2014
Annual Report
CONTENTS
Financial Highlights
2014 Message to Shareholders
Management’s Discussion and Analysis dated February 12, 2015
Consolidated Financial Statements
Annual Information Form dated February 12, 2015
pg
3
4
8
28
79
3
FINANCIAL HIGHLIGHTS
(in millions of dollars, except share and per share amounts)
2014
2013
Financial Summary
Sales
Adjusted EBITDA (1)
Net earnings
Per Share Data
Net earnings 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)
Financial Ratios (%)
Net debt as a % of invested capital, adjusted (1)
Pre-tax return on total assets (1)
Notes:
(1) See Glossary for definition.
1,447.2
169.3
40.7
0.62
22.15
13.02
9.54
2.17
66.0
1,068.5
220.4
636.5
839.0
24.1%
6.4%
1,105.2
134.0
42.2
0.73
13.92
7.82
8.17
2.14
57.7
824.1
145.5
515.1
655.9
21.5%
7.3%
“2014 was an outstanding year for Interfor. Significant progress was made on our
growth agenda and a number of important milestones were set as the year
progressed.”
Message to Shareholders – February 2015
For further highlights, please see the 2014 Message to Shareholders and
Management’s Discussion and Analysis on the following pages.
Message to Shareholders
____________________
Overview
2014 MESSAGE TO SHAREHOLDERS
4
2014 was an outstanding year for Interfor. Significant progress was made on our growth agenda
and a number of important milestones were set as the year progressed.
Highlights for the year included:
• Production exceeded 2 billion board feet for the first time in the Company’s history;
• Sales revenue exceeded $1.4 billion;
• We acquired and integrated Tolleson Lumber Company adding more than 345 million
board feet of capacity to our U.S. Southeast platform. The new mills made a significant
contribution to our results during the year;
• New continuous dry kilns were successfully installed at our mills at Baxley and Thomaston,
Georgia;
• A $50 million capital project to upgrade our Castlegar mill was announced;
• US$50 million in fixed-rate, long-term debt was placed at a very attractive rate; and
• Agreement was reached with Simpson Lumber Company to acquire four mills (two in the
U.S. Southeast and two in the U.S. Northwest) in a transaction that will close in early
2015.
Most important, our share price increased by 63% over the course of the year (following a 68%
increase in 2013) as investors responded positively to the steps being taken to position the
Company for long-term success.
Once the Simpson acquisition closes in March, Interfor will be firmly established as the 4th largest
lumber producer in the world.
But being big isn’t enough.
Our goal is to become the world’s most profitable, valuable and respected lumber company.
With the steps taken and results delivered in recent years, we are well on our way to achieving
our goal.
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 or questions you
might have to me directly at duncan.davies@interfor.com.
Record Production and Sales Volumes Contribute to Strong Results
Interfor continued to ramp up production and sales activity in 2014.
For the year, lumber production was up 29% to 2.22 billion board feet from 1.73 billion board
feet, with the Company’s operations in Canada accounting for 42% of production and our mills in
the U.S. accounting for the balance. It was the first time in the Company’s history that production
exceeded the 2 billion board foot benchmark.
Sales volumes, including agency and wholesale activities, were up from 1.76 billion board feet to
2.28 billion board feet last year.
Unlike recent years, product prices were relatively stable in 2014.
For the year, the Random Lengths Composite Index, which measures pricing levels for a basket of
products, came in at US$383 versus US$384 in 2013.
In financial terms, the benefits of higher production and sales volumes had a positive impact on
our results in 2014.
Message to Shareholders
____________________
5
Sales revenue was a record $1.45 billion last year compared with $1.11 billion in 2013 while net
earnings were $40.7 million versus $42.2 million in 2013 in spite of a $23 million pre-tax
restructuring provision taken on the closure of our Beaver sawmill in Washington State and a
$23.9 million share-based compensation charge resulting from the increase in our share price
over the course of the year.
EBITDA1, reported before one-time items and share-based compensation expenses, hit an all-time
high of $169.3 million versus $134.0 million a year earlier.
Strategic Initiatives Building Value
Interfor has invested actively in recent years to enhance the Company’s strategic position and to
improve profitability, and 2014 was no exception.
In March we completed the acquisition of Tolleson Lumber Company (“Tolleson”) of Perry,
Georgia from Ilim Timber Continental, SA for US$189.5 million.
The Tolleson acquisition added 345 million board feet to our platform in the U.S. Southeast and
opened the door to a number of system-related synergies with our existing operations in the
region.
Good progress has been made on the integration of the Tolleson mills into our operations and
more gains are expected in the years to come.
The Tolleson mills on their own are solid performers and made a strong contribution to our results
during the year.
We also installed new continuous kilns at our mills at Baxley and Thomaston, Georgia, enabling
higher operating rates at those mills.
The new kilns significantly improve drying quality as well as increasing throughput, enabling
higher grade outturns, and lower operating costs.
We are looking at similar installations at a number of our other mills.
In November, we announced a $50 million capital upgrade to our mill at Castlegar in the B.C.
Interior.
The Castlegar mill was acquired in 2008 and is located within one of the finest timber baskets in
our Company.
The project will convert the mill from a 3-line operation to a 2-line facility utilizing state-of-the-art
technology similar to that employed at our mills at Adams Lake, Grand Forks and Port Angeles.
The project will improve lumber recovery, productivity and grade outturns, lower conversion costs
and eliminate approximately $20 million in non-return maintenance spending that would
otherwise have been required over the next few years. The project is scheduled for completion in
the 4th quarter of 2015, with full operating performance expected in early 2016.
Finally, in December, we announced the acquisition of Simpson Lumber Company, LLC’s
(“Simpson”) sawmilling operations in the U.S. Southeast and U.S. Northwest for a purchase price
of US$94.7 million plus working capital and a series of contingent payments tied to the
performance of one of the acquired mills over the next three years.
1 Refer to definition of Adjusted EBITDA in the Glossary.
Message to Shareholders
____________________
6
The Simpson mills will add to our platforms in the U.S. Southeast and U.S. Northwest and, like
the Tolleson acquisition, will enable a number of system-related synergies between our legacy
operations in those areas and the newly-acquired mills.
With the addition of the Simpson mills, Interfor’s total production capacity will increase by
another 31% to 3.1 billion board feet, solidifying our position as the fastest growing lumber
company in the world.
The Simpson transaction is scheduled to close March 1st.
Balance Sheet is Strong
Managing the risks associated with the Company’s balance sheet is a hallmark of Interfor’s
management philosophy and steps were taken during the year to ensure appropriate financing
was in place to support our growth agenda and investing activity.
The Tolleson transaction was financed in part through an equity takeback by the vendor of 3.68
million Interfor shares.
And, in early 2015, following the announcement of the Simpson acquisition, we agreed to a
bought deal public offering with a group of Canadian underwriters totaling 3.3 million shares,
raising an additional $63.7 million, net of the underwriters’ commission.
The equity issues were supplemented with two fixed-rate debt issues: a US$50 million issue of 7
year senior secured notes at a fixed rate of 4.02% was completed in December, and a US$100
million issue of 10 year senior secured notes at a fixed rate of 4.17% was announced shortly after
year-end in support of the Simpson transaction.
At year-end, Interfor had net debt outstanding of $202.6 million compared with $140.8 million at
the end of 2013, representing a ratio of net debt to invested capital of 24.1% versus 21.5% a
year earlier.
Share Structure Simplified; New Name Adopted
At the AGM in May, Interfor’s shareholders voted to simplify the Company’s share structure,
eliminating the Company’s Class B Common Shares, known as the Multiple Voting Shares, and
redesignating the Class A Subordinated Voting Shares as Common Shares. The resulting one
share structure is more in keeping with modern governance practices and was well received by
investors.
Also, at the AGM, shareholders voted to change the Company’s name from International Forest
Products Limited to Interfor Corporation.
The name change provides a direct link between the Company’s traditional trade name (i.e.
“Interfor”) and its formal corporate identity and provides an opportunity to build on the successful
branding efforts undertaken in recent years using the Interfor name and logo.
Like the changes to the Company’s share structure, the adoption of the Interfor name has been
well received by investors and other stakeholders.
Positions for Long-Term Success
In spite of weaker-than-expected market conditions in the first six weeks of 2015, we continue to
see positive signs emerging in the world’s key lumber markets.
In the U.S., housing starts continue to improve, albeit slowly, and can be expected to gain
momentum as the economic recovery matures.
Message to Shareholders
____________________
7
In China, slower growth rates and policies introduced by the central government to address issues
within that country’s real estate market have had an impact on construction activity and product
demand.
That said, we believe the underlying fundamentals in China with respect to wood products are
very positive and look favorably on the prospects to grow our business platform in that market,
including southern yellow pine from our operations in the U.S. Southeast.
More important, though, are the steps we are taking to position Interfor for long-term success.
Our business strategy is based on two primary tenets: growth by acquisition and operational
excellence.
We’ve made tremendous strides in both areas in recent years and we see numerous opportunities
for more gains as we move forward.
In closing, I would like to thank our Board of Directors for their on-going support and our
employees for their dedication and efforts to build value for all our stakeholders.
Last but not least I would like to thank our shareholders for their support.
I’m convinced we’re on track to build significant value at Interfor and look forward to reporting to
you on our progress again this time next year.
Duncan Davies
President & CEO
February 2015
8
MANAGEMENT’S DISCUSSION AND ANALYSIS
Prepared as of February 12, 2015
This Management’s Discussion and Analysis (“MD&A”) provides a review of financial condition and
results of operations as at and for the three month period and year ended December 31, 2014 (“Q4’14”
and “2014”, respectively). It should be read in conjunction with the audited consolidated financial
statements of Interfor Corporation (“Interfor” or the “Company”) for year ended December 31, 2014,
and the notes thereto which have been 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 figures are stated in Canadian dollars, unless otherwise noted, and references to US$/USD and ¥
are to the United States dollar and Japanese Yen, respectively. For definitions of technical terms and
abbreviations used within this MD&A, refer to the Glossary in the Company’s 2014 Annual Report.
Forward-Looking Statements
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 2014”, “Outlook”,
“Summary of Fourth Quarter 2014 Financial Performance”, “Summary of 2014 Financial
Performance”, “Liquidity”, “Capital Resources”, “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 2014
Q4’14 Results
Interfor recorded a net loss of $5.2 million, or $0.08 per share, and Adjusted EBITDA of
$37.4 million. These figures compare with net earnings and Adjusted EBITDA of $11.0
million and $45.4 million in Q3’14, and $11.4 million and $36.2 million in Q4’13,
respectively. Sales revenue amounted to $389.0 million, compared with $373.1 million in
Q3’14 and $315.3 million in Q4’13.
The net loss in the fourth quarter was impacted by an increase in the accrual for long term
incentive compensation expense of $13.9 million, compared with an expense of $3.6 million
in the third quarter. The long term incentive compensation programs are directly tied to
Interfor’s share price performance and are therefore marked-to-market at each quarter end.
In the fourth quarter of 2014, Interfor’s share price increased by 35.9%.
Management’s Discussion and Analysis
9
____________________
Lumber production in the fourth quarter of 2014 was 578 million board feet, up 11 million
board feet or 1.9% compared to Q3’14 and up 108 million board feet or 23.0% compared to
Q4’13. The production growth from Q4’13 primarily reflects the addition of two sawmills
with the Tolleson acquisition and higher operating rates.
Interfor generated $25.0 million of cash from operations before working capital changes and
$35.1 million after considering working capital changes. Capital spending amounted to
$24.7 million during the quarter.
The Company reduced its net debt during the quarter to $202.6 million or 24.1% of
invested capital, leaving $235.6 million of availability under its credit facilities.
Significant Operational Changes, Investment & Financing
On March 14, 2014, Interfor acquired all of the outstanding common shares of Tolleson Ilim
Lumber Company (“Tolleson”) from Ilim Timber Continental, S.A. for total consideration of
$188.5 million, comprising $126.9 million in cash and 3,680,000 Common Shares valued at
$61.6 million. This acquisition added two sawmills located in Perry and Preston, Georgia,
and a remanufacturing facility in Perry, Georgia. We have filed a Business Acquisition
Report on SEDAR with respect to this acquisition.
In conjunction with the acquisition of Tolleson, Interfor increased the credit available on two
of its facilities to ensure sufficient liquidity and flexibility post-transaction. On March 21,
2014, the Company increased the credit available under its U.S. Operating Line from US$20
million to US$30 million, without significant change to other terms and conditions. On
March 31, 2014, the Company increased the credit available under its Revolving Term Line
from $200 million to $250 million, without change to other terms and conditions.
On June 27, 2014, the Company announced a curtailment of its Beaver-Forks operation on
the Olympic Peninsula in Washington State. Following a comprehensive strategic review,
permanent closure of the operation and consolidation of production at Interfor’s Port
Angeles facility was announced on July 31, 2014.
On November 6, 2014, Interfor announced a $50 million capital project to upgrade its
sawmill in Castlegar, B.C. The project will convert the Castlegar mill to a two line operation
with state-of-the-art technology and optimization. The project is scheduled for completion
in the fourth quarter of 2015 with full operating performance targeted for the first quarter of
2016.
On December 17, 2014, the Company completed a US$50 million term debt financing with
Prudential Capital Group. The Senior Secured Notes carry an annual interest rate of 4.02%
and have a final maturity of June 26, 2023.
On December 18, 2014, Interfor signed an agreement to acquire four sawmills from
Simpson Lumber Company, LLC (“Simpson”) for consideration of US$94.7 million, plus
working capital and contingent future consideration. The sawmills are located in Tacoma,
Washington, Longview, Washington, Meldrim, Georgia and Georgetown, South Carolina and
fit within the Company’s existing operating infrastructure. Upon closing of this acquisition,
Interfor’s total production capacity will increase by 30% to 3.1 billion board feet. The
Company’s lumber capacity in the U.S. Southeast and U.S. Northwest will total 1.2 billion
and 900 million board feet, respectively, representing 67% of the Company’s total pro
forma capacity. The completion of the transaction is subject to customary conditions and is
expected on March 1, 2015. Regulatory approval was received on January 23, 2015.
On January 27, 2015, Interfor closed a bought deal public offering of subscription receipts
(the “Subscription Receipts”) through a syndicate of underwriters. The Company issued an
aggregate of 3,300,000 (including 300,000 Subscription Receipts issued pursuant to the
Management’s Discussion and Analysis
10
____________________
exercise of the over-allotment option) Subscription Receipts at a price of $20.10 per
Subscription Receipt, for aggregate gross proceeds of $66.3 million (the “Offering”).
The gross proceeds from the Offering less one half of the underwriters’ commission will be
held in escrow until all conditions precedent to completion of the acquisition from Simpson,
described above, have been satisfied. Each Subscription Receipt entitles the holder thereof,
for no additional consideration and without further action, to one Common Share of the
Company upon closing of this acquisition. Net proceeds of the offering will be used to
partially fund the acquisition price and thereby provide the Company with ongoing financial
flexibility.
Markets and Pricing
Average commodity lumber prices were modestly down across the board in the fourth
quarter of 2014 as demand adjusted to reflect seasonal factors. The benchmark prices for
Western SPF 2x4, SYP East 2x4 and HF Stud 2x4 9’ declined US$17, US$11 and US$18,
respectively, as compared to the prior quarter. Demand for lumber in China softened in the
fourth quarter due to the combination of credit tightening and slowing real estate activity.
Benchmark Commodity Lumber Prices
Source: Random Lengths Publications, Inc. (“Random Lengths”)
Lumber price levels remained above the relevant softwood lumber benchmark price in Q4’14
and enabled Canadian producers to ship lumber to U.S. markets without an export tax
throughout the quarter. This export tax rate has been set at zero percent for January and
February of 2015. The Company incurred $0.6 million of export taxes in the comparable
period of 2013.
The U.S. dollar strengthened against the Canadian dollar during Q4’14, closing up 3.5%
over September 30, 2014. The average rate of 1.1350 in Q4’14 was 8.2% higher than in
the comparable quarter of 2013, which positively impacted Interfor’s net earnings reported
in Canadian dollars.
Outlook
The near term outlook for commodity lumber prices will be impacted by North American and
overseas demand as well as supply side shifts within North America. With respect to
demand, Interfor anticipates a gradual upward trend in U.S. housing starts for 2015 on
positive gains in employment and consumer confidence while demand in China is expected
to reflect a moderated real estate market. Log supply constraints in certain parts of British
Management’s Discussion and Analysis
11
____________________
Columbia are anticipated to continue, which may lead to reductions in available lumber
industry production from that region. By contrast, modest increases in industry capacity
and utilization rates are anticipated in the U.S. South region.
Interfor’s strategy of maintaining a diversified portfolio of lumber operations allows the
Company to both reduce risk and maximize returns on invested capital over the business
cycle. Interfor will continue its disciplined approach to production, cost control, inventory
management and capital spending. At the same time, Interfor will remain alert to growth
opportunities to position the Company for long term success.
Financial and Operating Highlights (1)
Financial Highlights( 2 )
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
EBITDA(3)
Adjusted EBITDA(3)
Adjusted EBITDA margin(3)
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 sales(5)
Logs - average selling price(5)
Notes:
Unit
$mm
$mm
$mm
$mm
$mm
$mm
$mm
$/share
$mm
$mm
%
$mm
$mm
%
%
For the 3 months
ended December 31,
2013
2014
For the year ended
December 31,
2013
2012
2014
389.0
318.6
37.4
29.1
3.9
(1.1)
(5.2)
(0.08)
23.2
37.4
9.6%
315.3
249.2
41.3
20.0
4.9
13.7
11.4
0.18
31.4
36.2
1,447.2
1,105.2
1,177.3
144.8
105.5
19.6
36.1
40.7
0.62
144.2
169.3
872.3
136.6
72.4
23.9
52.5
42.2
0.73
115.8
134.0
11.5%
11.7% 12.1%
1,068.5
220.4
-0.1%
24.1%
824.1
145.5
6.8%
21.5%
1,068.5
220.4
6.4%
824.1
145.5
7.3%
24.1% 21.5% 24.2%
849.2
631.2
113.9
69.4
34.7
(3.1)
(9.5)
(0.17)
50.2
59.9
7.1%
632.0
135.0
-0.4%
million fbm
million fbm
$/thousand fbm
thousand cubic metres
$/cubic metre
578
620
514
358
84
470
500
498
397
92
2,222
2,282
516
1,440
85
1,725
1,761
495
1,339
88
1,351
1,432
441
1,352
72
(1) Figures in this table may not equal or sum to figures presented elsewhere due to rounding.
(2) Financial information presented for interim 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 only.
Management’s Discussion and Analysis
12
____________________
Summary of Fourth Quarter 2014 Financial Performance
Sales
Interfor recorded $389.0 million of total sales, up 23.4% from $315.3 million in the fourth
quarter of 2013, driven by the sale of 620 million board feet of lumber at an average price
of $514 per mfbm. Lumber sales volume and average selling price increased 120 million
board feet and 3.2%, respectively, over the same quarter of 2013.
The growth in lumber sales volume was primarily in the U.S. market, where sales increased
by 136 million board feet or 43.6% over the fourth quarter of 2013. This growth is mostly
attributable to the acquisition of two sawmills in the first quarter of 2014, higher operating
rates and the draw-down of lumber inventories.
The increase in the average selling price of lumber is primarily related to the U.S. dollar
strengthening against the Canadian dollar by 8.2%, partially offset by lower benchmark
prices and an increased proportion of Southern Yellow Pine sales.
Log sales of $37.4 million represents a decrease of $3.9 million or 9.4% compared to the
same quarter of 2013. This reflects lower sales volume and an 8.7% decrease in the
average selling price on B.C. log sales, which accounted for 80.3% of total log sales revenue
in the quarter.
Sales of wood chips and other residual products increased to $29.1 million, up $9.1 million
over the comparable quarter of 2013. This increase mainly reflects a 23.0% rise in lumber
production from Q4’13.
Operations
Production costs increased by $71.5 million or 26.3% over the fourth quarter of 2013,
explained primarily by the 24.0% increase in lumber sales volume and the stronger U.S.
dollar as noted above.
Depreciation of plant and equipment was $14.7 million, up 33.2% from the fourth quarter of
2013. The majority of this increase is explained by the inclusion of depreciation on the two
sawmills acquired in the first quarter of 2014 and higher operating rates.
Depletion and amortization of timber, roads and other was $8.7 million, up 39.1% from the
comparable quarter of 2013. This increase is mostly related to amortization of a non-
competition agreement associated with the acquisition of Tolleson.
Corporate and Other
Selling and administration expenses were $8.9 million, up $1.9 million from the fourth
quarter of 2013. This increase reflects the growth of Interfor’s operations in the U.S.
Southeast and includes $0.2 million of non-recurring costs associated with the Simpson
acquisition.
The $13.9 million of long term incentive compensation expense reflects the impact of a
35.9% increase in the market price for Interfor Common Shares during the quarter on the
Company’s share-based incentive compensation plans.
Income Taxes
The Company recorded income tax expense of $0.2 million, comprised primarily of current
taxes in respect of its U.S. operations.
Management’s Discussion and Analysis
13
____________________
Net Earnings (Loss)
The Company recorded a net loss of $5.2 million or $0.08 per share, compared to net
earnings of $11.4 million or $0.18 per share in the comparable period of 2013. The net loss
was impacted by the $13.9 million increase in the accrual for long term incentive
compensation expense as noted above, compared to an increase of $5.2 million in the
comparable quarter of 2013.
Summary of 2014 Financial Performance
Sales
Interfor recorded $1,447.2 million of total sales, up 30.9% from $1,105.2 million in 2013,
driven by the sale of 2.3 billion board feet of lumber at an average price of $516 per mfbm.
Lumber sales volume and average selling price increased 521 million board feet and 4.2%,
respectively, over 2013.
The growth in lumber sales volume was primarily in the U.S. market, where sales increased
by 512 million board feet or 47.7% over 2013. This growth is mostly attributable to the six
sawmills in Georgia acquired since March of 2013 as well as increased demand.
The increase in the average selling price of lumber is primarily related to the strengthening
of the U.S. dollar against the Canadian dollar by 7.3%, partially offset by an increased
proportion of Southern Yellow Pine sales.
Log sales of $144.8 million represents an increase of $8.2 million or 6.0% compared to
2013, with higher volume partially offset by a lower average realize price.
Sales of wood chips and other residual products increased to $105.5 million, up $33.1
million over 2013. This increase mainly reflects the 28.8% increase in lumber production
over the prior year.
Operations
Production costs increased by $302.8 million or 32.2% compared to 2013, explained
primarily by the acquisition of two sawmills in the first quarter of 2014, contributing to a
29.6% increase in lumber sales volume, and a 7.5% increases in B.C. log sales volumes.
The stronger U.S. dollar as noted above also contributed to this increase.
Depreciation of plant and equipment was $55.2 million, up 40.7% from 2013. The majority
of this increase is explained by the inclusion of depreciation on the six mills in the U.S.
Southeast acquired since March 2013, and higher operating rates.
Depletion and amortization of timber, roads and other was $28.9 million, up 25.4% over
2013. Amortization of the non-competition agreement associated with the Tolleson
acquisition contributed to this increase.
Corporate and Other
Selling and administration expenses were $35.5 million, up $6.7 million from 2013. This
increase reflects the growth of our operations into the U.S. Southeast and includes $1.6
million of non-recurring expenses related to the Tolleson and Simpson acquisitions.
Long term incentive compensation expense was $23.9 million, up $5.1 million over 2013, as
a result of a higher market price for Interfor Common Shares on the Company’s share-
based incentive compensation plans.
Management’s Discussion and Analysis
14
____________________
In conjunction with curtailment of the Beaver-Forks operation in the second quarter of
2014, the Company recorded asset impairment and restructuring charges of $14.2 million,
net of an $8.5 million deferred tax recovery.
Income Taxes
The Company recorded an income tax recovery of $16.2 million, comprised of $1.3 million
of current tax expense net of a $17.6 million deferred tax recovery. The deferred tax
recovery includes two notable items: i) recognition of $19.3 million of previously
unrecognized deferred tax assets related to its U.S. operations as a result of the acquisition
of Tolleson; and ii) an $8.5 million recovery related to the Beaver-Forks restructuring and
impairment charges.
Net Earnings
The Company recorded net earnings of $40.7 million or $0.62 per share, compared with
$42.2 million or $0.73 per share of net earnings in 2013. As noted above, net earnings in
2014 were impacted by increased long term incentive compensation expense, restructuring
and impairment charges associated with the curtailment of the Beaver-Forks operation and
recognition of previously unrecognized deferred tax assets related to U.S. operations.
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 $/share
EBITDA(2)
Adjusted EBITDA(2)
Shares outstanding - end of period
Shares outstanding - weighted average
$mm
$mm
million
million
$mm
$mm
$mm
$mm
$mm
$mm
$mm
Unit
Q4
2014
Q3
Q2
Q1
Q4
2013
Q3
Q2
Q1
389.0 373.1 390.2 294.8
318.6 303.0 325.2 230.4
37.6
22.4
4.4
13.3
27.5
0.43
32.3
39.2
66.7
63.8
37.4
29.1
3.9
(1.1)
(5.2)
(0.08)
23.2
37.4
66.7
66.7
34.4
28.3
7.4
20.1
11.0
0.16
40.9
45.4
66.7
66.7
35.4
25.8
3.8
3.8
7.4
0.11
47.8
47.3
66.7
66.7
315.3 272.7 274.7 242.5
249.2 212.2 219.5 191.4
26.1
16.6
8.4
17.2
15.2
0.27
30.6
37.1
55.9
55.9
36.6
18.4
5.4
2.3
(0.1)
(0.00)
18.4
24.6
63.1
55.9
32.6
17.4
5.2
19.3
15.8
0.28
35.3
36.1
55.9
55.9
41.3
20.0
4.9
13.7
11.4
0.18
31.4
36.2
63.1
63.1
Operating Performance
Lumber production
Lumber sales
Lumber - average selling price (3)
Log sales(4)
Logs - average selling price (4)
million fbm
million fbm
$/thousand fbm
thousand cubic metres
$/cubic metre
578
620
514
358
84
567
595
509
380
75
582
628
518
305
103
495
439
525
398
82
470
500
498
397
92
447
446
476
353
93
418
433
507
301
90
390
383
500
289
76
Average USD/CAD exchange rate (5)
Closing USD/CAD exchange rate (5)
1 USD in CAD
1 USD in CAD
1.1350 1.0890 1.0905 1.1033
1.1601 1.1208 1.0676 1.1053
1.0491 1.0385 1.0233 1.0080
1.0636 1.0303 1.0518 1.0160
Notes:
(1) Figures in this table may not add due to rounding.
(2) Refer to the Non-GAAP Measures section of this MD&A.
(3) Gross sales before export taxes.
(4) For B.C. operations.
(5) Based on Bank of Canada 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 USD/CAD foreign currency exchange
rate.
Management’s Discussion and Analysis
15
____________________
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
break-up 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.
Three sawmills acquired on March 1, 2013, and one sawmill acquired on July 1, 2013,
contributed to growth in production, sales and earnings. Production, sales and earnings
have also benefited since the acquisition of two sawmills on March 14, 2014. The
permanent closure of the Beaver sawmill impacted production and sales in subsequent to
Q2’14.
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 translated to
Canadian dollars.
Liquidity
Balance Sheet
Interfor strengthened its financial position throughout the fourth quarter of 2014. Net debt
at quarter-end of $202.6 million, or 24.1% of invested capital, was $61.8 million higher
than at December 31, 2013, due primarily to borrowings for the Tolleson acquisition.
As at December 31, 2014, the Company had net working capital of $109.7 million and
available capacity on operating and term facilities of $235.6 million. These resources, in
addition to cash generated from operations, will be used to support working capital
requirements, debt servicing commitments and capital expenditures. We believe that
Interfor will have sufficient liquidity to fund operating and capital requirements for the
foreseeable future.
Cash Flow from Operating Activities
In 2014, the Company generated $143.0 million of cash flow from operations before
changes in working capital, up $19.3 million over 2013. Incremental cash flow generated
from increased sales was partially offset by a small reduction in margin on production costs
and a $6.7 million increase in selling and administration costs. The increase in selling and
administration costs includes $1.6 million of a non-recurring nature related to the Tolleson
and Simpson acquisitions.
Total cash generated from operations after changes in working capital was $161.8 million,
with $18.8 million of cash released from operating working capital. The reduction in
working capital was led by a $17.3 million decrease in log inventory compared to December
31, 2013. In 2013, $26.2 million of cash was consumed by operating working capital,
leading to $97.5 million of total cash generated from operations.
Cash Flow from Investing Activities
Investing activities totaled $200.9 million in 2014, including $124.4 million related to the
Tolleson acquisition, $48.9 million for property, plant and equipment and $26.7 million for
Management’s Discussion and Analysis
16
____________________
development of logging roads. Discretionary mill improvements of $25.0 million during the
period included the installation of a new kiln and crane at the Thomaston sawmill, a Weinig
moulder at the Gilchrist sawmill and preparatory work on the Castlegar sawmill rebuild.
In 2013, total investing activities of $186.7 million included $86.6 million related to the
acquisition of Rayonier’s Wood Products Business, $33.8 million for the acquisition of the
Thomaston sawmill and $68.3 million of capital expenditures. Capital expenditures included
the addition of two timber tenures in the Kootenay Region of B.C. from Springer Creek
Management Ltd. with a combined Allowable Annual Cut of approximately 174,000 cubic
metres.
Cash Flow from Financing Activities
Net drawings on the Company’s long term debt facilities were $59.4 million 2014, leading to
total cash from financing activities of $51.5 million. This includes US$112.5 million drawn
from the Company’s Revolving Term Line and Operating Line to fund the Tolleson
acquisition.
In 2013, net drawings on the Company’s long term debt facilities were $4.2 million with
total cash from financing activities of $78.0 million. This includes $82.4 million of net cash
proceeds raised from the issuance of 7,187,500 Common Shares.
Summary of Contractual Obligations
The estimated cash payments due in respect of contractual and legal obligations including
projected major capital improvements are summarized as follows:
Thousands of Canadian dollars
Trade accounts payable and accrued liabilities
Income taxes payable
Reforestation liability
Long term debt
Provisions and other liabilities
Operating leases and expected capital commitments
Total obligations (1 )
$
Total
105,150
365
34,628
220,419
68,317
83,864
$
Up to
1 Year
105,150
365
9,797
-
31,908
64,294
$
$
Payments due by Period
4-5
Years
-
-
8,456
-
3,314
4,510
2-3
Years
-
-
9,040
104,709
12,270
10,040
$
After 5
Years
-
-
7,335
115,710
20,825
5,020
$
512,743
$
211,514
$
136,059
$
16,280
$
148,890
Note: (1) Figures in this table may not add due to rounding
Capital Resources
The following table summarizes Interfor’s credit facilities and availability as of December 31,
2014:
Thousands of Canadian dollars
Available line of credit and maximum borrowing available
Less:
Drawings
Outstanding letters of credit included in line utilization
Unused portion of facility
Operating
Line
65,000
$
Revolving
Senior
U.S.
Term Secured Operating
Line
Notes
34,803
116,010
$
$
Line
250,000
$
Total
465,813
$
-
8,637
56,363
$
104,409
-
145,591
$
116,010
-
-
-
1,183
33,620
$
220,419
9,820
235,574
$
Interfor continues to maintain its disciplined focus on monitoring discretionary capital
expenditures, optimizing inventory levels and matching production with offshore and
domestic demand. Based on current pricing, cash flow projections and existing credit lines,
the Company believes it has sufficient liquidity to meet all of its financial obligations.
Management’s Discussion and Analysis
17
____________________
Transactions between Related Parties
Other than transactions in the normal course of business with key management personnel,
the Company had no transactions between related parties in the twelve months ended
December 31, 2014.
Off-Balance Sheet Arrangements
The Company has off-balance sheet arrangements which include letters of credit and surety
performance bonds, primarily for timber sales. At December 31, 2014, such instruments
aggregated $30.9 million (December 31, 2013 - $26.7 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’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 are the Company’s Canadian bankers who are highly-
rated and, hence, the risk of credit loss on such instruments is mitigated.
Interest Rate Swaps
As at December 31, 2014, Interfor had drawn $104.4 million of floating rate debt, excluding
letters of credit, from its operating and term credit facilities, and $116.0 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%
and 4.02% for Series A and Series B, respectively.
On April 14, 2014, the Company entered into two additional interest rate swaps, each with a
notional value of US$25.0 million maturing on April 14, 2016. Under the terms of these
swaps, the Company pays an amount based a fixed annual interest rate of 0.58% and
receives payment based on 90 day LIBOR which recalculated at set interval dates.
On March 25, 2013, the Company entered into two interest rate swaps, each with a notional
value of US$25.0 million and maturing on 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 payment based on 90 day LIBOR which is recalculated at set interval dates.
These interest rate swaps convert the Company’s floating-rate interest expense to fixed-rate
interest expense and have been designated as cash flow hedges. The fair value of these
interest rate swaps at December 31, 2014, being an asset of $0.1 million (measured based
on Level 2 of the fair value hierarchy), has been recorded in Trade accounts receivable and
other (2013 - $0.2 million) and a negligible loss (2013 - $0.2 million gain) has been
recognized in Other comprehensive income.
Based on the Company’s average debt level during 2014, there is no net earnings exposure
to changes in interest rates as all debt is covered by fixed rate instruments.
Management’s Discussion and Analysis
18
____________________
Foreign Currency Contracts
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 foreign currency exchange forward, collar and option contracts to
manage its currency risk from time to time. The Company routinely assesses its foreign
exchange exposure by reviewing outstanding contracts, pending order files and working
capital denominated in foreign currencies.
As at December 31, 2014, the Company had outstanding forward currency exchange
contract obligations to sell during 2015 a maximum of US$11.0 million at an average rate of
$1.1527 per U.S. dollar and ¥53.6 million at an average rate of ¥107.1 per U.S. dollar.
Under outstanding call/put option collar agreements, the Company also had the right to sell
US$4 million per month at an average rate of $1.1000 per U.S. dollar and the obligation to
sell US$4 million per month at an average rate of $1.1638 per U.S. dollars in each of
January, February and March 2015.
All foreign currency gains or losses in 2014 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 a liability of $0.2 million in Trade accounts payable and provisions (2013 - $0.1
million asset recorded in Trade accounts receivable and other).
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.
As at December 31, 2014, the Company had designated the US$90.0 million drawn under
its Revolving Term Line and US$100.0 million drawn under its Senior Secured Notes as
hedges against the net investment in its U.S. operations. The Company recorded a $20.4
million unrealized foreign exchange net gain on translation of its U.S. operations with a U.S.
dollar functional currency to Other comprehensive income (loss) in 2014 (2013 - $8.2
million net gain).
Outstanding Shares
As of February 12, 2015, Interfor had 66,730,455 Common Shares issued and outstanding.
These shares are listed on the Toronto Stock Exchange under the symbol IFP.
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, 2014.
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 2013 COSO framework. Based on this
Management’s Discussion and Analysis
19
____________________
evaluation, the CEO and CFO have concluded that the Company’s ICFR were effective as of
December 31, 2014.
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, 2014,
which materially affected, or are reasonably likely to materially affect, the Company’s ICFR.
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 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 cost
lagged one month and for B.C. Interior logs is based on the three month moving average
cost, both adjusted for unusual items. The unit cost for U.S. logs is based on purchase cost.
When net realizable value is lower than cost, a charge to operating earnings is recorded.
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, 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 operating 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.
Management’s Discussion and Analysis
20
____________________
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, 2014.
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 impairment may
exist. The Company assessed the recoverability of goodwill as at December 31, 2014 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 liability for 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 liabilities 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 for access
to 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 two defined benefit
pension plans for those hourly employees not covered by forest industry union plans; a third
defined benefit pension plan wound-up in the fourth quarter of 2014. 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 plan obligations and assets
include assumptions for 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 income taxes based on the respective tax rules and regulations in the
jurisdictions in which the Company operates. Due to the number of variables associated
Management’s Discussion and Analysis
21
____________________
with the judgments, assumptions and estimates, and differing tax rules and regulations
across the multiple jurisdictions, the precision and reliability of the resulting estimates are
subject to uncertainties and may change as additional information becomes known.
Income tax assets and liabilities, both current and deferred, are measured according to the
income tax legislation that is expected to apply when the asset is realized or the liability
settled. Deferred income tax assets and liabilities are comprised of the tax effect of
temporary differences between the carrying amount and tax basis of assets and liabilities,
tax loss carry forwards and tax credits. Assumptions underlying the composition of deferred
income 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 deferred income tax
assets and liabilities is reasonably likely to change from period to period due to the
uncertainties surrounding these assumptions.
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, 2014, and have not been applied in
preparing the Company’s 2014 annual consolidated financial statements. The following
pronouncements are considered by the Company to be the most significant of several
pronouncements that may affect the financial statements.
IFRS 9, Financial Instruments, will replace the multiple classification and measurement
models in IAS 39, Financial Instruments: Recognition and Measurement, with a single model
that has only two classification categories: amortized cost and fair value. IFRS 9 is
effective for annual periods beginning on or after January 1, 2018, with earlier adoption
permitted. The Company does not expect this standard to have a significant effect on its
financial statements.
IFRS 15, Revenue from Contracts with Customers, will replace all existing IFRS revenue
requirements. Application is required for annual periods beginning on or after January 1,
2017, with earlier adoption permitted. The Company has not yet completed an assessment
of the impact, if any, of this standard on its financial statements.
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 unaudited interim and audited annual condensed consolidated
financial statements prepared in accordance with IFRS:
Management’s Discussion and Analysis
22
____________________
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, capital asset and timber write-downs
Finance costs
Other foreign exchange loss (gain)
Income tax expense (recovery)
EBITDA
Add:
Long term incentive compensation
Other expense (income)
Beaver sawmill post-closure wind-down costs
Adjusted EBITDA
Pre-tax return on total assets
Operating earnings (loss) before restructuring
and capital asset write-downs
Total assets(1)
Pre-tax return on total assets(2)
Net debt to invested capital
Net debt
Long term debt
Cash and cash equivalents
Total net debt
Invested capital
Net debt
Shareholders' equity
Total invested capital
Net debt to invested capital (3)
For the 3 months
ended December 31,
2013
2014
For the year ended December
31,
2012
2014
2013
(5,187)
11,431
40,690
42,239
(9,474)
14,707
8,699
857
2,268
1,646
160
23,150
13,864
(3)
363
37,374
11,040
6,253
49
2,097
211
324
31,405
5,205
(375)
-
36,235
55,167
28,912
24,129
8,915
2,651
(16,230)
144,234
39,206
23,061
371
9,069
1,250
555
115,751
23,933
37
1,075
169,279
18,841
(602)
-
133,990
28,745
23,648
529
6,441
(189)
458
50,158
10,065
(334)
-
59,889
(259)
1,058,346
-0.1%
13,737
812,305
6.8%
60,192
946,325
6.4%
52,882
728,083
7.3%
(2,569)
623,438
-0.4%
220,419
(17,866)
202,553
145,479
(4,717)
140,762
220,419
(17,866)
202,553
145,479
(4,717)
140,762
135,046
(14,994)
120,052
202,553
636,480
839,033
24.1%
140,762
515,137
655,899
21.5%
202,553
636,480
839,033
24.1%
140,762
515,137
655,899
21.5%
120,052
376,030
496,082
24.2%
Notes:
(1) Opening total assets for three month periods; average of opening and closing total assets for annual periods.
(2) Annualized rate.
(3) Net Debt to Invested Capital balances are as of the period end.
Risks and Uncertainties
The Company is exposed to many risks and uncertainties in conducting its business
including, but not limited to the factors described below.
Price Volatility
The Company’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 the Company 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. The Company’s financial results may be
significantly affected by changes in the selling prices of its products.
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 the Company’s
lumber production is sold in markets where the Company competes against many producers
of approximately the same or larger capacity. Some of the Company’s competitors have
greater financial resources and a number are, in certain product lines, lower-cost producers.
Management’s Discussion and Analysis
23
____________________
Factors which affect the Company’s competitive position include:
•
•
•
•
•
•
•
•
•
the foreign currency exchange rates;
the cost of labour;
the costs of harvesting or purchasing logs;
the ability to secure a quality log supply matched to a sawmill’s requirements;
the quality of its products and customer service;
the ability to secure space on vessels for overseas shipments and on trucks and
railcars for North American
shipments;
the cost of export taxes payable on sales to the United States; and
its 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.
Availability and Cost of Log Supply
The log requirements of the Company’s sawmills 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 the
Company’s sawmills are either traded for suitable logs or sold on the open market.
Operating at normal capacity, the Company’s Canadian sawmills 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 sawmills, with a small volume occasionally supplied by the
Company’s Canadian coastal logging operations for the sawmill 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 the Company’s business, financial position, results of
operations and cash flow. In addition, weather-related issues can restrict timely access to
log supply.
The Company relies on third-party independent contractors to harvest timber in areas over
which it holds timber tenures. Increases in rates charged by these independent contractors
or the limited availability of these independent contractors may increase the Company’s
timber harvesting costs.
Additionally, in order to ensure uninterrupted access to logs harvested from its timber
tenures in Canada, the Company must also focus on the continuous development of road
networks. This encompasses an integrated plan by foresters, engineers and logging
operations personnel to identify future logging areas and develop the engineering for roads.
The Company expects to fund its ongoing road development with cash generated from
operations and through utilization of its existing Lines of Credit.
Natural or Man-Made Disasters
The Company’s operations are subject to adverse natural or man-made events such as
forest fires, severe weather conditions, climate change, timber disease and insect
infestation and earthquake activity. These events could damage or destroy the Company’s
physical facilities or timber supply and similar events could also affect the facilities of the
Company’s suppliers or customers. Any such damage or destruction could adversely affect
the Company’s financial results as a result of decreased production output or increased
operating costs. Although management believes it has reasonable insurance arrangements
in place to cover certain of such incidents, there can be no assurance that these
arrangements will be sufficient to fully protect the Company against such losses. As is
Management’s Discussion and Analysis
24
____________________
common in the industry, the Company does not insure loss of standing timber for any
cause.
Currency Exchange Sensitivity
The Company’s Canadian operations ordinarily sell approximately 75% of their lumber into
export markets, with the majority of these sales denominated in U.S. dollars and, to a
lesser extent, in Japanese Yen. While the Canadian operations also incur some U.S. dollar–
denominated expenses, primarily for ocean freight and other transportation and for
equipment operating leases, the majority of expenses are incurred in Canadian dollars. The
Company’s operations in the United States transact primarily in U.S. 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.
Government Regulation
The Company’s operations are subject to extensive provincial, state, federal or other laws
and regulations that apply to most aspects of its business activities. Where applicable, the
Company is required to obtain approvals, permits and licences for its operations as a
condition to operate.
From time to time, changes in government policy or regulation may impact the Company’s
operations. Until the details of all such changes are announced and implemented, the full
impact of these changes on the Company’s production, costs, financial position and results
of operations cannot be determined.
Allowable Annual Cut (“AAC”)
The Company holds cutting rights in British Columbia 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.
The AAC is regulated by the Ministry of Forests, Lands and Natural Resource Operations and
is subject to periodic review 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 the Company’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 southern portion of the B.C. Interior is
expected to remain stable for the next several years, then decline 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 over the next three to
ten years as 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.
Management’s Discussion and Analysis
25
____________________
Aboriginal Issues
Aboriginal groups have claimed aboriginal title and rights over substantial portions of British
Columbia, including areas where the Company’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 the Company’s forest tenures or the amounts of
compensation to the Company, 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 and complex issues. The Government of British
Columbia has been working to improve the functional relationship between the Crown and
aboriginal groups prior to treaty settlement. The Province of British Columbia and First
Nations groups on the coast of British Columbia 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 the Company’s coastal tenures.
The agreements will be assessed and monitored in the years ahead to determine the extent
of any implications on those operations.
On June 26, 2014, the Supreme Court of Canada (“SCC”) released its ruling on Tsilhqot’in
vs. British Columbia. This ruling may define, for the first time, the criteria upon which
aboriginal title rests and is considered a positive development for the Company. It is also an
important motivation for the federal and provincial governments to move forward on the
treaty process in British Columbia.
The SCC ruling applies to 2% of the Tsilhqot’in traditional territory in a remote area of
central British Columbia – far removed from the Company’s operations. To date, aboriginal
title has not been established in any of the Company’s tenures and doing so will likely be a
lengthy and complex process. The Company will continue to manage its operations within
the existing legal framework while paying close attention to the direction provided by the
Province of British Columbia and First Nations regarding the application of this ruling.
Therefore, risks and uncertainties remain consistent with those referenced above.
Softwood Lumber Agreement
A portion of the Company’s products that are manufactured in Canada are exported for sale.
The Company’s financial results are dependent on continued access to the export markets
and tariffs and other trade barriers that restrict or prevent access represent a continuing
risk to the Company. 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 (“RLCI”) of lumber is at or below US$355 per mfbm. On
January 23, 2012, Canada and the United States 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 remained above this threshold for all of 2014.
There is no assurance that the SLA will be renewed or, if is renewed, that export duties will
not be increased from current ranges or that other thresholds in the SLA, such as
differential trigger prices, surge limits and quotas will not change in a manner that
Management’s Discussion and Analysis
26
____________________
adversely affects the Company. Further, the expiry of the SLA without its renewal, or any
amendments to the SLA, could result in the imposition of export duties or other protective
measures, such as antidumping duties or countervailing duties, that are in excess of the
range of export duties that are currently imposed under the SLA. The SLA provides that no
action may be taken with respect to the imposition of softwood lumber duties from Canada
for the twelve-month period following expiry of the SLA.
Stumpage Fees
The Province of British Columbia 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 British Columbia.
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 determine an individual stumpage rate for each cutting permit.
Periodic changes in the provincial government’s administrative policy can affect the market
price for timber and the viability of individual logging operations. There can be no assurance
that current changes or future changes will not have a material impact on stumpage rates.
Environment
The Company has incurred, and will continue to incur, costs to minimize environmental
impact, prevent pollution and for continuous improvement of its environmental
performance. The Company may discover currently unknown environmental problems or
conditions relating to its past or present operations, or it may be faced with an 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 the Company’s financial condition and results of
operations.
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 depends on a variety of third parties that employ unionized workers to
provide critical services to the Company. Labour disputes by these third parties could lead
to disruptions at the Company’s facilities. The Company’s Acorn, Hammond, Grand Forks,
and Castlegar sawmill employees are members of the Canadian United Steelworkers union
(“USW”). The collective agreement with the Southern Interior USW agreement (Grand Forks
and Castlegar) expires on June 30, 2018, while the USW agreement for the B.C. Coast
(Acorn and Hammond) expires on June 15, 2019. The Company also has 22 employees in
the B.C. Interior who are members of the Canadian Marine Service Guild (“CMSG”), and
their collective agreement expired September 30, 2014. Negotiations with the CMSG
regarding renewal of the expired agreement are in process, with employees continuing to
work under the terms of the expired agreement with no workplace disruptions.
Management’s Discussion and Analysis
27
____________________
Additional Information
Additional information relating to the Company and its operations can be found on its
website at www.interfor.com, in the Annual Information Form and on SEDAR at
www.sedar.com.
28
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
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
2014 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 thereon. 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
Executive Vice President and Chief Financial
Officer
February 12, 2015
29
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Shareholders
We have audited the accompanying consolidated financial statements of Interfor Corporation (the
“Company”) which comprise the consolidated statements of financial position as at December 31,
2014 and December 31, 2013, the consolidated statements of earnings, comprehensive income,
changes in equity and cash flows for the years ended December 31, 2014 and December 31,
2013, 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 audits to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on our
judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, we
consider internal control relevant to the Company’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of Interfor Corporation as at December 31, 2014 and December 31,
2013, and its consolidated financial performance and its consolidated cash flows for the years
ended December 31, 2014 and December 31, 2013 in accordance with International Financial
Reporting Standards.
KPMG LLP, Chartered Accountants
February 12, 2015
Vancouver, Canada
30
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian dollars)
As at December 31, 2014 and 2013
Note
December 31
2014
December 31
2013
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
Deferred income taxes
Equity:
Share capital
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
19
13
17,866
80,283
148,668
12,175
258,992
2,520
2,972
541,378
22,244
79,024
24,397
136,996
-
$
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
$ 1,068,523
$ 824,126
$ 139,153
9,797
$
98,017
11,754
365
395
149,315
23,099
220,419
7,361
25,190
6,659
110,166
20,662
145,479
7,006
25,676
-
490,363
428,723
7,476
20,950
133
7,476
561
167
117,558
78,210
636,480
515,137
$ 1,068,523
$ 824,126
Commitments and contingencies (note 20); Subsequent events (note 27).
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board of Directors:
L. Sauder, Director
D.W.G. Whitehead, Director
31
Consolidated Statements of Earnings
(Expressed in thousands of Canadian dollars, except earnings per share)
Years ended December 31, 2014 and 2013
Sales
Costs and expenses:
Production
Selling and administration
Long term incentive compensation expense
Export taxes
Depreciation of plant and equipment
Depletion and amortization of timber, roads and other
Operating earnings before restructuring costs
Restructuring costs
Operating earnings
Finance costs
Other foreign exchange loss
Other income (expense)
Earnings before income taxes
Income tax expense (recovery):
Current
Deferred
Net earnings
Note
2014
2013
$1,447,157
$1,105,222
5
11
8
9
18
16
17
19
1,243,464
35,489
23,933
-
55,167
28,912
1,386,965
60,192
(24,129)
36,063
(8,915)
(2,651)
(37)
(11,603)
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)
24,460
42,794
1,342
(17,572)
(16,230)
463
92
555
$ 40,690
$ 42,239
Net earnings per share, basic and diluted
21
$
0.62
$
0.73
See accompanying notes to consolidated financial statements.
32
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
Note
2014
2013
Net earnings
$ 40,690
$ 42,239
Other comprehensive income:
Items that will not be recycled to Net earnings:
Defined benefit plan actuarial gains (losses)
22
(1,342)
5,832
Items that are or may be recycled to Net earnings:
Foreign currency translation differences for
foreign operations, net of tax
Gain (loss) 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
Total items that are or may be recycled to Net earnings
Total other comprehensive income, net of tax
26
16
19
20,389
(34)
-
-
20,355
19,013
8,167
241
58
212
8,678
14,510
Comprehensive income
$ 59,703
$ 56,749
See accompanying notes to consolidated financial statements.
33
Consolidated Statements of Changes in Equity
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
Note
Common
Shares
Class B Contributed
Surplus
Shares
Translation
Reserve
Hedge
Reserve
Retained
Earnings
Total
Equity
Balance at December 31, 2012
$ 342,285 $ 4,080
$ 7,476 $ (7,818)
$
(132)
$ 30,139 $ 376,030
Net earnings:
Other comprehensive income:
Foreign currency translation differences for
foreign operations, net of tax
Defined benefit plan actuarial gains
Gain in fair value of interest rate swaps
Reclassification of loss in fair value of interest rate
swap to net earnings
Contributions:
22
26
16
-
-
-
-
-
-
-
-
-
-
Share issuance, net of share issue expenses
Share exchange
13(a)
13(a)
82,358
4,080
-
(4,080)
Balance at December 31, 2013
428,723
Net earnings:
Other comprehensive income (loss):
Foreign currency translation differences for
foreign operations, net of tax
Defined benefit plan actuarial losses
Loss in fair value of interest rate swaps
Contributions:
-
-
-
-
22
26
Shares issued in business combination
5, 13(a)
61,640
-
-
-
-
-
-
-
-
-
-
-
-
-
7,476
-
-
-
-
-
-
-
42,239
42,239
8,379
-
-
-
-
-
561
-
-
-
241
58
-
-
-
5,832
-
-
-
-
8,379
5,832
241
58
82,358
-
167
78,210
515,137
-
40,690
40,690
20,389
-
-
-
-
(34)
-
(1,342)
-
20,389
(1,342)
(34)
-
-
-
61,640
Balance at December 31, 2014
$ 490,363
$ - $
7,476 $ 20,950
$
133
$117,558 $ 636,480
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
Years ended December 31, 2014 and 2013
34
Cash provided by (used in):
Operating activities:
Net earnings
Items not involving cash:
Note
2014
2013
$ 40,690
$ 42,239
Depreciation of plant and equipment
Depletion and amortization of timber, roads and other
Income tax expense (recovery)
Finance costs
Other assets
Reforestation liability
Other liabilities and provisions
Write-down of plant and equipment
Unrealized foreign exchange losses (gains)
Other income (expense)
8,18
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 13(a)
Interest payments
Debt refinancing costs
Additions to long term debt
Repayments of long term debt
10
10
8
9
19
16
12
17
8
9
9
5
55,167
28,912
(16,230)
8,915
986
1,910
(63)
20,468
2,191
46
142,992
(8,628)
15,083
1,236
14,185
(3,077)
161,791
(48,922)
(26,656)
(2,818)
(124,421)
1,926
(13)
(200,904)
-
(7,122)
(757)
480,487
(421,059)
51,549
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
Foreign exchange gain 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
713
13,149
4,717
$ 17,866
887
(10,277)
14,994
4,717
$
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
35
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
1. Nature of operations:
Interfor Corporation and its subsidiaries (the “Company” or “Interfor”) produce wood
products in British Columbia, the U.S. 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.
These consolidated financial statements of the Company as at and for the years ended
December 31, 2014 and 2013 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 12, 2015.
(b) Basis of measurement:
These 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 number of shares and per share amounts.
(d) Use of estimates and judgements:
The preparation of these 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, 2014 and 2013
36
(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 provisions
Note 3(m)
Cash-settled share based compensation
Note 9
Roads and bridges, timber tenures, other intangible assets and goodwill
Note 12
Reforestation liability
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, including unrealized income and expenses arising from
intercompany transactions have been eliminated upon consolidation.
The Company measures goodwill in business acquisitions 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 functional currency of the
respective entity at transaction date exchange rates. Monetary assets and
liabilities denominated in foreign currencies at the reporting date are revalued
using the exchange rate on that date.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
37
(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 exchange differences arising on revaluation are recognized in Net earnings.
Where revaluations relate to trade accounts receivable those foreign exchange
differences are adjusted to Sales in the Statement of Earnings; where revaluations
relate to trade accounts payable those foreign exchange differences 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 of such foreign operations 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 foreign currency translation differences are recognized in Other
comprehensive income, and recorded to the Translation reserve in Equity.
Foreign currency translation differences 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.
Monetary receivables from a foreign operation, the settlement of which are neither
planned nor likely in the foreseeable future are considered to form part of the net
investment in the foreign operation. Related foreign exchange translation
differences are recognized 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 revaluation 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 differences remaining in the Translation reserve and subsequent
unrealized foreign exchange differences 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
38
(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 comprise cash and cash equivalents, trade
and other receivables, trade accounts payable and accrued liabilities, provisions,
and loans and borrowings including long term debt.
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 transaction
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 exchange, interest, and commodity price
risk. The Company does not utilize derivative financial instruments for trading or
speculative purposes.
The Company has chosen not to designate its derivative foreign currency exchange
forward, collar and option contracts as hedges for accounting purposes.
Consequently, these derivative financial instruments, designated as held-for-
trading, 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.
(iii) Share capital:
Common shares are classified as equity. Incremental costs directly attributable to
the issuance of common shares and share options are recognized as a deduction
from equity, net of any tax effects.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
39
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(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. Net realizable value is the estimated
selling price in the normal course of business, less estimated costs of completion and
selling expenses.
Log inventories are valued at the lower of cost and net realizable value on a specific
boom basis where logs are boomed, or in aggregate on a species and sort basis where
the logs are not boomed.
Cost for internally produced log inventories is determined as the weighted average cost
of logging on a twelve month rolling average, lagged by one month, for the B.C. Coast
and on a three month rolling average for the B.C. Interior, 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
designated for lumber processing, on estimated net realizable value less estimated
costs of completion and selling expenses.
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
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% per year) 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 as incurred, with the exception of
programs that extend the useful life of an asset or increase its value, which are
capitalized.
Borrowing costs directly attributable to the acquisition, construction or production of
qualifying assets, being those requiring a substantial period of time prior to availability
for their intended use, are capitalized.
(g) Logging roads and bridges:
Logging roads and bridges are recorded at cost less accumulated amortization and
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, 2014 and 2013
40
(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 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
impairment losses. Amortization on other intangible assets is provided on a
straight-line basis ranging from five to ten 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:
The Company’s non-financial assets are reviewed for impairment whenever events or
circumstances indicate that the carrying amount may not be recoverable. Impairment
tests are carried out annually for goodwill.
External indicators of impairment include adverse changes in expected future prices,
costs and other market and economic factors. Internal indicators include changes in
the expected useful life of an asset or changes to the planned capacity of an asset.
An impairment loss is charged to Net earnings if an asset’s carrying amount exceeds
its recoverable amount. The recoverable amount is calculated based on the higher of
its fair value less direct costs to sell and its value in use.
Fair value is determined as the amount that would be obtained from the sale, net of
direct selling costs, of the asset in an arm’s length transaction between knowledgeable
and willing parties. Value in use is determined as the present value of the estimated
future cash flows expected to arise from the continued use of the asset in its present
form and its eventual disposal and does not consider future capital enhancements.
For purposes of assessing impairment, assets are grouped at the lowest level for which
there are separately identifiable cash inflows that are largely independent of the cash
inflows from other assets or groups of assets (cash generating units or “CGU”).
Goodwill is allocated to CGU’s or groups of CGU’s expected to benefit from the
synergies of the combination.
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
41
(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):
Non-financial assets, other than goodwill, for which an impairment was previously
recognized, are reviewed for possible reversal of the impairment at each reporting
date. When an impairment loss is reversed, the increased carrying amount of the
asset cannot exceed the carrying amount that would have been determined, net of
amortization, had the impairment never been recognized.
An impairment loss recorded against 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 estimates 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.
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 to 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
42
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(l) Employee benefits:
Defined benefit pension and other post-retirement benefit obligation accruals are
estimated using actuarial methods and assumptions, including management’s best
estimates of the discount rate, future investment earnings, salary escalation, and
health care costs and are calculated using the projected unit credit method.
Plan assets are valued at fair value for the purpose of calculating the expected return
on plan assets.
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, and are recognized in Retained earnings through Other
comprehensive income in the year in which they occur.
Pension expenses for defined contribution plans are limited to the Company’s
contribution to the plans in respect of services rendered by employees, as the
Company has no legal or constructive obligation to pay further amounts. Plans
administered by the government and the industry-wide unionized employees’ pension
plan are treated as defined contribution plans.
(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 Company uses the fair value method of
accounting for obligations under the SAR, DSU and TSR Plans.
Compensation expense is recorded for SARs over the vesting period based on the
estimated fair value of the SARs at the date of grant. Fair value is measured using a
Black-Scholes option pricing model and is adjusted to reflect the number of SARs
expected to vest.
Compensation expense is recorded for DSUs 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 expense 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, including amounts charged to
customers for freight, wharfage and handling costs. Actual costs of export taxes and
for freight, wharfage and handling are recorded to Export taxes and Production,
respectively, in Net earnings.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
43
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(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 Net earnings 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 accounting purposes and the amounts
used for taxation purposes. Deferred income tax is not recognized for the following
temporary differences: the initial recognition of assets or liabilities in a transaction that
is not a business combination and that affects neither accounting nor taxable profit or
loss, and differences relating to investments in subsidiaries and jointly controlled
entities to the extent that it is probable that they will not reverse in the foreseeable
future. In addition, deferred income tax is not recognized for taxable temporary
differences arising on the initial recognition of goodwill.
Deferred income tax is measured at the tax rates that are expected to be applied to
temporary differences when they reverse, based on the laws that have been enacted
or substantively enacted by the reporting date. Deferred income tax assets and
liabilities are offset if there is a legally enforceable right to offset current tax liabilities
and assets, and they relate to income taxes levied by the same tax authority on the
same taxable entity, or on different tax entities, but they intend to settle current tax
liabilities and assets on a net basis or their tax assets and liabilities will be realized
simultaneously.
A deferred income tax asset is recognized for unused tax losses, tax credits and
deductible temporary differences, to the extent that it is probable that future taxable
profits will be available against which they can be utilized. Deferred income tax assets
are reviewed at each reporting date and are reduced to the extent that it is no longer
probable that the related tax benefit will be realized.
(q) Earnings per share:
Basic earnings per share is computed by dividing Net earnings by the weighted
average number of common shares outstanding during the reporting period. Diluted
earnings per share is determined by adjusting the Net earnings and the weighted
average number of common shares outstanding during the reporting period for the
effects of all dilutive potential common shares, including outstanding share options, if
any.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
44
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(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, 2014, 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, will replace the multiple classification and measurement
models in IAS 39, Financial Instruments: Recognition and Measurement, with a single
model that has only two classification categories: amortized cost and fair value. IFRS
9 is effective for annual periods beginning on or after January 1, 2018, with earlier
adoption permitted. The Company does not expect this standard to have a significant
effect on its financial statements.
In May 2014, the International Accounting Standards Board issued IFRS 15, Revenue
from Contracts with Customers, which will supercede IAS 18, Revenue, IAS 11,
Construction Contracts and related interpretations. The new standard is effective for
annual periods beginning on or after January 1, 2017. The Company is in process of
assessing the impact, if any, on the financial statements of this new standard.
4. Changes in accounting policy:
Effective January 1, 2014, IAS 32, Offsetting Financial Assets and Financial Liabilities, was
revised to clarify the requirements relating to the offset of financial assets and financial
liabilities and was applied retrospectively. The Company has assessed whether certain of
its financial assets and financial liabilities qualify for offset based on the criteria set out in
the amendments and concluded that the application of the amendments had no impact on
the amounts recognized in the Company’s consolidated financial statements.
Effective January 1, 2014, IAS 36, Recoverable Amount Disclosures for Non-Financial
Assets, was revised to remove the requirement to disclose the recoverable amount of a
CGU to which goodwill or other intangible assets with indefinite useful lives had been
allocated when there has been no impairment of reversal of impairment of the related
CGU. The application of these amendments had no impact on the disclosures in the
Company’s consolidated financial statements.
5. Acquisition:
On March 14, 2014, a wholly-owned subsidiary of Interfor acquired all of the outstanding
common shares of Tolleson Ilim Lumber Company (“Tolleson”) from Ilim Timber
Continental, S.A. (“Ilim”), pursuant to a Share Purchase Agreement for total consideration
of $188,545,000. Tolleson, through its wholly-owned subsidiary, owns and operates two
sawmills in Perry and Preston, Georgia, and a remanufacturing facility in Perry, Georgia.
Subsequent to the acquisition, both Tolleson and its wholly-owned subsidiary were
merged into the Company’s wholly-owned subsidiary which had acquired the common
shares of Tolleson.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
45
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
5. Acquisition (continued):
The acquisition has been accounted for as a business combination and the value of
consideration transferred is allocated as follows:
Assets acquired:
Cash and cash equivalents
Other current assets
Property, plant and equipment
Other intangible assets
Goodwill
Liabilities assumed:
Current liabilities
Long term provisions and other liabilities
Deferred income taxes
Consideration funded by:
Current liabilities
Operating Line
Revolving Term Line
Share capital (3,680,000 Common Shares)
Note
8
9
9
19
10(a)
10(b)
13(a)
$ 2,484
16,790
86,561
22,190
107,419
235,444
(15,929)
(6,697)
(24,273)
$ 188,545
$ 2,086
24,964
99,855
61,640
$ 188,545
As part of the acquisition, the Company entered into a non-competition agreement with
Ilim under which Ilim and its associates are prohibited from carrying on various activities
within Canada and the U.S. that would be in competition with the Company’s operating
activities for a period of five years from the acquisition date. An intangible asset of
$22,190,000 was recognized in respect of this non-competition agreement, which will be
amortized to expense over its five year term.
The goodwill of $107,419,000 recognized in the transaction is calculated as the excess of
the purchase consideration transferred over the fair values of the identifiable assets
acquired and liabilities assumed. The factors that contribute to the recognition of goodwill
include Tolleson's historical cash flows and income levels, reputation in its markets,
management team strength, efficiency of operations, synergies with other Interfor-owned
sawmills in close proximity, and future cash flows and income growth projections. None
of the goodwill is expected to be tax deductible.
In conjunction with recognizing a $24,273,000 deferred tax liability in accounting for the
acquisition of Tolleson, the Company recognized $19,253,000 of previously unrecognized
deferred tax assets related to its U.S. operations. The recognition of these deferred
income tax assets is included in the $17,572,000 deferred income tax recovery in Net
earnings.
Transaction costs of $1,368,000 related to the acquisition have been expensed in Selling
and administration expenses in Net earnings.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
46
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
5. Acquisition (continued):
Since acquisition, Tolleson contributed sales of $126,067,000 and earnings of $12,016,000
to the Company’s results. If the acquisitions had occurred on January 1, 2014,
management estimates that Sales and Net earnings would have been $1,477,716,000 and
$39,672,000 respectively. In determining these amounts, management has assumed that
the fair value adjustments that arose on the acquisition date would have been the same if
the acquisition had occurred on January 1, 2014.
In 2013, the Company acquired Rayonier Inc.’s Wood Products Business in Georgia, U.S.
for $86,641,000 and the sawmill operations of Keadle Lumber Enterprises, Inc. in
Thomaston, Georgia for $41,129,000. The Thomaston sawmill acquisition resulted in the
recognition of $10,518,000 in goodwill.
6. Inventories:
Logs
Lumber
Other
2014
2013
$
71,841
66,798
10,029
$
89,170
51,449
8,890
$
148,668
$
149,509
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, 2014 was $9,774,000 (2013 - $7,926,000).
7. Other investments and assets:
Timber deposits and other investments and deposits
Deferred financing fees, net of accumulated amortization
$
2014
809
2,163
$
2013
1,771
2,189
$
2,972
$
3,960
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
47
8. Property, plant and equipment:
Cost
Note
Land
Buildings Equipment Equipment Equipment Improvements
Machinery and
Mobile Computer
Site
Balance at December 31, 2012
Additions
Acquisitions
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2013
Additions
Acquisitions
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2014
$ 35,066 $ 61,496 $ 413,382 $ 15,697 $ 19,047 $ 38,023 $
5
-
3,479
(80)
-
246
-
13,911
(5)
8,906
1,703
-
79,346
(1,129)
14,282
13,432
466
1,568
(707)
1,790
234
1,200
2,739
(162)
452
636
-
3,198
(10)
4,146
652
Projects in
Process
Other
Total
6,192 $
351
59
(20)
244
61
6,568 $ 595,471
34,813
104,853
(2,123)
-
17,184
32,796
553
(10)
(29,820)
220
38,711
212
1,930
(106)
-
654
750,198
47,224
86,561
(2,462)
(159)
35,873
$ 41,401 $ 95,872 $ 644,288 $ 27,891 $ 28,324 $ 56,470 $ 10,574 $ 12,415 $ 917,235
519,313
-
73,368
(1,270)
25,626
27,251
10,307
40,618
-
-
(39,207)
697
23,912
1,319
1,535
(21)
370
1,209
86,011
382
4,972
(123)
1,141
3,489
19,048
787
2,927
(719)
5,163
685
46,009
2,604
1,824
(208)
4,445
1,796
6,887
1,302
5
(15)
2,303
92
Accumulated Depreciation
Buildings Equipment Equipment Equipment Improvements
Other
Total
Machinery and
Mobile Computer
Site
Balance at December 31, 2012
Depreciation
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2013
Depreciation
Disposals
Transfers
Impairment
Exchange rate movements
Balance at December 31, 2014
Net book value at
December 31, 2013
December 31, 2014
$ 26,998 $ 169,689 $ 12,155 $ 13,702 $ 18,942 $
3,483
(3)
-
551
31,029
4,684
(102)
-
2,996
1,147
28,861
(852)
-
4,365
202,063
41,145
(959)
11
16,672
9,513
1,232
(570)
-
143
12,960
2,125
(374)
-
-
293
2,378
(162)
(6)
497
16,409
2,934
(14)
(6)
7
831
2,867
(5)
-
373
22,177
3,687
(208)
11
793
765
$ 39,754 $ 268,445 $ 15,004 $ 20,161 $ 27,225 $
4,206
385
(20)
6
53
4,630
592
(15)
(16)
-
77
5,268
$ 245,692
39,206
(1,612)
-
5,982
289,268
55,167
(1,672)
-
20,468
12,626
$ 375,857
$ 38,711 $ 54,982 $ 317,250 $
6,088 $
41,401
56,118 375,843
12,887
7,503 $ 23,832 $
8,163
29,245
2,257 $ 10,307 $ 460,930
12,415 541,378
5,306
There were no borrowing costs capitalized in 2014 (2013 - $nil). As at December 31, 2014, additions includes $1,698,000 in accrued contract costs
(2013 - $3,428,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
48
(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
Note
Balance at December 31, 2012
Additions
Acquisition
Disposals
Exchange rate movements
Balance at December 31, 2013
Additions
Transfers
Acquisition
Disposals
Exchange rate movements
5
Roads and
Bridges
Timber
Licences
Other
Intangibles
$
52,744 $
18,676
-
(21,624)
130
49,926
26,656
-
-
(7,461)
279
116,280 $
14,342
-
(1,269)
-
129,353
-
-
-
-
-
4,778 $
2,189
-
-
106
7,073
2,818
159
22,190
-
1,179
Goodwill
13,955
-
10,518
-
119
24,592
-
-
107,419
-
5,862
Balance at December 31, 2014
$
69,400 $
129,353 $
33,419 $
137,873
Accumulated amortization
Roads and
Bridges
Timber
Licences
Other
Intangibles
Goodwill
Balance at December 31, 2012
Amortization
Disposals
Exchange rate movements
Balance at December 31, 2013
Amortization
Disposals
Exchange rate movements
$
35,428 $
19,152
(20,932)
54
33,702
19,539
(6,280)
195
42,484 $
4,040 $
3,392
(867)
-
45,009
5,320
-
-
517
-
96
4,653
4,053
-
316
877
-
-
-
877
-
-
-
Balance at December 31, 2014
$
47,156 $
50,329 $
9,022 $
877
Net book value at
December 31, 2013
December 31, 2014
$
16,224 $
22,244
84,344 $
79,024
2,420 $
24,397
23,715
136,996
For the purpose of impairment testing, goodwill of $13,078,000 and $123,918,000 are
attributable to the Coastal Whitewood cash-generating unit (“CWW CGU”) and the U.S.
Southeast cash-generating units (“SE CGU’s”), respectively.
The recoverable amounts for the goodwill impairment assessments were based on the
CGU’s (or groups of CGU’s) value in use and were determined by discounting the future
cash flows generated from the continuing use of the units for a period of twenty
years. The cash flows were projected based on past experience, actual operating results
and the five year business plan in both 2013 and 2014. 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 and the SE CGU’s as at December 31, 2014,
and December 31, 2013 were determined to be higher than the related carrying amount
and no impairment has been recognized.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
49
(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 (2013 – 16 percent) was applied in determining the
recoverable amounts of each of the CGU’s. The discount rate was estimated with the
assistance of external experts, past experience, and the industry average weighted
average cost of capital. An inflation rate of 2.0 percent (2013 – 1.2 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:
2014
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
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 $250,000 $116,010 $ 34,803 $ 465,813
465,813
220,419
116,010
116,010
250,000
104,409
65,000
-
34,803
-
Unused portion of line
$ 56,363 $ 145,591 $
8,637
-
1,183
9,820
-
- $ 33,620 $ 235,574
$ 65,000 $200,000 $ 53,180 $ 21,272 $ 339,452
339,452
145,479
200,000
90,619
53,180
53,180
21,272
744
65,000
936
7,529
-
-
7,529
-
- $ 20,528 $ 186,444
Unused portion of line
$ 56,535 $ 109,381 $
(a) Operating Line:
The Canadian operating line of credit (“Operating Line”) may be drawn in either CAD$
or US$ advances, and bears interest at bank prime plus a margin or, at the
Company’s option, at rates for Bankers’ Acceptances or LIBOR based loans plus a
margin, and in all cases dependent upon a financial ratio of total debt divided by
twelve months’ trailing EBITDA¹. Borrowing levels under the line are subject to a
borrowing base calculation dependent on certain accounts receivable and inventories.
The Operating Line matures on February 27, 2017.
¹EBITDA represents earnings before interest, taxes, depreciation, depletion, amortization and
non-cash asset revaluations.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
50
(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.
As at December 31, 2014, the Operating Line was drawn by $8,637,000 (2013 -
$8,465,000), including outstanding letters of credit.
In March, 2014, the Company drew US$22,500,000 under its Operating Line to fund
its acquisition in the U.S. (see note 5), which it designated as a hedge against the
Company’s investment in its U.S. operations. In April, 2014, the Company
transferred this borrowing to the Revolving Term Line facility. The Company
recognized unrealized foreign exchange gains of $72,000 (2013 - $nil) in Other
comprehensive income in relation to the Operating Line borrowing in 2014.
(b) Revolving Term Line:
The Revolving Term Line may be drawn in either CAD$ or US$ advances, and bears
interest at bank prime plus a margin or, at the Company’s option, at rates for
Bankers’ Acceptances or LIBOR based loans plus a margin, and in all cases dependent
upon a financial ratio of total debt divided by twelve months’ trailing EBITDA¹. The
Revolving Term Line matures on February 27, 2017.
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 March 31, 2014, the Company increased the credit available under its Revolving
Term Line from $200,000,000 to $250,000,000. All other terms and conditions of
this line remained unchanged.
In March, 2014, the Company drew US$90,000,000 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$142,700,000 of drawings under the Revolving Term Line previously designated as
a hedge (see note 26(c)). Related cumulative unrealized foreign exchange losses
remain in Foreign currency translation differences in Other comprehensive income.
As at December 31, 2014, the Revolving Term Line was drawn by US$90,000,000
(2013 – US$85,200,000) revalued at the year-end exchange rate to $104,409,000
(2013 - $90,619,000), being the total drawings under the facility and leaving an
unused available line of $145,591,000 (2013 - $109,381,000).
¹EBITDA represents earnings before interest, taxes, depreciation, depletion, amortization and
non-cash asset revaluations.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
51
(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. dollar 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 $10,770,000 (2013 – $5,538,000)
arising on revaluation of the Revolving Term Line, and from translation of U.S. dollar
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, bearing interest at 4.33%. On December 17, 2014, the Company issued
US$50,000,000 of Series B Senior Secured Notes (together with the Series A Senior
Secured Notes, the “Senior Secured Notes”), bearing interest at 4.02%. The Senior
Secured 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$33,334,000 are required on each
of June 26, 2021 and 2022, with the balance due on June 26, 2023.
As at December 31, 2014, Senior Secured Notes of US$100,000,000 were
outstanding (2013 – US$50,000,000) and revalued at the quarter-end exchange rate
to $116,010,000 (2013 - $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
$4,705,000 (2013 –$635,000) arising on their revaluation were recognized in Foreign
currency translation differences in Other comprehensive income for the year ended
December 31, 2014.
(d) 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. The U.S.
Operating Line is subject to a minimum tangible net worth convenant, with borrowing
levels subject to a collateral calculation dependent upon certain accounts receivable
and inventories. On March 21, 2014, the Company increased the credit available
under this agreement from US$20,000,000 to US$30,000,000.
As at December 31, 2014, the U.S. Operating Line was drawn by US$1,020,000,
including outstanding letters of credit (2013 – US$700,000), revalued at the year-end
exchange rate to $1,183,000 (2013 –$744,000), with cumulative unrealized foreign
exchange losses of $115,000 (2013 –$67,000) recognized in Foreign currency
translation differences in Other comprehensive income.
Minimum principal amounts due on long term debt are follows:
2015
2016
2017
2018
2019
Thereafter
$
-
-
104,409
-
-
116,010
$ 220,419
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
52
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
10. Cash and borrowings (continued):
(e) Cash and cash equivalents:
At December 31, 2014, the Company’s cash balances are restricted by contractor
holdback payments of $15,000 (2013 - $168,000).
11. Provisions and other liabilities:
2014
Note
Current
Non-current
11(a), 18
Restructuring
11(a)
Road deactivation
Environmental
11(a)
Cash-settled share based compensation
11(b)
11(c)
11(d)
Storm damage remediation funds 11(e)
11(f)
Air permit contingent payment
Retained compensation liabilities
11(g)
Other
SAR Plan
TSR Plan
DSU Plan
$
627
406
56
12,450
10,614
763
224
8,121
7,193
1,175
$
1,498
3,645
772
$
2,494
5,059
10,614
310
-
382
416
Total
2,125
4,051
828
14,944
15,673
11,377
534
8,121
7,575
1,591
$ 41,629
$ 25,190
$ 66,819
2013
Note
Current
Non-current
11(a), 18
Restructuring
11(a)
Road deactivation
Environmental
11(a)
Cash-settled share based compensation
11(b)
11(c)
11(d)
Storm damage remediation funds 11(e)
Air permit contingent payment 5, 11(f)
Other
SAR Plan
TSR Plan
DSU Plan
$
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
The current portion of provisions and other liabilities is included in Trade accounts
payable and provisions in the Statements 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
53
(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):
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 of the Castlegar sawmill.
Provisions are measured at the expected value of future cash flows, discounted to
their present value and determined according to the probability of alternative
estimates of cash flows using a current pre-tax 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, 2012
$
457
$
4,007
$
832
Note
Restructuring Road deactivation
Environmental
Provisions made during year
Liabilities assumed with
18
timber acquisition
Expenditures made during year
Reversal of provision during year
Unwind of discount
Changes in estimated future expenditures
Balance at December 31, 2013
371
302
(600)
-
-
-
530
Provisions made during year
Expenditures made during year
Unwind of discount
Changes in estimated future expenditures
Exchange rate movements
18
3,248
(1,810)
-
-
157
451
95
(357)
(170)
68
(178)
3,916
628
(103)
83
(473)
-
-
-
(11)
-
13
(42)
792
-
(2)
15
23
-
Balance at December 31, 2014
$
2,125
$
4,051
$
828
(b) Share Appreciation Rights Plan:
Awards under the SAR Plan have been granted to directors, officers and certain
employees 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 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, which is amortized
over the remaining vesting periods.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
54
(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, 2014 and 2013
are as follows:
2014
Weighted
average
strike price
Units
Outstanding, beginning of year 1,410,850
147,403
Granted
(416,300)
Exercised
(28,000)
Expired or cancelled
$ 5.29
17.43
5.19
5.12
2013
Weighted
average
strike price
$ 5.29
9.18
5.97
6.38
Units
1,898,710
255,000
(666,000)
(76,860)
Outstanding, end of year
1,113,953
$ 7.35
1,410,850
$ 5.62
Units exercisable, end of year
427,350
$ 4.37
572,350
$ 5.03
Weighted average fair value assumptions for grants made in 2014 and 2013 are as
follows:
Risk-free interest rate
Expected life
Annualized volatility
Dividend rate
Termination rate
Grant date fair value
2014
2.0%
8.2 years
45%
0%
12%
$9.06
2013
1.7%
8.2 years
44%
0%
12%
$4.66
Details of units outstanding under the SAR Plan at December 31, 2014 are as follows:
Number
outstanding,
Strike December 31,
2014
price
$1.38-$4.64 324,050
$4.77-$5.40 187,900
$6.01-$7.09 184,100
$8.02-$17.43 417,903
Units outstanding
Weighted
average Weighted
average
strike price
remaining
unit life (yrs)
5.3
4.2
4.8
7.2
$ 3.45
4.87
6.14
12.02
Units exercisable
Number
exercisable,
December 31,
2014
173,250
140,900
87,700
25,500
Weighted
average
strike price
$ 2.42
4.89
6.29
8.02
1,113,953
$ 7.35
427,350
$ 4.37
The Company recorded a Long term incentive compensation expense in respect of the
SAR Plan of $9,210,000 (2013 – $6,963,000) for the year ended December 31, 2014.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
55
(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:
Under terms of the TSR Plan, a participant will receive a target number of
performance share units (“PSUs”) based on a target award divided by the value of the
Company’s Common 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 a three year performance period.
The number of PSU’s outstanding at December 31, 2014 and 2013 are as follows:
Outstanding, beginning of year
Granted
Matured
Cancelled
2014
872,699
171,730
(326,961)
(8,254)
2013
662,951
209,748
-
-
Outstanding, end of year
709,214
872,699
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 obligations under the TSR Plan is subsequently measured at each
reporting date with any changes in fair value reflected in Long term incentive
compensation expense in Net earnings.
Fair value of the TSR Plan 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
2014
2013
1.4%
3 years
47% to 56%
0.00%
0.00%
$87,316
1.5%
3 years
46% to 56%
0.00%
0.00%
$1,509
The Company recorded Long term incentive compensation expense under the TSR
Plan of $10,429,000 (2013 – $9,223,000) for the year ended December 31, 2014.
(d) Deferred Share Unit Plan:
The Company’s directors and certain officers participate in the DSU Plan. 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 market price of
the Company’s Common Shares.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
56
(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. DSUs may also be granted directly to directors or officers 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, 2014 and 2013 are as follows:
2014
2013
Outstanding, beginning of year 498,593
70,656
Granted¹
(18,000)
Exercised
Units
Average
unit value
$13.48
15.29
21.51
Units
504,825
87,472
(93,704)
Average
unit value
$ 8.09
10.80
11.64
Outstanding, end of year
551,249
$21.27
498,593
$13.48
Changes to the market value of the Company’s Common Shares 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 an
expense of $4,890,000 (2013 – $2,752,000) for the year ended December 31, 2014
in respect of the DSU Plan, of which $4,294,000 was recorded in Long term
compensation expense and $596,000 (2013 - $302,000), related to payment for
director’s fees, was recorded in Selling and administration expense.
¹Fair value at the date of the grants.
(e) 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, 2014, $534,000 (2013 - $577,000) of this provision remains unspent.
(f) Air permit contingent payment:
Upon acquisition of the Thomaston sawmill operations from Keadle Lumber
Enterprises Inc. in 2013, the Company agreed to pay additional consideration of
US$7,000,000, contingent upon receipt of an upgrade to the air permit which will
allow the Company to operate a second shift. Approval was received on February 28,
2014, with the payment to be made on February 27, 2015. The liability, revalued at
the year-end exchange rate to $8,121,000 (2013 - $7,445,000), is included in Trade
accounts payable and provisions as at December 31, 2014.
(g) Retained compensation liabilities:
Upon acquisition of the Tolleson sawmills on March 17, 2014, the Company assumed
certain incentive payments payable to certain senior management over a four year
period. The liability of US$6,530,000 was revalued at the year-end exchange rate to
$7,575,000 (2013 - $nil).
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
57
(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:
Reforestation liability, beginning of year
Reforestation expense on current logging and
market logging agreements
Liabilities assumed with timber acquisition
Reforestation expenditures
Unwind of discount
Changes in estimated future reforestation expenditures
Consisting of:
Current reforestation liability
Long term reforestation liability
2014
2013
$ 32,416
$ 28,485
11,264
-
(11,770)
529
457
13,283
2,279
(11,341)
441
(731)
$ 32,896
$ 32,416
$
9,797
23,099
$ 11,754
20,662
$ 32,896
$ 32,416
The total undiscounted amount of the estimated future expenditures required to settle
the reforestation obligation, adjusted for inflation, at December 31, 2014 is $34,628,000
(2013 - $35,060,000). 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 2% (2013 – 3%). 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, 2014 consists of:
• 150,000,000 Common Shares without par value; and
• 5,000,000 Preference Shares without par value.
On May 6, 2014, the Company eliminated its 1,700,000 authorized Class B Common
Shares (“Class B”), known as Multiple Voting Shares, re-designated its Class A
Subordinate Voting Shares (“Class A”) as Common Shares, and increased its
authorized Common Shares by 50,000,000 shares to 150,000,000 shares.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
58
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
13. Share capital (continued):
(a) Share transactions (continued):
Share transactions during 2014 and 2013 were as follows:
Issued and Fully Paid
Balance, December 31, 2012
Share issued for cash, net of share
issue expenses
Class B shares converted to
Common shares
Balance, December 31, 2013
Shares issued in business
combination (see note 5)
Balance, December 31, 2014
Number
Common
54,847,176
Class B
Total
1,015,779 55,862,955
Amount
$ 346,365
7,187,500
-
7,187,500
82,358
1,015,779
63,050,455
(1,015,779)
-
- 63,050,455
-
428,723
3,680,000
66,730,455
-
3,680,000
- 66,730,455
61,640
$ 490,363
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 Shares for Common 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 Common Shares.
On September 30, 2013, the Company closed a public offering of 7,187,500 Common
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 to increase the operational
efficiency of, and support higher operating rates from, the Company’s assets.
Initially, a portion of the proceeds was used to reduce the Company’s debt levels.
On March 14, 2014, the Company issued 3,680,000 Common Shares to partially fund
the acquisition of Tolleson (see note 5).
There were no changes to contributed surplus in 2014 or 2013.
At December 31, 2014, 1,631,740 Common 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, 2014 and 2013.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
59
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
14. Depreciation, depletion and amortization:
Depreciation, depletion and amortization allocated by function are as follows:
Production
Selling and administration
15. Personnel expenses:
2014
2013
$ 79,359
4,720
$ 61,300
967
$ 84,079
$ 62,267
Note
2014
2013
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:
$ 178,902
$ 133,795
10,054
5,046
9,543
1,270
23,933
16,446
6,601
3,392
5,789
1,183
18,841
11,046
$ 245,194
$ 180,647
2014
2013
$
(7,568)
79
$
(7,460)
(210)
-
(627)
(799)
(58)
(522)
(819)
$
(8,915)
$
(9,069)
2014
2013
Effective portion of changes in fair value of interest rate swap
$
(34)
$
241
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
60
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
17. Other income (expense):
Gain (loss) on disposal of surplus equipment, licences and roads $
Gain on lumber futures trading
2014
(46)
9
$
2013
484
118
$
(37)
$
602
18. Restructuring costs:
Write down of plant and equipment
Severance
Onerous contract
Other
Note
8
11
11
2014
$ 20,468
1,575
1,673
413
$
2013
-
371
-
-
$ 24,129
$
371
On June 27, 2014, the Company curtailed its Beaver-Forks operation, located on the
Olympic Peninsula in Washington. As a result, in 2014 the Company recorded provisions
for severance, remediation, and an onerous contract totaling $2,362,000, an impairment
charge of $20,468,000 on the plant and equipment to reduce the carrying value of these
assets to estimated fair values, partially offset by a deferred income tax recovery of
$8,532,000. The Company announced the permanent closure of the Beaver-Forks
operation on July 31, 2014.
The Company also recorded other severance costs of $886,000.
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
2014
2013
$
1,281
61
1,342
$
434
29
463
3,330
-
(20,902)
(17,572)
13,273
(529)
(12,652)
92
$ (16,230)
$
555
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
61
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
19. Income taxes (continued):
Income tax expense (recovery) recognized in Other comprehensive income is as follows:
Loss (gain) on hedge of net investment in foreign operation
2014
-
-
$
$
2013
212
212
$
$
The reconciliation of income taxes at the statutory rate to the income tax expense
(recovery) is as follows:
Income tax expense at the statutory rate of
26.00% (2013 – 25.75%)
Benefits of previously unrecognized deferred income tax assets
Entities with different tax rates and foreign rate adjustments
Change in future tax rates and statutory and tax recovery
rate difference
Other
2014
2013
$
6,360
(20,902)
(639)
$ 11,019
(12,652)
2,618
-
(1,049)
(529)
99
$ (16,230)
$
555
The statutory tax rate increased by 0.25% as a result of changes to the B.C. income tax
rate enacted in 2013.
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 $249,000,000
(2013 - $276,000,000), expire between 2023 and 2033, 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 in respect of Canadian operations, except in limited circumstances.
Deferred income tax assets are not recognized in respect of the following:
Losses carried forward
Deductible temporary differences
2014
$ 25,119
3,903
2013
$ 80,592
2,561
$ 29,022
$ 83,153
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
62
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
19. Income taxes (continued):
Recognized deferred income taxes:
December 31, 2014
Deferred income tax assets
Opening
Balance
Recognized in
Expense
Recognized
in Other
Acquired
in Business
Income (loss) Combination
Income Tax Comprehensive
Ending
Balance
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
$ 59,904
15,242
955
$ 12,400
3,093
-
$
692
694
1,252
(78,521)
-
-
1,474
605
-
-
-
-
-
-
-
$
- $ 72,304
24,579
955
6,244
-
-
-
(188)
692
694
2,538
(30,329) (108,245)
-
-
(176)
-
(176)
Total
$
218
$ 17,572
$
(176)
$ (24,273) $ (6,659)
December 31, 2013
Deferred income tax assets
Opening
Balance
Recognized in
Expense
Recognized
in Other
Acquired
in Business
Income (loss) Combination
Income Tax Comprehensive
Ending
Balance
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
$ 52,471
12,394
955
$
7,433
2,848
-
$
680
668
1,523
12
26
(271)
(68,331)
(10,190)
$
-
-
-
-
-
-
-
- $ 59,904
15,242
-
955
-
-
-
-
692
694
1,252
-
(78,521)
(262)
50
212
-
-
Total
$
98
$
(92)
$
212
$
- $
218
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
63
(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:
2015
2016
2017
2018
2019
$ 24,620
6,220
3,820
2,350
2,160
(b) Surety Performance Bonds:
The Company has posted $21,129,000 in surety performance bonds, with various
expiry dates extending through December, 2020.
(c) 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 Common Shares outstanding for the year.
The reconciliation of the numerator and denominator is determined as follows:
2014
Weighted
average
Net number of
earnings
Shares Per share
2013
Weighted
average
Net number of
Shares
earnings
Per share
Issued Shares at
January 1
Effect of Shares issued on:
September 30, 2013
March 14, 2014
Basic and diluted
earnings (loss)
per share
$ 40,690
63,050
-
2,955
55,863
1,831
-
66,005 $
0.62
$ 42,239
57,694
$
0.73
There were no share options outstanding at December 31, 2014 (2013 – nil).
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
64
(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):
(a) Defined contribution plans:
In Canada, salaried employees of the Company are provided with the opportunity
to make voluntary contributions to a Registered Retirement Savings Plan
(“RRSP”) based on a percentage of an employee’s earnings. 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 2014, the pension expense for this
plan is equal to the Company’s contribution of $2,649,000 (2013 - $1,324,000).
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 2014, the pension expense is equal to the Company’s
contribution of $49,000 (2013 - $49,000).
Employees of Interfor U.S. Inc. and Interfor 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 2014, the pension expense for this
plan is equal to the Company’s contribution of $2,502,000 (2013 - $1,317,000).
(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 2014, the pension expense for these plans is equal to the Company’s
contribution of $3,346,000 (2013 - $2,420,000). 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) 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 2014 the Company recorded an expense of $792,000 (2013 - $679,000)
in respect of these plans. The amounts accrued for defined contribution
commitments is $5,481,000 (2013 - $4,926,000).
The accrued liabilities of this plan are included in the Company’s Statements of
Financial Position as follows:
Trade accounts payable and provisions
Employee future benefits obligation
$
2014
372
5,109
$
2013
317
4,609
$
5,481
$
4,926
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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 (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 made contributions to a defined benefit pension plan that provided
pension benefits to the eligible employees of wholly-owned subsidiary Seaboard
Shipping Company Limited (“SSCL”) upon retirement. The plan provided 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 all plan benefits were settled with either the purchase of annuities
from an insurance company on November 28, 2014 or via lump sum payments. 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
December 31, 2013
December 31, 2013
December 31, 2016
December 31, 2016
Most Recent Valuation
Next Scheduled Valuation
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 2014, the Company paid contributions of $1,333,000, and in lieu of making cash
special payments to fund certain deficits, posted letters of credits totaling
$2,376,000. In 2015, the Company expects to pay contributions of $739,000 to its
defined benefit plans, and hold a total of $2,376,000 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 is not lower than the balance of the
total fair value of the plan assets less the total present value of obligations. The
settlement of the SSCL Plan resulted in a change in the effect of the asset ceiling,
excluding interest, of $700,000.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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 (continued):
The following summarizes the pension and other post-retirement obligations:
Pension Benefits
2014
Other Post-retirement Benefits
2013
2014
2013
Defined benefit obligation:
$
Beginning of year
Service cost
Employee contributions
Interest cost
Benefit payments
Past service cost (settlements)
Actuarial loss (gain) due to:
53,178 $
746
369
2,430
(2,839)
(186)
54,812 $
716
342
2,272
(3,222)
-
1,545 $
35
-
72
(70)
-
Demographic assumptions
Financial assumptions
Experience adjustment
Settlements
798
5,422
165
(11,354)
1,043
(3,390)
605
-
29
89
-
-
1,833
45
-
78
(87)
(17)
28
(1)
(334)
-
End of year
$
48,729 $
53,178 $
1,700 $
1,545
Plan assets:
Beginning of year
Interest on plan assets
Employer contributions
Employee contributions
Benefit payments
Administration costs
Actuarial gain
Settlements
$
56,882 $
51,897 $
2,595
1,263
369
(2,839)
(374)
4,395
(11,716)
2,139
1,471
342
(3,222)
(228)
4,483
-
- $
-
70
-
(70)
-
-
-
End of year
$
50,575 $
56,882 $
- $
Asset ceiling:
Beginning of year
Interest effect
Impact of settlements
$
(700) $
(32)
732
- $
-
(700)
- $
-
-
End of year
$
- $
(700) $
- $
-
-
87
-
(87)
-
-
-
-
-
-
-
-
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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 following summarizes the balances recognized on the Statements of Financial
Position:
Pension Benefits
2014
Other Post-retirement Benefits
2013
2014
2013
Fair value of plan assets
Present value of unfunded
$
50,575 $
56,882 $
- $
-
obligations
393
Present value of funded obligations 48,336
1,846
Surplus (deficit)
-
Effect of asset ceiling limit
414
52,764
3,704
(700)
1,700
-
(1,700)
-
1,545
-
(1,545)
-
Accrued benefit (obligation) $
1,846 $
3,004 $
(1,700) $
(1,545)
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:
Statement of Earnings
Production expense
Finance (income) costs
Restructuring costs
Pension Benefits
2014
Other Post-retirement Benefits
2013
2014
2013
$
1,120 $
(133)
176
944 $
133
-
35 $
72
-
28
78
-
$
1,163 $
1,077 $
107 $
106
Other comprehensive loss (income)
Actuarial losses (gains)
Effect of asset ceiling limit
$
$
1,990 $
(732)
1,258 $
(6,225) $
700
(5,525) $
118 $
-
118 $
(307)
-
(307)
The Company’s accrued benefit assets (liabilities) are included in the Company’s
Statements of Financial Position as follows:
Pension Benefits
2014
Other Post-retirement Benefits
2013
2014
2013
Employee future benefits
asset
$
2,520 $
3,980 $
- $
-
Trade accounts payable and
provisions
Employee future benefits obligation
(72)
(602)
(74)
(902)
(50)
(1,650)
(50)
(1,495)
$
1,846 $
3,004 $
(1,700) $
(1,545)
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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):
Plan assets consist of:
Asset category
Investment Funds
Canadian Equity
Global
Money Market
Fixed Income
Balanced
Cash
Other
Total
$
2014
2013
13,515 $
14,855
816
19,809
520
66
994
16,630
14,494
28
24,090
527
88
1,025
$
50,575 $
56,882
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 in the fair value hierarchy.
Actuarial assumptions used in accounting for the Company maintained benefit
plans (expressed as weighted averages) are:
Pension Benefits
2014
2013
Other Post-retirement Benefits
2013
2014
Defined benefit obligation as of December 31
Discount rate
Compensation increases¹
3.99%
3.50%
Pension expense
Discount rate
Compensation increases¹
4.74%
3.50%
4.69%
3.22%
4.19%
3.39%
4.00%
-
4.75%
-
4.65%
-
4.25%
-
¹Compensation increases only relate to the CMSG plan and the SSCL plans.
For measurement purposes at December 31, 2014, the Company has assumed a
5.85% health care cost trend in 2015 grading down to 4.38% in 2021 (2013 –
5.85% health care cost trend in 2014 grading down to 4.38% in 2021).
Effect of 1% decrease in discount rate
on defined benefit obligation
$
7,138
$
234
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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):
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. The duration of the invested assets
for the SSCL plan 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.
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
$
2014
6,577
671
-
18,791
$
2013
4,339
412
(97)
14,016
$ 26,039
$ 18,670
Obligations in relation to key management personnel, including directors, are as
follows:
Trade accounts payable and provisions
Employee benefits obligation
Provisions and other liabilities
2014
$ 13,824
3,238
16,761
$
2013
7,960
3,131
11,675
$ 33,823
$ 22,766
(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.
All transactions were conducted on a normal commercial basis, including terms
and prices.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
70
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
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
Northwest and Southeast regions of the U.S.
The Company sells to both foreign and domestic markets as follows:
United States
Canada
China/Taiwan
Japan
Other export
Sales by product line are as follows:
Lumber
Logs
Wood chips and other by products
Ocean freight and other
2014
2013
$ 864,309
231,733
170,785
127,279
53,051
$ 556,878
226,989
130,697
121,548
69,110
$ 1,447,157
$ 1,105,222
2014
2013
$ 1,177,258
144,770
105,506
19,623
$ 872,264
136,633
72,418
23,907
$ 1,447,157
$ 1,105,222
Non-current assets by geographic location are as follows:
Canada
United States
2014
2013
$ 342,290
467,241
$ 345,256
250,535
$ 809,531
$ 595,791
25. Capital management:
The Company’s policy is to maintain a strong capital base so as to maintain investor,
creditor and market confidence and to sustain future development of the business.
The Company monitors the pre-tax return on total assets, which it defines as
operating earnings before restructuring and capital asset write-downs, divided by the
average of Total assets for the period.
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
71
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
25. Capital management (continued):
There were no changes in the Company’s approach to capital management during
2014. 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
indebtedness, including letters of credit, and long term debt, net of cash and cash
equivalents up to $20 million; and total capitalization defined as total debt plus
shareholders’ equity and subordinated debt, excluding non-controlling interests,
deferred income taxes, and a maximum of $20 million cumulative (from January 1,
2012) non-cash asset revaluations. 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, 2014, the fair value of the Company's long term debt
approximated its carrying value of $220,419,000 (2013 - $145,479,000). The
fair values of other financial instruments approximate their carrying values due to
their short-term nature.
(b) Derivative financial instruments:
The Company uses a variety of derivative financial instruments to reduce its
exposures to risks associated with fluctuations in foreign exchange rates, lumber
prices, and floating interest rates on long-term debt. These include foreign
currency exchange forward, collar and option contracts, interest rate swaps and
lumber futures.
On March 25, 2013, the Company entered into two 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.
On April 14, 2014, the Company entered into two additional interest rate swaps,
each with a notional value of US$25,000,000 and maturing on April 14, 2016.
Under the terms of these interest swaps, the company pays an amount based on
a fixed annual interest rate of 0.58% 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 and each has been designated as a cash
flow hedge.
In respect of its trading in foreign currency exchange forward, collar and option
contracts, and interest rate swaps, 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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 (continued):
Fair value of the Company’s derivative financial instruments is measured based
on Level 2 of the fair value hierarchy as defined under IFRS 13, Fair Value
Measurement and summarized in the following table as at December 31.
Foreign exchange collars and forward contracts
Interest rate swaps
$
2014
(177)
132
$
2013
136
166
Total asset (liability), net
$
(45)
$
302
Financial instruments in an asset position are classified as Trade accounts
receivable and other in the Statements of Financial Position, while financial
instruments in a liability position are classified as Trade accounts payable and
provisions. Assets and liabilities are not netted, for purposes of presentation on
the Statements of Financial Position.
The following table summarizes the gain (loss) on derivative financial instruments
for the years ended December 31, 2014 and 2013.
Foreign exchange collars and forward contracts¹
Interest rate swaps²
Lumber futures³
$
2014
(884)
(34)
9
$
2013
(1,138)
241
118
Total gain (loss), net
$
909
$
(779)
¹ Recognized in Other foreign exchange gain (loss) in Net earnings.
² Recognized in Other comprehensive income.
³ Recognized in Other income (loss) in Net earnings.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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, 2014, U.S. dollar borrowings under the Revolving Term Line
and Senior Secured Notes were designated as hedges against the Company’s
investment in its U.S. operations with unrealized foreign exchange gains (losses)
recorded in Other comprehensive income as follows:
Designation date balance¹ Additions¹ Payments¹
Opening
Unrealized foreign
exchange
gains (losses)²
2014
2013
Closing
balance¹
October 1, 2008³ $ 30,200
55,000
March 2, 2013³
-
June 19, 2013³
June 26, 20134
50,000
-
July 1, 2013³
-
March 13, 2014³
-
December 15, 2017³
December 17, 20144
-
$
- $ (30,200) $
(55,000)
-
-
-
-
-
-
-
(22,500)
112,500
(35,000)
35,000
-
50,000
-
-
-
50,000
-
90,000
-
50,000
$ (1,259)
(4,184)
-
120
-
(4,958)
(297)
(4,825)
$(2,075)
(2,265)
(1,495)
(635)
297
-
-
-
$135,200
$197,500 $ (142,700) $190,000
$(15,403)
$(6,173)
¹Denominated in U.S. dollars.
²Denominated in Canadian dollars.
³Drawn on Revolving Term Line.
4Drawn on Senior Secured Notes.
Repayments were de-designated as a hedge of the Company’s investment in its
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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):
Risk management policies and systems are reviewed regularly to reflect changes
in market conditions and the Company’s activities. Through its standards and
procedures, management has developed a control environment in which
employees are clear on roles and obligations and management regularly monitors
compliance with its risk management policies and procedures.
(i) Credit risk:
Credit risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its contractual obligations,
and arises primarily from the Company’s receivables from customers and
from cash and cash equivalents.
Accounts receivable
The Company’s exposure to credit risk is dependent upon individual
characteristics of each customer. Each new customer is assessed for
creditworthiness before standard payment and delivery terms and conditions
are offered, with such review encompassing any external ratings, and bank
and other references. Purchase limits are established for each customer, and
are regularly reviewed. In some cases, where customers fail to meet the
Company’s benchmark creditworthiness, the Company may choose to
transact with the customer on a prepayment basis.
All North American sales are conducted under standard industry terms. All
lumber sales outside of the North American markets are either insured as to
90% of receivable amounts by the Export Development Corporation or are
secured by irrevocable letters of credit.
The Company regularly reviews the collectability of its accounts receivable
and establishes an allowance for doubtful accounts based on its best estimate
of any potentially uncollectible accounts. Historically, the Company has
managed its credit tightly and 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 $46,000 was recorded as at December 31, 2014 (2013 -
$42,000).
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 2014.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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):
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit
exposure for receivables in North America. As log and lumber sales outside of
the North American markets are insured by the Export Development
Corporation to 90% or secured by irrevocable letters of credit, credit
exposure for these sales is limited.
Accounts receivable carrying values at the reporting date by geographic
region were as follows:
Canada
United States
Japan
China/Taiwan
Other
(ii) Liquidity risk:
2014
$ 16,107
44,975
7,848
4,444
6,909
2013
$ 12,813
31,093
7,962
5,065
5,802
$ 80,283
$ 62,735
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 an Operating Line, a Revolving Term Line and a
U.S. Operating Line that can be drawn on to meet obligations.
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
365
Income taxes payable
34,628
Reforestation liability
Long term debt
220,419
Provisions and other liabilities 68,317
Operating leases and expected
capital commitments
83,864
$ 105,150 $ 105,150 $
365
9,797
-
31,908
- $
-
9,040
104,709
12,270
- $
-
8,456
-
3,314
-
-
7,335
115,710
20,825
64,294
10,040
4,510
5,020
Total obligations
$ 512,743 $ 211,514 $ 136,059 $ 16,280 $ 148,890
¹ Figures in table may not add due to rounding.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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:
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.
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 foreign
currency exchange forward, collar and option contracts 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, 2014, the Company has U.S. dollar drawings under its
Revolving Term Line and Senior Secured Notes of US$190,000,000 (2013 –
US$135,200,000). These U.S. dollar drawings have been designated as a
hedge against the Company’s net investment in its U.S. operations.
As at December 31, the Company’s accounts receivable were denominated in
the following currencies (in thousands):
2014
Accounts receivable
Accounts receivable held by foreign
CAD
USD
Japanese ¥
19,745
20,773
27,211
subsidiaries with US$ functional currency
-
31,184
-
2013
Accounts receivable
Accounts receivable held by foreign
19,745
51,957
27,211
CAD
USD
Japanese ¥
15,109
18,926
160,548
subsidiaries with US$ functional currency
-
24,592
-
15,109
43,518
160,548
As at December 31, 2014, the domestic operations of the Company held cash
and cash equivalents of US$2,414,000 (2013 – US$1,071,000). Cash and
cash equivalents held by foreign subsidiaries totaled US$9,650,000 (2013 -
US$2,845,000).
Based on the Company’s net exposure to foreign currencies as at December
31, 2014, 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:
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
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):
U.S. dollar
$0.01 increase vs CAD$
$150,000 decrease in net earnings
Based on the Company’s net exposure to foreign currencies as at December
31, 2014, 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
$0.01 increase vs CAD$
$2,052,000 increase in OCI
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. In addition, the Company has converted
US$100,000,000 of borrowings under its Revolving Term Line to fixed rate
Senior Secured Notes (see Note 10(c)).
Based on the Company’s average debt level during 2014, there is no net
earnings exposure to changes in interest rates as all debt is covered by fixed
rate instruments.
Other market price risk
The Company does not enter into commodity contracts other than to meet
the Company’s expected usage and sale requirements and such contracts are
not settled net.
27. Subsequent events:
(a) Acquisition:
On December 18, 2014, a wholly-owned subsidiary of the Company entered into
an asset purchase agreement with Simpson Lumber Company, LLC (“Simpson”)
to acquire its sawmill operations in Meldrim, Georgia; Georgetown, South
Carolina; Longview, Washington; and Tacoma, Washington (the “Acquisition”).
Consideration is comprised of US$94,700,000, plus working capital and
adjustments related to Simpson’s pre-closing capital expenditure commitments,
and a series of future payments tied to the financial performance of the Tacoma
sawmill.
The contingent future payments will be calculated over the three years following
the closing of the transaction as follows:
(i) An annual payment equal to half of the Tacoma sawmill’s EBITDA for each of
the three years post closing; and
(ii) A final payment at the end of the third year equal to 2.5 times the Tacoma
sawmill’s average annual EBITDA over the three year period.
The minimum total contingent future payments as outlined in (i) and (ii)
combined will be US$10,000,000.
Notes to Consolidated Financial Statements
Years ended December 31, 2014 and 2013
78
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
27. Subsequent events (continued):
(a) Acquisition (continued):
Regulatory approval was received on January 23, 2015. The Acquisition remains
subject to various closing conditions, and is anticipated to close on March 1,
2015. The Acquisition will be financed through proceeds from a share issuance
(see Note 27 (b)) and from Interfor’s existing credit facilities.
(b) Public offering:
On January 27, 2015, Interfor closed a bought deal public offering of subscription
receipts (the “Subscription Receipts”) through a syndicate of underwriters. The
Company issued an aggregate of 3,300,000 (including 300,000 Subscription
Receipts issued pursuant to the exercise of the over-allotment option)
Subscription Receipts at a price of $20.10 per Subscription Receipt, for aggregate
gross proceeds of $66,330,000 (the “Offering”).
The gross proceeds from the Offering less one half of the underwriters’
commission will be held in escrow until all conditions precedent to completion of
the Acquisition from Simpson described above, have been satisfied. Each
Subscription Receipt entitles the holder thereof, for no additional consideration
and without further action, one Common Share of the Company upon the closing
of the Acquisition. Net proceeds of the offering will be used to partially fund the
acquisition price and thereby provide the Company with ongoing financial
flexibility.
If the Acquisition does not close, holders of the Subscription Receipts will be
entitled to receive the full purchase price of their Subscription Receipts, together
with their pro rata share of interest earned thereon.
79
ANNUAL INFORMATION FORM
Prepared as of February 12, 2015
FORWARD-LOOKING STATEMENTS
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., Canada,
Japan and China, 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 2014 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 is 2.4 billion board feet.
Interfor also owns value-added remanufacturing facilities in Washington and Georgia.
The Company was incorporated under the Company Act (British Columbia) on May 6, 1963
and on December 1, 1979, was amalgamated with subsidiary Whonnock Forest Products
Limited. On January 1, 1988, a change in name from Whonnock Industries Limited to
International Forest Products Limited occurred. On February 10, 2006 we transitioned
under the Business Corporations Act (British Columbia). Effective on May 6, 2014, the
Company’s name was changed to Interfor Corporation. 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 Interfor
Corporation and its predecessors and all our subsidiaries. Our significant wholly-owned
subsidiary, Interfor U.S. Inc., is incorporated in the State of Washington and owns and
operates our U.S. sawmills. Other wholly-owned subsidiaries include Interfor Cedarprime
Inc. (incorporated in the State of Washington), Interfor Sales & Marketing Ltd. (incorporated
in British Columbia), Interfor Japan Ltd. (incorporated in British Columbia), Interfor
Insurance Corporation (incorporated in Barbados), and Seaboard Shipping Company Limited
(incorporated in British Columbia).
Annual Information Form
____________________
80
HISTORY
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
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.A. 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 was
contingent upon receipt of an upgrade to the air permit which would allow the Company to
operate a second shift. This permit was received in 2014 and the payment will be made in
February, 2015.
On September 30, 2013, the Company closed a public offering of 7,187,500 Common
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.
2014
On March 14, 2014, Interfor acquired all of the outstanding common shares of Tolleson Ilim
Lumber Company from Ilim Timber Continental, S.A. for total consideration of $188.5
million, comprising $126.9 million in cash and 3,680,000 Common Shares valued at $61.6
million. This acquisition added two sawmills located in Perry and Preston, Georgia, and a
remanufacturing facility in Perry, Georgia. We have filed a Business Acquisition Report on
SEDAR with respect to this acquisition.
On June 27, 2014, the Company announced a curtailment of its Beaver-Forks operation on
the Olympic Peninsula in Washington State. Following a comprehensive strategic review,
permanent closure of the operation and consolidation of production at Interfor’s Port
Angeles facility was announced on July 31, 2014.
Annual Information Form
____________________
81
On November 6, 2014, Interfor announced a $50 million capital project to upgrade its
sawmill in Castlegar, B.C. The project will convert the Castlegar mill to a two line operation
with state-of-the-art technology and optimization. The project is scheduled for completion
in the fourth quarter of 2015 with full operating performance targeted for the first quarter of
2016.
On December 17, 2014, the Company completed a US$50 million term debt financing with
Prudential Capital Group. The senior secured notes carry an annual interest rate of 4.02%
and have a final maturity of June 26, 2023.
On December 18, 2014, Interfor signed an agreement to acquire four sawmills from
Simpson Lumber Company, LLC, for consideration of US$94.7 million, plus working capital
and contingent future consideration. The sawmills are located in Tacoma, Washington,
Longview, Washington, Meldrim, Georgia and Georgetown, South Carolina and fit within the
Company’s existing operating infrastructure. Upon closing of this acquisition, Interfor’s total
production capacity will increase by 30% to 3.1 billion board feet. The Company’s lumber
capacity in the U.S. Southeast and U.S. Northwest will total 1.2 billion and 900 million board
feet, respectively, representing 67% of the Company’s total pro forma capacity. The
completion of the transaction is subject to customary conditions and is expected to occur on
March 1, 2015. Regulatory approval was received on January 23, 2015.
MANUFACTURING AND TIMBER SUPPLY
We operate five sawmills in B.C., one sawmill and one remanufacturing plant in Washington,
U.S.A., two sawmills in Oregon, U.S.A., and six sawmills and one remanufacturing plant in
Georgia, U.S.A. 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
two sawmills in Georgia during 2014.
Annual Information Form
____________________
82
Rated capacity and production of lumber for each mill is set out in the following table:
Sawmills
B.C. Coast(2)
B.C. Interior
U.S. Northwest(3)
U.S. Southeast(4)
Present
Rated
Capacity
(1)
Production for years
ended
December 31,
2014
2013 2012
(millions of board feet)
320
720
470
880
198
744
539
741
182
699
569
275
203
623
525
-
Total
2,390
2,222
1,725
1,351
(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 11 million board feet in 2014.
(3) The Beaver sawmill was curtailed on June 27, 2014.
(4) The Baxley, Eatonton and Swainsboro sawmills were acquired March 1, 2013. The Thomaston
sawmill was acquired on July 1, 2013. The Perry and Preston sawmills were acquired March
14, 2014. Volumes reported are Interfor only.
CANADIAN OPERATIONS
B.C. Coast
Hammond
The Hammond operation is located on the Fraser River in Maple Ridge, B.C. The facility is
focused on western red cedar and supplies siding, decking, fascia and timbers for both
offshore and North American markets. The facility consists of a three-line sawmill, a planer
mill and dry kilns.
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 AAC of 630,000 cubic metres and manufactures fir-larch, SPF, cedar and
hemlock dimension lumber.
Annual Information Form
____________________
83
In the fall, 2014, Interfor approved the installation of state-of-the-art technology in
Castlegar, which will convert the sawmill from its current three line configuration to a two-
line facility. Construction is scheduled for completion in the fourth quarter of 2015, with full
operating performance targeted for the first quarter of 2016. Capacity is expected to
increase to 210 million board feet.
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 AAC of 514,000 cubic metres.
The sawmill cuts approximately 75% SPF and 25% fir-larch.
In late 2012, Interfor completed the installation of a new small log line to replace an
existing two line facility and the installation of an automated lumber grading system.
Including the expanded scope of enhancements approved in 2012, the Company spent
$20.1 million, and a further $4.2 million on an upgrade of the mill’s log and lumber storage.
B.C. Timber Supply
In 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 Licence (“FL”), Tree Farm Licence (“TFL”) and Timber Licence (“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 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. currently 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 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.
Annual Information Form
____________________
84
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.
B.C. Timber Supply
2015
2014
2013
2012
Years ended December 31,
Allowable Annual Cut (1)
— Forest Licences
— Tree Farm Licences
— Non Replaceable Forest Licences
— Discretionary Annual Harvest Levels
Total AAC
Log Production
— Coast(2)
— Interior
Total Log Production
(thousands of cubic metres)
2,775
2,775
2,684
2,684
875
220
80
875
220
40
801
286
40
801
286
40
3,950
3,910
3,811
3,811
1,523
1,639
1,526
1,517
1,959
1,770
3,040
3,598
3,296
Log Purchases
1,395
1,131
1,156
Log Sales
1,440
1,339
1,352
(1) AAC status at the beginning of each year (includes a provision for non-recoverable fibre).
(2) 2014 volumes include production volume of 48,000 cubic metres of third party timber sales
managed by Interfor (2013 - 25,000 cubic metres; 2012 – 10,000 cubic metres).
U.S. OPERATIONS
U.S. 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
____________________
Cedarprime
85
Interfor 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 and 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 and 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 and 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. Interfor has invested in additional kilns and
infrastructure over the course of 2014 to increase production capacity on a two shift basis
producing 2x4 through 2x12 dimension products.
Preston
This sawmill in Preston, Georgia was acquired on March 14, 2014 from Ilim Timber
Continental, S.A. The mill operates two shifts and produces 2x4 through 2x12 dimension
products.
Perry
This sawmill in Perry, Georgia was acquired on March 17, 2014 from Ilim Timber
Continental, S.A. The mill operates an extended single shift and produces 2x4 through
2x12 dimension products.
U.S. Timber Supply
U.S. Northwest
Timber supply in the U.S. Northwest (“NW”) 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 2014, about 58% of the log supply in the NW came from land that is
owned by industrial and small private landowners, while the remainder was sourced from
State, Federal and tribal lands.
Our timber supply requirements at the Port Angeles sawmill are weighted to western
hemlock with lesser volumes of Douglas-fir and sitka spruce. Douglas-fir is the prominent
species, with smaller volumes of western hemlock and white fir at the Molalla sawmill. The
Port Angeles and Molalla sawmills depend on private industrial landowners and small private
landowners for the majority of their supply. In the case of Port Angeles, this timber is
supplemented with timber from State, Federal, and tribal lands.
Annual Information Form
____________________
86
At the Gilchrist sawmill, 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 lands.
U.S. Southeast
Timber in the U.S. Southeast (“SE”) 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.
At the time the Company acquired the Baxley, Swainsboro and Eatonton sawmills from
Rayonier Inc. in March 2013, the parties entered into a services-for-fee contract under
which Rayonier Inc.’s fibre procurement group would continue to manage timber
procurement activities for the three sawmills on behalf of Interfor. This contract expired
during 2014 when the Company began managing all procurement activities at each of the
three sawmills.
The total 2015 log supply requirement for the mills in the U.S. is estimated to be supplied
from the following sources:
Expected Sources of Timber 2015
State, Federal and tribal lands
Industrial lands
Private lands
U.S.
Northwest
U.S.
Southeast
42%
51%
7%
100%
1%
20%
79%
100%
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 and
may be lower cost producers.
Annual Information Form
____________________
87
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.A
— Japan
— China
— Other export
Offshore transportation and handling
Logs
Wood chips and other residuals
Ocean freight, contract services
and other
Total sales
Years ended December 31,
2014
2013
2012
(thousands of dollars)
$ 103,599
$ 90,470
$ 84,760
770,153
107,561
109,205
46,812
39,928
1,177,258
144,770
105,506
498,524
105,590
105,703
38,675
33,302
872,264
136,633
72,418
319,365
87,609
73,886
31,353
34,265
631,238
113,902
69,376
19,623
$1,447,157
23,907
$1,105,222
34,680
$849,196
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 NW or the SE. 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.
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 NW 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.
Annual Information Form
____________________
88
Southern yellow pine (“SYP”) lumber produced in Georgia mills is sold out of our office in
Peachtree City, Georgia to leverage our regional knowledge of SYP 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 NW and SE operations are sold to pulp producers or fiber 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 break-bulk vessels while shipments of lumber
within North America are done by truck and rail. The majority of break-bulk shipments in
2014 were carried by our wholly-owned subsidiary Seaboard International Shipping
Company Limited (Barbados). In 2015, break-bulk shipments will move under contract with
an independent ocean carrier. 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 14, 2019, while the Southern Interior USW
agreement expires on June 30, 2018. The Canadian Marine Service Guild (“CMSG”)
represents 22 employees, and their collective agreement expired September 30, 2014.
Negotiations with the CMSG regarding renewal of the expired agreement are in process,
with employees continuing to work under the terms of the expired agreement with no
workplace disruptions.
In the U.S., we employ approximately 1,548 employees in our sawmill and remanufacturing
operations in Washington, Oregon, Georgia and in our offices located in Bellingham,
Washington and Peachtree City, Georgia.
THE ENVIRONMENT
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.
Annual Information Form
____________________
Regulatory Compliance
89
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 B.C. 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 and fibre sourcing
procedures that track 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 (“FN”) groups have claimed aboriginal title and rights over substantial portions
of British Columbia. Interfor tenures overlap with the traditional territories of over 60
different FN groups. The Company’s operations in B.C. account for approximately 40% of its
total lumber production.
Interfor has a number of agreements and initiatives with FN in B.C., and as such, remains
committed to working with FN to develop economic opportunities of mutual benefit. Each FN
group is notified prior to development activities as part of the Forest Stewardship Planning
process.
On June 26, 2014 the Supreme Court of Canada (“SCC”) released its ruling on the
Tsilhqot’in vs. British Columbia. To the extent that this defines for the first time the criteria
upon which Aboriginal title rests is a positive development. It is also an important
motivation for the federal and provincial governments to move forward on the treaty
process in British Columbia.
The SCC ruling applies to two percent of the Tsilhqot’in traditional territory in a remote area
of Central B.C. – far removed from Interfor’s operations. To date, Aboriginal title has not
been established in any of Interfor’s tenures; and doing so will likely be a lengthy and
complex process. The Company will continue to manage its operations within the existing
legal framework while paying close attention to the direction provided by the Province and
First Nations regarding the application of this ruling.
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
Annual Information Form
____________________
90
(less than 30%) and are less affected by the MPB. The longer term timber supply impacts of
the MPB are not expected to have a significant impact on the Company’s operating areas.
Continual Improvement
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 12, 2015, 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:
• 150,000,000 Common Shares without Par Value with Special Rights and
Restrictions (“Common Shares”); and
• 5,000,000 Preference Shares without Par Value with Special Rights and
Restrictions (“Preference Shares”).
As at February 12, 2015 there were 66,730,455 Common Shares outstanding. There were
no Preference Shares outstanding.
The following is a summary of the material provisions of the authorized share capital of the
Company.
Common Shares
The holders of Common Shares are entitled, at the discretion of the board of directors of the
Company, after providing for all dividends payable in respect of the Preference Shares, if
any, to non-cumulative preferential dividends of up to 13⅓ cents per annum for each
Common Share and if, after providing for all dividends payable in respect of Preference
Shares, there shall remain any assets, profits or surplus available for dividends, such
assets, profits or surplus or any part thereof may, in the discretion of the board of directors
of the Company, be declared and paid in equal amounts per Common Share.
The holders of Common Shares are entitled to receive notice of and attend all meetings of
shareholders, with each Common Share held entitling the holder to one vote on any
resolution to be passed at such shareholder meetings. The Common Shares are entitled,
upon liquidation, dissolution or winding-up of the Company, to receive the remaining assets
of the Company available for distribution to shareholders. The provisions relating to the
Common Shares may not be varied unless sanctioned by a resolution of the holders of the
Common Shares passed by at least three-fourths of the votes cast.
Annual Information Form
____________________
Preference Shares
91
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 Common 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.
MARKET FOR SECURITIES OF THE COMPANY
The Common Shares are listed on the Toronto Stock Exchange (“TSX”) under the symbol
IFP. The following table sets out the market price range and trading volumes of the
Common Shares on the TSX for the periods indicated:
Toronto Stock Exchange (TSX)
2014 Trading Volumes
Ticker: IFP
$ Low
$ High
Volume
13.02
14.31
15.60
14.83
15.90
14.55
14.15
14.35
15.33
14.59
16.84
17.49
15.85
18.09
18.25
17.49
18.16
16.65
15.33
17.50
17.23
17.15
18.54
22.15
6,383,619
7,048,930
8,499,348
5,862,068
3,959,204
4,210,755
4,584,537
4,253,513
2,816,661
3,702,144
5,098,010
8,075,233
Month
January
February
March
April
May
June
July
August
September
October
November
December
TRANSFER AGENT
The transfer agent for our Common Shares is Computershare Investor Services Inc. at its
principal offices in Vancouver, British Columbia.
MATERIAL CONTRACTS
The Company or one of its subsidiaries entered into the following material contracts during
2014:
1. Share Purchase Agreement, dated February 8, 2014, between the Company, Interfor
U.S. Inc. Ilim Timber Continental, S.A. and Tolleson Ilim Lumber Company
(“Tolleson”) for the acquisition of all of the issued and outstanding shares of common
stock of Tolleson for a total consideration of approximately $188.5 million, including
issuance of 3,680,000 Common Shares of the Company. The Tolleson operations
include two sawmills in Preston and Perry, Georgia. The transaction was completed
on March 14, 2014.
2. Interfor March 31, 2014 Amended and Restated Credit Agreement, dated for
reference March 31, 2014, between the Company, the Agent, the Arranger and the
Lenders (capitalized terms are defined in the agreement) to, among other things,
increase the credit available under its revolving term line from $200 million to $250
million, without change to other terms and conditions.
Annual Information Form
____________________
92
3. First Amendment to the Interfor March 31, 2014 Amended and Restated Credit
Agreement, dated for reference December 1, 2014, to, among other things, provide
for the US$50 million term debt financing with Prudential Capital Group.
4. Amendment, dated March 13, 2014, between Prudential Investment Management,
Inc., the holders of the notes, and International Forest Products Limited to, among
other things, amend the springing lien covenant in respect of the Tolleson Lumber
acquisition and restrict modifications to the preferred share financing structure
5. Second Amendment, dated March 31, 2014, between Prudential Investment
Management, Inc., the holders of the notes, and International Forest Products
Limited to, among other things, amend provisions relating to restricted subsidiaries,
include a covenant addressing the contribution of the company and the restricted
subsidiaries, and amend and restate the events of default.
6. Asset Purchase Agreement, dated December 18, 2014, between Simpson Lumber
Company, LLC and Interfor U.S. Inc. for the acquisition of four sawmills located in
Meldrim, Georgia, Georgetown, South Carolina, Longview, Washington and Tacoma,
Washington for a total consideration of approximately US$94.7 million, plus working
capital and contingent future payments. The transaction is expected to close on
February 28, 2015.
All of these contracts have been posted on www.sedar.com.
DIRECTORS AND OFFICERS
Directors of the Company
The following table sets out the Company’s directors as of February 12, 2015, their
respective municipalities of residence, principal occupations within the past five years and
the period during which each director has served as a director:
Name and
Municipality of Residence
Director
Since
Principal Occupations
From
To
DUNCAN K. DAVIES
Vancouver, BC, Canada
November
1998
President and Chief Executive Officer
Interfor Corporation
2000
Present
PAUL HERBERT
Germantown, TN, USA
March 2014
Corporate Director
JEANE HULL
Clayton, MI, USA
May 2014
Chief Executive Officer, Ilim Group, Russia’s
largest forest pulp & paper company
Executive Vice President and Chief Technical
Officer,
Peabody Energy Corporation, a private-sector
coal company
2013
Present
2007
2013
2007
Present
PETER M. LYNCH
Toronto, ON, Canada
October 2006
President & CEO, Dieffenbacher USA, Inc., a
manufacturer and designer of press and
forming systems
2013
Present
Independent Business Consultant
2010
2013
Executive Vice President and Director
Grant Forest Products Inc. (and its
predecessor), a producer of OSB and
engineered wood products
GORDON. H. MacDOUGALL
West Vancouver, BC, Canada
February 2007 Corporate Director
Vice Chairman, Connor, Clark & Lunn
Investment Management Ltd., an asset
management firm
1993
2010
2014
Present
2006
2014
Annual Information Form
____________________
93
Name and
Municipality of Residence
Director
Since
Principal Occupations
From
To
J. EDDIE McMILLAN
Pensacola, FL, USA
October 2006
Independent Business Consultant
2002
Present
Executive Vice President, Wood Products
Group Willamette Industries, Inc., a forest
products company
1998
2002
ANDREW K. MITTAG
Colleyville, TX, USA
October 2012
Corporate Director
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
2014
Present
2005
2014
E. LAWRENCE SAUDER
Vancouver, BC, Canada
April 1984
Chief Executive Officer and Chairman, Metrie
Canada Ltd. (formerly 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, BC, Canada
October 2012
President and Chief Executive Officer, Finning
International Inc., a distributor of Caterpillar
products and support services
2013
Present
Executive Vice-President, Finance and Chief
Financial Officer, Talisman Energy Inc., a
global upstream oil and gas company
2008
2013
DOUGLAS W.G. WHITEHEAD
North Vancouver, BC, Canada
April 2007
Corporate Director
President and Chief Executive Officer
Finning International Inc., a distributor of
Caterpillar products and support services
2008
Present
2000
2008
To our knowledge, only one of the Company’s directors has in the last 10 years been an
officer or director of a company that, while the person was acting in that capacity, was
subject to bankruptcy or similar proceedings or securities regulatory sanctions described in
National Instrument 51-102 Continuous Disclosure Obligations. From 1993 to 2010, Mr.
Lynch was an executive director of Grant Forest Products Inc. (“Grant Forest”). On June 25,
2009, Grant Forest filed and obtained protection under the Companies’ Creditors
Arrangement Act in order to restructure its business affairs.
The term of office for all current directors will end at the conclusion of the next Annual
General Meeting of the Company’s shareholders. The next Annual General Meeting is
scheduled for Thursday, April 30, 2015.
Annual Information Form
____________________
Committees of the Board
94
The table below lists the committees of Interfor’s board of directors and their members as of
February 12, 2015:
Committees
Audit
Corporate Governance & Nominating Committee
Management Resources & Compensation Committee
Environment & Safety Committee
Members
Douglas Whitehead (Chair)
Paul Herbert
Peter Lynch
Andrew Mittag
Scott Thomson
Eddie McMillan (Chair)
Jeane Hull
Peter Lynch
Gordon MacDougall
Douglas Whitehead
Gordon MacDougall (Chair)
Eddie McMillan
Andrew Mittag
Lawrence Sauder
Peter Lynch (Chair)
Paul Herbert
Jeane Hull
Lawrence Sauder
Scott Thomson
Officers of the Company
The following table sets out the Company’s officers as of February 12, 2015, their respective
municipalities of residence and their principal occupations for at least the last five years:
Name and
Municipality of Residence
Positions Held
DUNCAN K. DAVIES
Vancouver, BC, Canada
President & Chief Executive Officer
Interfor Corporation
JOHN A. HORNING
West Vancouver, BC, Canada
Executive Vice President & Chief Financial Officer
Interfor Corporation
Senior Vice President & Chief Financial Officer
Interfor Corporation
J. STEVEN HOFER
Bellingham, WA, USA
Senior Vice President, Sales & Marketing
and Senior Vice President, US Northwest Operations, Interfor
Corporation
Vice President, Sales & Marketing
Interfor Corporation
General Manager, Sales & Marketing
Interfor U.S. Inc. (formerly Interfor Pacific Inc.)
JOSEPH A. RODGERS
Sharpsburg, GA, USA
Senior Vice President, US Southeast Operations
Interfor Corporation
Vice President, US Operations
Interfor Corporation
Vice President, Operations – Solid Wood
Temple-Inland Building Products
Operations Manager – Solid Wood
Temple-Inland Building Products
From
To
2000
Present
2014
Present
2002
2014
2014
Present
2011
2014
2004
2011
2014
Present
2013
2014
2011
2013
2009
2011
Annual Information Form
____________________
95
MARTIN L. JURAVSKY
Toronto, ON, Canada
Senior Vice President, Corporate Development and Strategy
Interfor Corporation
2014
Present
Vice President, Corporate Development and Strategy
Interfor Corporation
Business Consultant
Vice President, Corporate Development
Woodland Biofuels Inc.
Managing Director
Macquarie Capital Markets Canada Ltd.
IAN M. FILLINGER
Kamloops, BC, Canada
Senior Vice President, Canadian Operations
Interfor Corporation
Vice President, Canadian Operations
Interfor Corporation
Senior General Manager
Interfor Corporation
2013
2014
2012
2013
2011
2012
2009
2011
2014
Present
2013
2014
2013
2013
General Manager, Adams Lake & Coastal Manufacturing
Interfor Corporation
2012
2013
General Manager, Adams Lake Division
Interfor Corporation
MARK W. STOCK
North Vancouver, BC, Canada
Senior Vice President, Human Resources
Interfor Corporation
Vice President, Human Resources
Interfor Corporation
Vice President, Global Human Resources
Tree Island Industries Ltd.
RICHARD J. SLACO
Delta, BC, Canada
Vice President & Chief Forester
Interfor Corporation
MARILYN LOEWEN
MAURITZ
Vancouver, BC, Canada
General Counsel & Corporate Secretary
Interfor Corporation
General Counsel
Interfor Corporation
2005
2012
2014
Present
2012
2014
2007
2012
2002
Present
2012
Present
2007
2012
SHAREHOLDINGS OF DIRECTORS AND OFFICERS
As at December 31, 2014, the directors and officers of the Company as a group owned,
directly or indirectly, or exercised control of or direction over 863,705 Common Shares
representing approximately 1.29% of the outstanding Common 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.
Annual Information Form
____________________
LEGAL PROCEEDINGS
96
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 2014 in conjunction with regularly scheduled Board
meetings.
Members’ Financial Literacy, Expertise and Simultaneous Service
The board of directors has determined that the members of the Audit Committee during
2014 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 each member of the Audit Committee:
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 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 a former
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.
Annual Information Form
____________________
97
Paul Herbert
Member since May 2014
Mr. Herbert is a corporate director with over 47 years of experience in the pulp and
paper industry. From 2007 to 2013, Mr. Herbert was the Chief Executive Officer of Ilim
Group, Russia’s largest forest pulp & paper company. From 2003 to 2007, he was
Senior Vice President of Global Strategic Initiatives for International Paper. Prior
thereto, he held various senior executive positions with International Paper, including
Senior Vice President, Printing and Communications, President of International Paper
Europe and Vice President Engineering & Manufacturing. He is currently a director of
Ilim Timber Group in Russia. He holds a degree in Engineering from East London
Polytechnic University and an Executive Master of Business Administration from Texas
A&M University.
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.
Andrew K. Mittag
Member since May 2013
Mr. Mittag is a Corporate Director. From 2005 to 2014, he was 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 was 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 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.
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. From 2008 to 2013, he was Chief Financial
Officer of Talisman Energy Inc. Prior thereto, 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.
AUDIT FEES
The Committee annually recommends the appointment of the Company’s external auditors
and approves the annual audit plan and compensation of the external auditors for all audit,
audit related and non-audit services. In the case of non-audit services, the services and
compensation are approved by the Committee before the services commence.
Annual Information Form
____________________
98
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, 2014, 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,
and consultation related to accounting issues (2014 and 2013); bought deal
financing involvement (2013).
Tax fees
Tax fees consist of fees for tax compliance services, planning and related
services, personal tax (foreign and domestic) compliance and planning advice
(2014 and 2013); indirect tax recovery audit contingency fees which are based
on percentage of recoveries, and advice on setup of Insurance Captive (2014).
Other fees
Forestry certification. And assistance with ERP system design and
implementation and conversion review (2014 and 2013) and general IT control
documentation (2013).
TOTAL
CODE OF ETHICS
2014
2013
$586,900
$477,000
61,500
269,100
37,771
24,376
123,347
168,978
$809,518
$939,454
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, 2014.
Copies of the documents referred to above and additional information relating to the
Company are available on the SEDAR website at www.sedar.com and may also be obtained
upon request from:
Interfor Corporation
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
Annual Information Form
____________________
99
Appendix “A”
AUDIT COMMITTEE
Terms of Reference
PURPOSE
The Audit Committee has been established by the Board and under powers delegated to it
by the Board is mandated to oversee the accounting and financial reporting processes of the
Company and audits of its financial statements in accordance with the Board Objective.
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
National Instrument 52-110 (“NI 51-110”).
All members must be financially literate within the meaning of NI 52-110 or become
financially literate within a reasonable period following appointment and at least one
member should have accounting or related expertise.
The Chair 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 any 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:
Financial Disclosure, Risk Management and Internal Controls
1.
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. annual and quarterly financial statements;
b. Management’s Discussion and Analysis; and
c. annual and interim earnings press releases.
The review will involve direct discussions with Management and the Company’s
external auditor (the “Auditor”), including an opportunity for an in-camera meeting
with the Auditor independent of Management.
2.
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.
Annual Information Form
____________________
100
3.
4.
5.
6.
7.
8.
Review the process for certifications of the interim and annual financial statements by
the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) and the
certification made by the CEO and CFO.
Review all news releases announcing financial results, containing financial information
based on unreleased financial results or non-GAAP financial measures or providing
earnings guidance, forward-looking financial information and future-oriented financial
information or financial outlooks before the public disclosure of same by the Company.
Review financial information contained in any prospectus, take-over bid circular, issuer
bid circular, rights offering circular and any other document that the Audit Committee
is to review before the public disclosure of same by the Company, and, if appropriate,
recommend approval by the Board.
Review matters related to internal controls over financial reporting of the Company
and ensure the Company has adequate procedures in place in respect thereof. Ensure
that the necessary measures are taken to follow up suggestions from the Auditor’s
reports.
Review the principal risks of the Company, other than the risks associated with the
Company’s compensation policies and practices, 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.
External Auditor
9.
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.
10. Establish the mandate of the Auditor, including the annual engagement, audit plan,
audit scope and compensation for the audit services, subject to shareholder approval.
11. Oversee the activities of the Auditor. The Auditor shall report directly to the Audit
Committee.
12. Directly communicate and meet with the Auditor, with and without Management
present, to discuss the results of their examinations.
13. 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.
14. Review the performance of the Auditor, including the relationship between the Auditor
and Management and the evaluation of the lead partner of the Auditor.
15. Resolve disagreements between Management and the Auditor regarding financial
reporting.
16. Review material written communications between the Auditor and Management.
Annual Information Form
____________________
Non-Audit Services
101
17. 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
18. 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.
19. 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.
20. Review and approve the Company’s hiring policies regarding partners, employees and
former partners and employees of the former and present Auditor.
Insurance
21. Review the Company’s insurance programs, including the Company’s directors’ and
officers’ insurance coverage, and make recommendations for their renewal or
replacement.
MEETINGS AND PROCEDURES
1.
2.
3.
4.
The Audit Committee shall meet a minimum of four (4) times per year and, subject to
these Terms of Reference and applicable law, otherwise establish its procedures and
govern itself as the members of the Audit Committee may see fit in order to carry out
and fulfill its duties and responsibilities hereunder. Extraordinary meetings of the
Audit Committee may be called at the request of a member on the Audit Committee
or the Chair of the Board to be held at such times and places as the person calling
such meeting may determine.
A majority of members of the Audit Committee will constitute a quorum (provided
that a quorum shall not be less than two (2) members). Decisions of the Audit
Committee will be by an affirmative vote of the majority of those members of the
Audit Committee voting at a meeting. In the event of an equality of votes, the Chair
will not have a casting or deciding vote. The Audit Committee may also act by
resolution in writing signed by all the members of the Audit Committee.
The Audit Committee shall appoint a Secretary who shall keep minutes or other
records of its meetings and proceedings.
The Chair of the Audit Committee shall report to the Board at its next regular meeting
the Audit Committee’s deliberations and recommendations, if any, requiring the
Board’s approval.
Annual Information Form
____________________
OTHER MATTERS
102
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, other income (expense) and
sawmill post-closure wind-down costs.
“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.
“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, finance costs, other foreign exchange gains (losses) and other income (expense),
divided by the average of opening and closing total assets for annual periods and by opening total assets for
three month periods.
“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
Paul Herbert
Germantown, TN, US
Peter M. Lynch
Toronto, ON, Canada
J. Eddie McMillan
Pensacola, FL, US
E. Lawrence Sauder (Chair)
Vancouver, BC, Canada
Douglas W.G. Whitehead
North Vancouver, BC, Canada
DIRECTORS
Duncan K. Davies
Vancouver, BC, Canada
Jeane Hull
St. Louis, MO, US
Gordon H. MacDougall
West Vancouver, BC, Canada
Andrew K. Mittag
Colleyville, TX, US
L. Scott Thomson
Vancouver, BC, Canada
OFFICERS
Duncan K. Davies
John A. Horning
President and Chief Executive Officer
Executive Vice President & Chief Financial Officer
J. Steven Hofer
Joseph A. Rodgers
Senior Vice President, Sales & Marketing
Senior Vice President, US Northwest Operations
Senior Vice President, US Southeast Operations
Martin L. Juravsky
Ian M. Fillinger
Senior Vice President, Corporate Development &
Strategy
Senior Vice President, Canadian Operations
Mark W. Stock
Richard J. Slaco
Senior Vice President, Human Resources
Vice President and Chief Forester
Marilyn Loewen Mauritz
General Counsel & Corporate Secretary
CORPORATE INFORMATION
Stock Exchange
Common Shares listed on
The Toronto Stock Exchange
Symbol: IFP
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
Adams Lake Division
(Sawmill and Woodlands)
Tel: (250) 679-3234
Fax: (250) 679-3545
9200 Holding Road
Chase, BC V0E 1M2
Baxley Division
(Sawmill)
Tel: (912) 367-3671
Fax: (912) 367-1500
1830 Golden Isles East
Baxley, GA 31513
Acorn Division
(Sawmill)
Tel: (604) 581-0494
Fax: (604) 581-5757
9355 Alaska Way
Delta, BC V4C 4R7
Castlegar Division
(Sawmill)
Tel: (250) 365-4400
Fax: (604) 422-3252
P.O. Box 3728
2705 Arrow Lakes Drive
Castlegar, BC V1N 3W4
Eatonton Division
(Sawmill)
Tel: (706) 485-4271
Fax: (706) 485-3879
370 Dennis Station Road SW
Eatonton, GA 31024
Castlegar Division
(Woodlands)
Tel: (250) 265-3741
Fax: (604) 422-3251
P.O. Box 2000
442 Highway 6 West
Nakusp, BC V0G 1R0
Gilchrist Division
(Sawmill)
Tel: (541) 433-2222
Fax: (541) 433-9581
P.O. Box 638
#1 Sawmill Road
Gilchrist, OR 97737
Hammond Division
(Sawmill)
Tel: (604) 465-5401
Fax: (604) 422-3221
20580 Maple Crescent
Maple Ridge, BC V2X 1B1
Interfor Cedarprime Inc.
(Remanufacturing)
Tel: (360) 988-2120
Fax: (360) 988-2126
601C West Front Street
Sumas, WA 98295
Perry Division
(Sawmill & Remanufacturing)
Tel: (478) 987-2105
Fax: (478) 987-5773
903 Jernigan Street
Perry, GA 31069-3435
Port Angeles Division
(Sawmill)
Tel: (360) 457-6266
Fax: (360) 457-1486
243701 Highway 101 West
Port Angeles, WA 98363
Swainsboro Division
(Sawmill)
Tel: (912) 562-4441
Fax: (912) 562-3621
8796 Highway 297
Swainsboro, GA 30401
Thomaston Division
(Sawmill)
Tel: (706) 647-8981
Fax: (706) 647-3534
75 Ben Hill Road
Thomaston, GA 30286
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
Molalla Division
(Sawmill)
Tel: (503) 829-9131
Fax: (503) 829-5481
15555 S. Hwy. 211
Molalla, OR 97038
Preston Division
(Sawmill)
Tel: (229) 828-5025
Fax: (229) 828-4370
378 Tolleson Road
Preston, GA 31824
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: (770) 282-3250
Fax: (770) 486-6837
700 Westpark Drive
Peachtree City, GA 30269
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
Tel: (604) 422-3468
Fax: (604) 422-3250
600-2700 Production Way
Burnaby, BC V5A 4X1