to improve profitability. The gains from these investments were clearly evident in
2013.
The Adams Lake sawmill, which was rebuilt at a cost of $99.7 million during the 2007-09
period, ran exceptionally well and delivered strong returns in 2013.
The Grand Forks sawmill, which was acquired in 2008 and rebuilt in 2012 at a cost of $28.7
million, commenced start-up in December 2012, hit full stride early in the year and
delivered impressive results in 2013.
And, in 2013, Interfor invested for the first time in the U.S. Southeast with the acquisitions
of Rayonier’s Wood Products Business in March and the sawmilling assets of Keadle Lumber
Enterprises in July.
These acquisitions involved a total of four sawmills located in south central Georgia with an
effective production capacity at the time of purchase of 330 million board feet. Once certain
capital upgrades have been completed, the combined annual production capacity of the four
mills will be 535 million board feet.
The acquisitions were financed from Interfor’s credit lines and made an immediate and
significant contribution to our results during the year.
Equally important, the acquisitions established a foothold for Interfor in the U.S. Southeast,
a market we had been looking to enter for many years, and where we believe more
opportunities for growth exist.
Interfor was active on the acquisition front in Canada during 2013 as well.
In May, we acquired two timber tenures in the southern B.C. Interior representing an
allowable annual harvest volume of 174,000m3. Once these licences have been integrated
into our operations, the incremental supply will support additional operating hours and
production at our sawmill at Castlegar.
Similar to the Rayonier and Keadle acquisitions, the B.C. tenure acquisition was financed
from our established credit lines.
TOLLESON ACQUISITION ANNOUNCED
Shortly after year-end, Interfor announced agreement to acquire Tolleson Lumber Company
of Perry, Georgia from Ilim Timber Continental, S.A. for total consideration of US$129.9
million plus 3.68 million Class A Subordinate Voting Shares.
The Tolleson mills will add more than 400 million board feet of production to Interfor’s
existing platform in Georgia and further establish the Company’s presence in the U.S.
Southeast.
The transaction is scheduled to close in mid-March.
Message to Shareholders
____________________
6
EQUITY AND FIXED RATE DEBT ISSUES SOLIDIFY INTERFOR’S BALANCE
SHEET; CREDIT LINE EXPANDS
In August, Interfor took advantage of a strong equity market by agreeing to a bought deal
equity issue with a group of Canadian underwriters. The transaction, which closed in
September, resulted in the issuance of 7.2 million Class A Subordinate Voting Shares at a
price of $12 per share. After accounting for issue costs, Interfor received $82.4 million in
net proceeds from the transaction.
At year-end, Interfor had net debt outstanding of $140.8 million compared with $120.1
million at the end of 2012, representing a ratio of net debt to invested capital of 21.5%
versus 24.2% a year earlier.
Managing the risks associated with the Company’s balance sheet has been a hallmark of
Interfor’s management philosophy for many years, and 2013 was no exception.
In order to reduce the risks associated with rising interest rates and to position the
Company to pursue its growth agenda, Interfor, in June, issued US$50 million in 10 year,
senior secured notes at a fixed rate of 4.33%. The notes are secured on a pari-passu basis
with the Company’s existing credit lines and are subject to a series of modest financial
covenants consistent with those which apply to the credit lines.
On the closing of the Tolleson acquisition the Company’s net debt to invested capital ratio
calculated on a pro forma basis as at year-end 2013 will increase from 21.5% to
approximately 30.5%.
Concurrently, the credit available under the Company’s bank lines will be increased by $60
million, leaving the Company with more than $125 million in available liquidity.
MULTIPLE VOTING SHARES EXCHANGED
In August, Interfor’s controlling shareholder, Sauder Industries Limited, exercised its right
under the Company’s articles to exchange its Class B Common Shares, often referred to as
the Multiple Voting Shares, for Class A Subordinate Voting Shares on a one-for-one basis,
without any cash or non-cash consideration.
The exchange was undertaken for internal planning reasons by the shareholders of Sauder
Industries leaving Interfor, in effect, with one class of common shares.
A motion will be tabled at the Company’s Annual General Meeting in May to eliminate the
Class B Common Shares and to redesignate the Class A Subordinate Voting Shares as
Common Shares.
MANAGEMENT GROUP SOLIDIFIED
During 2013, Interfor took a number of steps to solidify the Company’s senior management
group and to set the stage for further growth.
In February, Marty Juravsky joined Interfor as a Special Advisor in the corporate
development area. Marty has significant experience in the North American investment
banking industry having served with Salomon Brothers and National Bank Financial where
he was involved in a number of forest products related transactions. Since joining Interfor,
Marty has been actively involved in a number of key initiatives, including the Tolleson
acquisition. He was subsequently appointed Vice-President, Corporate Development and
Strategy in December.
Message to Shareholders
____________________
7
In July, Joe Rodgers joined Interfor as Vice-President, U.S. Operations from Temple-Inland
Building Products where he had served for more than 20 years, most recently as Vice-
President, Operations - Solid Wood. Joe has extensive experience in the forestry and
lumber sectors in the U.S. South and has made a strong contribution to Interfor since
coming on board.
Also, in July, Ian Fillinger, who had played an important role in the construction and
operation of Adams Lake and more recently with the Company’s B.C. Coast sawmills, was
appointed Vice-President, Canadian Operations, with responsibility for all woodlands and
manufacturing operations in Canada.
With Marty, Joe and Ian joining John Horning, our Chief Financial Officer, Steven Hofer, our
Vice-President, Sales & Marketing and Mark Stock, our Vice-President, Human Resources,
Interfor is well-positioned at the senior executive level to meet the challenges and
opportunities we expect in the years ahead.
NEW NAME TO BE ADOPTED
At the Annual General Meeting in May, a proposal will be placed before shareholders to
change the formal name of the Company to Interfor Corporation from International Forest
Products Limited.
The name change will result in a direct link with the Company’s traditional trade name, i.e.
“Interfor”, and will build on the successful branding efforts undertaken in recent years using
the Interfor name and logo. It will also be consistent with the formal names of our U.S.
subsidiaries which now account for more than 50 per cent of our production.
The name “Interfor” has been trademarked for exclusive use of the Company in the world’s
major lumber markets.
BUSINESS OUTLOOK IMPROVING; VISION REMAINS INTACT
Positive signs continue to emerge in the U.S. and offshore laying the foundation for better
market conditions in 2014 and beyond.
And, with the progress we’ve made in recent years, Interfor is well-positioned to take
advantage of the improving market environment.
That said, we can’t afford to become complacent.
Our business strategy is based on two tenets: growth by acquisition and operational
excellence, and we have room for further progress in each area.
I remain convinced we are on track to build significant value for our shareholders and other
stakeholders.
Thank you for your continued support.
Duncan Davies
President & CEO
February 2014
8
MANAGEMENT’S DISCUSSION AND ANALYSIS
Prepared as of February 13, 2014
This Management’s Discussion and Analysis (“MD&A”) provides a review of financial
condition and results of operations as at and for the year ended December 31, 2013. It
should be read in conjunction with the 2013 annual audited consolidated financial
statements of International Forest Products Limited (“Interfor” or the “Company”) that are
prepared in accordance with International Financial Reporting Standards (“IFRS”). This
MD&A contains certain non-GAAP measures which, within the Non-GAAP Measures section,
are discussed, defined and reconciled to figures reported in the Company’s consolidated
financial statements.
All financial figures are stated in Canadian dollars, unless otherwise noted, and references
to US$ and ¥ are to United States dollars and Japanese Yen, respectively. For definitions of
technical terms and abbreviations used within this MD&A, refer to the Glossary in our 2013
Annual Report.
FORWARD LOOKING INFORMATION
This MD&A contains forward-looking 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 under the headings “Overview of 2013”, “Business
Outlook”, “Summary of 2013 Annual Financial Performance”, “Liquidity”, “Off-Balance Sheet
Arrangements”, “Financial Instruments and Other Instruments”, “Accounting Policy
Changes” and “Risks and Uncertainties”. These forward-looking statements reflect
management’s current expectations and beliefs and are based on certain assumptions
including those related to general business and economic conditions in Canada, the U.S.,
Japan and China, and 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, if any. 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 under the
heading “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 circumstances, except as required by law.
OVERVIEW OF 2013
Interfor capitalized on the improving market environment by increasing operating rates to
achieve record lumber production and sales in 2013. The Company generated sales of
$1.1 billion, net earnings of $42.2 million or $0.73 per share, and Adjusted EBITDA of
$134.0 million. The combination of higher prices, increased volumes and contribution from
four sawmills acquired during the period resulted in significantly enhanced financial results
relative to 2012.
With a focus on improving competitiveness and production capacity, the Company invested
$188.7 million in sawmill acquisitions and capital improvements, logging roads, timber and
intangibles in 2013. The Company continues to balance production against demand, while
maintaining its focus on margin enhancement and cost containment.
Management’s Discussion and Analysis
9
____________________
Investments and Equity Financing
On March 1, 2013, Interfor completed the acquisition of Rayonier Inc.’s Wood Products
Business in Georgia, U.S., adding three sawmills with a combined annual capacity of 360
million board feet to its operations, and broadening its product mix to include Southern
Yellow Pine. On July 1, 2013, a fourth sawmill, also located in Georgia, was acquired from
Keadle Lumber Enterprises, Inc. Following an upgrade of this sawmill’s drying capacity, it
will have an annual capacity in excess of 160 million board feet on a two-shift basis, and
increase the Company’s annual production capacity to more than 2.2 billion board feet.
These new operations in Georgia (“U.S. Southeast”) were immediately accretive to net
earnings.
On May 1, 2013, the Company also acquired two timber tenures in the Kootenay Region of
B.C. from Springer Creek Management Ltd. The tenures have a combined Allowable Annual
Cut (“AAC”) of approximately 174,000 cubic metres and will support increased production
levels at the Castlegar sawmill.
On August 23, 2013, the Company’s controlling shareholder, Sauder Industries Limited
(“SIL”), exercised its right under the Company’s Articles to exchange its Class B Common
Shares for Class A Subordinate Voting Shares on a share for share basis without any cash or
non-cash consideration. As a result, all remaining Class B Shares were automatically
converted to Class A Shares.
On September 30, 2013, the Company closed a public offering of 7,187,500 Class A
Subordinate Voting Shares at a price of $12.00 per share for net proceeds of $82.4 million,
which were used to fund capital upgrades and reduce long term debt. The offering included
the exercise, in full, of the overallotment option by the underwriters totaling 937,500
shares.
Proposed Acquisition of Tolleson Lumber Company
On February 8, 2014, the Company entered into a share purchase agreement (the
“Purchase Agreement”) with Ilim Timber Continental, S.A. to acquire all of the outstanding
common shares of Tolleson Ilim Lumber Company for consideration comprised of US$129.9
million in cash and retained liabilities, and 3,680,000 common shares of the Company. The
Tolleson operations include two sawmills in Perry and Preston, Georgia, with a combined
annual lumber production capacity of more than 400 million board feet plus a
remanufacturing facility in Perry, Georgia. This acquisition is consistent with Interfor’s
strategy of adding capacity in attractive regional markets and will bring Interfor’s annual
capacity to more than 2.6 billion board feet.
This acquisition remains subject to various closing conditions, including regulatory approval,
and is anticipated to close in the first quarter of 2014. The acquisition will be financed in
part from Interfor’s existing credit facilities, to be amended as described below, and is
expected to be accretive to net earnings immediately.
In conjunction with the Purchase Agreement, the Company has secured commitments from
its lenders to increase the credit available under its Revolving Term Line from $200 million
to $250 million, without change to other terms and conditions.
Markets and Pricing
North American lumber markets continued to improve in 2013, reflecting higher housing
starts and home prices in the U.S. Activity levels in Japan improved slightly over 2012,
while lumber shipments to China rebounded from a decline in 2012. North American
suppliers gained price leverage in offshore markets as domestic buyers consumed larger
Management’s Discussion and Analysis
10
____________________
volumes, thus tightening supplies available for export. The net result was higher product
prices for 2013, on average. The Random Lengths Framing Lumber Composite Price
(“RLCI”) averaged US$384 per thousand board feet (“mfbm”) in 2013, up 19% over 2012.
Building off positive momentum in late 2012, U.S. housing starts and demand for lumber
showed continued improvement throughout the first quarter of 2013. The strength of North
American markets was further bolstered by strong demand in offshore markets and limited
supply, resulting in the strongest pricing environment experienced since the first quarter of
2005.
After peaking in early April 2013, North American commodity lumber prices corrected
sharply in the second quarter, due primarily to oversupply and U.S. construction activity
hampered by unseasonably wet weather. This trend reversed in the third and fourth
quarters, as the supply chain became more balanced with a steady rise in lumber prices
supported by solid demand from both North American and offshore markets. Improved
North American prices allowed Canadian producers to ship lumber to U.S. markets without
an export tax for most of 2013.
Benchmark Commodity Lumber Prices
m
b
f
m
/
$
S
U
500
450
400
350
300
250
200
2
1
-
n
a
J
2
1
-
r
a
M
2
1
-
y
a
M
2
1
-
l
u
J
2
1
-
p
e
S
2
1
-
v
o
N
3
1
-
n
a
J
3
1
-
r
a
M
3
1
-
y
a
M
3
1
-
l
u
J
3
1
-
p
e
S
3
1
-
v
o
N
SYP East 2x4 #2&Btr
HF Stud 2x4 #2&btr
Western SPF 2x4
#2&Btr
Source: Random Lengths Publications, Inc. (“Random Lengths”)
BUSINESS OUTLOOK
Though the U.S. economic recovery remains fragile, expectations are that U.S. housing
starts and lumber prices will continue to improve in 2014. Export tax rates for the first two
months of 2014 have been set at 0% as lumber prices remain above the relevant
benchmark price. Demand in Japan is expected to be stable through the first half of 2014.
Following the implementation of a VAT increase in April 2014, there is potential for a
moderate reduction in demand as consumers adjust to higher housing prices. Demand and
pricing in China are expected to remain stable across all product lines.
Long term interest rates are expected to increase while continued volatility in the value of
the Canadian dollar is anticipated.
Interfor will maintain its disciplined approach to production, cost control, inventory
management and capital spending to help position the Company to deliver above average
returns on invested capital as conditions improve. At the same time, Interfor will remain
alert to opportunities to position itself for long-term success.
Management’s Discussion and Analysis
11
____________________
FINANCIAL AND OPERATING HIGHLIGHTS(1)
For the 3 months
ended December 31,
2012
2013
For the year ended
December 31,
2012
2011
2013
315.3
249.2
41.3
20.0
4.9
13.7
11.4
0.18
31.4
36.2
11.5%
222.4
173.3
24.5
15.9
8.7
(2.4)
(3.8)
(0.07)
13.0
19.3
8.7%
1,105.2
872.3
136.6
72.4
23.9
52.5
42.2
0.73
115.8
134.0
849.2
631.2
113.9
69.4
34.7
(3.1)
(9.5)
(0.17)
50.2
59.9
758.2
538.4
108.4
68.4
43.1
(5.8)
(13.9)
(0.26)
46.7
46.8
12.1%
7.1%
6.2%
824.1
145.5
632.0
135.0
614.8
110.7
5.3% -1.4% -2.0%
21.5% 24.2% 20.4%
Financial Highlights( 2 )
Total sales
Lumber
Logs
Wood chips and other residual products
Ocean freight and other
Operating earnings (loss)
Net earnings (loss)
Unit
$mm
$mm
$mm
$mm
$mm
$mm
$mm
Net earnings (loss) per share, basic and diluted $/share
EBITDA(3)
Adjusted EBITDA(3)
Adjusted EBITDA margin(3)
$mm
$mm
%
$mm
$mm
%
%
Total assets
Total long-term debt
Pre-tax return on total assets(3)
Net debt to invested capital(3)
Operating Highlights
Lumber production
Lumber sales
Lumber - average selling price(4)
Log production(5)
Log sales(5)
Logs - average selling price(5)
Notes:
million fbm
million fbm
$/thousand fbm
thousand cubic metres
thousand cubic metres
$/cubic metre
470
500
498
965
397
92
347
384
452
748
267
76
1,725
1,761
495
3,598
1,339
88
1,351
1,432
441
3,296
1,352
72
1,264
1,301
414
3,408
1,356
72
(1) Figures in this table may not add due to rounding.
(2) Financial information presented for the annual periods in this MD&A is based on the Company’s
audited financial statements as at and for the years ended December 31, 2013, 2012 and 2011,
prepared in accordance with IFRS. Financial information presented for quarterly periods in this
MD&A is prepared in accordance with IFRS but is unaudited.
(3) Refer to the Non-GAAP Measures section of this MD&A for definitions and reconciliations of these
measures to figures reported in the Company’s consolidated financial statements.
(4) Gross sales before export taxes.
(5) For B.C. operations.
Management’s Discussion and Analysis
12
____________________
SUMMARY OF 2013 ANNUAL FINANCIAL PERFORMANCE
Sales
The Company realized $1.1 billion of total sales, up 30% from $849 million in 2012, driven
by the sale of nearly 1.8 billion board feet of lumber at an average price of $495 per mfbm.
Lumber sales volume and average selling price increased 23% and 12%, respectively, over
2012.
Higher North American pricing, supplemented by higher realizations in China and Japan and
a weaker Canadian dollar, contributed to a $55 per mfbm average selling price improvement
from 2012.
The 329 million board feet increase in lumber shipments from 2012 primarily reflects the
addition of four U.S. Southeast sawmills, which contributed sales of 247 million board feet,
and increased production from the B.C. Interior and U.S. Pacific Northwest operations.
Lumber shipments to China increased by 18%, as 2012 was affected by an oversupply in
late 2011 and interest rate increases by the Chinese government. China remained a
significant market for the Company, accounting for 17% of total lumber sales volume in
2013 (2012 - 17%). Lumber shipments to Japan improved marginally over 2012 levels.
Log sales of $136.6 million represents an increase of $22.7 million, or 20%, compared to
2012. A slight decline in sales volume from our B.C. operations was more than offset by a
22% increase in average selling price to $88 per cubic meter, reflecting improved lumber
markets and a shift in mix to offshore markets.
Wood chips and other residual products revenue increased 4% from 2012 to $72.4 million,
due mostly to higher volumes from increased sawmill production.
Ocean freight and other revenues decreased by $10.8 million from 2012 to $23.9 million,
due mainly to lower ocean freight resulting from decreased break bulk volumes.
Operations
Production costs increased by 24% or $181.1 million over 2012, attributable primarily to the
23% increase in lumber shipments.
The $7.3 million decrease in export taxes from 2012 was due to higher commodity lumber
prices, which resulted in the export tax rate under the Softwood Lumber Agreement (“SLA”)
averaging 2% of lumber sales from Canada to the U.S., compared to 11% in 2012.
Increased operating rates in the U.S. Pacific Northwest sawmills, a higher depreciation base
for the rebuilt Grand Forks sawmill, and the inclusion of depreciation for the four acquired
U.S. Southeast sawmills resulted in a $10.5 million increase in depreciation of plant and
equipment as compared to 2012.
Corporate and Other
Long term incentive compensation (“LTIC”) expense increased by 87% over 2012 to
$18.8 million, reflecting changes in the estimated fair value of the share-based
compensation plans. A 68% increase in the Company’s share price during the year had the
greatest impact on this expense.
Business development costs, including transaction and integration costs related to the
acquisition of the four U.S. Southeast sawmills, and larger infrastructure to support the
Company’s growth contributed to the $8.1 million increase in selling and administration
costs over 2012.
Management’s Discussion and Analysis
13
____________________
Income Taxes
The Company recorded income tax expense of $0.6 million and decreased its unrecognized
deferred tax assets by $12.7 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 assets
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 $276 million (2012 - $292 million) expire between 2023 and 2032, and
are available to reduce future taxable income. The overall effective tax rate is significantly
different from the Canadian statutory rate of 25.75% (2012 - 25%) due mainly to the
decrease in unrecognized deferred tax assets of $12.7 million (2012 – increase of $2.4
million).
Net Earnings
The Company recorded net earnings of $42.2 million or $0.73 per share, compared to a net
loss of $9.5 million or $0.17 per share in 2012. The improved performance was primarily
the result of the addition of the four sawmills in the U.S. Southeast, increased lumber
prices, record shipment volumes and lower export tax rates, offset partly by the cost of
additional infrastructure required to support growth and the increase in LTIC expense.
SUMMARY OF FOURTH QUARTER 2013 FINANCIAL PERFORMANCE
Sales
The Company achieved $315.3 million of total sales in the fourth quarter of 2013, an
improvement of $92.9 million over the same quarter of 2012. The majority of this
improvement, amounting to $75.8 million, was driven by higher lumber sales.
Lumber shipments improved 30% over 2012 to reach a record level of 500 million board
feet for the quarter. Sales volumes benefited from the four acquired U.S. Southeast
sawmills and stronger domestic demand driven by improved U.S. housing starts, which
increased 18% from 2012 to 923,000 units in 2013. Lumber sales averaged $498 per
mfbm in the quarter, 10% higher than the same period of 2012. Higher North American
pricing, supplemented by higher realizations in China and Japan and a weaker Canadian
dollar were factors in this improvement.
Log sales revenue was $41.3 million in the quarter, up 68% from the comparable quarter of
2012. B.C. log sales volumes increased 130,000 cubic metres, or 49%, from the fourth
quarter of 2012 due mainly to tight supply at the end of 2012 and increased logging rates in
2013. On the B.C. Coast, where the majority of Interfor’s log sales are transacted, the price
per cubic meter improved 18% as compared to the fourth quarter of 2012. This
improvement reflects higher average overall log sales prices and a shift in mix to offshore
markets.
Higher chip and residuals volumes from the addition of the four U.S. Southeast mills were
partially offset by lower overall chip prices, which resulted in an increase of $4.1 million in
wood chip and other residuals revenues for the quarter, as compared to the same period of
2012.
Management’s Discussion and Analysis
14
____________________
Operations
Production costs increased by 38% or $75.3 million as compared to the same period in
2012, driven mostly by the 30% increase in lumber shipments. The remainder of the cost
increase is explained by higher log and conversion costs. Log costs increased due to higher
logging and stumpage costs in the B.C. Interior, partially offset by the addition of lower log
costs in the U.S. Southeast. Competition for logs from China spurred increased log costs for
some of the Company’s sawmills in the U.S. Pacific Northwest.
Elevated operating rates in the U.S. Pacific Northwest sawmills, a higher depreciation base
for the rebuilt Grand Forks sawmill, and the inclusion of depreciation for the four acquired
U.S. Southeast sawmills increased plant and equipment depreciation expense, as compared
to the fourth quarter of 2012.
Corporate and Other
Business development costs and larger infrastructure required to support the Company’s
growth contributed to increased selling and administration costs over the comparable
quarter of 2012.
Long term incentive compensation expense decreased by $1.0 million over the
corresponding period of 2012, reflecting changes in the estimated fair value of the share-
based compensation plans. The movement in the Company’s share price had the greatest
impact on this expense, as reflected by a 13% increase in the share price during the quarter
versus a 35% increase over the same period of 2012.
Income Taxes
In the fourth quarter of 2013, the Company recorded income tax expense of $0.3 million
(2012 - $0.1 million) and decreased its unrecognized deferred tax assets by $3.7 million
(2012 – increased by $1.0 million) in relation to certain unused tax losses that are available
to be carried forward against future taxable income.
Net Earnings
The Company recorded net earnings of $11.4 million or $0.18 per share, compared to a net
loss of $3.8 million or $0.07 per share in fourth quarter of 2012. The improved
performance was due mainly to the addition of the four sawmills in the U.S. Southeast,
increased lumber prices, increased shipment volumes and lower export tax rates, offset
partly by the cost of additional infrastructure required to support growth.
Management’s Discussion and Analysis
15
____________________
SUMMARY OF QUARTERLY RESULTS(1)
Financial Performance (Unaudited)
Total sales
Lumber
Logs
Wood chips and other residual products
Ocean freight and other
Operating earnings (loss)
Net earnings (loss)
Net earnings (loss) per share, basic and diluted
Unit
$mm
$mm
$mm
$mm
$mm
$mm
$mm
$/share
2013
Q3
Q4
Q2
Q1
Q4
2012
Q3
Q2
Q1
315.3
249.2
41.3
20.0
4.9
13.7
11.4
0.18
272.7
212.2
36.6
18.4
5.4
2.3
(0.1)
0.00
274.7
219.5
32.6
17.4
5.2
19.3
15.8
0.28
242.5
191.4
26.1
16.6
8.4
17.2
15.2
0.27
222.4
173.3
24.5
15.9
8.7
(2.4)
(3.8)
(0.07)
214.7
161.9
26.8
17.5
8.5
2.3
0.9
0.02
225.4
162.4
35.6
17.8
9.6
2.6
0.1
0.00
186.7
133.6
27.0
18.2
7.9
(5.6)
(6.7)
(0.12)
Operating Performance
Lumber production
Lumber sales
Lumber - average selling price(2)
Log production(3)
Log sales(3)
Logs - average selling price(3)
million fbm
million fbm
$/thousand fbm
thousand cubic metres
thousand cubic metres
$/cubic metre
470
500
498
965
397
92
447
446
476
895
353
93
418
433
507
854
301
90
390
383
500
902
289
76
347
384
452
748
267
76
350
366
442
817
345
75
333
363
448
840
379
75
323
320
418
892
361
64
Average US$/CAD$ exchange rate(4)
Closing US$/CAD$ exchange rate(4)
1 US$ in CAD$
1 US$ in CAD$
1.0491 1.0385 1.0233 1.0080
1.0636 1.0303 1.0518 1.0160
0.9914 0.9954 1.0104 1.0010
0.9949 0.9832 1.0181 0.9975
Notes:
(1) Figures in this table may not add due to rounding.
(2) Gross sales before export taxes.
(3) For B.C. operations.
(4) Based on Bank of Canada closing foreign exchange rates.
The Company’s quarterly financial trends are most impacted by seasonality, levels of lumber
production, log costs, market prices for lumber and the US$/CAD$ foreign currency
exchange rate.
Logging operations are seasonal due to a number of factors including weather, ground
conditions and fire season closures. Generally, the Company’s B.C. Coast logging division
experiences 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 dependent on the
availability of logs from our logging operations and our 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.
Steady recoveries in the U.S. housing market helped drive up domestic demand and pricing
through the end of 2012. Building on the positive momentum of 2012, U.S. housing starts
surged, supporting higher lumber prices and positive net earnings in the first quarter of
2013. Mid-way through the second quarter of 2013, supply outstripped demand, and
lumber prices dropped, ending the quarter at levels close to those of early 2012. Late in
the third quarter of 2013, lumber prices rose in response to improved demand from China,
which provided competition for limited supply, and continued a slow increase for the balance
of the year, supported by improving U.S. housing starts.
The three sawmills acquired on March 1, 2013, and one sawmill acquired on July 1, 2013,
contributed to the increased lumber production and sales throughout 2013, and were
accretive to net earnings immediately.
Management’s Discussion and Analysis
16
____________________
The volatility of the Canadian dollar against the U.S. dollar also impacted results, given that
historically over 75% of the Canadian operation’s lumber sales are to the U.S. and export
markets priced in U.S. dollars. A weaker Canadian dollar increases the lumber sales
realizations in Canada, and increases net earnings of U.S. operations when converted to
Canadian dollars.
LIQUIDITY
Balance Sheet
The Company strengthened its financial position throughout 2013, ending the year with
$140.8 million of net debt representing 21.5% of invested capital. Interfor’s strong financial
position benefited from $97.5 million of cash generated from operating activities in 2013.
As at December 31, 2013, the Company had net working capital of $118.2 million
(2012 - $90.1 million), available operating and term lines of $186.4 million
(2012 - $124.8 million) and unrestricted cash of $4.5 million (2012 - $14.3 million).
These resources, in addition to cash generated from operations, will be used to support our
working capital requirements, debt servicing commitments and capital expenditures. The
Company believes that it will have sufficient liquidity to satisfy the funding of operating and
capital requirements for the foreseeable future.
Cash Flow from Operating Activities
The Company generated $123.7 million of cash flow from operations, before changes in
working capital, an increase of 165% over 2012. This improvement was driven mainly by
higher lumber shipments and lumber sales prices, a zero export tax rate for nine months of
2013, and positive contributions from the four newly acquired U.S. Southeast sawmills.
Increased sales volumes, lumber prices, manufacturing unit rates and log costs all
contributed to an operating working capital cash utilization of $26.2 million, as compared to
$1.3 million in 2012.
Total cash generated from operations after changes in working capital was $97.5 million,
increased from $45.4 million for 2012. Throughout 2013, 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.
Cash Flow from Investing Activities
Cash capital expenditures totaled $68.2 million for 2013 (2012 - $60.8 million), with
$14.9 million spent on high-return discretionary projects, $20.3 million on other business
maintenance expenditures, and $33.0 million on road construction and timber licences.
These investments included the installation of a Weinig moulder at the Gilchrist sawmill, and
kiln projects at the Baxley, Swainsboro and Thomaston sawmills.
On March 1, 2013, the Company concluded the acquisition of Rayonier Inc.’s Wood Products
Business in Georgia, U.S., consisting of three manufacturing facilities plus working capital
for $86.6 million.
On May 1, 2013, the company acquired two timber tenures in the Kootenay Region of B.C.
from Springer Creek Management Ltd. The tenures have a combined AAC of approximately
174,000 cubic metres and will support an increase in production at the Castlegar sawmill.
Management’s Discussion and Analysis
17
____________________
On July 1, 2013, the company acquired the Thomaston sawmill from Keadle Lumber
Enterprises, Inc. in Georgia, U.S., including working capital, for $33.8 million. The
Company will pay an additional US$7.0 million contingent upon receipt of an upgrade to the
air permit which would allow the Company to operate a second shift. Receipt of this
approval is expected in the first quarter of 2014, with payment to be made 365 days
thereafter.
Cash Flow from Financing Activities
On September 30, 2013 the Company closed a public offering of 7,187,500 Class A
Subordinate Voting shares at a price of $12.00 per share for proceeds of $82.4 million, net
of $3.9 million in transaction costs. The proceeds were used to fund completion of capital
projects and reduce debt. No shares were issued in 2012.
During 2013, the Company funded its U.S. Southeast acquisitions and capital improvements
with drawings of US$85.2 million under its Revolving Term Line, and the issuance of
US$50.0 million of Series A Senior Secured Notes (“Senior Secured Notes”) on June 26,
2013.
Interfor also utilized its operating lines in 2013 for net drawings of $9.2 million, including
$7.5 million in outstanding letters of credit (2012 – $5.2 million letters of credit).
Summary of Contractual Obligations
The payments due in respect of contractual and legal obligations, including projected major
capital improvements, are summarized as follows:
Payments due by period
Up to
1 year
2-3
years
4-5
years
After 5
years
Total
Trade accounts payable
and accrued liabilities
Income taxes payable
Long term debt
Reforestation liability
Provisions and other liabilities
Operating leases and
contractual commitments
(millions of dollars)
$
81.8 $
0.4
145.5
33.3
40.9
81.8 $
0.4
-
11.8
15.9
- $
-
0.7
8.1
9.6
- $
-
91.6
6.1
2.0
-
-
53.2
7.3
13.5
31.0
12.3
9.5
4.7
4.5
Total contractual obligations (1)
$
332.8 $
122.1 $
27.9 $
104.3 $
78.5
Note: (1) Figures in this table may not add due to rounding.
CAPITAL RESOURCES
As at December 31, 2013, 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
borrowings of $8.5 million, including letters of credit, with available credit of $56.5 million.
On February 27, 2013, the Company extended the maturities of its Operating Line and
Revolving Term Line to February 27, 2017 and increased the credit available under the
Revolving Term Line from $200 million to $250 million. Subsequent to the issuance of
Management’s Discussion and Analysis
18
____________________
US$50 million of Senior Secured Notes on June 26, 2013, the credit available on the
Revolving Term Line was reduced from $250 million to $200 million. All other terms and
conditions of this line remained unchanged except for a reduction in pricing. As at
December 31, 2013, the Revolving Term Line was drawn by $90.6 million (December 31,
2012 – $135.0 million), leaving available capacity of $109.4 million (2012 - $65.0 million).
On May 24, 2013, the Company entered into an agreement with a U.S. lender for a
US$20 million operating line. The U.S. Operating Line is secured by accounts receivable and
inventories of the Company’s wholly-owned subsidiary, Interfor U.S. Inc., and matures on
April 28, 2015. As at December 31, 2013, the U.S. Operating Line was drawn by US$0.7
million, revalued at the year-end exchange rate to $0.7 million.
On June 26, 2013, the Company issued US$50.0 million of Series A Senior Secured Notes,
bearing interest at 4.33%. The notes are subject to certain financial covenants including a
minimum working capital requirement, a maximum ratio of total debt to total capitalization
and a minimum net worth calculation. Payments of US$16.7 million are required on each of
June 26, 2021 and 2022, with the balance due on June 26, 2023. As at December 31,
2013, the Senior Secured Notes were revalued at the year-end exchange rate to $53.2
million.
TRANSACTIONS BETWEEN RELATED PARTIES
On August 23, 2013, the Company’s controlling shareholder, Sauder Industries Limited
(“SIL”) exercised its right under the Company’s Articles to exchange its Class B Common
Shares for Class A Subordinate Voting Shares on a share for share basis without any cash or
non-cash consideration and ceased to be a significant shareholder.
Prior to August 23, 2013, the Company had lumber sales to SIL in the amount of $0.5
million (2012 - $1.1 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 10
and Note 20(c) of the Company’s 2013 consolidated financial statements. At December 31,
2013, such instruments aggregated $26.7 million (2012 - $23.0 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.
FINANCIAL INSTRUMENTS 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. 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 such
instruments is mitigated.
Management’s Discussion and Analysis
19
____________________
Interest Rate Swaps
As at December 31, 2013, Interfor had drawn $92.3 million of floating rate debt, excluding
letters of credit, from its operating and term credit facilities, and $53.2 million of fixed rate
debt through the Senior Secured Notes.
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 Canadian
dollar loans or at LIBOR for U.S. dollar loans, in all cases dependent upon a financial ratio.
The Senior Secured Notes bear interest at 4.33%.
On August 25, 2011, the Company entered into two interest rate swaps, each with a
notional value of $25 million and maturing July 28, 2015. Under the terms of these swaps,
the Company paid an amount based on a fixed annual interest rate of 1.56% and received a
90 day BA CDOR which was recalculated at set interval dates. These interest rate swaps
were unwound on October 22, 2013.
On March 25, 2013, the Company entered into two additional interest rate swaps, each with
a notional value of US$25.0 million and maturing February 17, 2017. Under the terms of
these swaps, the Company pays an amount based on a fixed annual interest rate of 0.84%
and receives a 90 day LIBOR which is recalculated at set interval dates.
The intent of these interest rate swaps is to convert floating-rate interest expense to fixed-
rate interest expense. As these swaps have been designated as cash flow hedges the fair
value of these interest rate swaps at December 31, 2013, being an asset of $0.2 million
(measured based on Level 2 of the fair value hierarchy), has been recorded in Trade
accounts receivable and other (2012 - $0.1 million in Trade accounts payable and
provisions) and a gain of $0.2 million (2012 - $0.4 million gain) has been recognized in
Other comprehensive income.
Based on the Company’s average debt level during 2013, the sensitivity of a 100 basis point
increase in interest rates would result in an approximate decrease of $0.5 million in Net
earnings.
Foreign Currency Forward Exchange Contracts
The Company actively manages its currency exchange risk for fluctuations in U.S. dollars
and Japanese Yen by identifying opportunities to enter into foreign exchange contracts and
options to effectively hedge its net exposure. As at December 31, 2013, the Company had
outstanding foreign currency forward contract obligations to sell a maximum of US$8.0
million at an average rate of CAD$1.0653 per U.S. dollar and ¥145 million at an average
rate of ¥96.95 per U.S. dollar during 2014. All foreign currency gains or losses in 2013
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 receivable and other (2012 - $0.1 million asset recorded in Trade accounts
receivable and other).
Based on the Company’s net exposure to foreign currencies resulting from forward contracts
in 2013, the sensitivity of Interfor’s net earnings is as follows:
US$
$0.01 increase vs. CAD$
$2.6 million increase in net income
Japanese Yen
1¥ increase vs. US$
$0.1 million increase in net income
Interfor’s U.S. operations produce and sell products almost exclusively for the U.S. market,
with all revenues and expenses denominated in U.S. dollars. All foreign currency
denominated assets and liabilities of Interfor’s U.S. foreign operations with a U.S. dollar
functional currency are translated at exchange rates in effect at the Consolidated Statement
Management’s Discussion and Analysis
20
____________________
of Financial Position date. Revenues and expenses are translated at transaction date or
average rates for the period as appropriate. 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 Consolidated 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 Consolidated Statement of Earnings.
The Company recorded an $8.4 million unrealized foreign exchange gain on translation of its
U.S. operations with a U.S. dollar functional currency to Other comprehensive income (loss)
in 2013 (2012 - $2.9 million loss).
As at December 31, 2013, the Company had designated the US$85.2 million drawn under
its Revolving Term Line and US$50.0 million drawn under its Senior Secured Notes as
hedges against the investment in its U.S. operations. Unrealized foreign exchange losses of
$6.2 million have been recorded in Other comprehensive income (loss) in 2013 (2012 -
$0.7 million gain).
Lumber Futures
To manage price risk, the Company also traded lumber futures which were designated as
held for trading with changes in fair value recorded within Other income in Net earnings. At
December 31, 2013, there were no outstanding lumber futures contracts and a gain of
$0.1 million was recognized in Other income on completed contracts during the year (2012
– negligible gain).
OUTSTANDING SHARES
As of February 13, 2014, Interfor had 63,050,455 Class A Subordinate Voting Shares issued
and outstanding. These shares are listed on the Toronto Stock Exchange under the symbol
IFP.A.
CONTROLS AND PROCEDURES
The Company’s management, under the supervision of the Chief Executive Officer (“CEO”)
and the Chief Financial Officer (“CFO”), has evaluated the design and effectiveness of the
Company’s disclosure controls and procedures. Based on this evaluation, the CEO and CFO
have concluded that the Company’s disclosure controls and procedures were effective as of
December 31, 2013.
The Company’s management, under the supervision of the CEO and CFO, has evaluated the
design and effectiveness of the Company’s internal controls over financial reporting (“ICFR”)
based on the criteria established within the 1992 COSO framework. Based on this
evaluation, the CEO and CFO have concluded that the Company’s ICFR were effective as of
December 31, 2013.
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 year ended December 31, 2013,
which materially affected, or are reasonably likely to materially affect, the Company’s ICFR.
The operations in Georgia acquired during 2013 have been in compliance with the
Company’s ICFR since acquisition.
Management’s Discussion and Analysis
21
____________________
CRITICAL ACCOUNTING ESTIMATES
The Company’s financial statements include critical accounting estimates made by
management. Management is required to make various assumptions about matters that are
highly uncertain at the time accounting estimates are made; the use of different
assumptions could have a material impact on the Company’s financial condition and
performance. These critical accounting estimates are described below.
Valuation of Inventories. Lumber inventories are valued 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. The unit net realizable value for
lumber inventories and B.C. Coast log inventories is determined by reference to the average
sales values by specific product in the period immediately following the reporting date. The
unit realizable value for B.C. 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 B.C. Coast logs is based on a twelve month moving
average actual cost and for B.C. 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 recoverable amount 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.
A high degree of uncertainty exists in these assumptions and, as such, any significant
change in assumptions could result in a conclusion that the carrying value of these assets
may 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 within the
cash flow projections represents the published Bank of Canada consumer price index as at
December 31, 2013.
Management’s Discussion and Analysis
22
____________________
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 goodwill as at December 31, 2013
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 accrues the cost
of road deactivation as the related timber is cut, including those expenses in the cost of
current production. The estimate of future road deactivation cost is based on
comprehensive plans prepared by Professional Foresters and Engineers employed by
Interfor and includes such considerations as road structure and terrain. Estimates of road
deactivation liability could be materially impacted by unfavourable terrain, changing
legislative requirements and standards, or inaccurate projections, which could result in a
charge against operating earnings. Each of these estimates is reviewed regularly on an
ongoing basis.
Pension and Other Post-retirement Benefits. The Company sponsors three defined benefit
pension plans for those hourly employees not covered by forest industry union plans and for
a small group of salaried employees (the salaried plan was curtailed at December 31,
2013.) 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.
Management’s Discussion and Analysis
23
____________________
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
Effective January 1, 2013, 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 also impacts the calculation of finance costs, resulting in an
increase to Production expense and Finance costs in the Statement of Earnings, which will
be fully offset by an increase (decrease) 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 no longer recognizes the equity risk premium and is based on the
discount rate only.
Future Accounting Policy Changes
A number of new standards, and amendments to existing standards and interpretations,
were not yet effective for the year ended December 31, 2013, and have not been applied in
preparing the Company’s 2013 annual consolidated financial statements. The following
pronouncement is considered by the Company to be the most significant of several
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 will be
in effect for accounting periods beginning on or after January 1, 2015, with earlier adoption
permitted. The Company does not expect this standard to have a significant effect on its
financial statements.
Management’s Discussion and Analysis
24
____________________
NON-GAAP MEASURES
This MD&A makes reference to the following non-GAAP measures: EBITDA, Adjusted
EBITDA, Pre-tax return on total assets and Net debt to invested capital, which are used by
the Company and certain investors to evaluate operating performance and financial
position. These non-GAAP measures do not have any standardized meaning prescribed by
IFRS and are therefore unlikely to be comparable to similar measures presented by other
issuers. The following table provides a reconciliation of these non-GAAP measures to figures
as reported in the Company’s audited annual (and unaudited interim) consolidated financial
statements prepared in accordance with IFRS:
Thousands of Canadian dollars
Adjusted EBITDA
Net earnings (loss)
Add:
Depreciation of plant and equipment
Depletion and amortization of timber, roads and other
Restructuring costs, asset write-downs and other costs
Finance costs
Other foreign exchange (gains) losses
Income tax expense
EBITDA
Add:
Long term incentive compensation expense
Other (income) expense
Adjusted EBITDA
Pre-tax return on total assets
Earnings (loss) before income taxes
Add:
Restructuring costs, asset write-downs and other costs
Other foreign exchange (gains) losses
Other (income) expense
Total assets, period end
Pre-tax return on total assets
Net debt to invested capital
Net debt
Long term debt
Less: Cash and cash equivalents
Total net debt
Invested capital
Net debt
Shareholders' equity
Total invested capital
Net debt to invested capital
For the 3 months
ended December 31,
2012
2013
For the year ended
December 31,
2012
2011
2013
11,431
(3,827)
42,239
(9,474)
(13,919)
11,040
6,253
49
2,097
211
324
31,405
5,205
(375)
36,235
7,565
7,528
283
1,549
(174)
83
13,007
6,245
5
19,257
39,206
23,061
371
9,069
1,250
555
115,751
28,745
23,648
529
6,441
(189)
458
50,158
27,291
24,263
580
7,073
25
1,366
46,679
18,841
(602)
133,990
10,065
(334)
59,889
449
(371)
46,757
42,794
(9,016)
(12,553)
529
(189)
(334)
(9,010)
371
1,250
(602)
43,813
580
25
(371)
(12,319)
824,126 632,040 614,836
5.3% -1.4% -2.0%
145,479 135,046 110,713
(14,994)
(10,435)
140,762 120,052 100,278
(4,717)
140,762 120,052 100,278
515,137 376,030 390,822
655,899 496,082 491,100
21.5% 24.2% 20.4%
RISKS AND UNCERTAINTIES
The Company is exposed to many risks and uncertainties in conducting its business
including, but not limited to: price volatility; availability of log supply; competition;
government regulation; foreign currency exchange fluctuations; environmental matters; and
labour disruption.
Management’s Discussion and Analysis
25
____________________
Price Volatility
Interfor’s operating results are affected by fluctuations in the selling prices for lumber, logs
and wood chips. Prices are 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.
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 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 Washington’s 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 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 with cash generated from operations and
through utilization of its existing credit facilities.
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 and a number are, in certain product lines, lower cost producers.
Factors which affect the Company’s competitive position include:
foreign currency exchange rates;
cost of labour;
costs of harvesting or purchasing logs;
•
•
•
• ability to secure a quality log supply matched to a sawmill’s requirements;
• quality of products and customer service;
• ability to secure space on vessels for overseas shipments and on trucks and railcars
for North American shipments;
cost of export taxes payable on sales to the U.S.; and
•
• ability to maintain high operating rates to leverage fixed manufacturing costs.
If the Company is unable to successfully compete on a global basis, its financial condition
could suffer.
Management’s Discussion and Analysis
26
____________________
Government Regulation
Interfor’s operations are subject to extensive provincial, state, federal or other laws and
regulations that apply to most aspects of our business activities. Where applicable, Interfor
is required to obtain approvals, permits and licences for its operations as a condition to
operate.
From time to time the changes in government policy or regulation may impact the
Company’s operations. Until the details of all such changes are announced and
implemented, the full impact of these changes on the Company’s production, costs, financial
position and results of operations cannot be determined.
Allowable Annual Cut
Interfor holds cutting rights in B.C. that represent an AAC of approximately of 3.9 million
cubic metres. Of this amount, 3.6 million cubic metres 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. In 2013, Interfor acquired two
replaceable tenures in the Kootenay region of the B.C. Interior with an AAC of 174,000
cubic metres.
The AAC is regulated by the Ministry of Forests, Lands and Natural Resource Operations and
subject to periodic reviews to 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. Interior is expected to remain high
for the next several 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 AAC
determinations are made by the provincial Chief Forester in a Timber Supply Review
process, and will vary by location.
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. The Provincial Government of
B.C. has been working to improve the functional relationship between the Crown and
aboriginal groups prior to treaty settlement. The Province of B.C. and First Nations groups
Management’s Discussion and Analysis
27
____________________
on the B.C. Coast have signed Reconciliation Protocols that provide 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 agreements will be assessed
and monitored in the years ahead to determine the extent of any implications on those
operations.
Softwood Lumber Agreement
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 Random Lengths Framing Lumber
Composite Price of lumber is at or below US$355 per mfbm. On January 23, 2012, Canada
and the U.S. agreed to a two year extension of the SLA through October 2015. The RLCI
benchmark exceeded US$355 per mfbm for all but three months in 2013 and has remained
above this threshold for 2014 year-to-date.
Stumpage Fees
The B.C. Government charges stumpage fees to companies that 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 B.C. 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 or future changes will not have a material impact on stumpage rates.
Foreign Currency Exchange Fluctuations
The Company’s Canadian operations ordinarily sell approximately 75% of their lumber into
export markets, with the majority of these sales denominated in U.S. dollars, and to a
lesser extent in Japanese Yen. While the Canadian operations also incur some U. dollar
denominated expenses, primarily for ocean freight and other transportation, and equipment
operating leases, the majority of expenses are incurred in Canadian dollars.
An increase in the value of the Canadian dollar relative to the U.S. dollar would reduce the
amount of revenue in Canadian dollars realized by the Company from lumber sales made in
U.S. dollars. This would reduce the Company’s operating margin and the cash flow
available to fund operations. Consequently, a significant strengthening of the Canadian
dollar against the U.S. dollar could have a material adverse effect on the Company’s
business, financial condition, results of operations and cash flows.
Environment
Interfor has incurred, and will continue to incur, costs to minimize environmental impact,
prevent pollution and for continuous improvement of its environmental performance.
Interfor may discover currently unknown environmental problems or conditions relating to
its past or present operations, or it may be faced with unforeseen environmental liability in
the future. This may require site or other remediation costs to maintain compliance or
correct violations of environmental laws and regulations or result in governmental or private
claims for damage to person, property or the environment, which could have a material
adverse effect on Interfor’s financial condition and results of operations.
Management’s Discussion and Analysis
28
____________________
Labour Disruptions
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.
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 union (Grand Forks and Castlegar) expired on
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. Negotiations with the USW regarding renewal of the expired Southern
Interior USW union collective agreement are ongoing, but employees continue to work
under the terms of the expired agreement with no workplace disruptions.
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 filed on SEDAR at
www.sedar.com.
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
29
Management is responsible for the integrity and fair presentation of the accompanying
consolidated financial statements. The financial statements were prepared in accordance with
International Financial Reporting Standards and, where necessary, are based in part on
management’s best estimates and judgements. Financial information included elsewhere in the
annual report is consistent with that disclosed in the consolidated financial statements.
Management maintains a system of internal accounting control which it 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 primarily through its Audit Committee, the members of which are neither officers
nor employees of Interfor. The Audit 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 independent 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
independent Auditors.
The consolidated financial statements have been examined by the independent
Auditors, KPMG LLP, whose report follows.
Duncan K. Davies
John A. Horning
President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
February 13, 2014
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
30
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, 2013 and December 31, 2012, the consolidated statements of
earnings, comprehensive income, changes in equity and cash flows for the years ended
December 31, 2013 and December 31, 2012, 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
judgement, 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,
2013 and December 31, 2012, and its consolidated financial performance and its consolidated
cash flows for the years ended December 31, 2013 and December 31, 2012 in accordance with
International Financial Reporting Standards.
KPMG LLP, Chartered Accountants
February 13, 2014
Vancouver, Canada
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
December 31, 2013 and 2012
Note
December 31
2013
December 31
2012
31
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
10
$
6
22
7
8
9
9
9
9
19
11
12
19
12
10
22
11
13
13
4,717
62,735
149,509
11,374
228,335
3,980
3,960
460,930
16,224
84,344
2,420
23,715
218
$
14,994
47,392
98,024
11,749
172,159
878
4,198
349,779
17,316
73,796
738
13,078
98
$ 824,126
$ 632,040
$
98,017
11,754
395
110,166
20,662
145,479
7,006
25,676
$
70,597
10,864
593
82,054
17,621
135,046
9,631
11,658
428,723
-
7,476
561
167
78,210
515,137
342,285
4,080
7,476
(7,818)
(132)
30,139
376,030
$ 824,126
$ 632,040
Commitments and contingencies (note 20); Subsequent event (note 27).
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
L. Sauder, Director
D.W.G. Whitehead, Director
Consolidated Statements of Earnings
(Expressed in thousands of Canadian dollars, except earnings per share amounts)
Years ended December 31, 2013 and 2012
32
Sales
Costs and expenses:
Note
2013
2012
Re-stated
(note 4)
$1,105,222
$ 849,196
Production
Selling and administration
Long term incentive compensation
Export taxes
Depreciation of plant and equipment
Depletion and amortization of timber, roads and other
4
8
9
Operating earnings (loss) before restructuring costs
and write-down of roads
Restructuring costs and write-down of roads
18
Operating earnings (loss)
Other earnings (expenses):
Finance costs
Other foreign exchange gain (loss)
Other income
Earnings (loss) before income taxes
Income taxes (recovery):
Current
Deferred
4,16
17
19
940,667
28,829
18,841
1,736
39,206
23,061
1,052,340
52,882
(371)
52,511
(9,069)
(1,250)
602
(9,717)
42,794
463
92
555
759,544
20,719
10,065
9,044
28,745
23,648
851,765
(2,569)
(529)
(3,098)
(6,441)
189
334
(5,918)
(9,016)
640
(182)
458
Net earnings (loss)
$ 42,239
$
(9,474)
Net earnings (loss) per share, basic and diluted
21
$
0.73
$
(0.17)
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian dollars, except earnings per share amounts)
Years ended December 31, 2013 and 2012
33
Note
2013
2012
Re-stated
(note 4)
Net earnings (loss)
$ 42,239
$
(9,474)
Other comprehensive income (loss):
Items that will not be reclassified subsequently to Net earnings (loss):
Defined benefit plan actuarial gains (losses)
4,22
5,832
(2,800)
Items that are or may be reclassified subsequently to Net earnings (loss):
Foreign currency translation differences
Gain in fair value of interest rate swaps
Reclassification of loss in fair value of interest rate
swaps to net earnings
Income tax on other comprehensive income (loss)
Total items that are or may be reclassified subsequently
26
16
19
to Net earnings (loss)
Total other comprehensive income (loss), net of tax
8,167
241
58
212
8,678
14,510
(2,805)
371
-
(84)
(2,518)
(5,318)
Comprehensive income (loss)
$ 56,749
$ (14,792)
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Equity
(Expressed in thousands of Canadian dollars, except earnings per share amounts)
Years ended December 31, 2013 and 2012
34
Class A Share Class B Share Contributed
Surplus
Capital
Capital
Note
Translation
Reserve
Hedge
Reserve
Retained
Earnings
Total
Equity
Balance at December 31, 2011
$ 342,285 $ 4,080
$ 7,476 $ (4,929)
$
(503)
$ 42,413 $ 390,822
Net earnings (loss):
Other comprehensive income (loss):
Foreign currency translation differences, net of tax
Defined benefit plan actuarial gains (losses)
Gain in fair value of interest rate swaps
4
4, 22
26
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(9,474)
(9,474)
(2,889)
-
-
-
-
371
-
(2,800)
-
(2,889)
(2,800)
371
Balance at December 31, 2012
342,285
4,080
7,476
(7,818)
(132)
30,139
376,030
Net earnings (loss):
Other comprehensive income (loss):
Foreign currency translation differences, net of tax
Defined benefit plan actuarial gains (losses)
Gain in fair value of interest rate swaps
Reclassification of loss in fair value of interest rate
swap to net earnings
Contributions:
Share issuance, net of share issue expenses
Share exchange
22
26
16
13
13
-
-
-
-
-
-
-
-
-
-
82,358
4,080
-
(4,080)
-
-
-
-
-
-
-
-
-
42,239
42,239
8,379
-
-
-
-
-
-
-
241
58
-
-
-
5,832
-
-
-
-
8,379
5,832
241
58
82,358
-
Balance at December 31, 2013
$ 428,723
$ - $
7,476 $
561
$
167
$ 78,210 $ 515,137
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2013 and 2012
35
Cash provided by (used in):
Operating activities:
Net earnings (loss)
Items not involving cash:
Note
2013
2012
Re-stated
(note 4)
$ 42,239
$
(9,474)
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 of roads
Unrealized foreign exchange losses (gains)
Other income
8
9
19
4,16
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
Acquisitions
Proceeds on disposal of property, plant and equipment
Investments and other assets
Financing activities:
Issuance of share capital, net of share issue expenses
Interest payments
Debt refinancing costs
Additions to long term debt
Repayments of long term debt
39,206
23,061
555
9,069
884
2,599
6,612
-
(14)
(484)
123,727
(9,667)
(40,866)
493
24,495
(652)
97,530
(33,038)
(18,676)
(16,531)
(120,407)
2,089
(108)
(186,671)
82,358
(7,142)
(1,460)
326,738
(322,517)
77,977
28,745
23,648
458
6,441
(1,953)
(516)
(710)
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
12
9
17
8
9
9
5
13
10
10
Foreign exchange gain (loss) on cash and cash equivalents held
in a foreign currency
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
887
(10,277)
14,994
4,717
$
(10)
4,559
10,435
$ 14,994
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
36
(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, the U.S. Pacific Northwest and the U.S.
Southeast for sale to markets around the world.
The Company is 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 years ended
December 31, 2013 and 2012 comprise the Company and its subsidiaries.
2. Basis of Preparation:
(a) Statement of compliance:
These consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) and were approved by the
Board of Directors on February 13, 2014.
(b) Basis of measurement:
The consolidated financial statements have been prepared on the historical cost basis
except for the following material items in the Statements 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) Employee benefit plan 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 IFRS
requires management to make judgements, estimates and assumptions that affect
the application of accounting policies and the reported amounts of certain assets,
liabilities, revenues and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions
to accounting estimates are recognized, on a prospective basis, in the period in
which the estimates are revised.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
37
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
2. Basis of Preparation (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, 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 3(m)
Cash-settled share based compensation
Note 9
Roads and bridges, timber tenures, other intangible assets and
goodwill
Note 12
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 upon consolidation.
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.
(b) Foreign currency:
(i) Foreign currency transactions:
Transactions in foreign currencies are translated to the respective functional
currency at transaction date exchange rates. 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
38
(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):
(i) Foreign currency transactions (continued):
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 in the Statement of Earnings;
where revaluations relate to trade accounts payable those foreign currency gains
or losses are adjusted to Production costs in the Statement of Earnings.
(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 the transaction date exchange rate, or at average rates for
the period which approximate the transaction date, as appropriate. 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 Foreign currency
translation differences in Other comprehensive income and presented in the
Translation reserve in Equity.
(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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
39
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(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 and 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 in U.S.
dollars, is managed through the use of foreign exchange forward contracts and
options.
The Company has chosen not to designate its derivative forward foreign currency
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 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.
From time to time, 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.
These risk management strategies and relationships are formally documented
and assessed on a regular, on-going basis.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
40
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(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 and cash equivalents consist 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
abnormal 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 for the B.C. Coast and on a three month rolling average for the B.C.
Interior. For both areas, costs are lagged by one month and adjusted for abnormal
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
market 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, which approximates net realizable value.
(f) Property, plant and equipment:
Property, plant and equipment are recorded at 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 require a substantial period of time to get
ready for their intended use, are added to the cost of those assets.
(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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
41
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(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.
(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.
(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 asset’s recoverable amount is determined as the higher of its fair
value less direct costs to sell and its 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
42
(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 (continued):
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.
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.
(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
estimated 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
43
(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 (continued):
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 are
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.
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, and 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) 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
44
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(m) Cash-settled share based compensation (continued):
Compensation expense is recorded for DSUs either at the time of the grant, in the
case of DSUs which vest immediately, or over the performance period, in the case of
DSUs with deferred 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
provisions and Provisions and other liabilities on the Statement of Financial Position.
(n) 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.
(o) 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, net interest on defined benefit plans, the
amortization of prepaid finance costs and other related transaction costs.
(p) Income tax:
Income tax expense comprises current and deferred income tax. Current and
deferred income taxes are recognized in profit or loss except to the extent that they
relate 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
45
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(p) Income tax (continued):
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.
(q) Earnings per share:
Basic earnings per share is computed by dividing Net earnings by the weighted
average shares outstanding during the reporting period. Diluted earnings 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.
(r) 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, 2013, and have not been applied
in preparing these consolidated financial statements. The following pronouncement
is considered by the Company to be the most significant of several 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. The Company does not expect this
standard to have a significant effect on its financial statements.
4. Changes in accounting policy:
Effective January 1, 2013, 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 also impacts the calculation of finance costs, resulting in an
increase to Production expense and Finance costs in the Statement of Earnings, which
will be fully offset by an increase (decrease) 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 no longer recognizes the equity risk
premium and is based on the discount rate only.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
46
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
4. Changes in accounting policy (continued):
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
For the year ended December 31, 2012
Statement of Earnings
Production costs
Finance costs
Net loss
Statement of Comprehensive Income
Defined benefit plan actuarial losses
Other comprehensive loss
$
758,893 $
6,324
(8,706)
651 $
117
(768)
759,544
6,441
(9,474)
(3,568)
(6,086)
768
768
(2,800)
(5,318)
Effective January 1, 2013, IFRS 13, Fair Value Measurement, replaced the fair value
measurement guidance contained in individual IFRSs with a single source of fair value
measurement guidance and established new requirements for fair value measurements
and disclosures. The new standard is applied prospectively and will require more
extensive disclosure, but has no impact on the Company’s financial information.
5. Acquisitions:
On March 1, 2013, the Company concluded the acquisition of Rayonier Inc.’s Wood
Products Business (“Rayonier acquisition”) in Georgia, U.S. (“U.S. Southeast”) for
US$84,355,000.
On July 1, 2013, the Company acquired the sawmill operations of Keadle Lumber
Enterprises, Inc. (“Keadle acquisition”) in Thomaston, Georgia for US$39,104,000, of
which US$32,104,000 had been paid as at December 31, 2013. The Company will pay
an additional US$7,000,000, contingent upon receipt of an upgrade to the air permit
which will allow the Company to operate a second shift. Receipt of this approval is
expected in the first quarter, 2014, with the payment to be made 365 days thereafter.
Transaction costs of $1,077,000 related to the acquisitions have been expensed in
Selling and administration in 2013.
The purchase price of each of these acquisitions has been allocated to the fair value of
assets acquired and liabilities assumed in the transactions on a preliminary basis, based
on management’s best estimates and taking into account all available information to
December 31, 2013. As updated information is available, further analysis may result in
a refinement to the values attributable to assets and liabilities arising on the acquisition.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
47
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
5. Acquisitions (continued):
These acquisitions have been accounted for using the acquisition method and the
purchase price is allocated as follows:
Note
Rayonier
acquisition
Keadle
acquisition
Total
Net assets acquired
Current assets
Property, plant and equipment
Goodwill
Current liabilities assumed
Cash consideration funded by:
Cash on hand
Operating Line
Revolving Term Line
Provisions and other liabilities
$
10,730 $
76,516
-
87,246
(605)
2,283 $
28,337
10,518
41,138
(9)
13,013
104,853
10,518
128,384
(614)
$
86,641 $
41,129 $
127,770
$
7,223 $
27,848
51,570
-
11
- $
-
33,766
7,363
7,223
27,848
85,336
7,363
$
86,641 $
41,129 $
127,770
Since acquisition, the U.S. Southeast divisions contributed sales of $121,398,000 and
earnings of $14,733,000 to the Company’s results. If the acquisitions had occurred on
January 1, 2013, management estimates that Sales would have been $1,140,751,000
and Net earnings for the period would have been $48,011,000. In determining these
amounts, management has assumed that the fair value adjustments, determined
provisionally, that arose on the acquisition date would have been the same if the
acquisition had occurred on January 1, 2013.
6. Inventories:
Logs
Lumber
Other
2013
2012
$ 89,170
51,449
8,890
$
59,772
31,833
6,419
$ 149,509
$
98,024
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, 2013 was $7,926,000 (2012 - $7,050,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
48
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
7. Other investments and assets:
2013
2012
Timber deposits and other investments and deposits
$
1,771
$
2,651
Deferred financing fees, net of accumulated amortization
2,189
1,547
$
3,960
$
4,198
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
49
8. Property, plant and equipment:
Cost
Balance at December 31, 2011
Additions
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2012
Additions
Acquisitions
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2013
Accumulated Depreciation
Balance at December 31, 2011
Depreciation
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2012
Depreciation
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2013
Net book value at
December 31, 2012
December 31, 2013
Land
35,114
8
-
-
(56)
35,066
-
3,479
(80)
-
246
Machinery and
Equipment
Buildings
62,719
-
(1,286)
519
(456)
61,496
-
13,911
(5)
8,906
1,703
414,744
(172)
(26,127)
28,403
(3,466)
413,382
-
79,346
(1,129)
14,282
13,432
Mobile
Computer
Site
Projects in
Equipment
Equipment Improvements
Other
Process
Total
14,653
303
(45)
845
(59)
15,697
466
1,568
(707)
1,790
234
17,291
706
-
1,218
(168)
19,047
1,200
2,739
(162)
452
636
33,474
-
-
4,736
(187)
38,023
-
3,198
(10)
4,146
652
6,550
620
(980)
22
(20)
2,300
40,018
-
(35,743)
(7)
586,845
41,483
(28,438)
-
(4,419)
6,192
351
59
(20)
244
61
6,568
595,471
32,796
34,813
553
104,853
(10)
(2,123)
(29,820)
-
17,184
220
6,887 $ 10,307 $ 750,198
$ 38,711 $ 86,011 $ 519,313 $ 19,048 $ 23,912 $ 46,009 $
Machinery and
Mobile
Computer
Site
Buildings
Equipment
Equipment
Equipment Improvements
Other
25,554
2,853
(1,270)
5
(144)
26,998
3,483
(3)
-
551
175,918
20,918
(26,029)
(5)
(1,113)
169,689
28,861
(852)
-
4,365
11,272
964
(45)
-
(36)
12,155
1,232
(570)
-
143
12,407
1,442
-
-
(147)
13,702
2,378
(162)
(6)
497
16,829
2,222
-
-
(109)
18,942
2,867
(5)
-
373
$ 31,029 $ 202,063 $ 12,960 $ 16,409 $ 22,177 $
4,831
346
(969)
-
(2)
4,206
385
(20)
6
53
4,630
Total
246,811
28,745
(28,313)
-
(1,551)
245,692
39,206
(1,612)
-
5,982
$ 289,268
$ 35,066 $ 34,498 $ 243,693 $
38,711
54,982 317,250
3,542 $
6,088
5,345 $ 19,081 $
7,503
23,832
1,986 $
2,257
6,568 $ 349,779
10,307 460,930
There were no borrowing costs capitalized in 2013 (2012 - $447,000). As at December 31, 2013, additions includes $3,428,000 in
accrued contract costs (2012 - $1,653,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
50
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
9. Roads and bridges, timber tenures, other intangible assets and goodwill:
Cost
Balance at December 31, 2011
Additions
Disposals
Exchange rate movements
Balance at December 31, 2012
Additions
Acquisition
Disposals
Exchange rate movements
Roads and
Bridges
Timber
Licences
Other
Intangibles
Goodwill
48,276
20,662
(16,189)
(5)
52,744
18,676
-
(21,624)
130
117,597
230
(1,547)
-
116,280
14,342
-
(1,269)
-
4,721
89
-
(32)
4,778
2,189
-
-
106
13,955
-
-
-
13,955
-
10,518
-
119
Balance at December 31, 2013
$
49,926 $
129,353 $
7,073 $
24,592
Accumulated amortization
Balance at December 31, 2011
Amortization
Disposals
Impairment
Exchange rate movements
Balance at December 31, 2012
Amortization
Disposals
Exchange rate movements
Roads and
Bridges
Timber
Licences
Other
Intangibles
Goodwill
31,523
19,826
(16,085)
164
-
35,428
19,152
(20,932)
54
40,805
3,226
(1,547)
-
-
42,484
3,392
(867)
-
3,471
596
-
-
(27)
4,040
517
-
96
877
-
-
-
-
877
-
-
-
Balance at December 31, 2013
$
33,702 $
45,009 $
4,653 $
877
Net book value at
December 31, 2012
December 31, 2013
$
17,316 $
16,224
73,796 $
84,344
738 $
2,420
13,078
23,715
For the purpose of impairment testing, goodwill of $10,637,000 and $13,078,000 are
attributable to the Thomaston cash-generating unit (“Thomaston CGU”) and Coastal
Whitewood cash-generating unit (“CWW CGU”), respectively.
No impairment testing was performed on the Thomaston CGU at December 31, 2013
given the Thomaston sawmill was acquired during 2013 and the purchase price is still
preliminary as at December 31, 2013 (see Note 5).
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 2012 and 2013. 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, 2013, and December 31,
2012 was determined to be higher than the related carrying amount and no impairment
has been recognized.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
51
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
9. Roads and bridges, timber tenures, other intangible assets and goodwill
(continued):
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.
A pre-tax discount rate of 16 percent (2012 – 14.7 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 1.2 percent (2012 – 0.8 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.
10. Cash and borrowings:
2013
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
Operating
Line
Revolving
Term
Line
Senior
U.S.
Secured Operating
Line
Notes
Total
$ 65,000 $ 200,000 $ 53,180 $ 21,272 $ 339,452
339,452
145,479
200,000
90,619
65,000
936
53,180
53,180
21,272
744
Unused portion of line
$ 56,535 $ 109,381 $
7,529
-
-
7,529
-
- $ 20,528 $ 186,444
2012
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
Unused portion of line
(a) Operating Line:
$ 65,000 $ 200,000 $
65,000 200,000
135,046
-
5,190
-
$ 59,810 $ 64,954 $
- $
-
-
-
- $
- $ 265,000
265,000
-
135,046
-
-
5,190
- $ 124,764
The terms and conditions of this line remain unchanged except for a reduction in
pricing.
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
52
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
10. Cash and borrowings (continued):
(a) Operating Line (continued):
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.
On February 27, 2013, the Company extended the maturity of its existing Operating
Line to February 27, 2017.
As at December 31, 2013, the Operating Line was drawn by $8,465,000, including
outstanding letters of credit.
(b) Revolving Term Line
The Revolving Term Line may be drawn in either CAD$ or US$ advances, and bears
interest at bank prime plus a margin or, at the Company’s option, at rates for
Bankers’ Acceptances or LIBOR based loans plus a margin, and in all cases
dependent upon a financial ratio of total debt divided by twelve months’ trailing
EBITDA(¹).
The Revolving Term Line is secured by a general security agreement which includes a
security interest in all accounts receivable and inventories, charges against timber
tenures, and mortgage security on sawmills. The term line is subject to certain
financial covenants including a minimum working capital requirement, a maximum
ratio of total debt to total capitalization and a minimum net worth calculation.
On February 27, 2013, the Company extended the maturity of its Revolving Term
Line to February 27, 2017 and increased the credit available from $200,000,000 to
$250,000,000. Subsequent to the issuance of US$50,000,000 of Senior Secured
Notes on June 26, 2013 (see Note 10(c)), the credit available on the Revolving Term
Line was reduced from $250,000,000 to $200,000,000. All other terms and
conditions of this line remained unchanged except for a reduction in pricing.
During the year, the Company drew US$83,000,000 under its Revolving Term Line to
fund its acquisitions in the U.S., which it designated as a hedge against the
Company’s investment in its U.S. operations. During the year, the Company repaid
US$28,000,000 of drawings previously designated as hedges. Related cumulative
unrealized foreign exchange losses remain in Foreign currency translation differences
in Other comprehensive income.
As at December 31, 2013, the Revolving Term Line was drawn by US$85,200,000
(2012 – US$30,200,000) revalued at the year-end exchange rate to $90,619,000
(2012 - $30,046,000), being the total drawings under the facility (2012 – additional
drawings of CAD$105,000,000 for total drawings of $135,046,000), and leaving an
unused available line of $109,381,000 (2012 - $64,954,000).
(1) EBITDA represents earnings before interest, taxes, depletion and amortization.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
53
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
10. Cash and borrowings (continued):
(b) Revolving Term Line (continued):
All outstanding U.S. drawings under the Revolving Term Line have been designated
as a hedge against the Company’s investment in its U.S. operations and cumulative
unrealized foreign exchange losses of $5,538,000 (2012 - $667,000 gain) arising on
revaluation of the Revolving Term Line, and from translation of US$ borrowings
designated as hedges and since repaid, were recognized in Foreign currency
translation differences in Other comprehensive income.
(c) Senior Secured Notes:
On June 26, 2013, the Company issued US$50,000,000 of Series A Senior Secured
Notes (“Senior Secured Notes”), bearing interest at 4.33%. The notes are subject to
certain financial covenants including a minimum working capital requirement, a
maximum ratio of total debt to total capitalization and a minimum net worth
calculation. Payments of US$16,667,000 are required on each of June 26, 2021 and
2022, with the balance due on June 26, 2023.
As at December 31, 2013, the Senior Secured Notes were revalued at the year-end
exchange rate to $53,180,000. The Senior Secured Notes have been designated as
a hedge against the Company’s investment in its U.S. operations and unrealized
foreign exchange losses of $635,000 arising on their revaluation were recognized in
Foreign currency translation differences in Other comprehensive income.
(d) U.S. Operating Line
On May 24, 2013, the Company entered into an agreement with a U.S. lender for a
US$20,000,000 operating line (“U.S. Operating Line”). The U.S. Operating Line is
secured by accounts receivable and inventories of wholly-owned subsidiary, Interfor
U.S. Inc., and matures on April 28, 2015. As at December 31, 2013, the U.S.
Operating Line was drawn by US$700,000 revalued at the year-end exchange rate to
$744,000, with cumulative unrealized foreign exchange losses of $67,000 recognized
in Foreign currency translation differences in Other comprehensive income.
Minimum principal amounts due on long term debt within the next five years are follows:
2014
2015
2016
2017
2018
$ -
744
-
91,555
-
$ 92,299
(e) Cash and cash equivalents:
At December 31, 2013, the Company’s cash balances are restricted by $168,000 for
contractor holdback payments (2012 - $652,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
54
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
11. Provisions and other liabilities:
2013
Note
Current
Non-current
Restructuring
Road deactivation
Environmental
Cash-settled equity based compensation
11(a),18 $
11(a)
11(a)
Share appreciation rights plan
11(b)
Total shareholder return plan
11(c)
11(d)
Deferred share unit plan
Deferred compensation payable 11(e)
11(f)
5, 11(g)
Storm damage remediation funds
Air permit contingent payment
Other
506
659
73
8,047
5,613
243
-
228
-
1,021
$
24
3,257
719
1,987
5,243
6,147
-
349
7,445
505
$
Total
530
3,916
792
10,034
10,856
6,390
-
577
7,445
1,526
$ 16,390
$ 25,676
$ 42,066
2012
Note
Current
Non-current
Restructuring
Road deactivation
Environmental
Cash-settled equity based compensation
11(a),18 $
11(a)
11(a)
11(b)
Share appreciation rights plan
11(c)
Total shareholder return plan
Deferred share unit plan
11(d)
Deferred compensation payable 11(e)
Storm damage remediation funds 11(f)
Other
441
838
47
4,773
2,688
294
2,281
337
900
$
16
3,169
785
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
The current portion of provisions and other liabilities is included in Trade accounts
payable and provisions 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
55
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
11. 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.
Balance at December 31, 2011
$
859
$
4,670
$
2,292
Note
Restructuring
Road
deactivation
Environmental
Provisions made during year
Expenditures made during
year
Reversal of provision
18
during year
Unwind of discount
Changes in estimated future expenditures
18
Balance at December 31, 2012
Provisions made during year
Liabilities assumed with
timber acquisition
Expenditures made during year
Reversal of provision
18
during year
Unwind of discount
Changes in estimated future expenditures
724
(767)
(359)
-
-
457
371
302
(600)
-
-
-
412
(518)
(537)
67
(87)
4,007
451
95
(357)
(170)
68
(178)
39
(110)
(68)
27
(1,348)
832
-
-
(11)
-
13
(42)
Balance at December 31, 2013
$
530
$
3,916
$
792
(b) Share Appreciation Rights Plan:
Awards under the SAR Plan have been granted to directors, officers and senior
managers of the Company. The vesting of 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
56
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
11. Provisions and other liabilities (continued):
(b) Share Appreciation Rights Plan (continued):
Details of the Company’s SAR Plan for the years ended December 31, 2013 and 2012
are:
2013
2012
Outstanding,
beginning of year
Granted
Exercised
Expired or cancelled
Units
1,898,710
255,000
(666,000)
(76,860)
Weighted
average
strike price
Weighted
average
strike price
Units
$ 5.29
9.18
5.97
6.38
2,128,030
318,500
(262,400)
(285,420)
$ 5.25
4.65
4.90
4.60
Outstanding, end of year
1,410,850
$ 5.62
1,898,710
$ 5.29
Units exercisable,
end of year
572,350
$ 5.03
995,310
$ 5.83
Weighted average fair value assumptions for grants made in 2013 and 2012 are as
follows:
Risk-free interest rate
Expected life
Annualized volatility
Dividend rate
Termination rate
Grant date fair value
2013
1.7%
8.2 years
44%
0%
12%
$4.66
2012
1.7%
8.2 years
44%
0%
12%
$2.37
Details of units outstanding under the SAR Plan at December 31, 2013 are as
follows:
Units outstanding
Weighted
Number
outstanding,
December 31,
remaining
2013 unit life (yrs)
average Weighted
average
strike price
Strike
price
$1.38
$3.40-$5.40
$6.01-$7.30
$8.02-$9.18
184,050
598,900
311,900
316,000
5.1
6.7
5.4
7.8
$ 1.38
4.80
6.34
8.92
Units exercisable
Number
exercisable,
December 31,
2013
126,750
221,400
153,200
71,000
Weighted
average
strike price
$ 1.38
5.02
6.68
8.02
1,410,850
$ 5.62
572,350
$ 5.03
The Company recorded a Long term incentive compensation expense in respect of
the SAR Plan of $6,963,000 (2012 – $4,395,000) for the year ended December 31,
2013.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
57
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
11. Provisions and other liabilities (continued):
(c) Total shareholder return plan:
In 2003, the Company introduced a 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, 2013 and 2012 are as follows:
2012
2013
Outstanding, beginning of year
Granted
Cancelled
662,951
209,748
-
366,397
385,097
(88,543)
Outstanding, end of year
872,699
662,951
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.
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
2013
2012
1.53%
3 years
46% to 56%
0.00%
0.00%
$1,509
1.38%
3 years
47% to 56%
0.00%
0.00%
$1,231
The Company recorded Long term incentive compensation expense under the TSR
Plan of $9,223,000 (2012 – $3,567,000) for the year ended December 31, 2013.
(d) Deferred Share Unit Plan:
In January 2004, the Company introduced a DSU Plan for Directors and senior
officers of the Company. The DSU Plan, which allows for immediate or deferred
vesting, is intended to provide a better link between share performance and
compensation for the participants, in that DSUs either increase or decrease in value
in a direct relationship with the Company’s Class A Subordinate Voting shares.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
58
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
11. Provisions and other liabilities (continued):
(d) Deferred Share Unit Plan (continued):
Participants in the TSR Plan may elect, subject to the approval of the Company’s
Board of Directors, to receive their award in DSUs 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 DSU Plan.
DSUs may also be granted directly to Directors or senior employees of the Company
at the discretion of the Board and Directors, who may also elect to take DSUs as
payment of their annual retainer.
The number of DSUs outstanding at December 31, 2013 and 2012 are as follows:
2013
2012
Outstanding, beginning of year 504,825
Granted(¹)
87,472
(93,704)
Exercised
Units
Average
unit value
$ 8.09
10.80
11.64
Units
458,821
46,004
-
Average
unit value
$ 4.20
5.21
-
Outstanding, end of year
498,593
$13.48
504,825
$ 8.09
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. The Company recorded a Long term incentive compensation expense of
$2,752,000 (2012 –$1,916,000) for the year ended December 31, 2013 in respect of
the DSU Plan.
(1) Fair value at the date of the grants.
(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 recovery of $97,000 (2012 -
$187,000 expense) was recorded as Long term incentive compensation expense for
the year ended December 31, 2013. The accrued balance of $2,855,000 was paid
out in July 2013.
(f) Storm damage remediation funds:
In 2011, the Company settled with its insurers for recovery of certain losses relating
to storm damage suffered in 2010. An amount 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, 2013 $577,000 (2012 - $844,000) of this provision remains unspent.
(g) Air permit contingent payment:
Upon completion of the Keadle acquisition on July 1, 2013, the Company accrued
US$7,000,000 (see Note 5), which is payable contingent upon receipt of an upgrade
to the air permit which will allow the Company to operate a second shift at the
Thomaston mill. Receipt of this approval is expected in the first quarter, 2014, with
the payment to be made 365 days thereafter. The accrual has been revalued at the
year-end exchange rate to $7,445,000.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
59
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
12. Reforestation liability:
The Company has an obligation to reforest areas harvested under various timber rights.
The obligation is incurred as logging occurs and the fair value of the liability for
reforestation is determined with reference to the present value of estimated future cash
flows required to settle the obligation.
Changes in the reforestation liability for the years ended December 31 are as follows:
2012
2013
Reforestation liability, beginning of year
Reforestation expense on current logging and
market logging agreements
Liabilities assumed with timber acquisition
Reforestation expenditures
Transfer of obligation
Unwind of discount
Changes in estimated future reforestation expenditures
Consisting of:
Current reforestation liability
Long term reforestation liability
$ 28,485
$ 31,898
13,283
2,279
(11,341)
-
441
(731)
10,847
-
(12,345)
(1,900)
360
(375)
$ 32,416
$ 28,485
$ 11,754
20,662
$ 10,864
17,621
$ 32,416
$ 28,485
The total undiscounted amount of the estimated future expenditures required to settle
the reforestation obligation at December 31, 2013 is 33,285,000 (2012 - $28,601,000).
The reforestation expenditures are expected to occur over the next one to fifteen years
and have been discounted at a long term risk-free interest rate of 3% (2012 – 2%).
Reforestation expense resulting from obligations arising from current logging are
included in Production costs for the year and expense related to the unwinding of the
discount is included in Finance costs.
13. Share capital:
(a) Share transactions:
Authorized capital at December 31, 2013 and 2012 consists of:
• 100,000,000 Class A subordinate voting shares without par value;
• 1,700,000 Class B common shares without par value; and
• 5,000,000 preference shares without par value.
Share transactions during 2013 and 2012 were as follows:
Number
Class A
Class B
Total
Amount
Balance, December 31,
2011 and 2012
Share issuance, net of share issue
expenses
Class B shares converted to Class A
54,847,176
1,015,779
55,862,955 $ 346,365
7,187,500
1,015,779
-
(1,015,779)
7,187,500
-
82,358
-
Balance, December 31, 2013
63,050,455
-
63,050,455 $ 428,723
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
60
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
13. Share capital (continued):
(a) Share transactions (continued):
The 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 August 23, 2013, the Company’s controlling shareholder, Sauder Industries
Limited (“SIL”) exercised its right under the Company’s Articles to exchange its Class
B Common Shares for Class A Subordinate Voting Shares on a share for share basis
without any cash or non-cash consideration. As a result of the exchange by SIL, all
remaining Class B Shares were automatically converted to Class A Shares.
On September 30, 2013 the Company closed a public offering of 7,187,500 Class A
Subordinate Voting shares at a price of $12.00 per share for gross proceeds of
$86,250,000 less transaction costs of $3,892,000 to net cash proceeds of
$82,358,000.
Proceeds were used to fund completion of capital projects expected to increase the
operational efficiency of, and support higher operating rates from, the Company’s
assets with the expectation of increased profitability. Initially, a portion of the
proceeds was used to reduce the Company’s debt levels.
There were no changes in contributed surplus in 2013 or 2012.
At December 31, 2013, 1,631,740 Class A shares are reserved for possible future
issuance pursuant to the share option plan.
(b) Share option plan:
The Company has 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, 2013 and 2012. No
share options have been granted after November 7, 2002.
14. Depreciation, depletion and amortization:
Depreciation, depletion and amortization allocated by function are as follows:
Production
Selling and administration
2013
2012
$ 61,300
967
$ 51,471
922
$ 62,267
$ 52,393
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
61
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
15. Personnel expenses:
Note
2013
2012
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
22
22
11
16. Finance costs:
Recognized in Net earnings:
Interest on borrowing
Net interest on defined benefit plans
Reclassification of loss in fair value of interest rate swap
from Other comprehensive income
Unwind of discount on provisions
Amortization of deferred finance costs
Recognized in Other comprehensive income:
$ 133,795
$ 100,743
6,601
3,392
5,789
1,183
18,841
11,046
5,671
3,716
4,778
925
10,065
8,848
$ 180,647
$ 134,746
2013
2012
$
(7,460)
(210)
$
(5,221)
(117)
(58)
(522)
(819)
-
(454)
(649)
$
(9,069)
$
(6,441)
2013
2012
Effective portion of changes in fair value of interest
rate swap
$
241
$
371
17. Other income:
Gain on disposal of surplus equipment, licences and roads
Gain on lumber futures trading
$
2013
484
118
$
2012
309
25
$
602
$
334
18. Restructuring costs and write-downs of roads:
Severance costs
Road write-downs
Other (recovery)
Note
11
9
11
$
2013
371
-
-
$
2012
724
164
(359)
$
371
$
529
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
62
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
19. Income taxes:
Income tax expense is as follows:
Current tax expense:
Current year
Adjustments for prior periods
Deferred income tax expense (recovery):
Origination and reversal of temporary differences
Changes in tax rates
Change in unrecognized deferred income tax assets
2013
2012
$
434
29
463
$
522
118
640
13,273
(529)
(12,652)
92
(2,612)
57
2,373
(182)
$
555
$
458
Income tax (expense) recovery recognized in Other comprehensive income is as follows:
Loss (gain) on hedge of net investment
in foreign operation
2013
2012
$
$
212
212
$
$
(84)
(84)
The reconciliation of income taxes at the statutory rate to the income tax expense is as
follows:
Income tax expense (recovery) at the statutory rate of
25.75% (2012 – 25%)
Unrecognized deferred income tax assets
Entities with different tax rates
Change in future tax rates and statutory and tax recovery
rate difference
Other
2013
2012
$ 11,019
(12,652)
2,618
$
(2,062)
2,373
(3)
(529)
99
57
93
$
555
$
458
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 total approximately $276,000,000
(2012 - $292,000,000), expire between 2023 and 2032, and are available to reduce
future taxable income.
Although the Company expects to realize the full benefit of the loss carry-forwards and
other deferred income tax assets, due to the cyclical nature of the wood products
industry and the economic conditions over the past 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
63
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
19. Income taxes (continued):
Deferred income tax assets are not recognized in respect of the following:
Losses carried forward
Deductible temporary differences
Recognized deferred income taxes:
2013
$ 80,592
2,561
2012
$ 117,203
7,584
$ 83,153
$ 124,787
December 31, 2013
Deferred income tax assets
Losses
Reserves
Tax credits
Defined benefit plan
actuarial losses
Share issuance costs
Other
Deferred income tax liabilities
Capital assets
Loss (gain) on hedge of net
Recognized in
Recognized
in Other
Income Tax Comprehensive
Income (loss)
Expense
Opening
Balance
$ 52,471
12,394
955
$
7,433
2,848
-
$
680
668
1,523
12
26
(271)
(68,331)
(10,190)
-
-
-
-
-
-
-
Ending
Balance
$ 59,904
15,242
955
692
694
1,252
(78,521)
investment in foreign operation
(262)
50
212
-
Total
$
98
Recognized in
$
(92)
$
212
Recognized
in Other
Income Tax Comprehensive
Income (loss)
Expense
Opening
Balance
$ 42,228
12,818
938
$ 10,243
(424)
17
$
680
668
2,427
-
-
(904)
(59,581)
(8,750)
-
-
-
-
-
-
-
$
218
Ending
Balance
$ 52,471
12,394
955
680
668
1,523
(68,331)
December 31, 2012
Deferred income tax assets
Losses
Reserves
Tax credits
Defined benefit plan
actuarial losses
Share issuance costs
Other
Deferred income tax liabilities
Capital assets
Loss (gain) on hedge of net
investment in foreign operation
(178)
-
(84)
(262)
Total
$
-
$
182
$
(84)
$
98
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
64
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
20. Commitments and contingencies:
(a) Operating leases and contractual obligations:
The Company is obligated under various operating leases and contracts requiring
minimum annual payments in each of the next five years as follows:
2014
2015
2016
2017
2018
$ 12,340
5,150
4,350
2,630
2,080
(b) On acquisition of the Thomaston sawmill operations from Keadle Lumber Enterprises,
Inc., the Company agreed to pay an additional US$7,000,000, contingent upon
receipt of an upgrade to the air permit which will allow the Company to operate a
second shift. Receipt of this approval is expected in the first quarter, 2014, with the
payment to be made 365 days thereafter. The liability, revalued at the year-end
foreign exchange rate to $7,445,000, is included in Other liabilities and provisions in
the Statement of Financial Position as at December 31, 2013.
(c) Surety Performance Bonds:
The Company has posted $19,164,000 in surety performance bonds, with various
expiry dates extending through March, 2018.
(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.
21. Net earnings per share:
Net earnings per share is based on the earnings attributable to shareholders and a
weighted average number of shares outstanding for the year.
The reconciliation of the numerator and denominator is determined as follows:
2013
Weighted
average
earnings number of
Net
(loss)
Shares Per share
2012
Net
Weighted
average
earnings number of
Shares
(loss)
Per share
Issued shares at
January 1
Effect of shares issued
55,863
on September 30, 2013
1,831
55,863
-
Basic and diluted
earnings (loss)
per share
$ 42,239
57,694 $
0.73
$ (9,474)
55,863
$
(0.17)
There were no share options outstanding at December 31, 2013 (2012 – nil).
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
65
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
22. Employee future benefits and other post-retirement plans:
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 2013, the pension expense for this plan
is equal to the Company’s contribution of $1,324,000 (2012 - $1,265,000).
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 2013, the pension expense is equal to the Company’s
contribution of $49,000 (2012 - $46,000).
Employees of Interfor U.S. Inc. and Cedarprime Inc., the Company’s wholly-owned
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 2013, the pension expense for this plan is equal to the Company’s
contribution of $1,317,000 (2012 - $730,000).
(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 2013, the
pension expense for these plans is equal to the Company’s contribution of
$2,420,000 (2012 - $2,358,000). 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 2013 the Company recorded an expense of $679,000 (2012 - $378,000) in
respect of these plans. The amounts accrued for defined contribution commitments
is $4,926,000 (2012 - $4,423,000).
The accrued liabilities of this plan are included in the Company’s Statement of
Financial Position as follows:
Trade accounts payable and provisions
Employee future benefits obligation
$
2013
317
4,609
$
2012
294
4,129
$
4,926
$
4,423
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
66
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
22. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans:
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 wholly-owned subsidiary Seaboard
Shipping Company Limited (“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. Effective December 31, 2013, the plan was
terminated and the wind-up process commenced. 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
December 31, 2012
December 31, 2012
December 31, 2012
December 31, 2015
December 31, 2015
December 31, 2013
Most Recent Valuation
Next Scheduled Valuation
The results of the December 31, 2013 SSCL Plan actuarial valuations will be received
in 2014. The significant pension plans are subject to the statutory requirements
(including minimum funding requirements) of their respective jurisdictions and the
Income Tax Act. Each plan’s pace of funding is determined by the Company, subject
to the statutory minimums and maximums.
In 2013, the Company paid contributions of $1,558,000, and in lieu of making cash
special payments to fund certain deficits, posted letters of credits totaling
$1,807,000. In 2014, the Company expects to pay contributions of $860,000 to its
defined benefit plans, and hold a total of $4,998,000 of letters of credit.
The Company has determined that, in accordance with statutory requirements of the
plans (such as minimum funding requirements), the present value of refunds or
reductions in future contributions for all plans, with the exception of the SSCL Plan, is
not lower than the balance of the total fair value of the plan assets less the total
present value of obligations. The curtailment of the SSCL Plan at December 31, 2013
resulted in the reduction of the defined benefit asset and the recognition of a defined
benefit liability resulting from the asset ceiling limit of $700,000 (2012 - $ nil).
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
67
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
22. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans (continued):
The Company adopted revised IFRS standard IAS 19R for its employee benefits
reporting, resulting in a restatement of its obligations at December 31, 2012. The
comparative reconciliations shown below reflect the restated figures at December 31,
2012.
Pension Benefits
Other Post-retirement Benefits
2013
2012
2013
2012
Defined benefit obligation:
$
Beginning of year
Service cost
Employee contributions
Interest cost
Benefit payments
Past service cost
(settlements)
Actuarial loss (gain) due to:
54,812 $
716
342
2,272
(3,222)
49,645 $
585
297
2,422
(2,691)
1,833 $
45
-
78
(87)
Demographic assumptions
Financial assumptions
Experience adjustment
1,043
(3,390)
605
-
-
-
4,410
144
(17)
28
(1)
(334)
1,627
35
-
80
(104)
-
-
195
-
End of year
$
53,178 $
54,812 $
1,545 $
1,833
Plan assets:
Beginning of year
Interest on plan assets
Employer contributions
Employee contributions
Benefit payments
Administration costs
Actuarial gain
$
51,897 $
48,516 $
2,139
1,471
342
(3,222)
(228)
4,483
2,342
1,791
297
(2,691)
(138)
1,780
- $
-
87
-
(87)
-
-
-
-
104
-
(104)
-
-
End of year
$
56,882 $
51,897 $
- $
-
The following summarizes the balances recognized on the Statement of Financial
Position:
Pension Benefits
Other Post-retirement Benefits
2013
2012
2013
2012
Fair value of plan assets
Present value of unfunded
obligations
Present value of funded
obligations
Surplus (deficit)
Effect of asset ceiling limit
$
56,882 $
51,897 $
- $
-
414
447
1,545
1,833
52,764
3,704
(700)
54,365
(2,915)
-
-
(1,545)
-
-
(1,833)
-
Accrued benefit (obligation)
$
3,004 $
(2,915) $
(1,545) $
(1,833)
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
68
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
22. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans (continued):
The following table shows the Company’s net expense recognized in the Statement
of Earnings and the actuarial (gains) losses recognized in Retained earnings through
Other comprehensive income:
Pension Benefits
Other Post-retirement Benefits
2013
2012
2013
2012
Statement of Earnings
Production expense
Finance costs
$
944 $
133
773 $
37
28 $
78
35
80
$
1,077 $
810 $
106 $
115
Other comprehensive income
Actuarial (gains) losses
Effect of asset ceiling limit
$
$
(6,225) $
700
(5,525) $
2,774 $
(169)
2,605 $
(307) $
-
(307) $
195
-
195
The Company’s accrued benefit assets (liabilities) are included in the Company’s
Statement of Financial Position as follows:
Pension Benefits
Other Post-retirement Benefits
2013
2012
2013
2012
Employee future benefits
asset
$
3,980 $
878 $
- $
-
Trade accounts payable and
provisions
Employee future benefits
obligation
(74)
(74)
(50)
(50)
(902)
(3,719)
(1,495)
(1,783)
$
3,004 $
(2,915) $
(1,545) $
(1,833)
Plan assets consist of:
Asset category
Investment Funds
Canadian Equity
U.S. Equity
International Equity
Global
Money Market
Fixed Income
Balanced
Cash
Other
Total
$
2013
2012
16,630 $
-
-
14,494
28
24,090
527
88
1,025
14,786
6,068
6,503
-
641
22,314
505
63
1,017
$
56,882 $
51,897
The plan assets held in investment funds are managed by Investment Managers and
the fair values of these investments have been determined based on the unit price
of the underlying funds. As such, all investment funds are categorized as Level 2 of
the fair value hierarchy.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
69
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
22. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans (continued):
Actuarial assumptions used in accounting for the Company maintained benefit plans
(expressed as weighted averages) are:
Pension Benefits
2013
2012
Other Post-retirement Benefits
2013
2012
Defined benefit obligation as of December 31
Discount rate
Compensation increases
(1)
4.69%
3.22%
4.19%
3.39%
4.65%
-
4.25%
-
Pension expense
Discount rate
Compensation increases(1)
4.19%
3.39%
4.88%
3.39%
4.25%
-
4.95%
-
(1) Compensation increases only relate to the CMSG plan and the SSCL plans.
For measurement purposes at December 31, 2013, the Company has assumed a
5.85% health care cost trend in 2014 grading down to 4.38% in 2021 (2012 –
5.40% health care cost trend in 2013 grading down to 4.27% in 2015).
Effect of 1% decrease in discount rate
on defined benefit obligation
$
7,044
$
196
Pension Benefits Other Post-retirement Benefits
The sensitivity to the discount rate has been determined assuming all other
assumptions remain unchanged. An increase in the discount rate would have an
opposite effect of similar magnitude.
The weighted average durations of the defined benefit pension plans and other post-
retirement benefit plans is twelve years.
Through its defined benefit pension plans and other post-retirement benefits, the
Company is exposed to a number of risks, the most significant of which are detailed
below:
Asset liability mismatch – The defined benefit plan obligations are calculated using a
discount rate set with reference to corporate bond yields. While the Adams Lake and
CMSG pension plans hold some fixed income investments, both plans hold a
significant proportion of equities, which are expected to outperform corporate bonds
in the long term. However, in the short term, there will be volatility in the funded
status of the plans. In relation to the SSCL plans the duration of the invested assets
is approximately matched by the duration of the liabilities and are all held in fixed
income investments.
Life expectancy – The majority of obligations are to provide benefits for the life of
the member, so increases in life expectancy would result in increased obligations.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
70
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
23. Related party transactions:
(a) Key management personnel compensation:
Key management personnel are comprised of the Company’s directors and executive
officers. The remuneration of key management personnel was as follows:
Salary and short-term employee benefits
Post-employment benefits
Other long term benefits
Share-based compensation expense
$
2013
4,339
412
(97)
14,016
$
2012
2,846
347
2,538
4,195
$ 18,670
$
9,926
Obligations in relation to key management personnel, including directors, are as
follows:
Trade accounts payable and provisions
Employee benefits obligation
Provisions and other liabilities
$
2013
7,960
3,131
11,675
$
2012
6,419
2,556
5,582
$ 22,766
$ 14,557
(b) On August 23, 2013, SIL ceased to be a significant shareholder (see Note 13(a)).
Prior to that date, the Company had lumber sales to SIL in the amount of $474,000
(2012 - $1,069,000).
All transactions were conducted on a normal commercial basis, including terms and
prices.
24. Segmented information:
The Company manages its business as a single operating segment, solid wood. The
Company harvests and purchases logs which are sorted by species, size and quality and
then either manufactured into lumber products at the Company’s sawmills, or sold.
Substantially all operations are located in British Columbia, Canada and the Pacific
Northwest and U.S. Southeast, U.S.
The Company sells to both foreign and domestic markets as follows:
2013
Canada
United States
China/Taiwan
Japan
Other export
$ 226,989
556,878
130,697
121,548
69,110
2012
$ 234,750
365,096
103,982
105,952
39,416
$ 1,105,222
$ 849,196
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
71
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
24. Segmented information (continued):
Sales by product line are as follows:
Lumber
Logs
Wood chips and other by products
Ocean freight and other
2013
2012
$ 872,264
136,633
72,418
23,907
$ 631,238
113,902
69,376
34,680
$ 1,105,222
$ 849,196
Non-current assets by geographic location are as follows:
Canada
United States
25. Capital management:
2013
2012
$ 345,256
250,535
$ 333,304
126,577
$ 595,791
$ 459,881
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.
There were no changes in the Company’s approach to capital management during 2013.
Under its debt financing agreements, 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 agreements 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.
26. Financial instruments:
(a) Fair value of financial instruments:
At December 31, 2013, the fair value of the Company's long term debt approximated
its carrying value of $145,479,000 (2012 - $135,046,000). The fair values of other
financial instruments approximate their carrying values due to their short-term
nature.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
72
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
26. Financial instruments (continued):
(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.
As at December 31, 2013, the Company had outstanding foreign currency forward
contract obligations to sell a maximum of US$8,000,000 at an average rate of
CAD$1.0653 to the US$1.00 and ¥145,425,000 at an average rate of ¥96.95 to the
US$1.00 during 2014. All foreign currency gains or losses to December 31, 2013
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 $136,000 (measured
based on Level 2 of the fair value hierarchy), has been recorded in Trade accounts
receivable and other (December 31, 2012 - $134,000 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. These
interest rate swaps were unwound on October 22, 2013.
On March 25, 2013, the Company entered into two additional interest rate swaps,
each with notional value of US$25,000,000 and maturing February 17, 2017. Under
the terms of these swaps the Company pays an amount based on a fixed annual
interest rate of 0.84% and receives a 90 day LIBOR which is recalculated at set
interval dates.
The intent of the interest rate swaps is to convert floating-rate interest expense to
fixed-rate interest expense. As these swaps have been designated as cash flow
hedges, the fair value of these interest rate swaps at December 31, 2013, being an
asset of $166,000 (measured based on Level 2 of the fair value hierarchy), has been
recorded in Trade accounts receivable and other (December 31, 2012 - $133,000
liability recorded in Trade accounts payable and provisions measured based on Level
2 of the fair value hierarchy) and a gain of $241,000 (December 31, 2012 -
$371,000 gain) has been recognized in Other comprehensive income for the year
ending December 31, 2013.
To manage price risk, the Company also traded lumber futures which were
designated as held for trading with changes in fair value recorded in Other income in
Net earnings. At December 31, 2013 there were no outstanding lumber futures
contracts and a gain of $118,000 was recognized in Other income on completed
contracts for the year ended December 31, 2013 (December 31, 2012 - $25,000
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
73
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
26. Financial instruments (continued):
(c) Hedge of investment in foreign operations:
As at December 31, 2013, U.S. dollar borrowings under the Revolving Term Line and
Senior Secured Notes were designated as hedges against the Company’s investment
in its foreign U.S. operations with unrealized foreign exchange gains (losses)
recorded in Other comprehensive income as follows:
Designation
date
Opening
Closing
balance(¹) Additions(¹) Payments(¹) balance(¹)
Unrealized foreign
exchange
gains (losses)(²)
2013
2012
October 1, 2008(³) $ 30,200
March 2, 2013(³)
-
June 19, 2013(³)
-
June 26, 2013(4)
-
July 1, 2013(³)
-
$
-
70,000
50,000
50,000
13,000
$
-
(15,000)
(50,000)
-
(13,000)
$ 30,200
55,000
-
50,000
-
$ (2,075)
(2,265)
(1,495)
(635)
297
$ 667
-
-
-
-
$ 30,200
$183,000
$(78,000) $135,200 $ (6,173)
$ 667
(1) Denominated in U.S. dollars
(2) Denominated in Canadian dollars
(3) Drawn on Revolving Term Line
(4) Drawn on Senior Secured Notes
Repayments were de-designated as a hedge of the Company’s investment in its
foreign U.S. operations.
(d) Financial risk management:
Financial instrument assets include cash and cash equivalents, deposits and accounts
receivable. Cash and cash equivalents, 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 provisions, long term debt, and certain other long term liabilities. All financial
liabilities are designated as other liabilities and are initially measured at fair value
plus any direct transaction costs and subsequently at amortized cost using the
effective interest method.
There are no financial instruments classified as available-for-sale or held-to-maturity.
The use of financial instruments exposes the Company to credit, liquidity and market
risk.
The Board of Directors has overall responsibility for the establishment and oversight
of the Company’s risk management framework. The Company’s risk management
policies are established to identify and analyze the risks faced by the Company, to
set appropriate risk limits and controls, and to monitor risks and adherence to limits.
Risk management policies and systems are reviewed regularly to reflect changes in
market conditions and the Company’s activities. Through its standards and
procedures, management has developed a control environment in which employees
are clear on roles and obligations and management regularly monitors compliance
with its risk management policies and procedures.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
74
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
26. Financial instruments (continued):
(d) Financial risk management (continued):
(i) Credit risk:
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 has experienced minimal bad debts. 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
$42,000 was recorded as at December 31, 2013 (2012 - $91,000).
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 2013.
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
75
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
26. Financial instruments (continued):
(d) Financial risk management (continued):
(i) Credit risk (continued):
Accounts receivable carrying value at the reporting date by geographic region
were:
Canada
United States
Japan
China/Taiwan
Other
(ii) Liquidity risk:
2013
$ 12,813
31,093
7,962
5,065
5,802
2012
$ 15,974
17,586
6,286
4,600
2,946
$ 62,735
$ 47,392
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.
The Company also maintains a revolving Operating Line, a Revolving Term Line
and a U.S. Operating Line that can be drawn on to meet financing needs.
The estimated cash payments due in respect of contractual and legal obligations
including projected major capital improvements are summarized as follows:(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
395
Income taxes payable
145,479
Long term debt
Reforestation liability
33,285
Provisions and other liabilities 40,882
Operating leases and expected
capital commitments
31,030
$ 81,772 $ 81,772 $
395
-
11,754
15,855
- $
-
744
8,097
9,576
- $
-
91,555
6,116
1,956
-
-
53,180
7,318
13,496
12,340
9,500
4,710
4,480
Total obligations
$332,843 $122,116 $ 27,917 $104,337 $ 78,474
(1) Table may not add due to rounding
(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 relative to risk.
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
76
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
26. Financial instruments (continued):
(d) Financial risk management (continued):
(iii) Market risk (continued):
Currency risk
The Company is exposed to currency risk on cash and cash equivalents, accounts
receivable, accounts payable and provisions 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 and U.S. dollars,
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 26(b). The Company routinely assesses its foreign exchange exposure by
reviewing outstanding contracts, pending order files and working capital
denominated in foreign currencies.
At December 31, 2013, the Company has U.S. dollar drawings under its
Revolving Term Line and Senior Secured Notes of US$135,200,000 (2012 –
US$30,200,000). These U.S. dollar drawings have been designated as a hedge
against the investment in the Company’s net investment in its U.S. operations.
As at December 31, the Company’s accounts receivable were denominated in the
following currencies (in thousands):
2013
Japanese ¥
USD
CAD
Accounts receivable
Accounts receivable held by foreign
15,109
18,926
160,548
subsidiaries with $US functional currency
-
24,592
-
2012
Accounts receivable
Accounts receivable held by foreign
15,109
CAD
17,389
43,518
USD
14,882
160,548
Japanese ¥
79,471
subsidiaries with $US functional currency 8
14,841
-
17,397
29,723
79,471
As at December 31, 2013, the domestic operations of the Company held cash and
cash equivalents of US$1,071,000 (2012 – US$3,982,000). Cash and cash
equivalents held by foreign subsidiaries totaled US$2,845,000 (2012 -
US$9,265,000).
Based on the Company’s net exposure to foreign currencies as at December 31,
2013, including U.S. dollar denominated cash and cash equivalents, long term
debt and other financial instruments, the sensitivity of the U.S. dollar 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,
2013, in respect of its net investment in U.S. subsidiaries, the sensitivity of the
U.S. dollar balances to the Company’s Other comprehensive income is as follows:
U.S. dollar
$0.01 increase vs CAD$
$934,000 decrease in OCI
Notes to Consolidated Financial Statements
Years ended December 31, 2013 and 2012
77
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
26. Financial instruments (continued):
(d) Financial risk management (continued):
(iii) Market risk (continued):
Interest rate risk
The Company has reduced its exposure to changes in interest rates on
borrowings by entering into interest rate swaps, as described in Note 26(b). 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 2013, the sensitivity of a 100
basis point increase in interest rates would result in an approximate decrease of
$944,000 (2012 - $472,000) in annual net earnings.
Other market price risk
The Company does not enter into commodity contracts other than to meet the
Company’s expected usage and sale requirements and such contracts are not
settled net.
27. Subsequent event:
On February 8, 2014, the Company entered into a share purchase agreement (the
“Purchase Agreement”) with Ilim Timber Continental, S.A. (“ITC”) to acquire all of the
outstanding common shares of Tolleson Ilim Lumber Company for consideration
comprised of US$129,900,000 in cash and retained liabilities and 3,680,000 common
shares of the Company. The Tolleson operations include two sawmills in Perry and
Preston, Georgia, with a combined annual lumber production capacity of more than 400
million board feet plus a remanufacturing facility in Perry, Georgia.
The Company also entered into a non-competition agreement (the “Non-Competition
Agreement”) with ITC, which is subject to completion of the Purchase Agreement.
Under terms of the Non-Competition Agreement, ITC and its affiliates would be
prohibited from carrying on various activities within Canada and the U.S. that would be
in competition with the Company’s operating activities. The Non-Competition
Agreement expires five years from the closing date of the Purchase Agreement.
This acquisition remains subject to various closing conditions, including regulatory
approval, and is anticipated to close in the first quarter of 2014. The acquisition will be
financed in part from Interfor’s existing credit facilities, to be amended as described
below, and is expected to be accretive to net earnings immediately.
In conjunction with the Purchase Agreement, the Company has secured commitments
from its lenders to increase the credit available under its Revolving Term Line from
$200,000,000 to $250,000,000, without change to other terms and conditions.
78
ANNUAL INFORMATION FORM
Prepared as of February 13, 2014
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 2013
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 of lumber products. The Company has sawmilling
operations in British Columbia, Washington, Oregon and Georgia and supplies lumber
products to markets in North America, the Asia-Pacific region and Europe. The Company’s
annual production capacity exceeds two billion board feet.
Interfor also owns a value-added remanufacturing facility in Washington and operates a
break bulk shipping service transporting lumber and other building materials from the west
coast of North America to markets in the Asia-Pacific region.
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
significant wholly-owned subsidiary, Interfor U.S. Inc. (formerly Interfor Pacific Inc.), is
incorporated in the State of Washington and owns and operates our U.S. sawmills. 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), Interfor Japan Ltd. (incorporated in British Columbia), and Seaboard
Shipping Company Limited (incorporated in British Columbia).
Annual Information Form
____________________
HISTORY
79
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.
RECENT DEVELOPMENTS
2011
Overseas markets, particularly China, continued their growth helping to offset weak North
American demand and providing some stability for pricing.
In January, 2011, the Company acquired full control of Seaboard International Shipping
Company Limited. 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. 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.
2012
North American lumber markets improved in 2012 as positive economic signs began to
emerge in the U.S. and activity levels in China and Japan rose as the year progressed.
Improved markets, combined with supply constraints, resulted in 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. Capital
upgrades started in 2011 at the Grand Forks sawmill were completed.
2013
Increased North American demand as U.S. housing markets continued to improve, coupled
with price tension created by off-shore markets resulted in higher sales realizations and
higher operating rates in 2013. On March 1, 2013, Interfor concluded the acquisition of
Rayonier Inc.’s Wood Products Business in Georgia, U.S. for US$84.4 million, adding three
sawmills (Baxley, Eatonton and Swainsboro) and a combined 360 million board feet to its
annual lumber capacity and broadening its product mix to include Southern Yellow Pine. We
have filed a Business Acquisition Report on SEDAR with respect to this acquisition.
On May 1, 2013, the Company acquired two timber tenures in the Kootenay Region of B.C.
from Springer Creek Management Ltd. The tenures have a combined allowable annual cut
(“AAC”) of approximately 174,000 cubic metres and will support increased production levels
at the Castlegar sawmill.
On July 1, 2013, the Company added a fourth sawmill (Thomaston) in Georgia for
US$39.1 million, of which US$32.1 million was paid on closing. Payment of US$7.0 million
is contingent upon receipt of an upgrade to the air permit which would allow the Company
to operate a second shift. Following an upgrade of the sawmill’s drying capacity, the
Thomaston sawmill will have an annual capacity in excess of 160 million board feet on a
two-shift basis.
On September 30, 2013, the Company closed a public offering of 7,187,500 Class A
Subordinate Voting shares at a price of $12.00 per share for gross proceeds of $86.3
million, with proceeds used to complete capital upgrades and reduce debt.
Annual Information Form
____________________
80
MANUFACTURING AND TIMBER SUPPLY
We operate five sawmills in B.C., two sawmills and one remanufacturing plant in
Washington, U.S., two sawmills in Oregon, U.S., and four sawmills in Georgia, U.S. 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.
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 the addition of
four sawmills in Georgia during 2013.
Rated capacity and production of lumber for each mill is set out in the following table:
Sawmills
B.C. Coast
Hammond(2)
Acorn
B.C. Interior
Adams Lake
Castlegar
Grand Forks
U.S. Pacific Northwest
Gilchrist
Molalla
Port Angeles
Beaver
U.S. Southeast
Baxley(3)
Eatonton(3)
Swainsboro(3)
Thomaston(4)
Total
Present
Rated
Capacity(1)
Production for years
ended December 31,
2013 2012
(millions of board feet)
2011
180
140
375
185
160
130
175
165
185
175
75
125
160
94
88
364
169
166
101
203
163
102
96
63
76
40
89
114
352
166
105
102
209
120
94
-
-
-
-
80
102
353
136
124
104
185
128
52
-
-
-
-
2,230
1,725 1,351
1,264
(1) Based on two shifts per day and adjusted for regional operating parameters.
(2) Volumes include lumber custom-cut at third party facilities under the direction of Hammond
management amounting to 9.0 million board feet in 2013.
(3) Baxley, Eatonton and Swainsboro were acquired March 1, 2013. Volumes reported are
Interfor only.
(4) Thomaston was acquired July 1, 2013. Volumes reported are Interfor only. Capacity is based
on receiving an expanded air permit which is expected in quarter one of 2014.
Annual Information Form
____________________
Canadian Operations
B.C. Coast
Hammond
81
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.
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.
B.C. Interior
Adams Lake
The Adams Lake operation 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.
The sawmill 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 sawmill incorporates proven technology that materially improved the operating
efficiency and cost structure of the Adams Lake operation.
Castlegar
Our Castlegar operation, located in the southern interior of B.C., includes a sawmill, dry
kilns, a planer and transportation system for moving logs on Arrow Lake. It has timber
tenures with an allowable annual cut of 624,000 cubic metres and manufactures Fir-Larch,
SPF, Western Red Cedar and Hemlock dimension lumber.
Grand Forks
Our Grand Forks sawmill is located in the southern interior of B.C. on a 75 acre site and
manufactures kiln dried lumber for the U.S. and Canadian construction markets as well as
the housing market in Japan. It has timber tenures with an allowable annual cut of
503,000 cubic metres. The sawmill cuts approximately 75% SPF and 25% Fir-Larch.
In late 2011, Interfor approved the installation of a new small log line to replace an 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.
Annual Information Form
____________________
B.C. Timber Supply
82
The Province of British Columbia (the “Crown”) owns about 95% of the timberlands from
which the majority of our 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.
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.
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 annual rent to cover general administration and fire preparedness obligations
and stumpage fees payable to the Crown.
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 hold various Forest License (“FL”), Tree Farm License (“TFL”) and Timber License (“TL”)
tenures that currently provide for an AAC of approximately of 3.9 million cubic metres. The
majority of Interfor’s tenures are long-term (15 and 25 year) renewable agreements that
are generally replaced every five years.
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 log 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.
On the B.C. Coast, we harvest a variety of species consisting primarily of Western Hemlock,
Amabilis Fir, Western Red Cedar and Douglas-Fir. In the B.C. Interior, the species mix
consists of Spruce, Pine, Fir, Douglas-Fir, Larch and Western Red 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 B.C. Coast, this amount is expected to
increase significantly over the next several decades. Logging operations are seasonal due
to a number of factors including weather, ground conditions and fire season closures.
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 for the
periods specified. It also presents the volume of log purchases and sales during the period.
Annual Information Form
____________________
83
B.C. Timber Supply
Allowable Annual Cut(1)
— Forest Licences
— Non Replaceable Forest Licences
— Tree Farm Licences
— Discretionary Annual Harvest Levels(2)
Log Production
— Coast
— Interior
Total Log Production
Log Purchases
Log Sales
Years ended December 31,
2014
2013
2012
2011
(thousands of cubic metres)
2,775
2,684
2,684
2,701
220
875
80
286
801
40
286
801
40
220
801
40
3,950
3,811
3,811
3,762
1,639
1,526
1,757
1,959
1,770
1,651
3,598
3,296
3,408
1,131
1,156
1,133
1,339
1,352
1,356
(1) AAC status at the beginning of each year (includes a provision for non-recoverable fibre).
(2) Volumes not included in AAC.
U.S. Operations
U.S. Pacific Northwest
Gilchrist
The Gilchrist sawmill is located in Gilchrist, Oregon, on approximately 140 acres. The
sawmill primarily processes Lodgepole Pine, Ponderosa Pine and White Fir to produce a wide
range of specialty and dimension lumber products. The sawmill 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.
Molalla
The Molalla sawmill is located in Molalla, Oregon, approximately 50 kilometres southeast of
Portland. The sawmill processes primarily Hemlock and Douglas-Fir logs to produce stud
lumber for the U.S. market.
Port Angeles
The Port Angeles sawmill 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. The sawmill 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.
Annual Information Form
____________________
Beaver
84
The Beaver sawmill consists of a single line 20’ dimension sawmill on a 45 acre owned site.
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 sawmill
produces Hemlock, Douglas-Fir and Spruce products for domestic markets complemented
with some export products.
Cedarprime
CEDARPRIME Inc. is located on leased premises in Sumas, Washington. 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 North American and offshore markets.
U.S. Southeast
Baxley
This sawmill in Baxley, Georgia was acquired on March 1, 2013 from Rayonier Inc. It
operates on a two shift basis with a capacity of 175 million board feet annually. The mill
produces Southern Yellow Pine lumber primarily in 2x4 through 2x12 products, and
4x4 timbers as market conditions warrant.
Eatonton
This sawmill in Eatonton, Georgia was acquired on March 1, 2013 from Rayonier Inc. It
operates on an extended one shift basis with a capacity of 75 million board feet annually.
The mill produces Southern Yellow Pine lumber primarily in 2x4 and 2x6 products.
Swainsboro
This sawmill in Swainsboro, Georgia was acquired on March 1, 2013 from Rayonier Inc. It
operates on a two shift basis with a capacity of 125 million board feet annually. The mill
produces Southern Yellow Pine lumber primarily in 2x4 and 2x6 products.
Thomaston
On July 1, 2013, the Company completed the acquisition of the Thomaston, Georgia sawmill
from Keadle Lumber Enterprises, Inc. Currently, the sawmill operates on a one shift basis
with production capacity of 80 million board feet annually. Interfor has plans to invest in
additional kilns and infrastructure over the course of 2014 to increase production capacity to
more than 160 million board feet, on a two shift basis.
U.S. Timber Supply
U.S. Pacific Northwest
Timber supply in the U.S. Pacific Northwest 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. In 2013, about 67% of the log supply in the U.S. Pacific Northwest came
from land that is owned by industrial and small private landowners, while the remainder was
sourced from State, Federal and tribal lands.
Annual Information Form
____________________
85
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 of the Washington
sawmills 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 are 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.
U.S. Southeast
Timber in the U.S. Southeast is sourced primarily from privately held timberlands with only
minor volumes coming from publicly owned timberlands. Private timberland ownership
includes non-industrial private owners, timber real estate investment trusts (“timber
REITs”) and various institutional investors such as pension funds, who are typically
represented by a timberland investment management organization (“TIMO”). Both timber
REITs and TIMOs are considered industrial timberland owners. Interfor’s sawmills in
Georgia purchase timber comprised exclusively of Southern Yellow Pine, originating from
each of these sources.
For the Baxley, Swainsboro and Eatonton sawmills, Interfor has a services-for-fee contract
under which Rayonier Inc.’s fibre procurement group manages timber procurement activities
on behalf of Interfor. This contract, which terminates December 31, 2014 unless extended,
was entered into when Interfor acquired the sawmills from Rayonier in March 2013. At the
Thomaston sawmill, which was acquired from Keadle Lumber Enterprises, Inc. in July 2013,
timber purchases are managed by Interfor employees.
The total 2014 log supply requirement for the mills in the U.S. is estimated to be supplied
from the following sources:
Expected Sources of Timber 2014
State and federal lands
Industrial lands
Private lands
U.S. Pacific
Northwest
U.S.
Southeast
46%
47%
7%
100%
1%
20%
79%
100%
Annual Information Form
____________________
86
SALES, MARKETING AND COMPETITIVE POSITION
The global markets for the Company’s products are highly competitive and producers
compete primarily on the basis of price. In addition, a majority of Interfor’s lumber
production is sold into markets where competitors have the same or larger capacity. Many
of our competitors also have greater financial resources than Interfor and a number may be,
in certain product lines, lower cost producers.
The following table shows our lumber sales by geographic area and total sales by product
line for the past three years:
Lumber
— Canada
— U.S.
— Japan
— China
— Other export
Offshore transportation and handling
Logs
Wood chips and other residuals
Ocean freight, contract services and other
Years ended December 31,
2013
2012
2011
(thousands of dollars)
$ 90,470
$ 84,760
498,524
105,590
105,703
38,675
33,302
872,264
136,633
72,418
23,907
319,365
87,609
73,886
31,353
34,265
631,238
113,902
69,376
34,680
$64,412
222,524
78,423
102,453
30,995
39,560
538,367
108,413
68,355
43,110
Total sales
$1,105,222
$849,196
$758,245
Lumber Sales
Like other commodities, the demand for lumber is cyclical. It is affected by factors such as
interest rates, foreign currency exchange rates, freight rates, government tariffs and import
policies, and demand for housing. However, in recent years, the residential repair and
remodeling market in North America has become a significant consumer of lumber. This
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 offer a diverse range of products. Interfor also has a specific
customer and product base in various countries, providing a diversified sales profile, and it
is aggressively targeting China’s rapidly growing wood frame construction market.
Product and market diversification is particularly important for B.C. Coastal 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, the U.S. Pacific Northwest or the U.S.
Southeast. A continuing priority for our Company 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.
Annual Information Form
____________________
87
The primary 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. Pacific
Northwest 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.
Southern Yellow Pine lumber produced in Georgia mills is sold out of our office in Baxley,
Georgia to leverage our regional knowledge of Southern Yellow Pine market segments and
distribution channels.
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 profile. 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 U.S. Pacific Northwest and U.S. Southeast operations are sold to pulp producers or
fibre board manufacturers under short-term arrangements, with the exception of the Baxley
sawmill which has a long-term contract with a pulp producer.
DISTRIBUTION
We use various modes of surface transportation to deliver our lumber products. Shipments
to export markets are done by container and breakbulk vessels while shipments of lumber
within North America are done by truck and rail. The majority of breakbulk shipments are
carried by our wholly-owned subsidiary Seaboard International Shipping Company Limited
(Barbados). 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.
HUMAN RESOURCES
In B.C., we directly employ approximately 1,034 people in our logging and manufacturing
operations and corporate offices. The United Steel Workers (“USW”) is the certified
bargaining agent for approximately 521 of these people. The agreement with the USW for
the B.C. Coast has an expiry date of June 15, 2014, while the B.C. Southern Interior USW
agreement expires on June 30, 2013. The Canadian Marine Service Guild represents 23
employees, and their collective agreement expires September 30, 2014.
In the U.S., we employ approximately 962 employees in our sawmill and remanufacturing
operations in Washington, Oregon, Georgia and in our office located in Bellingham,
Washington.
Annual Information Form
____________________
THE ENVIRONMENT
88
Interfor is committed to responsible stewardship of the environment. 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.
Regulatory Compliance
Interfor operates in compliance with extensive provincial, state, federal or other laws and
regulations that apply to most aspects of our business activities.
Forest Management Certification
Interfor has achieved the internationally recognized Sustainable Forestry Initiative (“SFI”)
forest management certification for all of our B.C. woodlands operations. Interfor also has
Forest Stewardship Council (“FSC”) certification on its tenures in the Mid-Coast as part of
group certification for that area. Independent third party certification audits are conducted
by KPMG Performance Registrar Inc.
Chain of Custody (CoC) and Responsible Purchasing
Interfor maintains Chain-of-Custody (“CoC”) certifications at certain mills that track certified
logs coming from sustainably managed forests through the manufacturing process.
Coast Forest Conservation Initiative (CFCI)
Interfor is 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”). The joint work done by JSP is a major step towards
fulfilling the landmark Great Bear Rainforest agreement.
First Nations
First Nations groups have claimed aboriginal title and rights over substantial portions of
British Columbia. Interfor tenures overlap with the traditional territories of over 50 different
First Nations groups. The Company notifies each First Nations group prior to development
activities as part of the Forest Stewardship Plan preparation process.
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.
Interfor operations are in the southern interior which have a much lower percentage of Pine
(less than 30%) and are less affected by the MPB. 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.
Annual Information Form
____________________
Continual Improvement
89
Each year a formal Management Review of the Company’s program and performance is
completed as part of the process of continual improvement.
Additional information about our environmental work and third party certification is available
on our website at www.interfor.com.
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-sap stain 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.
RISK FACTORS
Discussion of risk factors relating to the Company and its operations is included under the
heading Risks and Uncertainties within Management’s Discussion and Analysis prepared as
of February 13, 2014, which is incorporated by reference herein and available on SEDAR at
www.sedar.com.
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”).
On August 23, 2013, Interfor’s controlling shareholder, Sauder Industries Limited, exercised
its right under the Company’s Articles to exchange all of its Multiple Voting Shares for
Subordinate Voting Shares (the “Exchange”). As a result of the Exchange all of the
remaining Multiple Voting Shares automatically converted into Subordinate Voting Shares
(the “Conversion”).
As at February 13, 2014 there were 63,050,455 Subordinate Voting Shares outstanding.
There were no Preference Shares or Multiple Voting Shares outstanding.
The following is a summary of the material provisions of the authorized share capital of the
Company.
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 Subordinate Voting Shares and Multiple Voting Shares
for any fiscal year after 13 1/3 cents per share has been paid or set aside for payment on
Annual Information Form
____________________
90
the Subordinate Voting Shares. The holders of Subordinate Voting Shares are entitled to
one vote for each share and the holders of the Subordinate Voting Shares are entitled, as a
class, to elect one member of the board of directors and if there are no Multiple Voting
Shares outstanding, are entitled to elect the entire board of directors except in certain
circumstances where the holders of Preference Shares are entitled to elect two directors.
Holders of Subordinate Voting Shares have the right to attend, in person or by proxy, all
meetings of the shareholders of the Company, and to speak at such meetings to the same
extent that holders of Multiple Voting Shares are so entitled. As a result of the Exchange
and the Conversion, the holders of the Subordinate Voting Shares currently represent 100%
of the aggregate voting rights attached to all of the outstanding shares of the Company.
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 Interfor 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 for each share held and the holders of Multiple
Voting Shares are entitled, as a class, to elect all members of the board of directors of
Interfor, except one member to be elected by the holders of the Subordinate Voting Shares
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 Interfor or any distribution of its
assets, holders of Multiple Voting Shares are entitled after payment of any declared or
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 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 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.
Annual Information Form
____________________
91
Rights on Take-Over Bids and Conversion of Multiple Voting Shares
The authorized share capital of the Company includes Multiple Voting Shares which have the
right in the circumstances described below to be converted, at the option of the holder, into
Subordinate Voting Shares and which automatically convert into Subordinate Voting Shares
in certain circumstances, including in the event of certain take-over bids or acquisition
transactions.
The rights attached to the Multiple Voting Shares provide that any transfer:
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.
As a result of the Exchange and the Conversion, as of August 23, 2013 there are no Multiple
Voting Shares outstanding.
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 Subordinate Voting Shares and the
Multiple Voting Shares and over any other shares ranking junior to the Preference Shares,
with respect to payment of dividends and the distribution of assets of Interfor in the event
of liquidation, dissolution, or winding-up of Interfor.
Annual Information Form
____________________
92
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 2013
(January 1, 2013 through December 31, 2013).
Month
January
February
March
April
May
June
July
August
September
October
November
December
Toronto Stock Exchange (TSX)
2013 Trading Volumes
Ticker: IFP.A
$ High
$ Low
Volume
9.25
9.46
10.70
10.61
10.95
10.50
11.75
12.24
12.55
11.90
12.50
13.92
7.82
8.73
9.15
9.25
9.30
9.32
10.16
10.65
10.71
10.71
11.33
12.21
4,973,682
2,584,615
5,639,794
8,434,085
5,651,200
3,252,924
2,834,877
2,856,273
4,364,804
2,939,609
4,706,672
3,702,236
TRANSFER AGENTS
The transfer agent for our Subordinate Voting Shares is Computershare Investor Services
Inc. at its principal offices in Vancouver, British Columbia.
MATERIAL CONTRACTS
The Company or its subsidiary entered into the following material contracts during 2013:
1. Asset Purchase Agreement, dated January 21, 2013, between Interfor U.S. Inc. and
Rayonier Wood Products, LLC for the acquisition of Rayonier’s three (3) sawmills
located in central Georgia for $80 million, inclusive of working capital. The
transaction was completed on March 1, 2013.
2. Interfor 2013 Amended and Restated Credit Agreement, dated February 27, 2013,
between the Company and its syndicate of lenders to increase its credit facilities by
$50 million to bring the total available to $215 million. In addition, the maturity
dates of these facilities were extended from July 2015 to February 2017.
3. Asset Purchase Agreement, dated June 14, 2013, between Interfor U.S. Inc. and
Keadle Lumber Enterprises, Inc. and Keadle Land Company, LLLP for the acquisition
of Keadle’s sawmill operations in Thomaston, Georgia for US$39.1 million, of which
US$32.1 million was paid on closing. Payment of US$7.0 million is contingent upon
receipt of an upgrade to the air permit which would allow the Company to operate a
second shift. The transaction was completed on July 1, 2013.
4. Note Purchase and Private Shelf Agreement, dated June 26, 2013, between the
Company and the Prudential Capital Group. The US$50 million senior secured notes
carry an annual interest rate of 4.33% and have a final maturity of June 26, 2023.
Annual Information Form
____________________
93
5. Underwriting Agreement, dated September 17, 2013, as amended on September 23,
2013, between the Company and RBC Dominion Securities Inc., (“RBC”), Raymond
James Ltd., (“RJ”) (RBC and RJ are together the “Co-Lead Underwriters”), BMO
Nesbitt Burns Inc., CIBC World Markets Inc., Scotia Capital Inc. and TD Securities
Inc. (collectively, the “Underwriters”) in respect of the issuance and sale of
6,250,000 Class A Subordinate Voting shares without par value of the Company to
the Underwriters on the terms and conditions described in the agreement.
All of these contracts have been posted on www.sedar.com.
Annual Information Form
____________________
DIRECTORS AND OFFICERS
Directors of the Company
94
The following table sets out the Company’s directors as of February 13, 2014, 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
DUNCAN K. DAVIES
Vancouver, B.C., Canada
November
1998
President and Chief Executive Officer
International Forest Products Limited
From
To
2000
Present
PETER M. LYNCH
Toronto, ON, Canada
October
2006
President & CEO of Dieffenbacher USA, Inc., a
manufacturer and designer of press and forming systems
2013
Present
Independent Business Consultant
Executive Vice President and Director
Grant Forest Products Inc. (and its predecessor), a
producer of OSB and engineered wood products
2010
2013
1993
2010
February
2007
Vice Chairman, Connor, Clark & Lunn Investment
Management Ltd., an asset management firm
2007
Present
GORDON. H.
MacDOUGALL
West Vancouver, B.C.,
Canada
J. EDDIE McMILLAN
Pensacola, Florida, U.S.
October
2006
Independent Business Consultant
2002
Present
ANDREW K. MITTAG
Calgary, AB, Canada
October
2012
Executive Vice President – Wood Products Group
Willamette Industries, Inc., a forest products company
1998
2002
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
2005
Present
E. LAWRENCE SAUDER
Vancouver, B.C., Canada
April
1984
Chief Executive Officer and Chairman, Sauder Industries
Limited, a manufacturer and distributor of building
products
2010
Present
Chairman, Hardwoods Distribution Inc., a distributor of
wood products
2008
Present
L. SCOTT THOMSON
Vancouver, B.C., Canada
October
2012
President and Chief Executive Officer, Finning
International Inc., a distributor of Caterpillar products
and support services
2013
Present
DOUGLAS W.G.
WHITEHEAD
North Vancouver, B.C.,
Canada
April
2007
Executive Vice-President, Finance and Chief Financial
Officer, Talisman Energy Inc., a global upstream oil and
gas company
2008
2013
Corporate Director
2008
Present
President and Chief Executive Officer
Finning International Inc., a distributor of Caterpillar
products and support services
2000
2008
Annual Information Form
____________________
95
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 6, 2014.
Committees of the Board
The table below lists the committees of Interfor’s board of directors and their members on
February 13, 2014:
Committees
Audit
Corporate Governance & Nominating Committee
Management Resources & Compensation Committee
Environment & Safety Committee
Members
Douglas Whitehead (Chair)
Peter Lynch
Scott Thomson
Andrew Mittag
Eddie McMillan (Chair)
Peter Lynch
Gordon MacDougall
Douglas Whitehead
Gordon MacDougall (Chair)
Eddie McMillan
Andrew Mittag
Lawrence Sauder
Peter Lynch (Chair)
Lawrence Sauder
Scott Thomson
Annual Information Form
____________________
Officers of the Company
96
The following table sets out the Company’s officers as of February 13, 2014, their respective
municipalities of residence and their principal occupations for at least the last five years:
Name and
Municipality of Residence
Positions Held
DUNCAN K. DAVIES
Vancouver, B.C., Canada
President & Chief Executive Officer
International Forest Products Limited
JOHN A. HORNING
West Vancouver, B.C., Canada
Senior Vice President & Chief Financial Officer
International Forest Products Limited
J. STEVEN HOFER
Bellingham, Washington, U.S.
Vice President, Sales & Marketing
International Forest Products Limited
General Manager, Sales & Marketing
Interfor U.S. Inc. (formerly Interfor Pacific Inc.)
JOSEPH A. RODGERS
Corrigan, TX, U.S.
Vice President, U.S. Operations
International Forest Products Limited
Vice President, Operations – Solid Wood
Temple-Inland Building Products
Operations Manager – Solid Wood
Temple-Inland Building Products
Vice President, Integrated Planning
Temple-Inland Building Products
From
To
2000
Present
2002
Present
2011
Present
2004
2011
2013
Present
2011
2013
2009
2011
2007
2009
MARTIN L. JURAVSKY
Toronto, ON, Canada
Vice President, Corporate Development and Strategy
International Forest Products Limited
2013
Present
Business Consultant
Vice President, Corporate Development
Woodland Biofuels Inc.
Managing Director
Macquarie Capital Markets Canada Ltd.
Managing Director, Head of Mergers & Acquisitions
Dundee Securities Corporation
IAN M. FILLINGER
Kamloops, B.C., Canada
Vice President, Canadian Operations
International Forest Products Limited
Senior General Manager
International Forest Products Limited
General Manager, Adams Lake & Coastal Manufacturing
International Forest Products Limited
General Manager, Adams Lake Division
International Forest Products Limited
MARK W. STOCK
North Vancouver, B.C., Canada
Vice President, Human Resources
International Forest Products Limited
Vice President, Global Human Resources
Tree Island Industries Ltd.
OTTO F. SCHULTE
Black Creek, B.C., Canada
Vice President, Strategic Forestry Initiatives
International Forest Products Limited
Vice President, Coastal Operations
International Forest Products Limited
Vice President, Coastal Woodlands
International Forest Products Limited
2012
2011
2013
2012
2009
2011
2007
2009
2013
Present
2013
2013
2012
2013
2005
2012
2012
Present
2007
2012
2013
Present
2011
2013
2000
2011
Annual Information Form
____________________
RICHARD J. SLACO
Delta, B.C., Canada
Vice President & Chief Forester
International Forest Products Limited
MARILYN LOEWEN
MAURITZ
Vancouver, B.C., Canada
General Counsel & Corporate Secretary
International Forest Products Limited
General Counsel
International Forest Products Limited
97
2002
Present
2012
Present
2007
2012
SHAREHOLDINGS OF DIRECTORS AND OFFICERS
As at December 31, 2013, the directors and officers of the Company as a group owned, directly
or indirectly, or exercised control of or direction over 873,594 Subordinate Voting Shares
representing approximately 1.39% of the outstanding Subordinate Voting Shares.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Since the commencement of our most recently completed financial year, and for the three most
recently completed financial years, no director or executive officer of the Company, no person
or company that is the direct or indirect beneficial owner of, or who exercises control or
direction over, more than 10% of the Company’s voting securities or any associate or affiliate of
such persons, has had any material interest in any transaction involving the Company.
LEGAL PROCEEDINGS
We are not a party to, and our property is not the subject of, any material legal proceedings
which are currently in place or which we know to be contemplated.
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 purpose of the Company’s Audit Committee (the "Committee") is to assist the board of
directors in fulfilling its oversight responsibility relating to:
the integrity of the Company’s financial statements;
the financial reporting process;
the systems of internal accounting and financial controls;
the professional qualifications and independence of the external auditors;
the performance of the external auditors, risk management processes;
•
•
•
•
•
•
financial plans;
• pension plans; and
•
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 four times in 2013 in conjunction with regularly scheduled Board
meetings.
Annual Information Form
____________________
98
Members’ Financial Literacy, Expertise and Simultaneous Service
The board of directors has determined that the members of the Audit Committee during
2013 were, and all current members of the Audit Committee are literate and independent as
defined in National Instrument 52-110 – Audit committees. The table below indicates the
relevant education and experience of all the Audit Committee members during 2013 and the
current members.
Relevant Education and Experience
Director
Past Occupation
Douglas W.G.
Whitehead
Chair of the
Audit
Committee
since May
2012
Mr. Whitehead is a Corporate Director. From 2000 to May 2008, he was the President and Chief
Executive Officer of Finning International Inc. (“Finning”). Prior to joining Finning, Mr. Whitehead
held a number of senior executive positions with Fletcher Challenge Canada, including President
and Chief Executive Officer, Senior Vice President and Chief Operating Officer and Vice President
of the Crown Packaging Division. Mr. Whitehead is currently the director and Chair of Finning
and a director of both Belkorp Industries Inc. and Kal Tire. Previously, he served as director of
Inmet Mining Corporation, Ballard Power Systems Inc., Terasen Inc., Fletcher Challenge Canada,
Finlay Forest Industries and Timberwest Forest Limited. He is also a member of the Board of
Directors of Vancouver General Hospital and University of British Columbia Hospital Foundation.
Mr. Whitehead holds a Bachelor of Applied Science (Engineering) from the University of British
Columbia and a Masters of Business Administration from the University of Western Ontario.
Peter M.
Lynch
Member since
April 2009
Mr. Lynch is currently President & CEO of Dieffenbacher USA, Inc. (“Dieffenbacher”). Prior
thereto he provided consulting services to Dieffenbacher. From 1993 to 2010, he was an
Executive Vice President and director of Grant Forest Products Inc. (and its predecessor), a
producer of OSB and engineered wood products. Mr. Lynch holds a LL.B from Osgoode Law
School and is a member of the Law Society of Upper Canada, the Canadian Bar Association and
the Ontario Bar Association.
Harold C.
Kalke
Member from
April 2012 until
May 2013
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.
Andrew K.
Mittag
Member since
May 2013
Mr. Mittag is Senior Vice President, Agrium Inc. and President, Agrium Advanced Technologies, a
major retail supplier of agricultural products and services and a global wholesale producer and
marketer of major agricultural nutrients and industrial products. In addition to being part of
Agrium’s senior leadership team, he is responsible for Agrium’s enhanced efficiency fertilizer
business and the development of that market internationally, especially China. Prior to joining
Agrium in 2005, he was Co-founder, President and Chief Financial Officer of Rockland Capital
Partners and held senior leadership roles at TXU Corp. and Koch Industries Inc. Mr. Mittag is a
director of Lyndhurst Estate Homeowners Association. Previously, he was a director of Hanfeng
Evergreen Inc., Alida LLC and Floralla LLC. Mr. Mittag holds a Bachelor of Arts (Economics and
German) from Hamilton College, a Masters of Business Administration (Accounting and Finance)
from Columbia University and ICD.D designation from the Institute of Corporate Directors.
John P.
Sullivan
Member from
April 2012 until
May 2013
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.
L. Scott
Thomson
Member since
November
2012
Mr. Thomson is currently President and CEO of Finning International Inc., the world's largest
Caterpillar equipment dealer. Previously Mr. Thomson was Chief Financial Officer of Talisman
Energy Inc. Prior to joining Talisman, Mr. Thomson was Executive Vice President, Corporate
Development; Vice President, Head of Mergers and Acquisitions, and Vice President, Corporate
Strategy at Bell Canada Enterprises Inc. Mr. Thomson holds a Bachelor of Arts from Queen’s
University and a Masters of Business Administration from the University of Chicago.
Annual Information Form
____________________
AUDIT FEES
99
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, 2013 and December 31, 2012, were as follows:
Audit fees
Fees billed for professional services rendered.
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, bought deal
financing involvement 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
Assistance with defining business requirements for a new ERP system selection, a
related process re-design and certifications (2012); assistance with ERP system design
and implementation, forestry certification and general IT control documentation (2013).
TOTAL
CODE OF ETHICS
2013
2012
$477,000 $423,000
269,100
62,500
24,376
52,837
168,978
174,800
$939,454 $713,137
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 audited
consolidated financial statements and Management’s Discussion and Analysis for the year
ended December 31, 2013.
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: corporatesecretary@interfor.com
Additional information relating to the Company may be found on the SEDAR website at
www.sedar.com.
Annual Information Form
____________________
PURPOSE
Appendix “A”
AUDIT COMMITTEE
Terms of Reference
100
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.
Annual Information Form
____________________
101
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.
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 certifications 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.
Review the Company’s derivatives policies and activities, including details of
exposures to banks and other counterparties.
5.
6.
7.
8.
9.
10.
External Auditor
11.
12.
13.
14.
15.
16.
17.
Review and recommend to the Board the appointment of the Auditor to be
nominated for the purposes of preparing or issuing an Auditor’s report and
performing other audit, review or attest services for the Company.
Establish the mandate of the Auditor, including the annual engagement, audit plan,
audit scope and compensation for the audit services, subject to shareholder
approval.
Oversee the activities of the Auditor. The Auditor shall report directly to the Audit
Committee.
Directly communicate and meet with the Auditor, with and without Management
present, to discuss the results of their examinations.
Review the independence of the Auditor, any rotation of the partners assigned to the
audit in accordance with applicable laws and professional standards, the internal
quality control findings of the Auditor’s firm and peer reviews.
Review the performance of the Auditor, including the relationship between the
Auditor and Management and the evaluation of the lead partner of the Auditor.
Resolve disagreements between Management and the Auditor regarding financial
reporting.
18.
Review material written communications between the Auditor and Management.
Annual Information Form
____________________
Non-Audit Services
102
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.
103
GLOSSARY
Unless otherwise noted, all financial references in this Annual Report are in Canadian
dollars.
“Adjusted EBITDA” EBITDA excluding long term incentive compensation and other income
(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 flow provided by operating activities 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.
“Crown” Administrative agency of the provincial government of British Columbia
“EBITDA” Earnings before finance costs, income taxes, depreciation, depletion, amortization,
restructuring costs, asset write-downs and other costs, and other foreign exchange gains (losses).
“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 Net debt and shareholders’ equity.
“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” The total of long term debt and bank indebtedness, less cash and cash equivalents.
“Pre-tax return on total assets” Earnings (loss) before income taxes, restructuring costs, asset
write-downs and other costs, other foreign exchange gains (losses) and other income (expense),
divided by period-end 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.
“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 Western Red
Cedar and Yellow Cedar.
104
DIRECTORS
Duncan K. Davies
Vancouver, B.C., Canada
Peter M. Lynch
Toronto, ON, Canada
Andrew K. Mittag
Calgary, AB, Canada
E. Lawrence Sauder (Chair)
Vancouver, B.C., Canada
Gordon H. MacDougall
L. Scott Thomson
West Vancouver, B.C., Canada
Vancouver, B.C., Canada
J. Eddie McMillan
Pensacola, FL, U.S.
OFFICERS
Douglas W.G. Whitehead
North Vancouver, B.C., Canada
Duncan K. Davies
Ian M. Fillinger
President and Chief Executive Officer
Vice President, Canadian Operations
John A. Horning
Mark W. Stock
Senior Vice President & Chief Financial Officer
Vice President, Human Resources
J. Steven Hofer
Otto F. Schulte
Vice President, Sales & Marketing
Vice President, Strategic Forestry Initiatives
Joseph A. Rodgers
Richard J. Slaco
Vice President, U.S. Operations
Vice President and Chief Forester
Martin L. Juravsky
Marilyn Loewen Mauritz
Vice President, Corporate Development & Strategy
General Counsel & Corporate Secretary
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
105
Media Contact
Karen Brandt, Director, Public Affairs
& Corporate Communications
Office: 604-689-6866
karen.brandt@interfor.com
Corporate Office
Tel: (604) 689-6800
Fax: (604) 688-0313
P.O. Box 49114
3500-1055 Dunsmuir Street
Vancouver, BC V7X 1H7
OPERATIONS AND LOCATIONS
Acorn Division
(Sawmill)
Tel: (604) 581-0494
Fax: (604) 581-5757
9355 Alaska Way
Delta, BC V4C 4R7
Beaver Division
(Sawmill)
Tel: (360) 327-3377
Fax: (360) 327-3563
P.O. Box 38
200673 Highway 101 West
Beaver, WA 98305
Castlegar Division
(Woodlands)
Tel: (250) 265-3741
Fax: (604) 422-3251
P.O. Box 2000
442 Highway 6 West
Nakusp, BC V0G 1R0
Eatonton Division
(Sawmill)
Tel: (706) 485-4271
Fax: (706) 485-3879
370 Dennis Station Road SW
Eatonton, GA 31024
Hammond Division
(Sawmill)
Tel: (604) 465-5401
Fax: (604) 422-3221
20580 Maple Crescent
Maple Ridge, BC V2X 1B1
Swainsboro Division
(Sawmill)
Tel: (912) 562-4441
Fax: (912) 562-3621
8796 Highway 297
Swainsboro, GA 30401
Adams Lake Division
(Sawmill and Woodlands)
Tel: (250) 679-3234
Fax: (250) 679-3545
9200 Holding Road
Chase, BC V0E 1M2
Beaver Division
(Planermill)
Tel: (360) 374-4374
Fax: (360) 374-4331
P.O. Box 2299
143 Sitkum-Solduc Road
Forks, WA 98331
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
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
Thomaston Division
(Sawmill)
Tel: (706) 647-8981
Fax: (706) 647-3534
75 Ben Hill Road
Thomaston, GA 30286
Baxley Division
(Sawmill)
Tel: (912) 367-3671
Fax: (912) 367-1500
1830 Golden Isles East
Baxley, GA 31513
Castlegar Division
(Sawmill)
Tel: (250) 365-4400
Fax: (604) 422-3252
P.O. Box 3728
2705 Arrow Lakes Drive
Castlegar, BC V1N 3W4
Coastal Woodlands Division
Tel: (250) 286-1881
Fax: (250) 286-3412
1250A Ironwood Street
Campbell River, BC 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 V0H 1H0
Port Angeles Division
(Sawmill)
Tel: (360) 457-6266
Fax: (360) 457-1486
243701 Highway 101 West
Port Angeles, WA 98363
106
SALES AND MARKETING
North America – Cedar
Tel: (604) 422-3470
Fax: (604) 422-3244
600 - 2700 Production Way
Burnaby, BC V5A 4X1
North America – Southern
Yellow Pine
Tel: (912) 367-1509
Fax: (912) 367-1500
1830 Golden Isles East
Baxley, GA 31513
North America - Whitewood
Tel: (360) 788-2200
Fax: (360) 788-2210
2211 Rimland Drive, Suite 220
Bellingham, WA 98226
China
Tel: +86-21-6333-6268
Fax: +86-21-6333-6290
Unit 1007, Tower No. 1
No. 268 Zhongshan South Road
Shanghai, 200010, China
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
Export – Whitewood & Cedar
Sales
Tel: (604) 422-3468
Fax: (604) 422-3250
600-2700 Production Way
Burnaby, BC V5A 4X1
107