2016
Annual Report
CORRECTION NOTICE
This updated Annual Report corrects certain publishing and typographical issues that were
identified in the previous version. The Company’s 2016 Consolidated Financial Statements
(financial statements) and Management’s Discussion and Analysis (MD&A) filings are correct in
all respects and remain unchanged. The issues arose from the process of compiling these
documents into the Annual Report. In particular, the updated Annual Report reflects changes
to a paragraph in the MD&A titled Balance Sheet and the following items in the financial
statements: (i) operating earnings (loss) before restructuring costs; (ii) restructuring costs;
(iii) total items that are or may be recycled to net earnings (loss); and (iv) note 26 (d) (ii).
The result of these changes is that the updated Annual Report conforms with the Company’s
filed 2016 financial statements and MD&A.
CONTENTS
Financial Highlights
Message to Shareholders
Management’s Discussion and Analysis
Consolidated Financial Statements
Annual Information Form
pg
3
4
8
29
81
3
FINANCIAL HIGHLIGHTS
(in millions of dollars, except share and per share amounts)
Financial Summary
Sales
Adjusted EBITDA (1)
Net earnings (loss)
Per Share Data
Net earnings (loss) per common share
- basic and diluted
Price range per share
High
Low
Net book value per share
Operating cash flow per share before working capital change
Weighted average shares outstanding (millions)
Financial Position
Total assets
Total debt
Total shareholders’ equity
Invested capital (1)
2016
2015
1,792.7
199.6
65.6
1,687.4
91.7
(30.4)
0.94
(0.44)
15.99
8.67
11.23
2.75
70.0
1,301.6
308.8
786.7
1,076.2
23.61
8.86
10.36
0.96
69.5
1,389.8
468.8
725.3
1,177.6
Financial Ratios (%)
Net debt as a % of invested capital, adjusted (1)
Pre-tax return (loss) on total assets (1)
26.9%
6.2%
38.4%
(1.9%)
Notes:
(1) See Glossary for definition.
“With well-positioned mills, a strong balance sheet and momentum building in the
South, Interfor is in great shape to deliver on our goal of building long-term value for
our shareholders.”
Message to Shareholders – February 2017
For further highlights, please see the Message to Shareholders and Management’s
Discussion and Analysis on the following pages.
MESSAGE TO SHAREHOLDERS
4
Overview
2016 was a good year for Interfor. Better market conditions and prices were certainly a
factor but the biggest gains came from the steps taken in mid-2015 to deal with the
issues impacting our performance and from the resumption of operations at our mill at
Castlegar in the B.C. Interior, which was rebuilt during 2015.
Highlights for 2016 include:
Production remained flat at 2.5 billion board feet;
Sales revenue increased 6% to $1.79 billion;
Earnings and cash flow improved significantly;
The former Tacoma mill site was sold;
Net debt was reduced by $163 million; and
A margin improvement initiative was launched in the U.S. South.
I believe the progress made in 2016 has put Interfor back on track to meet our goal of
delivering above-average returns to our shareholders over time.
I invite you to read 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 have to me directly at
duncan.davies@interfor.com.
Production Volumes Flat; Higher Prices Contribute to Record Sales Revenue and
EBITDA
After rapid growth in the last three years, Interfor’s production volumes were flat in
2016 as the Company focused on digesting its recent growth and bringing the rebuilt
Castlegar mill back into production.
For the year, lumber production was 2.49 billion board feet compared with 2.50 billion
board feet in 2015, with the Company’s operations in Canada accounting for 35% of
production and our mills in the U.S. accounting for 65%.
Sales volumes, including agency and wholesale activities, came in at 2.56 billion board
feet in 2016 vs. 2.65 billion board feet the year prior.
Product prices were better across-the-board in 2016 as demand in the U.S. continued to
grow and trading patterns adjusted to the currency shifts that impacted 2015.
All in, Interfor made $65.6 million after-tax in 2016 on record sales of $1.79 billion
compared with a net loss of $30.4 million on sales of $1.69 billion in 2015.
EBITDA1 reported before non-recurring items and share-based compensation expense
came in at an all-time high of $199.6 million versus $91.7 million in 2015.
1 Refer to definition of Adjusted EBITDA in the Glossary
Message to Shareholders
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Castlegar Sawmill Exceeds Expectations
5
In November 2014 we announced a $50 million upgrade to our sawmill at Castlegar in
the B.C. Interior.
The project converted the mill from a 3-line operation to a 2-line facility using
technology similar to that employed at our mills at Adams Lake, Grand Forks and Port
Angeles, and avoided something in the range of $20 million in maintenance capital that
would otherwise have been required over the next few years.
The main elements of construction were completed in September 2015 and the mill
resumed operations in the first week of October 2015.
I’m pleased to report that the mill ramped up quickly post-project and performed very
well throughout the year, exceeding our expectations in almost every respect.
The rebuilt mill made a significant contribution to our financial results in 2016 and
additional gains are expected as operations are fine-tuned in the years ahead.
Tacoma Mill Site Sold
A key element of our improved performance in 2016 can be traced back to the decision
made in mid-2015 to permanently close our Tacoma sawmill, which had been acquired
using a contingent value structure earlier that year, as part of a transaction involving
three other mills.
The final step in the Tacoma initiative was completed in November with the sale of the
mill’s property for cash proceeds of US$31.5 million. Net proceeds were US$20.4 million
after taking account of transaction costs and the US$10.0 million due to the former
owner, which was paid following year-end.
The sale of the property triggered an after-tax gain of $9.4 million, which was included
in the Company’s net earnings in 2016.
Strong Cash Flow Contributes to $163 Million Reduction in Net Debt
Maintaining a strong balance sheet has always been a key element of our management
philosophy, with a target of maintaining a ratio of net debt to invested capital in the 30-
40% range.
At year-end 2015 our debt ratio sat in the upper end of that range at 38.4%.
I’m pleased to report that net debt was reduced by $162.8 million in 2016 to $289.6
million, the equivalent of 26.9% of invested capital.
The gains in the Company’s debt ratio and the corresponding increase in available
liquidity (which improved from $112 million at year-end 2015 to $296 million at the end
of 2016) provides additional protection against uncertainty and puts Interfor in a strong
position to take advantage of additional value-creating opportunities in the years ahead.
Margin Improvement Initiative Launched in U.S. South
There are two key pillars to Interfor’s business strategy: growth through acquisition and
operational excellence.
Message to Shareholders
____________________
6
In particular, we seek out opportunities for growth in attractive timber baskets and then
apply our operating and capital projects skills to effect improvements in the
performance, profitability and value of those operations.
We’ve done this a number of times in the past, most recently in the B.C. Interior at
Grand Forks and Castlegar.
Those mills were acquired as part of a bankruptcy process in 2008. At the time, they
were high cost facilities with out-dated equipment, poor productivity and a number of
other challenges. Now, following a series of initiatives undertaken by our staff and
crews in the area and the infusion of relatively modest amounts of capital, the mills are
firmly positioned as top performers in the Interior region.
In 2013, we embarked on a similar program in the U.S. South.
Through a series of five separate transactions over a two and-a-half year period we
acquired a total of nine mills in the U.S. South with aggregate production capacity of 1.3
billion board feet.
The U.S. South is a particularly interesting region. It constitutes the largest regional
lumber market in North America and has abundant timber supply. At the same time,
mills in the region often underperform mills in other jurisdictions from a productivity and
efficiency standpoint.
Through our acquisitions we have established a major platform in the U.S. South with
significant imbedded upside potential.
Our task now is to realize on that potential.
To that end, we have embarked on the first stage of a margin improvement initiative
which we believe will deliver $35 million in annualized EBITDA gains by the end of 2017,
without any significant capital expenditures.
These gains will be delivered through increases in mill reliability and productivity, the
volume of lumber recovered from each log and from gains in product mix and grade
recovery.
With good progress already made, we are confident the target gains in EBITDA will be
achieved by the end of this year.
Equally exciting are the second and third stage gains available in the region through the
application of high return capital which we’ll move to once the first stage gains have
been solidified.
Softwood Dispute Creates Uncertainty; Interfor Well-Positioned
The Softwood Lumber Agreement (“SLA”) between Canada and the U.S. expired in
October 2015. Following the expiry of a 12 month “standstill” provision which was built
into the SLA, U.S. lumber producers had the right under U.S. trade law to file a petition
against Canadian lumber imports. Not surprisingly, they did so in November, as they
have done on four previous occasions in the last 35 years.
As a company that operates in both Canada and the U.S., we don’t believe there is any
substance to the U.S. claims. And that fact has been verified in each of the four
Message to Shareholders
____________________
7
previous cases by independent tribunals, most recently in 2006, which led ultimately to
the signing of the SLA.
In our view, a dispute over trade in softwood lumber between Canada and the U.S. is a
waste of time.
We understand the reality of U.S. trade law and how it’s applied and, for that reason,
have long advocated for a negotiated settlement between the parties.
We remain hopeful that saner heads will prevail and once the new U.S. administration
gets up-to-speed, it will join with the Canadian government to make the negotiation of a
new SLA a priority.
In the meantime, with two-thirds of our production capacity located in the U.S. and our
Canadian mills in great shape, Interfor is well-positioned to withstand any disruption
that may arise in the absence of a settlement.
Gillian Platt Appointed To Board of Directors
In October 2016, Interfor’s Board of Directors appointed Gillian Platt of Kelowna, B.C. as
a director of the Company.
Gillian has more than 30 years of broad-based executive experience spanning a variety
of industries, with a focus on human resources management, executive compensation,
talent management and strategy.
Most recently she served as Executive Vice President and CHRO of Finning International
Inc. where she was responsible for human resources and communications globally.
Gillian’s background and expertise are ideally suited for a Company like ours, in the
current stage of our development, and we are looking for a significant contribution from
her in the years ahead.
Gillian has been nominated to stand for election as a director at the Company’s Annual
General Meeting in May.
Vision Remains Intact; Progress Being Made
Trade issues aside, positive signs continue to emerge in the U.S. and offshore, laying
the foundation for better markets in 2017 and beyond.
With well-positioned mills, a strong balance sheet and momentum building in the South,
Interfor is in great shape to deliver on our goal of building long-term value for our
shareholders.
In closing, I would like to thank our employees, Board of Directors and shareholders for
their on-going support.
I look forward to reporting to you on our progress again this time next year.
Duncan Davies
President & CEO
February, 2017
MANAGEMENT’S DISCUSSION AND ANALYSIS
Prepared as of February 9, 2017
8
This Management’s Discussion and Analysis (“MD&A”) provides a review of financial condition and results
of operations as at and for the three and twelve months ended December 31, 2016 (“Q4’16” and “2016”,
respectively). It should be read in conjunction with the audited consolidated financial statements of
Interfor Corporation and its subsidiaries (“Interfor” or the “Company”) for the year ended December 31,
2016, 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. This MD&A has been prepared as of February 9, 2017.
All figures are stated in Canadian Dollars, unless otherwise noted, and references to US$/USD are to the
United States Dollar. For definitions of technical terms and abbreviations used within this MD&A, refer to
the Glossary in the Company’s 2016 Annual Report.
Forward-Looking Statements
This MD&A contains information and statements that are forward-looking in nature, including,
but not limited to, statements about the Company’s business outlook, objectives, plans,
strategic priorities and other statements that are not historical facts. A statement Interfor
makes is forward-looking when it uses what is known today, to make a statement about the
future. Forward-looking statements are included under the headings “Overview of 2016”,
“Outlook”, “Liquidity”, “Capital Resources”, “Off-Balance Sheet Arrangements”, “Financial
Instruments and Other Instruments”, “Accounting Policy Changes” and “Risks and
Uncertainties”, and such statements may include words such as “believes”, “will”, “could”,
“should”, “expected”, “anticipate”, “intend”, “forecast”, “target”, “outlook” and “strategy”.
Such forward-looking statements are based on Interfor’s current expectations and certain
assumptions, including assumptions regarding lumber, log and wood chip prices; the
Company’s ability to compete on a global basis; the availability and cost of log supply; the
absence of natural or man-made disasters; currency exchange rates; no material changes in
government regulation; the availability of the Company’s allowable annual cut (“AAC”); the
outcome of aboriginal claims and treaty settlements; the Company’s ability to export its
products; the outcome of the softwood lumber dispute between Canada and the U.S.;
stumpage rates payable to the Province of British Columbia; environmental effects of the
Company’s operations; the absence of labour disruptions and the assumptions described under
the heading “Critical Accounting Estimates” herein. Such forward-looking statements involve
known and unknown risks and uncertainties that, if they eventuate, may cause Interfor’s
actual results to be materially different from those expressed or implied by those forward-
looking statements. Such risks and uncertainties include lumber, log and wood chip price
volatility; global competition; reduction of availability or increase in cost of log supply; natural
or man-made disasters; foreign currency exchange rate fluctuations; changes in government
regulation; reductions to the Company’s AAC; aboriginal claims or treaty settlements impacting
the Company’s forest tenures; export and other trade barriers; the softwood lumber dispute
between Canada and the U.S.; increases in stumpage rates payable to the Province of British
Columbia; environmental effects of the Company’s operations; labour disruptions; and other
factors referenced herein. Readers are cautioned not to place undue reliance on forward-
looking information or statements. Interfor undertakes no obligation to update such forward-
looking information or statements, except as required by law.
Management’s Discussion and Analysis
9
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Overview of 2016
Q4’16 Results
Interfor recorded net earnings in Q4’16 of $26.6 million, or $0.38 per share, compared to
$15.1 million, or $0.22 per share in Q3’16 and a loss of $3.5 million, or $0.05 per share in
Q4’15. Adjusted net earnings in Q4’16 were $17.7 million or $0.25 per share, compared to
$20.7 million, or $0.30 per share in Q3’16 and $4.5 million, or $0.06 per share in Q4’15.
Adjusted EBITDA was $51.3 million on sales of $442.3 million in Q4’16 versus $58.1 million on
sales of $457.6 million in Q3’16.
For the year, net earnings were $65.6 million, or $0.94 per share, compared to a loss of $30.4
million or $0.44 per share in 2015. Adjusted EBITDA was a record $199.6 million, eclipsing
the previous record set in 2014.
Notable items in the quarter included:
Strong Cash Flow and Proceeds from Tacoma Sale contributes to $57.4 million in Net Debt
Reduction
o
Interfor generated $49.0 million in cash from operations, after considering working
capital changes in Q4’16.
o The sale of the former sawmill property in Tacoma, Washington closed in Q4’16 with
cash proceeds of US$31.5 million. The net proceeds are approximately US$20.4
million after taking account of transaction costs and the US$10.0 million due to the
former owner that was paid in January, 2017.
o Capital spending was $19.8 million in Q4’16.
o The resulting free cash flow contributed to a reduction in net debt to $289.6 million,
or 26.9% of invested capital. For the year, net debt was reduced by $162.8 million.
Mixed Lumber Prices and Lower Canadian Dollar
o Key benchmark lumber prices were mixed in Q4’16. The Southern Pine Composite
increased US$11 to US$393 per mfbm as stronger prices for 2x4 and 2x8 more than
offset weaker prices for 2x6, 2x10 and 2x12. At the same time, the Western SPF
Composite and KD H-F Stud 2x4 9’ benchmarks declined US$6 to US$305 per mfbm
and US$18 to US$318 per mfbm respectively.
o The Canadian Dollar weakened by 2.2% to US$0.750 quarter-over-quarter thereby
offsetting, in part, the drop in SPF and H-F prices.
Seasonal Operating Schedules Impact Production and Sales Volumes
o
o
In Q4’16, Interfor reduced its operating schedules across several regions in line with
normal seasonal practice. Lumber production of 607 million board feet was 21
million board feet lower than the preceding quarter. Sales of Interfor–produced
lumber were 598 million board feet in Q4’16 versus 627 million board feet in Q3’16.
In Q4’16, the B.C. and Northwest regions accounted for 209 million board feet
(which equated to operating rates of 92% in the B.C. Interior and 47% on the B.C.
Coast) and 137 million board feet (which equated to an operating rate of 86%) of
production respectively in Q4’16 compared with 238 million board feet and 141
million board feet respectively in Q3’16. Operating rates in the South region were
up slightly in Q4’16, with production increasing to 260 million board feet (which
equated to an operating rate of 78%) from 248 million board feet in the preceding
quarter.
Management’s Discussion and Analysis
10
____________________
o
In addition, severe winter weather conditions adversely impacted certain of the
operations in B.C. and the Northwest during late December and continued into
January, impacting productivity and conversion costs in those regions.
Progress on Optimization Initiatives Sets the Foundation to Capture Target EBITDA Gains
o
In early 2016, Interfor launched a Business Optimization Initiative to capture
additional margin opportunities across the Company’s operating platform, with a
particular focus on the South region, where $35 million in annualized EBITDA gains
were targeted by year-end 2017.
o Good progress was made during Q4’16 with productivity levels across the South
region up 9% versus Q1’16 and lumber recovery up more than 5%. Good progress
is being made as well on the initiative to improve product mix and grade recovery.
o The Company believes the target uplift in EBITDA will be realized over the course of
2017, as operating rates in the South region increase to 90% or more, which is
expected by Q4’17.
Outlook
Interfor expects demand for lumber to continue to grow over the mid-term as the U.S. housing
market recovers and market promotion efforts in North America and offshore take full effect.
In addition, the Company is focused on a series of targeted initiatives related to margin
improvement opportunities across its operations in both the U.S. and Canada that should
contribute to Interfor’s financial results.
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.
Management’s Discussion and Analysis
11
____________________
Financial and Operating Highlights (1)
Notes:
(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 and 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.
Summary of Fourth Quarter 2016 Financial Performance
Sales
Interfor recorded $442.3 million of total sales, up 7.5% from $411.4 million in the fourth
quarter of 2015, driven by the sale of 619 million board feet of lumber at an average price of
$588 per mfbm. Lumber sales volume increased 4 million board feet, or 0.7%, while average
selling price increased $59 per thousand board feet, or 11.1%, as compared to the same
quarter of 2015.
The increase in the average selling price of lumber reflects higher prices across all benchmark
products in Q4’16 as compared to Q4’15. The Southern Pine Composite and KD HF Stud 2x4 9’
benchmark improved US$50 to US$393 per mfbm and US$24 to US$318 per mfbm,
respectively. The Western SPF Composite was up US$49 to US$305 per mfbm.
Sales generated from logs, residual products and other decreased by $7.6 million or 8.8%
compared to the same quarter of 2015. Nearly all of this decrease is related to the Q4’15
disposal of log inventories as the Tacoma sawmill wound down operations, partially offset by
lower chip prices across all regions except the U.S. South in Q4’16.
Operations
Production costs increased by $15.5 million or 4.2% over Q4’15, primarily due to higher log
costs on average in all regions except the U.S. South and higher conversion costs in the U.S.
South operations as work continues on optimization initiatives.
Lumber production of 607 million board feet in Q4’16 was 39 million board feet higher than
Q4’15.
Dec. 31Dec. 31Sept. 30,For the year ended Dec. 31Unit201620152016201620152014Financial Highlights(2)Total sales$MM442.3 411.4 457.6 1,792.7 1,687.4 1,447.2 Lumber$MM363.5 325.0 374.8 1,458.3 1,361.2 1,177.3 Logs, residual products and other$MM78.8 86.4 82.8 334.4 326.2 269.9 Operating earnings (loss)$MM22.3 (6.3) 20.1 75.9 (35.9) 36.1 Net earnings (loss)$MM26.6 (3.5) 15.1 65.6 (30.4) 40.7 Net earnings (loss) per share, basic and diluted$/share0.38 (0.05) 0.22 0.94 (0.44) 0.62 Adjusted net earnings (loss) (3)$MM17.7 4.5 20.7 58.7 (18.9) 60.7 Adjusted net earnings (loss) per share, basic and diluted(3)$/share0.25 0.06 0.30 0.84 (0.27) 0.92 Adjusted EBITDA(3)$MM51.3 35.8 58.1 199.6 91.7 169.3 Adjusted EBITDA margin(3)%11.6%8.7%12.7%11.1%5.4%11.7%Total assets$MM1,300.1 1,389.8 1,326.8 1,300.1 1,389.8 1,068.5 Total debt$MM308.8 468.8 365.3 308.8 468.8 220.4 Pre-tax return on total assets(3)%7.4%-1.0%6.5%6.2%-1.9%6.4%Net debt to invested capital(3)%26.9%38.4%31.8%26.9%38.4%24.1%Operating HighlightsLumber productionmillion fbm607 568 628 2,490 2,497 2,222 Total lumber salesmillion fbm619 615 647 2,561 2,652 2,282 Lumber sales - Interfor producedmillion fbm598 586 627 2,469 2,544 2,217 Lumber sales - wholesale and commissionmillion fbm21 29 20 92 108 65 Lumber - average selling price(4)$/thousand fbm588 529 580 570 513 516 For the 3 months ended
Management’s Discussion and Analysis
12
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Production from the Company’s nine U.S. South sawmills totaled 260 million board feet in
Q4’16, up 17 million board feet compared to Q4’15, primarily as a result of severe weather
events which impacted the Georgetown mill significantly in Q4’15.
Canadian production totaled 209 million board feet in Q4’16, up 24 million board feet as
compared to Q4’15. The increase in Canadian production primarily reflects efficiency gains at
the rebuilt Castlegar sawmill, which was in start-up in Q4’15.
Production from the Company’s U.S. Northwest operations totaled 137 million board feet in
Q4’16, representing a decline of 1 million board feet from Q4’15.
Depreciation of plant and equipment was largely unchanged from Q4’15 as a result of
comparable production levels in both periods. Depletion and amortization of timber, roads and
other was down $2.9 million from the comparable quarter of 2015 as a result of reduced
conventional logging on the B.C. Coast in Q4’16.
Corporate and Other
Selling and administration expenses were $9.6 million, down $0.7 million from the fourth
quarter of 2015 which included certain IT infrastructure improvement costs.
The $0.2 million long term incentive compensation expense is due primarily to the vesting of
awards in Q4’16. The Q4’15 long term incentive compensation expense of $9.3 million mostly
reflects the impact of a 49.0% increase in the market price for Interfor Common Shares during
the quarter.
Restructuring charges in Q4’16 relate to $1.2 million in impairment charges on surplus
equipment, $0.6 million in costs associated with the closure of the Tacoma sawmill, and $0.5
million for the settlement of a defined benefit pension plan. In Q4’15, the Company took an
impairment charge of $1.2 million on equipment replaced in 2016 as a result of changes to
government regulations.
Finance costs decreased to $4.1 million from $5.5 million in the fourth quarter, 2015. Free
cash flow was used to reduce the average debt level which decreased interest costs.
Other foreign exchange gains of $1.1 million in Q4’16 and $0.5 million in Q4’15 resulted
primarily from unrealized gains on short-term intercompany funding.
Other income increased by $13.6 million in Q4’16, primarily as the result of the sale of the
Tacoma sawmill property which completed on November 30, 2016.
Income Taxes
The Company recorded an income tax expense of $7.2 million in Q4’16, comprised of a $0.1
million current tax expense and a $7.1 million deferred tax expense. The Company started to
recognize deferred tax expense in respect of its Canadian operations in Q4’16 following full
recognition of previously unrecognized assets for non-capital loss carry-forwards.
Net Earnings (Loss)
The Company recorded net earnings of $26.6 million or $0.38 per share, compared to a net
loss of $3.5 million or $0.05 per share in the comparable period, 2015. Adjusted net earnings
were $17.7 million or $0.25 per share compared with $4.5 million or $0.06 per share in Q4’15.
Management’s Discussion and Analysis
13
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Summary of 2016 Financial Performance
Sales
Interfor recorded $1.8 billion in total sales, up 6.2% from $1.7 billion in 2015, driven by the
sale of 2.6 billion board feet of lumber at an average price of $570 per mfbm. Lumber sales
volume decreased 91 million board feet, or 3.4%, while average selling price increased $57 per
thousand board feet, or 11.0%, as compared to 2015.
The sales volume decline was affected by temporary operating shift modifications and down-
time taken for capital and business optimization projects at several mills in the U.S. South,
along with the closure of the Tacoma sawmill, partially offset by the inclusion of a full year of
sales volume in 2016 from the sawmills acquired in 2015 and a full year of production from the
rebuilt Castlegar sawmill.
The increase in the average selling price of lumber reflects higher prices across all benchmark
products in 2016 as compared to 2015. The Southern Pine Composite and KD HF Stud 2x4 9’
benchmark improved US$25 to US$382 per mfbm and US$30 to US$335 per mfbm,
respectively. The Western SPF Composite was up US$16 to US$295 per mfbm.
Sales realizations were also impacted by the strengthening of the U.S. Dollar against the
Canadian dollar by 3.6% on average.
Sales generated from logs, residual products and other increased by $8.2 million or 2.5%
compared to 2015 as a result of increased log exports in 2016 offsetting the impact of
relatively low prices realized on the disposal of log inventories at the exited Tacoma sawmill.
Operations
Production costs declined by $4.1 million or 0.3% as compared to 2015, explained primarily by
the 3.4% decrease in lumber sales volume, lower log costs at the Company’s U.S. operations
and lower conversion costs in the B.C. Interior, somewhat offset by higher log costs in
Canadian operations, higher conversion costs in the U.S. South operations as they continue to
work on optimization initiatives, and the stronger U.S. Dollar on average.
Lumber production of 2.5 billion board feet in 2016 was 7 million board feet lower than in
2015.
Production from the Company’s nine U.S. South sawmills totaled 1.0 billion board feet in 2016,
down 15 million board feet compared to 2015, with inclusion of a full year’s production from
the three sawmills acquired in 2015 offset by temporary adjustments to operating schedules
across the U.S. South platform to implement a series of capital and optimization initiatives.
Canadian production totaled 877 million board feet in 2016, up 92 million board feet as
compared to 2015. The increase in Canadian production primarily reflects efficiency gains at
the Castlegar sawmill, after its rebuild was substantially completed in Q4’15.
Production from the Company’s U.S. Northwest operations totaled 570 million board feet in
2016, representing a decline of 84 million board feet from 2015, resulting from closure of the
Tacoma sawmill, and reduced operating hours at Molalla.
As the Softwood Lumber Agreement (“SLA”) expired on October 12, 2015, there were no
export taxes in 2016. Export taxes of $5.2 million in 2015 were incurred in respect of lumber
shipments from the Company’s Canadian operations to the U.S. under the SLA.
Depreciation of plant and equipment was $76.1 million, up 6.4% from 2015. The majority of
this increase is explained by incremental depreciation on the rebuilt Castlegar sawmill and the
inclusion of a full year’s depreciation on four sawmills acquired in 2015.
Management’s Discussion and Analysis
14
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Depletion and amortization of timber, roads and other was $34.9 million, down 6.9% as
compared with 2015, as a result of a reduction in log production and a higher percentage of
heli-logging on the B.C. Coast in 2016.
Corporate and Other
Selling and administration expenses were $43.1 million, down $3.7 million from 2015. 2015
included $2.1 million of non-recurring acquisition and integration costs and $0.9 million for
certain IT infrastructure improvements.
The $4.6 million long term incentive compensation expense in 2016 mainly reflects a 7.6%
increase in the market price of Interfor Common Shares over the same period, coupled with
the impact of incentive awards maturing. The $5.4 million long term incentive compensation
recovery in 2015 resulted from a 36.0% decrease in the market price of Interfor Common
Shares over the same period, partially offset by the impact of incentive awards maturing.
In 2015, the Company recognized restructuring charges of $10.1 million, including severance,
an onerous contract, site closure costs and write-downs of inventories related to closure of the
Tacoma sawmill. An additional impairment charge of $2.8 million was recorded on equipment
to be replaced in 2016 as a result of changes to government regulations. Interfor also sold
substantially all of the assets of its Beaver-Forks operation, located on the Olympic Peninsula
in Washington, resulting in a reversal of a $1.2 million impairment previously recorded.
In 2016, Interfor recorded additional restructuring charges of $4.3 million for the Tacoma site,
including further site closure costs and write-downs of inventories, and an impairment of
buildings. Additional restructuring charges of $3.0 million relate to a number of costs, the
most significant of which is a $1.2 million impairment charge on surplus equipment.
Finance costs increased to $18.6 million from $17.6 million in 2015 as a result of a higher
average level of debt outstanding in 2016 as compared to 2015, together with the impact of a
stronger U.S. Dollar.
Other foreign exchange gain of $1.5 million is comprised primarily of foreign exchange gains
on short term intercompany funding. Other foreign exchange loss of $1.7 million in 2015 is
comprised primarily of foreign exchange losses on foreign exchange forward contracts.
Other income of $14.1 million is comprised primarily of a gain on the sale of the Tacoma
sawmill property which completed on November 30, 2016. Other income of $0.8 million in
2015 is comprised primarily of the gain on sale of timber tenures in the B.C. Interior.
Income Taxes
The Company recorded an income tax expense of $7.2 million in 2016, comprised of $0.9
million of current taxes and a $6.4 million deferred income tax expense. The Company
started to recognize deferred tax expense in respect of its Canadian operations in Q4’16
following full recognition of previously unrecognized assets for non-capital loss carry-forwards.
Net Earnings (Loss)
The Company recorded net earnings of $65.6 million or $0.94 per share, compared to a net
loss of $30.4 million or $0.44 per share in 2015. Adjusted net earnings were $58.7 million or
$0.84 per share compared with an Adjusted net loss of $18.9 million or $0.27 per share in
2015.
Management’s Discussion and Analysis
15
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Summary of Quarterly Results(1)
Notes:
(1) Figures in this table may not add due to rounding.
(2) 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.
(3) Gross sales before export taxes.
(4) 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.
Logging operations are seasonal due to a number of factors including weather, ground
conditions and fire season closures. Generally, the Company’s B.C. Coastal logging operations
experience higher production levels in the latter half of the first quarter, throughout the second
and third quarters and in the first half of the fourth quarter. Logging in the U.S. South follows
a similar pattern. 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 and renovation activities, which increase
during the spring, summer and fall.
Four sawmills acquired on March 1, 2015, and one sawmill acquired on June 19, 2015, have all
contributed to the growth in production and sales. The permanent closure of the Tacoma
sawmill impacted production and sales subsequent to May 22, 2015.
The volatility of the Canadian Dollar against the U.S. Dollar also impacted results. A weaker
Canadian Dollar increases the lumber sales realizations of Canadian operations and increases
net earnings or losses of U.S. operations when translated to Canadian Dollars.
UnitQ4Q3Q2Q1Q4Q3Q2Q1Financial Performance (Unaudited)Total sales$MM442.3 457.6 458.8 433.9 411.4 430.8 429.7 415.4 Lumber$MM363.5 374.8 371.1 348.9 325.0 343.3 352.2 340.7 Logs, residual products and other$MM78.8 82.8 87.7 85.0 86.4 87.5 77.5 74.7 Operating earnings (loss)$MM22.3 20.1 30.0 3.5 (6.3)(11.6)(25.8)7.8 Net earnings (loss)$MM26.6 15.1 23.2 0.8 (3.5)(6.1)(20.6)(0.2)Net earnings (loss) per share, basic and diluted$/share0.38 0.22 0.33 0.01 (0.05)(0.09)(0.29)(0.00)Adjusted net earnings (loss)(2)$MM17.7 20.7 17.5 2.7 4.5 (16.6)(10.3)3.5 Adjusted net earnings (loss) per share, basic and diluted(2)$/share0.25 0.30 0.25 0.04 0.06 (0.24)(0.15)0.05 Adjusted EBITDA(2)$MM51.3 58.1 56.9 33.4 35.8 11.5 12.7 31.8 Shares outstanding - end of periodmillion70.0 70.0 70.0 70.0 70.0 70.0 70.0 70.0 Shares outstanding - weighted averagemillion70.0 70.0 70.0 70.0 70.0 70.0 70.0 67.8 Operating PerformanceLumber productionmillion fbm607 628 637 618 568 618 672 639 Total lumber salesmillion fbm619 647 658 637 615 686 719 632 Lumber sales - Interfor producedmillion fbm598 627 634 609 586 663 688 607 Lumber sales - wholesale and commissionmillion fbm21 20 24 28 29 23 31 25 Lumber - average selling price(3)$/thousand fbm588 580 564 548 529 500 490 539 Average USD/CAD exchange rate(4)1 USD in CAD1.33411.30501.28861.37321.33541.30891.22971.2412Closing USD/CAD exchange rate(4)1 USD in CAD1.34271.31171.30091.29711.38401.33941.24741.268320162015
Management’s Discussion and Analysis
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Liquidity
Balance Sheet
Interfor strengthened its financial position throughout 2016, with strong cash flow generated
from operations and proceeds received from the monetization of the Tacoma sawmill property
used to repay debt and fund capital projects. Net debt at December 31, 2016 was $289.6
million, or 26.9% of invested capital, representing a decrease of $162.8 million from the level
of net debt at December 31, 2015.
A strengthening of the Canadian Dollar against the U.S. Dollar by 3.0% contributed $16.1
million to the net debt reduction in 2016 over 2015 as all debt held was denominated in U.S.
Dollars.
As at December 31, 2016, the Company had net working capital of $136.1 million and available
liquidity of $296.3 million, including cash and borrowing capacity on operating and term line
facilities.
On February 9, 2016, the Company extended the maturity of its Operating Line and Revolving
Term Line from February 27, 2017 to May 19, 2019 and amended certain other terms, resulting
in an increase in the maximum borrowing available under the financing agreement. On June
15, 2016, the Company extended the maturity of its U.S. Operating Line from May 1, 2017 to
May 1, 2018.
These resources, in addition to cash generated from operations, will be used to support working
capital requirements, debt servicing commitments and capital expenditures. We believe that
Interfor will have sufficient liquidity to fund operating and capital requirements for the
foreseeable future.
Thousands of dollars2016201520162015Net debtNet debt, period opening, CAD346,929$ 461,474$ 452,303$ 202,553$ Net drawing (repayment) on credit facilities, CAD(66,178) (19,207) (143,882) 182,949 Impact on U.S. Dollar denominated debt from (strengthening) weakening CAD9,678 14,592 (16,056) 65,391 Decrease (increase) in cash and equivalents, CAD(878) (4,556) (2,814) 1,410 Net debt, period ending, CAD289,551$ 452,303$ 289,551$ 452,303$ Net debt components by currencyU.S. Dollar debt, period opening, USD274,709$ 345,957$ 338,699$ 190,000$ Net drawing (repayment) on credit facilities, USD(44,709) (7,258) (108,699) 148,699 U.S. Dollar debt, period ending, USD230,000 338,699 230,000 338,699 Spot rate, period end1.3427 1.3840 U.S. Dollar debt expressed in CAD308,821 468,759 Canadian Dollar debt, including bank indebtedness, CAD- - Canadian Dollar operating line, CAD- - Total debt, CAD308,821 468,759 Cash and cash equivalents, CAD(19,270) (16,456) Net debt, period ending, CAD289,551$ 452,303$ For the 3 months endedFor the year endedDecember 31,December 31,
Management’s Discussion and Analysis
17
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Cash Flow from Operating Activities
The Company generated $192.6 million of cash flow from operations before changes in working
capital in 2016, or a $125.7 million increase over 2015. Incremental cash flow generated from
increased sales margins coupled with the strengthened U.S. Dollar, elimination of export taxes
and reductions in selling and administration costs were slightly offset by a reduction in sales
volumes. In 2015, increased sales volumes were offset by reduced sales margins and
increases in export taxes and selling and administration costs.
There was a net cash inflow from operations after changes in working capital of $199.3 million
in 2016, with $6.7 million of cash generated from operating working capital. In 2015, $34.5
million of cash was generated from operating working capital, with $101.4 million of total cash
generated from operations.
Cash Flow from Investing Activities
Investing activities totaled $36.2 million in 2016, net of $41.4 million in proceeds on the
disposal of property, plant and equipment, resulting primarily from the monetization of the
Tacoma sawmill property. Spending included $52.1 million for property, plant and equipment,
timber licenses and other intangibles, and $24.6 million for development of logging roads.
Discretionary improvements of $17.8 million during 2016 included $7.6 million for the
finalization of the Castlegar sawmill rebuild.
In 2015, total investing activities of $333.3 million included $170.8 million for the Simpson
acquisition, $43.7 million for the Monticello acquisition, $8.7 million for payment of the
contingent purchase price to Keadle Lumber Enterprises Inc., $95.3 million for property, plant
and equipment, timber licences and other intangibles and $26.1 million for development of
logging roads.
Spending of $11.3 million on investments and other assets in 2016 related primarily to fixed
income and equity investments purchased for treasury management purposes, the majority of
which were disposed of within the year, resulting in proceeds on the disposal of investments of
$10.3 million.
Cash Flow from Financing Activities
Net repayments under the Company’s credit facilities were $143.9 million, as the Company
utilized surplus cash generated from operations and the proceeds from the Tacoma sawmill
property sale to reduce debt. Cash used for financing activities totaled $162.2 million in 2016.
In 2015, net drawings on the Company’s credit facilities were $182.9 million and net proceeds
from issuance of 3.3 million shares were $63.2 million, leading to total cash from financing
activities of $229.7 million in 2015. This includes $151.3 million drawn on the Company’s
credit facilities to fund the Simpson and Monticello acquisitions.
Management’s Discussion and Analysis
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Summary of Contractual Obligations
The estimated cash payments due in respect of contractual and legal obligations as at
December 31, 2016, including major capital improvements are summarized as follows:
Notes:
(1) Relates to Simpson acquisition and was paid on January 13, 2017.
Capital Resources
The following table summarizes Interfor’s credit facilities and availability as of December 31,
2016:
As of December 31, 2016, the Company had commitments for capital expenditures totaling
$7.9 million for both maintenance and discretionary capital projects.
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 year ended December 31, 2016.
Off-Balance Sheet Arrangements
The Company has off-balance sheet arrangements which include letters of credit and surety
performance bonds, primarily for timber purchases. At December 31, 2016, such instruments
aggregated $45.7 million (December 31, 2015 - $47.4 million). Off-balance sheet
arrangements have not had, and are not reasonably likely to have, any material impact on the
Company’s current or future financial condition, results of operations or cash flows.
Payments due by PeriodUp to 2-34-5 After 5Thousands of Canadian dollarsTotal1 YearYearsYearsYearsTrade accounts payable and accrued liabilities112,592$ 112,592$ -$ -$ -$ Income taxes payable317 317 - - - Contingent future payment(1)13,427 13,427 - - - Reforestation liability39,419 11,609 10,226 8,141 9,443 Long term debt308,821 - 40,281 44,756 223,784 Provisions and other liabilities38,817 11,008 5,662 2,150 19,997 Operating leases and capital commitments66,820 19,570 23,320 10,220 13,710 Total obligations580,213$ 168,523$ 79,489$ 65,267$ 266,934$ RevolvingSeniorU.S.OperatingTermSecuredOperatingThousands of Canadian dollarsLineLineNotesLineTotalAvailable line of credit65,000$ 200,000$ 268,540$ 67,135$ 600,675$ Maximum borrowing available65,000$ 200,000$ 268,540$ 65,627$ 599,167$ Less: Drawings- 40,281 268,540 - 308,821 Outstanding letters of credit included in line utilization10,026 - - 3,296 13,322 Unused portion of facility54,974$ 159,719$ -$ 62,331$ 277,024$ Add cash and cash equivalents19,270 Available liquidity at Dec. 31, 2016296,294$
Management’s Discussion and Analysis
19
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Financial Instruments and Other Instruments
From time to time, the Company employs financial instruments, such as interest rate swaps
and foreign currency contracts, to manage exposure to fluctuations in interest rates and
foreign currency exchange rates. The Company’s policy is to not 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 existing at December 31, 2016, are the Company’s Canadian bankers who are
highly-rated, thereby mitigating the risk of credit loss on such instruments.
Interest Rate Swaps
As at December 31, 2016, Interfor had drawn a total of $40.3 million of floating rate debt,
excluding letters of credit, on its credit facilities. The Company’s 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.
Two of the Company’s interest rate swaps matured on April 14, 2016. Two interest rate swaps
remained outstanding at December 31, 2016 each with a notional value of US$25,000,000.
Under these two interest rate swaps, maturing February 27, 2017, 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
These interest rate swaps convert a portion of 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, 2016, being an asset of less than $0.1 million
(measured based on Level 2 of the fair value hierarchy), has been recorded in Trade accounts
receivable and other (2015 - $0.1 million) and a negligible loss (2015 – $0.1 million) has been
recognized in Other comprehensive income.
Based on the Company’s average debt level during 2016, the sensitivity of a 100 basis point
increase in interest rates would result in an approximate decrease of $0.3 million in Net
earnings.
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 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, 2016, the Company had no outstanding foreign currency exchange
contract obligations (2015 – nil). All foreign currency gains or losses on foreign currency
contracts in 2016 have been recognized in Other foreign exchange gain (loss) in Net earnings.
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.
Management’s Discussion and Analysis
20
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As at December 31, 2016, the Company had designated the US$30.0 million drawn under its
Revolving Term Line and US$200.0 million drawn under its Senior Secured Notes as hedges
against the net investment in its U.S. operations.
The Company recorded a $7.9 million unrealized foreign exchange loss on translation of its
U.S. operations with a U.S. Dollar functional currency, net of revaluations of debt designated
as hedges against the net investment in U.S. operations, to Other comprehensive income in
2016 (2015 - $56.5 million gain).
Outstanding Shares
As of December 31, 2016, Interfor had 70,030,455 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, 2016.
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 evaluation,
the CEO and CFO have concluded that the Company’s ICFR were effective as of December 31,
2016.
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, 2016,
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 abnormal costs, as in
the case of a curtailment. 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 abnormal costs. The unit cost for U.S. logs is based on
purchase cost. The Company records a charge to operating earnings when net realizable value
is lower than carrying value. Downward movements in commodity prices could result in a
material write-down of log and/or lumber inventories at any given time.
Management’s Discussion and Analysis
21
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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.
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.
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, 2016 and
concluded that there was no impairment.
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 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 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 liabilities 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.
Management’s Discussion and Analysis
22
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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. It also
sponsors two post-retirement medical and life insurance plans and a non-contributory defined
benefit pension plan for a former senior executive.
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 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, 2016, and have not been applied in
preparing the Company’s 2016 annual audited 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.
IFRS 15, Revenue from Contracts with Customers, will replace all existing IFRS revenue
requirements and is effective for annual periods beginning on or after January 1, 2018, with
earlier adoption permitted.
The Company is still in the process of assessing IFRS 9 and IFRS 15, but does not currently
believe either will have a significant impact on its financial statements.
IFRS 16, Leases, eliminates the current dual accounting model for lessees, which distinguishes
between on-balance sheet finance leases and off-balance sheet operating leases. Under the
Management’s Discussion and Analysis
23
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new standard, operating leases become an on-balance sheet liability that attracts interest,
together with a corresponding right-of-use asset. In addition, lessees will recognize a front-
loaded pattern of expense for most leases, even when cash rentals are constant. IFRS 16 is
effective for annual periods beginning on or after January 1, 2019, with earlier adoption
permitted. The Company has not yet completed an assessment of the impact of this standard
on its financial statements.
Non-GAAP Measures
This MD&A makes reference to the following non-GAAP measures: Adjusted net earnings
(loss), Adjusted net earnings (loss) per share, EBITDA, Adjusted EBITDA, Pre-tax return on
total assets and Net debt to invested capital, which are used by the Company and certain
investors to evaluate operating performance and financial position. These non-GAAP measures
do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be
comparable to similar measures presented by other issuers.
The following table provides a reconciliation of these non-GAAP measures to figures as
reported in the Company’s audited consolidated financial statements prepared (unaudited for
interim periods) in accordance with IFRS:
Dec. 31Dec. 31Sept. 30,For the year ended Dec. 31Thousands of Canadian dollars except number of shares and per share amounts201620152016201620152014Adjusted Net Earnings (Loss)(1)26,550$ (3,507)$ 15,093$ 65,643$ (30,386)$ 40,690$ Add:Restructuring costs and capital asset write-downs2,281 2,866 1,492 7,280 12,829 24,129 Other foreign exchange loss (gain)(1,072)(473)(792)(1,468)1,651 2,651 Long term incentive compensation expense (recovery)199 9,335 8,321 4,551 (5,431)23,933 Other income(14,452)(863)(7)(14,094)(757)37 Beaver sawmill post-closure wind-down costs128 6 6 145 365 1,083 Tacoma sawmill post-acquisition losses and closure costs(13)698 94 764 11,009 - Income tax effect of above adjustments4,895 (2,564)(1,408)2,008 (9,311)(10,951)Recognition of previously unrecognized deferred tax assets(769)(983)(2,134)(6,171)1,136 (20,902)Adjusted net earnings (loss)17,747$ 4,515$ 20,665$ 58,658$ (18,895)$ 60,670$ Weighted average number of shares - basic and diluted ('000)70,030 70,030 70,030 70,030 69,488 66,005 Adjusted net earnings (loss) per share0.25$ 0.06$ 0.30$ 0.84$ (0.27)$ 0.92$ Adjusted EBITDA26,550$ (3,507)$ 15,093$ 65,643$ (30,386)$ 40,690$ Add: Depreciation of plant and equipment18,534 18,482 18,624 76,092 71,492 55,167 Depletion and amortization of timber, roads and other7,833 10,734 9,441 34,895 37,478 28,912 Restructuring costs and capital asset write-downs2,281 2,866 1,492 7,280 12,829 24,129 Finance costs4,074 5,459 4,379 18,602 17,569 8,915 Other foreign exchange loss (gain)(1,072)(473)(792)(1,468)1,651 2,651 Income tax expense (recovery)7,236 (6,943)1,445 7,207 (24,017)(16,230)EBITDA65,436 26,618 49,682 208,251 86,616 144,234 Add: Long term incentive compensation expense (recovery)199 9,335 8,321 4,551 (5,431)23,933 Other income(14,452)(863)(7)(14,094)(757)37 Beaver sawmill post-closure wind-down costs128 6 6 145 363 1,075 Tacoma sawmill post-acquisition losses and closure costs(13)698 94 764 10,928 - Adjusted EBITDA51,298$ 35,794$ 58,096$ 199,617$ 91,719$ 169,279$ Pre-tax return on total assets24,617$ (3,461)$ 21,610$ 83,170$ (23,111)$ 60,192$ Total assets(2)1,326,792 1,383,751 1,337,569 1,345,722 1,229,160 946,325 Pre-tax return on total assets(3)7.4%(1.0%)6.5%6.2%(1.9%)6.4%Net debt to invested capitalNet debtTotal debt308,821$ 468,759$ 365,321$ 308,821$ 468,759$ 220,419$ Cash and cash equivalents(19,270)(16,456)(18,392)(19,270)(16,456)(17,866)Total net debt289,551$ 452,303$ 346,929$ 289,551$ 452,303$ 202,553$ Invested capitalNet debt289,551$ 452,303$ 346,929$ 289,551$ 452,303$ 202,553$ Shareholders' equity786,667 725,254 745,333 786,667 725,254 636,480 Total invested capital1,076,218$ 1,177,557$ 1,092,262$ 1,076,218$ 1,177,557$ 839,033$ Net debt to invested capital(4)26.9%38.4%31.8%26.9%38.4%24.1%Operating earnings (loss) before restructuring costsNet earnings (loss)Net earnings (loss)For the 3 months ended
Management’s Discussion and Analysis
24
____________________
Notes:
(1) Certain historical periods have been recast to exclude the recognition of previously unrecognized deferred tax
assets from Adjusted net earnings.
(2) Total assets at period beginning for three month periods; average of opening and closing total assets for
twelve month periods.
(3) Annualized rate.
(4) Net debt to invested capital 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.
Factors which affect the Company’s competitive position include:
foreign currency exchange rates;
the cost of labour;
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 existence and rate of export taxes payable on sales from Canada 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 40% 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,
Management’s Discussion and Analysis
25
____________________
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 credit facilities.
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 due to 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 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 80% 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.
Management’s Discussion and Analysis
26
____________________
Allowable Annual Cut (“AAC”)
The Company holds cutting rights in British Columbia (“B.C.”) that represent an AAC of
approximately of 3.7 million cubic metres. Of this amount, 3.65 million cubic metres is in the
form of replaceable tenures (4 Tree Farm Licences and 19 Forest Licences). The remaining
portion is held in non-replaceable Timber Licences that will expire over time.
The AAC is regulated by the Ministry of Forests, Lands and Natural Resource Operations and is
subject to a periodic Timber Supply Review process to make determinations that set harvesting
rates for each tenure. Many factors affect the AAC, including 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 is a Government plan in 2017
to set aside some additional area for conservation purposes in the Mid Coast region that may
affect some of the Company’s Timber Licences and trigger a claim for compensation. The
timber volume impacted has not been finalized, and the amount of compensation is not known
at this time.
Proposed regulatory changes in 2017 to meet new Ecosystem Based Management (“EBM”)
requirements in the Central Coast of B.C. will also impact the Company’s timber supply, and
these are not compensable. The AAC impact, once these changes take effect, will be
approximately a 6% reduction of the company’s timber supply in B.C.
The amount of timber available for harvest in the south-central portion of the B.C. Interior is
expected to decline over the next 10 years as the surplus of dead pine stands from the pine
beetle epidemic become no longer useable. A portion of Interfor’s tenures can expect some
modest AAC declines over this period, but they are not expected to have a material impact on
our internal supply.
Aboriginal Issues
Aboriginal groups have claimed aboriginal title and rights over substantial portions of B.C.,
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 B.C. in order to resolve
aboriginal rights and title claims. In addition, the governments have entered, and may
continue to enter, into interim measure (reconciliation) 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 B.C. has been
working to improve the functional relationship between the Crown and aboriginal groups prior
to treaty settlement. The Province of B.C. and some First Nations groups on the coast of B.C.
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.
Management’s Discussion and Analysis
27
____________________
Softwood Lumber Trade
The Company’s financial results are dependent on continued access to the U.S. market for the
portion of Company’s products that are manufactured in Canada and exported to the U.S.
Tariffs and other trade barriers that restrict or prevent access represent a continuing risk to
the Company’s Canadian based operations. Approximately 15% of Interfor’s total softwood
lumber sales would be exposed to duties and/or trade restrictions imposed by the U.S.
The Softwood Lumber Agreement implemented by the federal governments of Canada and the
United States in 2006, expired on October 12, 2015. As part of that agreement the U.S.
government agreed to a standstill period, where it would not take any trade action against
Canada for a twelve month period following expiry. On November 25, 2016, the U.S. Coalition
filed a petition with the U.S. Department of Commerce (“DoC”) and the U.S. International
Trade Commission (“ITC”) seeking countervailing and anti-dumping duties on Canadian
softwood lumber imports to the U.S.
On January 6, 2017, the ITC determined that there is a reasonable indication that the U.S.
industry is materially injured by the imports of softwood lumber products from Canada. As a
result, the DoC will commence its anti-dumping and countervailing duty investigations on
imports of these products.
The DoC is expected to announce its ruling in the Countervailing Duty (“CVD”) investigation in
the second quarter of 2017. A ruling in the Anti-dumping Duty (“AD”) investigation is
expected to come approximately 60 days thereafter. If the DoC rules that “critical
circumstances” apply, duties could be applied retroactively up to 90 days prior to the
preliminary determinations. It is not anticipated that this would give rise to a liability as at
December 31, 2016.
While dialogue continues between the U.S. and Canada, there is no assurance there will be any
new trade agreement forthcoming or whether a new trade agreement could adversely affect
the Company’s Canadian operations. Canada is expected to defend itself vigorously in any
trade action taken by the U.S.
Stumpage Fees
The Province of B.C. charges stumpage fees to companies that harvest timber from Crown
land. Stumpage payments for a harvesting area are based on a competitive market pricing
system (“MPS”) that has been established for both the coast and interior regions of B.C.
The stumpage system is complex and the subject of discussion involving, among other things,
lumber trade agreements between Canada and the United States. The primary variable in the
MPS is log pricing established through open market bidding for standing timber. In addition to
bid prices, there are a number of operational and administrative factors that 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
Management’s Discussion and Analysis
28
____________________
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”). The collective
agreement with the CMSG expires September 30, 2019.
In 2015, the Company acquired sawmills in Meldrim, Georgia and Longview, Washington where
employees were represented by the American USW and the International Association of
Machinist and Aerospace Workers (“IAM”), respectively. The American USW at the Meldrim
sawmill was decertified on April 28, 2016, while the IAM collective agreement expires on
November 15, 2020.
Additional Information
Additional information relating to the Company and its operations, including the Company’s
Annual Information Form, can be found on its website at www.interfor.com and on SEDAR at
www.sedar.com.
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
29
Management is responsible for the integrity and fair presentation of the accompanying
consolidated financial statements. The financial statements were prepared in accordance with
International Financial Reporting Standards and, where necessary, are based in part on
management’s best estimates and judgements. Financial information included elsewhere in
the 2016 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 09, 2017
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
30
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, 2016 and December 31, 2015, the consolidated statements of earnings (loss),
comprehensive income, changes in equity and cash flows for the years ended December 31,
2016 and December 31, 2015, 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, 2016 and December
31, 2015, and its consolidated financial performance and its consolidated cash flows for the
years ended December 31, 2016 and December 31, 2015 in accordance with International
Financial Reporting Standards.
KPMG LLP, Chartered Accountants
February 09, 2017
Vancouver, Canada
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian Dollars)
As at December 31, 2016 and 2015
31
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable and other
Income tax receivable
Inventories
Prepayments and other
Investments and other assets
Assets held for sale
Employee future benefits
Investments and other 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
Note
December 31
2016
December 31
2015
10
19
6
7
5
22(d)
7
4, 8
9
9
9
9
19
$
19,270
95,059
222
154,535
14,016
2,911
-
286,013
2,471
2,341
730,981
20,739
69,273
19,017
156,502
14,311
$
16,456
95,218
459
155,740
15,512
-
27,836
311,221
1,570
3,191
777,590
20,611
72,429
23,601
160,914
18,669
$1,301,648
$1,389,796
11, 22(d)
12
19
12
10
22(d)
11
19
13
$ 138,029
11,609
317
149,955
25,931
308,821
8,136
21,290
848
555,388
7,999
69,574
11
153,695
786,667
$ 130,840
11,052
398
142,290
25,074
468,759
8,391
20,028
-
553,559
7,665
77,425
62
86,543
725,254
$ 1,301,648
$ 1,389,796
Commitments and contingencies (note 20); Subsequent events (note 5, 20 (c)).
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board of Directors:
“L. Sauder”, Director
“D.W.G. Whitehead”, Director
32
Consolidated Statements of Earnings (Loss)
(Expressed in thousands of Canadian Dollars, except earnings per share)
Years ended December 31, 2016 and 2015
Sales
Costs and expenses:
Note
2016
2015
$1,792,712
$1,687,375
Production
Selling and administration
Long term incentive compensation expense (recovery)
Export taxes
Depreciation of plant and equipment
8, 14
Depletion and amortization of timber, roads and other 9, 14
4
11
Operating earnings (loss) before restructuring costs
Restructuring costs
Operating earnings (loss)
Finance costs
Other foreign exchange gain (loss)
Other income
Earnings (loss) before income taxes
Income tax expense (recovery):
Current
Deferred
18
16
17
19
1,550,912
43,092
4,551
-
76,092
34,895
1,709,542
83,170
(7,280)
75,890
(18,602)
1,468
14,094
(3,040)
1,554,975
46,756
(5,431)
5,216
71,492
37,478
1,710,486
(23,111)
(12,829)
(35,940)
(17,569)
(1,651)
757
(18,463)
72,850
(54,403)
853
6,354
7,207
614
(24,631)
(24,017)
Net earnings (loss)
$ 65,643
$ (30,386)
Net earnings (loss) per share, basic and diluted
21
$ 0.94 $
(0.44)
See accompanying notes to consolidated financial statements.
33
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian Dollars)
Years ended December 31, 2016 and 2015
Note
2016
2015
Net earnings (loss)
$ 65,643
$ (30,386)
Other comprehensive income (loss):
Items that will not be recycled to Net earnings (loss):
Defined benefit plan actuarial gains (losses), net of tax 19, 22
1,509
(629)
Items that are or may be recycled to Net earnings (loss):
Foreign currency translation differences for
foreign operations, net of tax
Loss in fair value of interest rate swaps
16, 26
Total items that are or may be recycled to Net earnings (loss)
Total other comprehensive income (loss), net of tax
(7,851)
(51)
(7,902)
(6,393)
56,475
(71)
56,404
55,775
Comprehensive income
$ 59,250
$ 25,389
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Equity
(Expressed in thousands of Canadian Dollars)
Years ended December 31, 2016 and 2015
Balance at December 31, 2014
$ 490,363 $
7,476 $ 20,950
$
133
$ 117,558 $ 636,480
Note
Common Contributed
Surplus
Shares
Translation
Reserve
Hedge
Reserve
Retained
Earnings
Total
Equity
34
-
-
(30,386)
(30,386)
Net loss:
Other comprehensive income (loss):
Foreign currency translation differences for
foreign operations, net of tax
Defined benefit plan actuarial losses, net of tax
Loss in fair value of interest rate swaps
Contributions:
-
-
-
-
-
-
-
-
22
26
56,475
-
-
Share issuance, net of share issue costs
Stock options
4, 13(a)
13(b)
63,196
-
-
189
-
-
Balance at December 31, 2015
Net earnings:
Other comprehensive income (loss):
Foreign currency translation differences for
foreign operations, net of tax
Defined benefit plan actuarial gains, net of tax
Loss in fair value of interest rate swaps
Contributions:
553,559
7,665
77,425
-
-
-
-
-
-
-
-
-
(7,851)
-
-
22
26
Deferred income tax on share issue costs
Stock options
13(a), 19
13(b)
1,829
-
-
334
-
-
-
-
(71)
-
-
62
-
-
-
(51)
-
-
-
(629)
-
56,475
(629)
(71)
-
-
63,196
189
86,543
725,254
65,643
65,643
-
(7,851)
1,509 1,509
(51)
-
-
-
1,829
334
Balance at December 31, 2016
$ 555,388 $
7,999 $ 69,574
$
11
$153,695
$ 786,667
See accompanying notes to consolidated financial statements.
35
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian Dollars)
Years ended December 31, 2016 and 2015
Cash provided by (used in):
Operating activities:
Net earnings (loss)
Items not involving cash:
Note
2016
2015
$ 65,643
$ (30,386)
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
Stock options
Reversal of write-down of plant and equipment
Write-down of plant and equipment
Unrealized foreign exchange losses (gains)
Other income
8
9
19
16
12
13(b)
18
8, 18
17
Cash generated from (used in) operating working capital:
Trade accounts receivable and other
Inventories
Prepayments and other
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
Proceeds on disposal of investments
Investments and other assets
8
9
9
4
5,17
17
Financing activities:
Issuance of capital stock, net of share issue expenses 4, 13(a)
Interest payments
Debt refinancing costs
Change in operating line components of long term debt
Additions to long term debt
Repayments of long term debt
10
10
10
76,092
34,895
7,207
18,602
(217)
559
789
334
-
2,172
596
(14,095)
192,577
(2,666)
(2,338)
704
11,702
(707)
199,272
(50,393)
(24,631)
(1,682)
-
41,437
10,342
(11,324)
(36,251)
-
(17,174)
(1,112)
(11,663)
56,974
(189,193)
(162,168)
71,492
37,478
(24,017)
17,569
639
1,612
(8,252)
189
(1,195)
2,812
(337)
(758)
66,846
8,748
48,717
3,017
(24,986)
(965)
101,377
(93,832)
(26,133)
(1,500)
(223,263)
12,509
-
(1,033)
(333,252)
63,196
(16,186)
(292)
10,057
362,582
(189,691)
229,666
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
1,961
2,814
16,456
$ 19,270
799
(1,410)
17,866
$ 16,456
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
36
(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. South for sale to markets
around the world.
Interfor Corporation exists 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, 2016 and 2015 comprise the accounts of Interfor Corporation 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 09, 2017.
(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) Liabilities for cash-settled share-based payment arrangements are measured at fair
value; and
(ii) 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, 2016 and 2015
37
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
2. Basis of Preparation (continued):
(d) Use of estimates and judgements (continued):
Significant areas requiring the use of management estimates relate to the
determination of restructuring, reforestation, road deactivation, environmental and tax
obligations, share-based compensation, recoverability of assets, rates for depreciation,
depletion and amortization, fair values of assets and liabilities acquired in business
combinations and impairment analysis of non-financial assets including goodwill.
Information about the use of management estimates that have the most significant
effect on the amounts recognized in the consolidated financial statements is included in
the following notes:
Note 3(e)
Inventories
Note 3(f)
Assets held for sale
Note 3(j)
Impairment of non-financial assets
Note 3(k)
Reforestation and other decommissioning provisions
Note 3(n)
Cash-settled share based compensation
Note 3(o)
Equity-settled share based compensation
Note 4
Note 9
Acquisitions
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 issuance 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 are revalued using the exchange rate at the
reporting date.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
38
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(b) Foreign currency (continued):
(i) Foreign currency transactions (continued):
Foreign exchange differences arising on revaluation are recognized in Net earnings.
Where revaluations relate to trade accounts receivables those foreign exchange
differences are adjusted to Sales in the Statement of Earnings; where revaluations
relate to trade accounts payables 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 net 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, 2016 and 2015
39
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(c) Financial instruments:
(i) Non-derivative financial instruments:
Non-derivative financial instruments comprise cash and cash equivalents, trade and
other receivables, certain investments and advances, 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.
Certain investments are classified as held for trading and are measured at fair
value.
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 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 and interest rate risks. The
Company does not utilize derivative financial instruments for trading or speculative
purposes.
The Company has chosen not to designate derivative foreign currency exchange
contracts as hedges for accounting purposes. Consequently, these derivative
financial instruments, designated as held-for-trading, are carried on the Statements
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:
Shares are classified as equity. Incremental costs directly attributable to the
issuance of Shares and share options are recognized as a deduction from equity, net
of any tax effects.
(d) Cash and cash equivalents:
Cash and cash equivalents consist of cash on deposit and short-term interest bearing
securities with maturities at their purchase date of three months or less.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
40
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(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 valued 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) Assets held for sale:
Non-current assets, or disposal groups compromising assets and liabilities, are classified
as held-for-sale if available for immediate sale and if it is highly probable that their
carrying amount will be recovered primarily through sale rather than through continuing
use.
Such assets, or disposal groups, are measured at the lower of their carrying amount
and fair value less costs to sell. Any impairment loss on a disposal group is allocated
first to goodwill, and then to the remaining assets and liabilities on a pro rata basis,
except that losses are not allocated to inventories, financial assets, deferred tax assets
or employee benefit assets, which continue to be measured in accordance with the
Company’s other accounting policies. Impairment losses on initial classification as held
for sale and subsequent gains and losses on remeasurement are recognized in Net
earnings.
Once classified as held for sale, intangible assets and property, plant and equipment are
no longer amortized or depreciated.
(g) 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
41
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(g) Property, plant and equipment (continued):
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, for which costs
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.
(h) 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.
(i) 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.
(j) 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 or when an indicator of impairment is
identified.
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
42
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(j) Impairment of non-financial assets (continued):
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 it.
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.
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.
(k) 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
43
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(k) Reforestation and other decommissioning provisions (continued):
In periods subsequent to the initial measurement, changes in the liability resulting from
the passage of time are recognized as Finance costs and revisions to fair value
calculations are recognized as Production costs in Net earnings as they occur.
(l) 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 be required 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 risk-free rate. The unwinding of the discount is recognized
as a Finance cost in Net earnings.
(m) 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, salary escalation, and health care costs and are
calculated using the projected unit credit method.
Plan assets are valued at fair value.
Actuarial gains and losses arise from actual experience being different from the
assumptions, or changes in actuarial assumptions used to determine the defined benefit
asset or obligation, are recognized in 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.
(n) Cash-settled share based compensation:
The Company has a Share Appreciation Rights (“SAR”) Plan, a Deferred Share Unit
(“DSU”) Plan and a Total Shareholder Return (“TSR”) Plan for directors, officers and
certain other eligible employees. The 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
44
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(n) Cash-settled share based compensation (continued):
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 Statements of
Financial Position.
(o) Equity-settled share based compensation:
The Company has a Stock Option Plan for its key employees and directors. The
Company uses the fair value method of accounting for obligations under this Plan.
The grant-date fair value of options is recognized as an incentive compensation
expense, with a corresponding increase in contributed surplus, over the vesting period.
The fair value of the options is determined using the Black-Scholes option pricing model
which takes into account, as of the grant date, the exercise price, the expected life of
the options, the current price of the underlying stock and its expected volatility,
expected dividends on the shares, and the risk-free interest rate over the expected life
of the option. Cash consideration received from employees when they exercise the
options is credited to share capital, as is the previously calculated fair value included in
contributed surplus.
(p) Sales revenue:
The Company recognizes sales 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, freight, wharfage and
handling are recorded to Export taxes and Production, respectively, in Net earnings.
(q) 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.
(r) Income tax:
Income tax expense comprises current and deferred income taxes. 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 income tax payable in respect of previous years.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
45
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(r) Income tax (continued):
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 taxable entities, but the intention is to settle current tax liabilities
and assets on a net basis or 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.
(s) 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 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 stock options, if any.
(t) 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, 2016, and have not been applied in
preparing these 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.
IFRS 15, Revenue from Contracts with Customers, will replace all existing IFRS revenue
requirements and is effective for annual periods beginning on or after January 1, 2018,
with earlier adoption permitted.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
46
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
3. Significant accounting policies (continued):
(t) New standards and interpretations not yet adopted (continued):
The Company is still in the process of assessing IFRS 9 and IFRS 15, but does not
currently believe either will have a significant impact on its financial statements.
IFRS 16, Leases, eliminates the current dual accounting model for lessees, which
distinguishes between on-balance sheet finance leases and off-balance sheet operating
leases. Under the new standard, operating leases become an on-balance sheet liability
that attracts interest, together with a corresponding right-of-use asset. In addition,
lessees will recognize a front-loaded pattern of expense for most leases, even when
cash rentals are constant. IFRS 16 is effective for annual periods beginning on or after
January 1, 2019, with earlier adoption permitted. The Company has not yet completed
an assessment of the impact of this standard on its financial statements.
4. Acquisitions:
In 2013, the Company acquired the Thomaston sawmill operations from Keadle Lumber
Enterprises, Inc. (“Keadle”). Upon acquisition, the Company agreed to pay additional
consideration of US$7,000,000, contingent upon receipt of an upgrade to the air permit
which allows the Company to operate a second shift. Approval was received on February
28, 2014, and a payment of $8,743,000 was made on February 27, 2015.
On March 1, 2015, Interfor concluded the acquisition of sawmill operations in Meldrim,
Georgia; Georgetown, South Carolina; Longview, Washington; and Tacoma, Washington
from Simpson Lumber Company, LLC (“Simpson”), pursuant to an Asset Purchase
Agreement (“APA”) for total consideration of US$146,088,000 ($182,654,000).
Consideration per the APA included a series of future payments tied to the financial
performance of the Tacoma sawmill with a minimum payment of US$10,000,000. The
Company recorded a discounted provision of US$9,464,000 ($11,833,000) in Provisions
and other liabilities in the Consolidated Statements of Financial Position as part of the
acquisition and recorded accretion expense of US$476,000 in 2016 (2015 – US$238,000)
in Finance costs in Net earnings.
As at December 31, 2016, the provision of US$10,000,000 was revalued at the year-end
exchange rate to $13,427,000 (2015 - US$9,643,000 revalued at the year end exchange
rate to $13,345,000) and recorded in Trade accounts payable and provisions in the
Consolidated Statement of Financial Position.
On June 19, 2015, Interfor concluded the acquisition of sawmill operations in Monticello,
Arkansas from The Price Lumber Company, Inc. (“Monticello”), for total consideration of
US$35,627,000 ($43,699,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
47
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
4. Acquisitions (continued):
These acquisitions have been accounted for as business combinations and the value of the
consideration transferred was allocated as follows:
Note
Simpson
Monticello
Keadle
Total
Net assets acquired:
Current assets
Property, plant and equipment
8
Current liabilities assumed
Consideration funded by:
Cash
Revolving Term Loan
Current liabilities
Cash consideration from
Common Share issuance
10(a)
13(a)
Cash consideration
Contingent future payments
Provisions and other liabilities
11
11
$ 57,661 $
129,227
186,888
(4,234)
2,900 $
40,846
43,746
(47)
- $ 60,561
170,073
-
230,634
-
(4,281)
-
$ 182,654 $ 43,699 $
- $ 226,353
- $
$
107,625
-
63,196
170,821
11,833
-
- $
43,675
24
-
43,699
-
-
8,743 $
-
-
8,743
151,300
24
-
8,743
-
(8,743)
63,196
223,263
11,833
(8,743)
$ 182,654 $ 43,699 $
- $ 226,353
Transaction costs of $2,105,000 related to the acquisitions were included in Selling and
administration expenses in Net earnings in 2015.
For the period of March 1 to December 31, 2015, Simpson and Monticello contributed sales
of $183,502,000 and a net loss of $31,564,000 to the Company’s results, including a
$13,238,000 net loss at the Tacoma sawmill. If the acquisitions had occurred on January 1,
2015, management estimates that Sales and Net loss for 2015 would have been
$1,745,323,000 and $37,753,000, respectively. In determining these amounts,
management has assumed that the fair value adjustments that arose on the acquisition
dates would have been the same if the acquisitions had occurred on January 1, 2015.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
48
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
5. Assets held for sale:
Opening balance
Additions
Impairment
Disposals
Exchange rate movements
2016
2015
$
$
27,836
-
(1,018)
(25,947)
(871)
-
26,239
-
-
1,597
Ending Balance
$
-
$
27,836
On July 30, 2015, the Company announced a plan to exit its sawmilling operation located in
Tacoma, Washington and classified US$20,113,000 of the Tacoma sawmill property and
buildings as assets held for sale (note 8).
On December 22, 2015, the Company entered into a purchase and sales agreement to sell
the remaining real estate assets, subject to customary closing conditions. The sale of the
Tacoma property was completed on November 30, 2016 for net proceeds of $40,830,000
(note 17) and on January 13, 2017, the minimum contingent amount of US$10,000,000
(note 4) was paid to Simpson, with no further amounts due. US$900,000 was paid into
escrow to be used for environmental remediation, if required. Any unused funds as at
November 30, 2021, if any, will be returned to the Company and recognized as additional
proceeds at that time.
6. Inventories:
Logs
Lumber
Other
2016
2015
$
80,726
58,739
15,070
$
69,980
69,046
16,714
$
154,535
$
155,740
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, 2016, was $7,922,000 (2015 - $11,961,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
49
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
7. Other investments and assets:
Investments designated as fair value through profit and loss
Deferred financing fees, net of accumulated amortization
Timber deposits and other
Current
Long term
2016
2,911
2,078
263
5,252
2,911
2,341
$
$
$
$
$
$
2015
1,528
1,663
-
3,191
-
3,191
$
5,252
$
3,191
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
8. Property, plant and equipment:
Cost
Balance at December 31, 2014
Additions
Acquisitions
Disposals
Transfers
Reclassification to assets held for sale
Exchange rate movements
Balance at December 31, 2015
Additions
Disposals
Transfers
Exchange rate movements
Balance at December 31, 2016
Accumulated Depreciation
Balance at December 31, 2014
Depreciation
Disposals
Transfers
Impairment
Reversal of impairment
Reclassification to assets held for sale
Exchange rate movements
Balance at December 31, 2015
Depreciation
Disposals
Transfers
Impairment
Exchange rate movements
Balance at December 31, 2016
Net book value at
December 31, 2015
December 31, 2016
Note
Land
Buildings
Machinery and
Equipment
Mobile
Equipment
Computer
Equipment Improvements
Site
$
5
$
5
95,872 $ 644,288 $
41,401 $
1,772
30,485
(643)
334
(25,066)
3,667
51,950
424
16,199
(5,873)
15,194
(1,044)
10,359
131,131
-
(64)
-
(578)
-
(150)
4,771
(2,102)
51,308 $ 133,650 $ 861,543 $
6
99,549
(30,868)
65,936
-
81,701
860,612
(2)
(2,396)
19,368
(16,039)
27,891 $
16
1,844
(1,936)
2,157
(1)
2,034
32,005
-
(740)
351
(414)
31,202 $
Mobile
Equipment
28,324 $
2,124
6,152
(4,317)
5,471
-
3,807
41,561
133
(860)
3,505
(626)
43,713 $
56,470 $
320
2,723
(1,803)
6,974
(23)
5,071
69,732
-
-
1,706
(1,000)
70,438 $
Site
Buildings
Machinery and
Equipment
Computer
Equipment Improvements
$
39,754 $ 268,445 $
5,926
(4,991)
138
37
-
(23)
2,848
43,689
6,796
(86)
-
-
(463)
50,076
(25,048)
(592)
2,775
(1,195)
-
23,691
318,152
53,527
(1,564)
(27)
1,154
(4,389)
$
49,936 $ 366,853 $
15,004 $
3,793
(1,487)
(3)
-
-
(1)
805
18,111
3,276
(596)
-
-
(162)
20,629 $
20,161 $
5,351
(4,294)
349
-
-
-
2,072
23,639
6,072
(677)
27
-
(344)
28,717 $
27,225 $
4,748
(1,816)
1,694
-
-
-
1,796
33,647
5,003
-
-
-
(329)
38,321 $
50
Projects in
Process
Total
12,415 $ 917,235
96,110
86,671
170,073
12,935
(46,397)
-
(1,154)
(95,992)
(26,269)
-
109,737
2,357
18,386 1,219,335
49,296
49,142
(4,614)
(100)
(1,637)
(31,361)
(21,334)
(436)
35,631 $ 1,241,046
Total
$ 375,857
71,492
(38,593)
-
2,812
(1,195)
(30)
31,402
441,745
76,092
(3,207)
-
1,154
(5,719)
$ 510,065
Other
10,574 $
4,777
186
(957)
(1,228)
(135)
741
13,958
23
(304)
23
(139)
13,561 $
Other
5,268
1,598
(957)
(1,586)
-
-
(6)
190
4,507
1,418
(284)
-
-
(32)
5,609
There were no borrowing costs capitalized in 2016 (2015 - $477,000). Additions in 2016 include $2,912,000 of accrued contract costs (2015 - $4,009,000; 2014 -
$1,731,000).
$
51,950 $
51,308
87,442 $ 542,460 $
83,714
494,690
13,894 $
10,573
17,922 $
14,996
36,085 $
32,117
9,451 $
7,952
18,386 $ 777,590
730,981
35,631
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
51
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
9. Roads and bridges, timber tenures, other intangible assets and goodwill:
Cost
Note
Balance at December 31, 2014
Additions
Transfers
Disposals
Exchange rate movements
Balance at December 31, 2015
Additions
Transfers
Disposals
Exchange rate movements
Roads and
Bridges
Timber
Licences
Other
Intangibles
$
69,400 $
26,133
-
(832)
341
95,042
24,631
-
(824)
(69)
129,353 $
589
-
(11,508)
-
118,434
195
-
-
-
33,419 $
911
1,154
(137)
4,922
40,269
1,487
1,637
(18)
(916)
Goodwill
137,873
-
-
-
23,918
161,791
-
-
-
(4,412)
Balance at December 31, 2016
$
118,780 $
118,629 $
42,459 $
157,379
Accumulated amortization
Roads and
Bridges
Timber
Licences
Other
Intangibles
Goodwill
$
Balance at December 31, 2014
Amortization
Disposals
Exchange rate movements
Balance at December 31, 2015
Amortization
Disposals
Exchange rate movements
47,156 $
27,285
(178)
168
74,431
24,478
(824)
(44)
50,329 $
3,891
(8,215)
-
46,005
3,351
-
-
9,022 $
6,302
(137)
1,481
16,668
7,066
(6)
(286)
877
-
-
-
877
-
-
-
Balance at December 31, 2016
$
98,041 $
49,356 $
23,442 $
877
Net book value at
December 31, 2015
December 31, 2016
$
20,611 $
20,739
72,429 $
69,273
23,601 $
19,017
160,914
156,502
For the purpose of impairment testing, goodwill components of $13,078,000 and
$143,424,000 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 the assessment for both 2015 and 2016. 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 both the CWW CGU and the SE CGU as at December 31, 2016,
and December 31, 2015 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, 2016 and 2015
52
(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, 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 post-tax discount rate of 10.5 percent (2015 – 10.5 percent) was applied in determining
the recoverable amount of each CGU assessed. 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 1.3 percent (2015 – 1.0 percent) is applied to the
projected cash flows 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:
2016
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
2015
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
Operating
Line
Revolving
Term
Line
Senior
U.S.
Secured Operating
Line
Notes
Total
$ 65,000 $ 200,000 $ 268,540 $ 67,135 $ 600,675
65,627 599,167
- 308,821
65,000 200,000 268,540
40,281 268,540
-
Unused portion of line
$ 54,974 $ 159,719 $
10,026
-
3,296
-
13,322
- $ 62,331 $ 277,024
$ 65,000 $ 200,000 $ 276,800 $ 69,200 $ 611,000
69,200 592,543
12,039 468,759
62,820 183,723 276,800
- 179,920 276,800
Unused portion of line
$ 53,424 $
3,803 $
9,396
-
2,290
-
11,686
- $ 54,871 $ 112,098
Minimum principal amounts due on long term debt are follows:
2017
2018
2019
2020
2021
Thereafter
$
-
-
40,281
-
44,756
223,784
$ 308,821
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
53
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
10. Cash and borrowings (continued):
(a) Operating Line and Revolving Term Line:
The Canadian Operating Line of credit and Revolving Term Line (“the Lines”) may be
drawn in either CAD$ or US$ advances, and bear 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
trailing twelve months’ trailing EBITDA1. The amount available under the Operating
Line is subject to a borrowing base calculation dependent on certain accounts receivable
and inventories.
The Lines are 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 certain sawmills. The Lines are subject to certain financial
covenants including a minimum working capital requirement, a maximum ratio of total
debt to total capitalization and a minimum net worth calculation.
As at December 31, 2015, maximum borrowings available under the Company’s Lines
were restricted by a financial covenant in the underlying credit agreement. In the table
above, this limitation has been applied to the Lines’ limits. This restriction was
removed based on changes to the agreement terms effective on February 9, 2016.
On February 9, 2016, the Company extended the maturity of the Lines from February
27, 2017 to May 19, 2019 and on September 22, 2016, further amended certain other
terms.
As at December 31, 2016, the Lines were drawn by US$30,000,000 (2015 -
US$130,000,000) revalued at the year end exchange rate to $40,281,000 (2015 -
$179,920,000, and by $10,026,000 (2015 - $9,396,000) representing outstanding
letters of credit.
All outstanding U.S. Dollar drawings under the Lines have been designated as a hedge
against the Company’s investment in its U.S. operations and foreign exchange gains of
$7,420,000 for the year ended December 31, 2016 (2015 - $30,649,000 losses) arising
on revaluation of the Lines were recognized in Foreign currency translation differences
in Other comprehensive income.
As at December 31, 2016, $214,693,000 (2015 - $57,227,000) of available credit on
the Lines was unused.
(b) Senior Secured Notes:
The Company’s Senior Secured Notes consist of Series A and Series B Senior Secured
Notes (each $US50,000,000 and bearing interest at 4.33% and 4.02%, respectively)
and Series C Senior Secured Notes (US$100,000,000, bearing interest at 4.17%). As
at December 31, 2016, US$200,000,000 of Senior Secured Notes were outstanding
(2015 – US$200,000,000) and revalued at the quarter-end exchange rate to
$268,540,000 (2015 - $276,800,000).
1 EBITDA represents earnings before interest, taxes, depreciation, depletion, amortization and
non-cash asset revaluations as defined under the agreement.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
54
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
10. Cash and borrowings (continued):
(b) Senior Secured Notes (continued):
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. Total payments of US$33,333,000
(US$16,667,000 for each of the Series A and Series B Senior Secured Notes) are
required on each of June 26, 2021 and 2022, with the balance due on June 26, 2023
for the Series A and B Senior Secured Notes. Payments of US$33,333,000 are required
on each of March 26, 2024 and 2025, with the balance due on March 26, 2026 for the
Series C Senior Secured Notes. In conjuction with the modifications to the Operating
Line and Revolving Term Line effective February 9, 2016, as per note 10(a), certain
terms and conditions of the Senior Secured Notes were also modified. All other terms
and conditions remained unchanged.
The Senior Secured Notes have been designated as a hedge against the Company’s
investment in its U.S. operations and unrealized foreign exchange gains of $8,260,000
(2015 - $32,760,000 losses) arising on their revaluation were recognized in Foreign
currency translation differences in Other comprehensive income for the year ended
December 31, 2016.
(c) U.S. Operating Line:
The U.S. Operating Line bears interest at rates for LIBOR based loans plus a margin
and is secured by accounts receivable and inventories of wholly-owned subsidiary,
Interfor U.S. Inc. The U.S. Operating Line is subject to a minimum net worth covenant,
with borrowing levels subject to a collateral calculation dependent upon certain
accounts receivable and inventories. On June 15, 2016, the Company extended the
maturity of its U.S. Operating Line from May 1, 2017 to May 1, 2018 with no other
significant changes.
As at December 31, 2016, the U.S. Operating Line was drawn by US$2,455,000
including outstanding letters of credit, revalued at the year-end exchange rate to
$3,296,000 (2015 – US$10,354,000 revalued at the year-end exchange rate to
$14,330,000).
As at December 31, 2016, $62,331,000 (US$46,422,000) of the available U.S.
Operating Line was unused (2015 - $54,871,000, US$39,647,000).
(d) Cash and cash equivalents:
At December 31, 2016, $515,000 of the Company’s cash balances are restricted (2015
- $1,299,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
55
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
11. Provisions and other liabilities:
2016
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)
Contingent future payment
4, 5
Retained compensation liabilities
11(f)
Lease incentives and other
SAR Plan
TSR Plan
DSU Plan
$
987
221
56
$
5,904
1,188
1,515
220
13,427
-
1,075
1,618
4,158
753
385
1,625
9,468
236
-
1,076
1,971
$
Total
2,605
4,379
809
6,289
2,813
10,983
456
13,427
1,076
3,046
$ 24,593
$ 21,290
$ 45,883
2015
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)
4, 5
Contingent future payment
Retained compensation liabilities
11(f)
Lease incentives and other
SAR Plan
TSR Plan
DSU Plan
$
494
392
56
$
6,089
4,189
-
224
13,345
2,665
179
1,681
3,776
770
879
1,525
8,651
291
-
40
2,415
$
Total
2,175
4,168
826
6,968
5,714
8,651
515
13,345
2,705
2,594
$ 27,633
$ 20,028
$ 47,661
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.
Environmental provisions are made when rehabilitation efforts are likely required 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 risk-free discount rate. The unwinding of the discount is
recognized as a Finance cost in Net earnings.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
56
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
11. Provisions and other liabilities (continued):
(a) Provisions (continued):
Provisions are measured at the expected value of future cash flows, discounted to their
present value and determined according to the probability of alternative estimates of
cash flows using a current pre-tax discount rate that reflects the risks specific to the
liability. The unwinding of the discount is recognized as a Finance cost in Net earnings.
Balance at December 31, 2014
$
2,125
$
4,051
$
828
Note
Restructuring Road deactivation
Environmental
Provisions made during year
Expenditures made during year
Unwind of discount
Changes in estimated future expenditures
Exchange rate movements
18
Balance at December 31, 2015
Provisions made during year
Expenditures made during year
Unwind of discount
Changes in estimated future expenditures
Exchange rate movements
18
4,131
(4,556)
-
-
475
2,175
1,370
(895)
-
-
(45)
346
(218)
58
(69)
-
4,168
446
(143)
46
(138)
-
-
-
10
(12)
-
826
-
-
8
(25)
-
Balance at December 31, 2016
$
2,605
$
4,379
$
809
(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, 2016 and 2015
57
(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, 2016 and 2015
are as follows:
2016
Weighted
average
strike price
Units
Outstanding, beginning of year 929,808
6,053
Granted
(173,800)
Exercised
(23,862)
Expired or cancelled
$ 7.52
15.01
4.96
12.63
2015
Weighted
average
strike price
$ 7.35
-
5.77
9.52
Units
1,113,953
-
(149,100)
(35,045)
Outstanding, end of year
738,199
$ 8.02
929,808
$ 7.52
Units exercisable, end of year
533,389
$ 6.73
509,250
$ 5.03
Weighted average fair value assumptions for grants made in 2016 and 2015 are as
follows:
Risk-free interest rate
Expected life
Annualized volatility
Dividend rate
Termination rate
Grant date fair value
2016
0.87%
6.7 years
41%
0%
6%
$15.01
2015
-
-
-
-
-
-
Details of units outstanding under the SAR Plan at December 31, 2016 are as follows:
Number
outstanding,
December 31,
2016
Strike
price
212,250
$1.38-$4.64
109,000
$4.77-$5.40
$6.01-$8.02
104,300
$9.18-$17.43 312,649
Units outstanding
Weighted
average Weighted
average
strike price
remaining
unit life (yrs)
4.1
2.6
3.6
6.4
$ 3.64
4.92
6.18
12.69
Units exercisable
Number
exercisable,
December 31,
2016
168,950
108,000
104,300
152,139
Weighted
average
strike price
$ 3.39
4.91
6.18
12.12
738,199
$ 8.02
533,389
$ 6.73
For the year ended December 31, 2016, the Company recorded a Long term incentive
compensation expense in respect of the SAR Plan of $1,010,000 (2015 – recovery of
$4,730,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
58
(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, 2016 and 2015 are as follows:
Outstanding, beginning of year
Granted
Matured
Cancelled
2016
518,199
237,497
(209,647)
-
2015
709,214
144,975
(335,990)
-
Outstanding, end of year
546,049
518,199
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-Scholes 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
2016
2015
0.8%
3 years
46% to 56%
0.00%
0.00%
$1,532
0.9%
3 years
47% to 56%
0.00%
0.00%
$2,340
For the year ended December 31, 2016, the Company recorded Long term incentive
compensation expense under the TSR Plan of $1,289,000 (2015 – $655,000).
(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.
DSUs may be granted directly to directors or officers of the Company at the discretion
of the Board of Directors, who are required to take DSU’s as payment of at least 60% of
their annual retainer.
For performance periods ending prior to 2016, participants in the TSR Plan had the
option to elect, subject to the approval of the Company’s Board of Directors, to receive
their award in DSUs at the end of the performance period.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
59
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
11. Provisions and other liabilities (continued):
(d) Deferred Share Unit Plan (continued):
The number of DSUs outstanding at December 31, 2016 and 2015 are as follows:
2016
2015
Outstanding, beginning of year 622,951
116,124
Granted¹
(14,157)
Exercised
Units
Average
unit value
$14.06
13.62
11.67
Units
551,249
157,973
(86,271)
Average
unit value
$21.27
18.73
21.91
Outstanding, end of year
724,918
$15.15
622,951
$14.06
¹Fair value at the date of the grants.
Changes to the market value of the Company’s Common Shares subsequent to issuance
of awards results in adjustments to the compensation accrual and Long term incentive
compensation expense in Net earnings. For the year ended December 31, 2016, the
Company recorded an expense of $1,775,000 (2015 – recovery of $2,835,000) in
respect of the DSU Plan, of which a $916,000 expense (2015 – recovery of $3,795,000)
was recorded in Long term compensation and a $860,000 expense (2015 - $960,000),
related to payment for director’s fees, was recorded in Selling and administration.
(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,
2016, $456,000 (2015 - $515,000) of this provision remains unspent.
(f) Retained compensation liabilities:
Upon acquisition of the Tolleson sawmills on March 17, 2014, the Company assumed
incentive payments payable to certain senior management over a four year period. The
incentive is earned and recognized as a liability over the incentive period. For the year
ended December 31, 2016, the Company recorded a long term incentive compensation
expense of $1,029,000 (2015 - $2,240,000) in respect of the retained compensation
liabilities. The liability of US$801,000 (2015 – US$1,954,000) was revalued at the
year-end exchange rate to $1,076,000 (2015 - $2,705,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
60
(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
Reforestation expenditures
Unwind of discount
Changes in estimated future reforestation expenditures
Consisting of:
Current reforestation liability
Long term reforestation liability
2016
2015
$ 36,126
$ 32,896
12,605
(10,924)
302
(569)
12,888
(9,691)
360
(327)
$ 37,540
$ 36,126
$ 11,609
25,931
$ 11,052
25,074
$ 37,540
$ 36,126
The total undiscounted amount of the estimated future expenditures required to settle the
reforestation obligation, adjusted for inflation, at December 31, 2016 is $39,419,000 (2015
- $37,848,000). 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% (2015 –
2%). Reforestation expense resulting from obligations arising from current logging and
changes in estimated future expenditures 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, 2016 consists of:
150,000,000 Common Shares (“Shares”) without par value; and
5,000,000 Preference Shares without par value.
Share transactions during 2016 and 2015 were as follows:
Issued and Fully Paid
Balance, December 31, 2014
Share issuance, net of share issue costs
Balance, December 31, 2015
Deferred income tax on share issue costs
Balance, December 31, 2016
Note
4
19
Number
66,730,455
3,300,000
70,030,455
-
70,030,455
Amount
490,363
63,196
553,559
1,829
$ 555,388
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
61
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
13. Share capital (continued):
(a) Share transactions (continued):
On January 27, 2015, the Company 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 Subscription Receipts (including 300,000
Subscription Receipts issued pursuant to the exercise of the over-allotment option) at a
price of $20.10 per Subscription Receipt, for cash proceeds, net of share issue costs, of
$63,196,000. In connection with the completion of the Simpson acquisition (note 4),
each Subscription Receipt was exchanged, for no additional consideration, for one
Common Share of the Company. The shares were issued on March 2, 2015.
At December 31, 2016, 1,631,740 Shares are reserved for possible future issuance
pursuant to the stock option plan.
(b) Equity-settled share based compensation:
The Company has a stock option plan for its key employees and directors under which
options may be granted to purchase up to 1,631,740 Shares, of which 1,450,215
remain available for issuance. 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. The exercise price of a stock option is at a price not less than the
closing price of a Common Share on the trading day immediately preceding the grant
date.
Details of the Company’s stock option plan for the years ended December 31, 2016 and
2015 are as follows:
2016
2015
Weighted
average
exercise price
Options
Outstanding, beginning of year 64,175
130,879
Granted
-
Exercised
(13,529)
Expired or cancelled
$
21.77
10.61
-
16.76
Weighted
average
exercise price
$
-
21.85
-
22.22
Options
-
78,926
-
(14,751)
Outstanding, end of year
181,525
$
14.10
64,175
$
21.77
Options exercisable, end of year
-
$
-
-
$
-
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
62
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
13. Share capital (continued):
(b) Equity-settled share based compensation (continued):
Weighted average fair value assumptions for grants made in 2016 and 2015 are as
follows:
Risk-free interest rate
Expected life
Annualized volatility
Dividend rate
Termination rate
Grant date fair value
2016
0.8%
6.7 years
43%
0%
6%
$4.63
2015
1.3%
8.2 years
45%
0%
12%
$10.48
Details of options outstanding under the option plan at December 31, 2016 are as
follows:
Number
outstanding,
December 31,
Units outstanding
Weighted
average
remaining
Weighted
Number
exercisable,
average December 31,
2016
2016 unit life (yrs) exercise price
Units exercisable
Weighted
average
strike price
Strike
price
$9.77-$15.01
$17.26-$22.22
124,936
56,589
9.2
8.2
$
$
10.65
21.70
181,525
$
14.10
-
-
-
$
$
$
-
-
-
The Company recognized an expense of $334,000 for the year ended December 31,
2016 (2015 –$189,000) in Contributed surplus.
14. Depreciation, depletion, and amortization:
Depreciation, depletion and amortization allocated by function are as follows:
Production
Selling and administration
15. Personnel expenses:
2016
2015
$ 102,539
8,448
$ 100,988
7,982
$ 110,987
$ 108,970
Note
2016
2015
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
$ 232,342
$ 219,362
13,071
6,182
9,866
1,648
4,551
36,796
12,817
7,505
10,948
1,304
5,431
34,027
$ 304,456
$ 291,394
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
63
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
16. Finance costs:
Recognized in Net earnings (loss):
Interest on borrowing
Net interest on defined benefit plans
Unwind of discount on provisions
Amortization of deferred finance costs
Recognized in Other comprehensive income:
2016
2015
$ (16,659)
(428)
(832)
(683)
$ (16,034)
(11)
(667)
(857)
$ (18,602)
$ (17,569)
2016
2015
Effective portion of changes in fair value of interest rate swap
$
(51)
$
(71)
17. Other income:
Gain (loss) on disposal of surplus equipment, licences and roads $ 14,072
22
Gain (loss) on lumber futures trading
2016
2015
758
(1)
$
$ 14,094
$
757
On November 30, 2016, Interfor completed the sale of its former sawmill in Tacoma,
Washington for net proceeds of $40,830,000 and a gain of $15,012,000.
During 2016, Interfor also sold fixed income investments for proceeds of $10,342,000 and
recognized a gain of $23,000.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
64
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
18. Restructuring costs:
Tacoma sawmill:
Write-down of inventories
Write-down of buildings
Severance
Site closure costs
Onerous contract
Beaver-Forks operation:
Write-down (reversal of write-down) of
plant and equipment
Severance
Onerous contract (recovery)
Write-down of inventories
Other
Write-down of equipment
Severance
Onerous contract
Other
Note
5
5
8
8
$
2016
1,533
1,018
-
1,738
-
-
-
(82)
-
1,155
955
497
466
$
2015
6,475
-
3,016
574
64
(1,195)
5
175
32
2,812
871
-
-
$
7,280
$ 12,829
On July 30, 2015, the Company announced a plan to exit the Tacoma sawmill (note 4),
classified the assets as Assets held for sale (note 5) and recorded related restructuring
charges. Inventory write-downs reflect extraordinary declines in fair value of inventory
subsequent to decision date.
In December, 2015, the Company recorded an impairment against operating equipment
replaced in 2016 for regulatory compliance.
In December, 2016, the Company recorded an impairment against surplus operating
equipment.
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
Change in unrecognized deferred income tax assets
2016
2015
$
802
51
853
$
895
(281)
614
12,525
(6,171)
6,354
(25,767)
1,136
(24,631)
$
7,207
$ (24,017)
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
65
(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:
Defined benefit plan actuarial losses
Foreign currency translation differences for foreign operations
$
2016
-
691
$
2015
(376)
(321)
$
691
$
(697)
Income tax expense (recovery) recognized in Equity is as follows:
2016
2015
Amortized and unamortized share issuance costs
$
(1,829)
$
-
The reconciliation of income taxes at the statutory rate to the income tax expense
(recovery) is as follows:
Income tax expense (recovery) at the statutory rate of
26.00% (2015 – 26.00%)
Change in unrecognized deferred income tax assets
Entities with different tax rates and foreign rate adjustments
Income Tax Credit
Other
2016
2015
$ 18,941
(6,171)
(4,884)
(715)
36
$ (14,145)
1,136
(12,702)
-
1,694
$
7,207
$ (24,017)
The statutory tax rate did not change from 2015.
The Company has the following non-capital loss carryforwards that are available to reduce
future taxable income:
(a) Canadian non-capital loss carry-forwards which total approximately $101,215,000
(2015 - $125,000,000), and expire between 2029 and 2036.
(b) U.S. net operating loss carry-forwards which total approximately US$175,176,000
(2015 - US$179,000,000), and expire between 2023 and 2035.
Unrecognized deferred income taxes:
As at December 31, 2016, the Company has unrecognized deferred income tax assets in
relation to accrued foreign exchange losses on U.S. Dollar denominated debt. These
losses, if realized, will result in allowable capital losses which can be applied against the
taxable portion of capital gains, if any, arising in future years.
As at December 31, 2015, the Company had unrecorded deferred income tax assets related
to non-capital loss carry-forwards, accrued and realized foreign exchange losses on U.S.
Dollar denominated debt, actuarial pension losses and unamortized shar issuance costs.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
66
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
19. Income taxes (continued):
Deferred income tax assets related to the Company’s Canadian operations are not
recognized in respect of the following:
Non-capital losses carried forward
Deductible temporary differences
$
2016
-
8,009
2015
$ 27,313
15,466
$
8,009
$ 42,779
Recognized deferred income taxes:
Recognized
December 31, 2016
Deferred income tax assets
Opening
Balance
Recognized in
in Other Recognized in
Income Tax Comprehensive Shareholder’s
Equity
Expense Income (loss)
Ending
Balance
Losses
Reserves
Tax credits
Share issue costs
Other
$ 117,627 $
20,494
111
-
2,520
(3,986) $
870
759
-
2,152
Deferred income tax liabilities
Capital assets
Foreign currency
(122,228)
(6,149)
- $
-
-
-
-
-
translation differences
for foreign operations
145
-
(681)
1,137 $ 114,778
21,364
870
692
4,672
-
-
692
-
-
-
(128,377)
(536)
Total
$
18,669 $
(6,354) $
(681) $
1,829 $
13,463
Recognized in
December 31, 2015
Deferred income tax assets
$
Losses
Reserves
Tax credits
Other
Deferred income tax liabilities
Capital assets
Foreign currency
translation differences
for foreign operations
Opening
Balance
Recognized in
in Other Recognized in
Income Tax Comprehensive Shareholder’s
Equity
Expense Income (loss)
Ending
Balance
72,304 $
25,965
955
2,538
45,323 $
(5,847)
(844)
(18)
(108,245)
(13,983)
- $
376
-
-
-
- $ 117,627
20,494
-
111
-
2,520
-
-
(122,228)
(176)
-
321
-
145
Total
$
(6,659) $
24,631 $
697 $
- $
18,669
Represented by the following:
Deferred income tax assets
Deferred income tax liabilities
2016
$ 14,311
(848)
2015
$ 18,669
-
$ 13,463
$ 18,669
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
67
(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:
2017
2018
2019
2020
2021
$ 19,570
12,790
10,530
5,430
4,790
(b) Surety Performance Bonds:
The Company has posted $32,375,000 in surety performance bonds, with various
expiry dates extending through January, 2025.
(c) Softwood Lumber Agreement:
The Canada-U.S Softwood Lumber Agreement (“SLA”) expired on October 12, 2015,
eliminating export taxes on Canadian softwood lumber shipments to the United States.
On November 25, 2016, the U.S. Lumber Coalition (“Coalition”) filed a petition with the
U.S. Department of Commerce (“DoC”) and the U.S. International Trade Commission
(“ITC”) seeking countervailing and anti-dumping duties on Canadian softwood lumber
imports to the U.S.
On January 6, 2017, the ITC determined that there is a reasonable indication that the
U.S. industry is materially injured by the imports of softwood lumber products from
Canada. As a result, the DoC will commence its anti-dumping and countervailing duty
investigations on imports of these products.
The DoC is expected to announce its ruling in the Countervailing Duty (“CVD”)
investigation in the second quarter, 2017. A ruling in the Anti-dumping Duty (“AD”)
investigation is expected to come approximately 60 days thereafter.
If the DoC rules that “critical circumstances” apply, duties could be applied retroactively
up to 90 days prior to the preliminary determinations. It is not anticipated that this
would give rise to a liability as at December 31, 2016.
(d) Timber Licence:
A Timber Licence held by Interfor for harvesting within the B.C. Coast region (the
“Licence”) is expected to be cancelled (or taken) by the Government of B.C., following
the passing into law of the Great Bear Rainforest (Forest Management) Act (the “Act”)
and regulations, which took effect January 1, 2017.
If the Licence is taken, Interfor would be entitled to compensation from the
Government of B.C. based upon the value of the harvesting rights under the Licence.
Although it is not practicable at this time to estimate the value or form of compensation
that would be received by Interfor if the Licence were taken, it is expected that such
compensation would exceed the net book value of the Licence as at December 31,
2016.
(e) Other contingencies:
The Company is subject to a number of claims arising in the normal course of business
in respect of which either an adequate provision has been made or for which no
material liability is expected.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
68
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
21. Net earnings per share:
Net earnings per share is based on the earnings attributable to shareholders and a
weighted average number of Shares, as defined in note 13, outstanding for the year.
The reconciliation of the numerator and denominator is determined as follows:
2016
Weighted
average
Net number of
earnings
Shares Per Share
2015
Weighted
average
Net number of
Shares
loss
Per Share
Issued Shares at
December 31
Effect of Shares issued on:
March 2, 2015
Basic and diluted earnings (loss)
70,030
-
66,730
2,758
per share
$ 65,643
70,030 $
0.94
$ (30,386)
69,488
$
(0.44)
22. Employee future benefits and other post-retirement plans:
The Company maintains a number of savings and retirement plans that are available to
employees that meet certain eligibility requirements.
(a) Defined contribution plans:
In Canada, salaried employees of the Company are provided with the opportunity 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 2016, the pension expense for this plan is
equal to the Company’s contribution of $1,639,000 (2015 - $1,785,000).
For certain eligible employees of the Canadian Merchant Services Guild (“CMSG”), the
Company makes required contributions based on a percentage of earnings into a
defined contribution plan. For 2016, the pension expense is equal to the Company’s
contribution of $49,000 (2015 - $44,000).
Employees of two wholly-owned U.S. operating subsidiaries of the Company, 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 2016, the pension expense for this plan is
equal to the Company’s contribution of $4,267,000 (2015 - $4,374,000).
(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 2016, the
pension expense for these plans is equal to the Company’s contribution of $3,352,000
(2015 - $3,499,000). 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
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):
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 2016 the Company recorded an expense of $559,000 (2015 - $738,000) in
respect of these plans.
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
d) Defined benefit plans:
$
2016
721
5,499
$
2015
418
5,644
$
6,220
$
6,062
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 provides post retirement life insurance benefits to eligible retirees of a
wholly-owned subsidiary, Seaboard Shipping Company Limited (“SSCL”). In addition,
specified individuals at SSCL received a supplemental pension based on a percentage of
final average earnings at retirement, and years of service. Effective December 12,
2016, the supplemental pension was settled and all liabilities were paid out through the
purchase of an annuity.
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
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
70
(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 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 2016, the Company paid contributions of $1,150,000 (2015 - $698,000), and in lieu
of making cash special payments to fund certain deficits, posted letters of credits
totaling $2,555,000 (2015 - $2,464,000). In 2017, the Company expects to pay
contributions of $803,000 to its defined benefit plans, and hold a total of $2,555,000 of
letters of credit.
The following summarizes the pension and other post-retirement obligations:
Pension Benefits
Other Post-retirement Benefits
2016
2015
2016
2015
Defined benefit obligation:
$
Beginning of year
Service cost
Employee contributions
Interest cost
Benefit payments
Actuarial loss due to:
Financial assumptions
Experience adjustment
Settlements
51,505 $
944
377
1,875
(1,986)
48,729 $
920
339
1,990
(2,094)
1,813 $
51
-
91
(66)
48
126
(1,680)
1,593
28
-
-
-
-
1,700
45
-
67
(48)
49
-
-
End of year
$
51,209 $
51,505 $
1,889 $
1,813
Plan assets:
Beginning of year
Interest on plan assets
Employer contributions
Employee contributions
Benefit payments
Administration costs
Actuarial gain
Settlements
$
52,020 $
50,575 $
1,925
1,084
377
(1,986)
(146)
1,683
(2,146)
1,995
650
339
(2,094)
(110)
665
-
- $
-
66
-
(66)
-
-
-
-
-
48
-
(48)
-
-
-
End of year
$
52,811 $
52,020 $
- $
-
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
71
(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:
2016
2015
2016
2015
Pension Benefits
Other Post-retirement Benefits
Fair value of plan assets
Present value of unfunded
$
52,811 $
52,020 $
- $
-
obligations
(345)
Present value of funded obligation (50,864)
(371)
(51,134)
(1,889)
-
(1,813)
-
Net employee future benefits
asset (liability)
$
Employee future benefits
1,602 $
515 $
(1,889) $
(1,813)
asset
$
2,471 $
1,570 $
- $
-
Trade accounts payable and
provisions
(71)
Employee future benefits obligation (798)
Net employee future benefits
asset (liability)
$
1,602 $
(71)
(984)
(50)
(1,839)
(50)
(1,763)
515 $
(1,889) $
(1,813)
The following table shows the Company’s net expense recognized in the Statement of
Earnings and the actuarial (gains) losses recognized in Other comprehensive income:
Statement of Earnings
Production expense
Finance (income) costs
Restructuring costs
Pension Benefits
Other Post-retirement Benefits
2016
2015
2016
2015
$
1,090 $
(50)
466
1,030 $
(5)
-
51 $
91
-
45
67
-
$
1,506 $
1,025 $
142 $
112
Other comprehensive income (loss)
Actuarial gains (losses)
$
1,509 $
(956) $
- $
(49)
Plan assets consist of:
Asset category
Investment Funds
Canadian Equity
Global
Money Market
Fixed Income
Balanced
Cash
Other
Total
$
2016
2015
15,787 $
16,766
985
18,715
457
101
-
13,735
16,946
831
19,050
483
8
967
$
52,811 $
52,020
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
72
(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 plan assets held in investment funds are managed by third party 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
2016
2015
Other Post-retirement Benefits
2016
2015
Defined benefit obligation as of December 31
Discount rate
Compensation increases¹
3.75%
3.50%
Pension expense
Discount rate
Compensation increases¹
3.75%
3.50%
3.75%
3.50%
3.99%
3.50%
3.75%
-
3.75%
-
3.75%
-
3.96%
-
¹Compensation increases only relate to the CMSG plan.
For measurement purposes at December 31, 2016, the Company has assumed a 5.36%
health care cost trend in 2017 grading down to 4.38% in 2021 (2015 – 5.60% health
care cost trend in 2016 grading down to 4.38% in 2021).
Effect of 1% decrease in discount rate
on defined benefit obligation
$
7,321
$
247
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 fifteen years.
Through its defined benefit pension plans and other post-retirement benefits, the
Company is exposed to a number of risks, the most significant of which are detailed
below:
Asset liability mismatch – The defined benefit plan obligations are calculated using a
discount rate set with reference to corporate bond yields. While the Adams Lake and
CMSG pension plans hold some fixed income investments, both plans hold a significant
proportion of equities, which are expected to outperform corporate bonds in the long
term. However, in the short term, there will be volatility in the funded status of the
plans.
Life expectancy – The majority of obligations are to provide benefits for the life of the
member, so increases in life expectancy would result in increased obligations.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
73
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
23. Related party transactions:
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
Share-based compensation expense (recovery)
$
2016
6,013
512
3,112
$
2015
4,838
729
(3,447)
$
9,637
$
2,120
Obligations in relation to key management personnel, including directors, are as follows:
Trade accounts payable and provisions
Employee future benefits obligation
Provisions and other liabilities
$
2016
3,947
3,998
10,840
$
2015
5,669
3,591
10,239
$ 18,785
$ 19,499
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
Japan
China/Taiwan
Other export
Sales by product line are as follows:
Lumber
Logs
Wood chips and other by products
Ocean freight and other
2016
2015
$ 1,248,684
234,308
137,795
91,606
80,319
$ 1,144,927
236,517
140,900
110,828
54,203
$ 1,792,712
$ 1,687,375
2016
2015
$ 1,458,296
179,275
145,608
9,533
$ 1,361,192
174,090
141,717
10,376
$ 1,792,712
$ 1,687,375
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
74
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
24. Segmented information (continued):
Non-current assets by geographic location are as follows:
United States
Canada
25. Capital management:
2016
2015
$ 666,839
348,796
$ 709,002
369,573
$ 1,015,635
$ 1,078,575
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.
There were no changes in the Company’s approach to capital management during 2016.
Under its debt financing agreements, the Company cannot exceed a total debt to total
capitalization ratio, 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 a limit; 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, a minimum net
worth requirement and a miminum EBITDA coverage ratio contingent on the total debt to
total capitalization ratio.
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, 2016, the fair value of the Company's long term debt exceeded its
carrying value by $7,378,000 (2015 – below carrying value by $8,188,000), measured
based on the level 2 of the fair value hierarchy. The fair values of other financial
instruments approximate their carrying values due to their short-term nature.
(b) Derivative financial instruments:
Derivative financial instruments in an asset position are classified as Trade accounts
receivable and other in the Statements of Financial Position, while derivative financial
instruments in a liability position are classified as Trade accounts payable and
provisions. Financial instrument assets and liabilities are not netted for purposes of
presentation in the financial statements.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
75
(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):
The Company may use a variety of derivative financial instruments to reduce its
exposure to risks associated with fluctuations in foreign exchange rates, interest rates
and lumber prices. These include foreign currency forward, collar and option contracts,
and interest rate swaps.
Two of the Company’s interest rate swaps matured on April 14, 2016. Two interest
rate swaps remained outstanding at December 31, 2016, each with a notional value of
US$25,000,000. Under these two interest rate swaps, maturing February 27, 2017,
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. At December 31,
2016, the fair value of the Company’s interest rate swaps was an asset of $10,000
(December 31, 2015 – $61,000 asset). Fair value of the Company’s interest rate
swaps are measured based on Level 2 of the fair value hierarchy.
In respect of its trading in foreign currency exchange 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 bankers, which are all highly
rated.
As at December 31, 2016, the Company had no outstanding obligations under foreign
currency contracts.
The following table summarizes the gain (loss) on derivative financial instruments for
the years ended December 31, 2016 and 2015.
Foreign exchange collars and forward contracts¹
Interest rate swaps²
Lumber futures³
$
2016
271
(51)
(1)
$
2015
(1,420)
(71)
(1)
Total gain (loss), net
$
219
$
(1,492)
¹ Recognized in Other foreign exchange gain (loss) in Net earnings.
² Recognized in Other comprehensive income.
³ Recognized in Other income in Net earnings.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
76
(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, 2016, 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
Opening
balance¹ Additions¹ Payments¹
Closing
balance¹
June 26, 20134
50,000
March 13, 2014³
75,000
December 17, 20144 50,000
January 14, 20153
10,000
February 26, 20153
-
March 16, 20154
100,000
March 30, 20153
10,000
May 12, 20153
35,000
October 5, 20163
-
-
-
-
-
-
-
-
-
22,000
-
(67,000)
-
(10,000)
-
-
(10,000)
(35,000)
-
50,000
8,000
50,000
-
-
100,000
-
-
22,000
Unrealized foreign
exchange
gains (losses)²
2016
2015
2,065
4,414
2,065
352
-
4,130
704
2,516
(566)
(11,195)
(17,313)
(11,195)
(1,892)
(4,112)
(10,370)
(1,260)
(6,073)
-
$330,000
$ 22,000 $(122,000) $230,000
$ 15,680
$(63,410)
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, trade and other
receivables and certain investments and advances. 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.
Certain Other investments and advances are classified as held for trading and are
measured at fair value.
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 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, 2016 and 2015
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):
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
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 based on standard industry
terms.
Most 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
the receivable amounts by the Export Development Corporation or are secured by
documentary collections or 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, no reserve in respect of doubtful accounts was recorded as at
December 31, 2016 (2015 - $67,000).
Deposits
The Company limits its 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 2016.
Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure for
receivables in North America. As all log and lumber sales outside of the North
American markets are typically insured by the Export Development Corporation to
90% or secured by irrevocable letters of credit, credit exposure for these sales is
limited.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
78
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
26. Financial instruments (continued):
(d) Financial risk management (continued):
(i) Credit risk (continued):
Accounts receivable carrying values at the reporting date by geographic region were
as follows:
United States
Canada
Japan
China/Taiwan
Other
(ii) Liquidity risk:
2016
$ 61,755
14,243
5,312
7,397
6,352
2015
$ 62,148
16,233
5,837
5,523
5,477
$ 95,059
$ 95,218
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 capital commitments are summarized as follows:
Payments due by period
Up to
1 year
2-3
years
4-5
years
After 5
years
Total
$ 112,592 $ 112,592 $
Trade accounts payable and
accrued liabilities
317
Income taxes payable
13,427
Contingent future payment
39,419
Reforestation liability
Long term debt
308,821
Provisions and other liabilities 38,817
Operating leases and
capital commitments
66,820
317
13,427
11,609
-
11,008
- $
-
-
10,226
40,281
5,662
- $
-
-
8,141
44,756
2,150
-
-
-
9,443
223,784
19,997
19,570
23,320
10,220
13,710
Total obligations
$ 580,213 $ 168,523 $ 79,489 $ 65,267 $ 266,934
(iii) Market risk:
Market risk is the risk that changes in market prices, such as foreign exchange
rates, interest rates and equity prices, will affect the Company’s income or the value
of its holdings of financial instruments. The objective of market risk management is
to manage and control market risk exposures within acceptable parameters, while
optimizing the return relative to risk.
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
79
(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):
Currency risk
The Company is exposed to currency risk on cash and cash equivalents, accounts
receivable, accounts payable and provisions, long term debt and intercompany loans
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 may use 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.
At December 31, 2016, the Company has U.S. Dollar drawings under its Revolving
Term Line and Senior Secured Notes of US$230,000,000 (2015 – US$330,000,000).
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):
2016
Accounts receivable
Accounts receivable held by foreign
CAD
USD
Japanese ¥
18,072
20,614
19,230
subsidiaries with USD functional currency
-
36,559
-
2015
Accounts receivable
Accounts receivable held by foreign
18,072
57,173
19,230
CAD
USD
Japanese ¥
18,292
18,526
17,678
subsidiaries with USD functional currency
-
36,909
-
18,292
55,435
17,678
As at December 31, 2016, the domestic operations of the Company held cash and
cash equivalents of US$7,503,000 (2015 – US$5,118,000). Cash and cash
equivalents held by foreign subsidiaries totaled US$5,195,000 (2015 -
US$320,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2016 and 2015
80
(Tabular amounts expressed in thousands of Canadian dollars, except number of shares and per share amounts)
____________________
26. Financial instruments (continued):
(d) Financial risk management (continued):
(iii) Market risk (continued):
Based on the Company’s net exposure to foreign currencies as at December 31,
2016, including U.S. Dollar denominated cash and cash equivalents, long term debt
and other financial instruments, the sensitivity of the U.S. Dollar balances to the
Company’s net annual earnings is as follows:
U.S. Dollar
$0.01 increase vs CAD
$29,000 decrease in net earnings
Based on the Company’s net exposure to foreign currencies as at December 31,
2016, 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
$2,564,000 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 issued US$200,000,000 of Senior Secured Notes (note
10(b)), which bear interest at fixed rates ranging from 4.02 to 4.33%.
Based on the Company’s average debt level during 2016, the sensitivity of a 100
basis point increase in interest rates would result in an approximate decrease of
$343,000 in net earnings.
Other market price risk
The Company does not enter into commodity contracts other than to meet the
Company’s expected usage and sale requirements and such contracts are not
settled net.
ANNUAL INFORMATION FORM
Prepared as of February 9, 2017
81
FORWARD LOOKING INFORMATION
This Annual Information Form contains information and statements that are forward-looking in
nature, including, but not limited to, statements about the Company’s business outlook,
objectives, plans, strategic priorities and other statements that are not historical facts. A
statement Interfor makes is forward-looking when it uses what is known today, to make a
statement about the future. Forward-looking statements may include words such as “will”,
“could”, “should”, “expected”, “anticipate”, “intend”, “forecast”, “target”, “outlook” and
“strategy”. Such forward-looking statements are based on Interfor’s current expectations and
certain assumptions, including assumptions regarding lumber, log and wood chip prices; the
Company’s ability to compete on a global basis; the availability and cost of log supply; the
absence of natural or man-made disasters; currency exchange rates; no material changes in
government regulation; the availability of the Company’s allowable annual cut (“AAC”); the
outcome of aboriginal claims and treaty settlements; the Company’s ability to export its
products; the outcome of the softwood lumber dispute between Canada and the U.S.;
stumpage rates payable to the Province of British Columbia; environmental effects of the
Company’s operations; the absence of labour disruptions; and the assumptions described
under the heading “Critical Accounting Estimates” in Interfor’s 2016 annual Management’s
Discussion & Analysis, which is available on www.sedar.com and www.interfor.com. Such
forward-looking statements involve known and unknown risks and uncertainties that, if they
eventuate, may cause Interfor’s actual results to be materially different from those expressed
or implied by those forward-looking statements. Such risks and uncertainties include lumber,
log and wood chip price volatility; global competition; reduction of availability or increase in
cost of log supply; natural or man-made disasters; foreign currency exchange rate
fluctuations; changes in government regulation; reductions of the Company’s AAC; aboriginal
claims or treaty settlements impacting the Company’s forest tenures; export and other trade
barriers; the softwood lumber dispute between Canada and the U.S.; increases in stumpage
rates payable to the Province of British Columbia; environmental effects of the Company’s
operations; labour disruptions; and other factors referenced herein and in Interfor’s 2016
annual Management’s Discussion & Analysis under the heading “Risks and Uncertainties”.
Readers are cautioned not to place undue reliance on forward-looking information or
statements. Interfor undertakes no obligation to update such forward-looking information or
statements, except as required by law.
DESCRIPTION OF THE BUSINESS
Interfor is a leading global supplier of lumber products. The Company has annual production
capacity of approximately 3 billion board feet and offers one of the most diverse lines of
lumber products to customers in North America, the Asia-Pacific region and Europe.
The Company has sawmilling operations in British Columbia, Washington, Oregon, Georgia,
South Carolina and Arkansas. Interfor also owns value-added remanufacturing facilities in
Washington and Georgia.
COMPANY HISTORY AND DESCRIPTION
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.
Annual Information Form
____________________
82
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 and our registered and records
offices are located at Suite 3500, 1055 Dunsmuir Street, Vancouver, British Columbia, V7X
1H7.
Our significant indirectly wholly-owned subsidiary, Interfor U.S. Inc., is incorporated in the
State of Washington and owns and operates our U.S. sawmills. Interfor Cedarprime Inc.
(incorporated in the State of Washington) is also an indirectly wholly owned subsidiary of
Interfor. Directly wholly-owned subsidiaries include Interfor U.S. Holdings Inc. (incorporated
in 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).
RECENT DEVELOPMENTS
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.
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 to convert the Castlegar mill to a two line operation with state-of-the-art
technology and optimization. The project was substantially completed by the end of 2015.
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.
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 Subscription Receipts at a price of $20.10 per Subscription Receipt, for
aggregate gross proceeds of $66.3 million (the “Offering”). Each Subscription Receipt entitled
the holder thereof, for no additional consideration and without further action, to one Common
Share upon closing of the acquisition of four sawmills and associated working capital from
Simpson Lumber Company, LLC (“Simpson”). Net proceeds of the Offering were used to
partially fund this acquisition.
On March 1, 2015, Interfor completed its acquisition of four sawmills and associated working
capital from Simpson. The sawmills are located in Tacoma, Washington; Longview,
Washington; Meldrim, Georgia and Georgetown, South Carolina.
Annual Information Form
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On March 16, 2015, the Company completed a US$100 million term debt financing of Senior
Secured Notes with Prudential Capital Group. The Senior Secured Notes carry an annual
interest rate of 4.17% and have a final maturity of March 26, 2026. The proceeds were used
to reduce the drawings under the Company’s Revolving Term Line. In conjunction with this
financing, Interfor decreased the credit available under its Revolving Term Line from $250
million to $200 million, without change to other terms and conditions.
On April 27, 2015, Interfor extended the maturity date of its U.S. Operating Line from April 28,
2015, to May 1, 2017, and increased the credit available under that line from US$30 million to
US$50 million to provide enhanced financial flexibility.
On May 22, 2015, Interfor curtailed operations at its Tacoma sawmill as a result of challenging
lumber and log market conditions. Following a comprehensive strategic review, the Company
announced its decision on July 30, 2015, to exit the mill. The Tacoma sawmill accounted for
47 million board feet of production in 2015 since acquisition.
On June 19, 2015, Interfor closed its acquisition of a sawmill and associated working capital in
Monticello, Arkansas, from Price Lumber Company. This acquisition increased Interfor’s U.S.
South production capacity to 1.3 billion board feet and raised the proportion of Interfor’s total
capacity in the U.S. South to more than 40%.
2016
The capital project to upgrade the Company’s sawmill in Castlegar, B.C. was substantially
complete by the end of 2015 and it was operating at its designed productivity level to start
2016.
On February 9, 2016, Interfor renewed and extended its Canadian Operating Line of credit and
Revolving Term Line to a new maturity date of May, 2019. The commitment amount, security
and pricing grid remained unchanged, but the renewal included a number of improved
provisions to provide enhanced financial flexibility and liquidity.
On June 15, 2016, the Company extended the maturity of its U.S. Operating Line from May 1,
2017 to May 1, 2018, without significant change to other terms.
On November 30, 2016, Interfor closed the sale of the Tacoma sawmill property for gross
proceeds of US$32.4 million. Net cash proceeds from the sale of the property were US$20.4
million after taking into account transaction costs and US$10 million of contingent
consideration owed to Simpson, from which Interfor acquired the sawmill in March 2015.
MANUFACTURING AND TIMBER SUPPLY
We operate five sawmills in B.C. and have U.S. operations comprising two sawmills and one
remanufacturing plant in Washington, two sawmills in Oregon, one sawmill in South Carolina,
one sawmill in Arkansas, and seven sawmills and one remanufacturing plant in Georgia. 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.
Annual Information Form
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Rated capacity and production of lumber for each region is set out in the following table:
Sawmills
B.C. Coast(2)
B.C. Interior
U.S. Northwest(3,4)
U.S. Southeast(5)
Present
Rated
Capacity
(1)
Production for years
ended
December 31,
2016
2015 2014
(millions of board feet)
320
750
635
159
717
570
164
620
655
1,325
1,042
1,058
198
744
539
741
Total
3,030
2,488
2,497
2,222
(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, 13 and 14 million board feet in 2014, 2015 and 2016 respectively.
(3) The Beaver and Tacoma sawmills were curtailed on June 27, 2014 and May 22, 2015,
respectively.
(4) The Longview and Tacoma sawmills were acquired on March 1, 2015. The Tacoma mill was
permanently curtailed in August, 2015 and is not included in rated capacity. Volumes reported
are Interfor only.
(5) The Perry and Preston sawmills were acquired March 14, 2014. The Meldrim and Georgetown
sawmills were acquired on March 1, 2015. The Monticello sawmill was acquired on June 19,
2015. Volumes reported are Interfor only.
CANADIAN OPERATIONS
B.C. Coast
We own and operate two sawmill operations within the B.C. Coast region. Our Hammond
operation is located on the Fraser River in Maple Ridge, B.C. and consists of a three-line
sawmill, a planer mill and dry kilns. This facility is focused on western red cedar and supplies
siding, decking, fascia and timbers for both offshore and North American markets. Our Acorn
operation is located on leased land in Delta, B.C. and consists of a log dewatering and
merchandizing system, a sawmill, a planer mill and dry kilns. This 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
We own and operate three sawmill operations within the B.C. Interior region with timber
tenures having a total AAC of 1,888,000 cubic metres. Our Adams Lake operation is located
near Kamloops, B.C., while our Castlegar and Grand Forks operations are located in the
southern interior of B.C. These mills manufacture kiln-dried lumber for the U.S. and Canadian
construction markets as well as for offshore markets, and have the capability to cut Douglas-
fir, spruce-pine-fir (“SPF”), fir-larch, western red cedar and hemlock dimension lumber. The
Castlegar operation includes a transportation system for transporting logs on Arrow Lake.
Annual Information Form
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B.C. Timber Supply
85
In the Province of British, the government or “Crown” owns 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 Forest
and Range Practices Act (British Columbia) and the Forest Act (British Columbia). The
Government of B.C. 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 3.7 million cubic meters. 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 log purchases on the open market.
When operating at normal capacity, our mills in B.C. currently acquire 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
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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
Allowable Annual Cut (1)
— Forest Licences
— Tree Farm Licences
— Non Replaceable Forest Licences
— Discretionary Annual Harvest Levels(2)
Total AAC
Log Production
— Coast(3)
— Interior
Total Log Production
Years ended December 31,
2017
2016
2015 2014
(thousands of cubic metres)
2,775
2,775
2,775
2,775
875
875
-
50
-
50
875
220
80
875
220
40
3,700
3,700
3,950
3,910
1,308
1,331
1,523
1,657
1,708
1,517
2,965
3,039
3,040
Log Purchases
1,199
1,112
1,395
Log Sales
1,296
1,453
1,440
(1) AAC status at the beginning of each year (includes a provision for non-recoverable fibre).
(2) Includes Timber Licence tenures.
(3) 2016 volumes include production volume of 16,000 cubic metres of third party timber sales
managed by Interfor (2015 – 30,000 cubic metres, 2014 – 48,000 cubic metres).
U.S. OPERATIONS
U.S. Northwest
We own and operate four sawmill operations in the U.S. Northwest. Three of these operations,
located in Port Angeles, Washington, Longview, Washington and Molalla, Oregon, produce stud
lumber for the U.S. construction market. Both the Port Angeles and Molalla sawmills produce
kiln-dried stud lumber from hemlock and Douglas-fir logs while the Longview sawmill produces
green Douglas-fir stud lumber with a focus on servicing home centers. Port Angeles also
produces lumber in 12 foot lengths for the U.S. market and is capable of producing metric
sizes for export.
Our Gilchrist sawmill located in Gilchrist, Oregon, processes lodgepole and ponderosa pine to
produce a wide range of specialty and industrial lumber products. This 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.
We also own and operate a value-added cedar remanufacturing facility in Sumas, Washington.
Annual Information Form
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U.S. Southeast
87
We own and operate nine sawmill operations in the U.S. South. Seven of these sawmills are
located in Georgia (Baxley, Eatonton, Swainsboro, Thomaston, Preston, Perry and Meldrim),
one is located in Georgetown, South Carolina and another in Monticello, Arkansas. These nine
sawmills produce southern yellow pine lumber in a range of dimensions from 2x4 through 2x12
products, with 4x4 products also produced at certain mills.
We also own and operate a value-added southern yellow pine remanufacturing facility in Perry,
Georgia.
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 2016, approximately 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. At our Longview location, we only purchase Douglas-fir.
Douglas-fir is the prominent species, with smaller volumes of western hemlock and white fir at
the Molalla sawmill. All three of our western Oregon and Washington sawmills depend on
private industrial landowners and small private landowners for the majority of their supply. The
remainder of their supply is comprised of timber from State, Federal, and tribal lands.
At the Gilchrist sawmill, log purchases consist primarily of lodgepole pine and ponderosa pine
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. South 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 the U.S. South purchase timber comprised
exclusively of southern yellow pine, originating from each of these sources.
The total 2017 log supply requirement for the mills in the U.S. is estimated to be supplied from
the following sources:
Expected Sources of Timber 2017
State, Federal and tribal lands
Industrial lands
Private lands
U.S.
Northwest
35%
58%
7%
100%
U.S.
South
1%
29%
70%
100%
Annual Information Form
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88
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.
The following table shows our lumber sales by geographic area and total sales by product line
for the past three years:
Lumber
— U.S.A.
— Japan
— Canada
— 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,
2016
2015
2014
(thousands of dollars)
$1,098,106
$ 996,683
$ 770,153
123,878
124,252
92,248
59,102
60,179
24,783
94,483
66,581
47,104
32,089
107,561
103,599
109,205
46,812
39,928
1,458,296
1,361,192
1,177,258
179,275
145,608
174,090
141,717
144,770
105,506
9,533
$1,792,712
10,376
$1,687,375
19,623
$1,447,157
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 overall demand.
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. Many of
our operations are strategically located close to ports which allow us to fully realize on the
opportunities that are available to us in our overseas markets.
Product and market diversification is particularly important as the variability inherent in the log
resource produces a much wider spectrum of product sizes and quality. 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 for the Japan market.
We also have an office in France to serve Continental Europe and Middle Eastern markets, and
a representative in China to support that country’s growing demand for wood.
The primary market for our cedar product line 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.
Annual Information Form
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89
In North America, we currently service our customer base from three sales locations. Our
cedar products are sold out of our office in Burnaby, B.C. Our office in Bellingham, Washington
services our North American customers for products produced by our sawmills in Canada and
the U.S. Northwest. Finally, our office in Peachtree City, Georgia services our customers for
products produced by our sawmills in the U.S. South. In 2017, the Bellingham office will be
relocated to Canada. Each of these offices leverages our regional knowledge of 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-term and long-term
contracts to pulp producers. In general, wood chips produced on the B.C. Coast are sold at
prices related to current Northern Bleached Softwood Kraft (“NBSK”) pulp prices, while the
wood chips produced in the B.C. Interior are sold at current market prices for chips. Chips
from our U.S. Northwest and U.S. South operations are sold to pulp and paper producers or
fibre board manufacturers under short-term arrangements, with the exception of the Baxley,
Georgetown, Meldrim, Gilchrist, Longview and Port Angeles sawmills which each have a long-
term contract with a pulp and paper 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. In 2016, break-bulk shipments were transported
under contract with an independent ocean carrier and this same arrangement is in place for
2017. 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 1,162 people in our logging and manufacturing
operations and corporate offices. The Canadian United Steel Workers (“USW”) is the certified
bargaining agent for approximately 556 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 expires September 30, 2019.
In the U.S., we employ approximately 1,694 employees in our sawmill and remanufacturing
operations in Washington, Oregon, Georgia, Arkansas, South Carolina and in our offices
located in Bellingham, Washington and Peachtree City, Georgia. The International Association
of Machinists (“IAM”) is the certified bargaining agent for approximately 92 of these people
employed in the Longview, Washington sawmill.
The IAM collective agreement expires on November 15, 2020.
Annual Information Form
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THE ENVIRONMENT
90
Interfor is committed to responsible stewardship of the environment. We maintain an
Environmental Management System (“EMS”) for all of our woodlands and manufacturing
facilities. The EMS provides a structure for identifying, addressing and managing environmental
issues. Audits are performed regularly in both the woodlands and manufacturing operations to
verify its effectiveness.
Regulatory Compliance
Interfor operates in compliance with extensive provincial, state, federal or other laws and
regulations that apply to most aspects of our business activities.
Forest Management Certification
Interfor has achieved the internationally recognized Sustainable Forestry Initiative (“SFI”)
forest management certification for all of our B.C. woodlands operations. Independent third
party certification audits are conducted by KPMG Performance Registrar Inc.
Chain of Custody 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
Interfor is a member of the Coast Forest Conservation Initiative (“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) 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 announced by the province in 2016.
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 30% of its total
lumber production.
Interfor has a number of agreements and initiatives with FN in B.C., and 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.
Mountain Pine Beetle
The Mountain Pine Beetle (“MPB”) infestation has resulted in the mortality of a significant
portion of the mature pine trees in the B.C. Interior. The greatest impact has been in the
central interior region where there is a high percentage (over 60%) of pine in the forest.
Interfor operations are in the southern interior which have a much lower percentage of pine
(less than 30%) and are less affected by the MPB. The longer term timber supply impacts of
the MPB are not expected to have a significant impact on the Company’s operating areas.
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 timber
is cut, and includes these expenses in the cost of current production. The estimate of future
Annual Information Form
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91
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 are
reviewed annually or more frequently if required, and can 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 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 liabilities are
reviewed annually or more frequently if required, and can be materially impacted by
unfavourable terrain, changing legislative requirements and standards, or inaccurate
projections, which could result in a charge against operating earnings.
Continual Improvement
Each year a formal management review of the Company’s sustainable forest management
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 Interfor’s 2016 annual Management’s Discussion and
Analysis prepared as of February 09, 2017, 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 9, 2017 there were 70,030,455 Common Shares outstanding. There were no
Preference Shares outstanding.
Annual Information Form
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Common Shares
92
Each holder of a Common Share is entitled to receive notice of and to attend and vote in
person or by proxy at all meetings of the shareholders of the Company and is entitled to one
vote for each such share held.
Each holder of a Common Share is entitled to receive such dividends as the directors may in
their sole discretion declare from time to time. No holder of a Common Share will be entitled
to any dividend other than or in excess of the dividends declared by the directors. Subject to
any special rights or restrictions as to dividends attached to any Preference Shares issued and
outstanding from time to time, the directors have the discretion to declare dividends on the
Common Shares.
In the event of the liquidation, dissolution or winding-up of the Company or other distribution
of its assets for the purpose of winding up its affairs, holders of the Common Shares will not
receive any amount, property or asset, until the holders of the Preference Shares and any
other class or series of shares entitled to receive assets of the Company in priority to the
holders of the Common Shares, have first received the amount to which they are entitled.
Thereafter, the holders of the Common Shares will be entitled to all remaining property and
assets of the Company on a share for share basis.
Preference Shares
The Preference Shares may be issued in one or more series. The directors may by resolution
fix the number of Preference Shares in each series, determine the designation of the
Preference Shares of each series, and attach special rights and restrictions to the Preference
Shares of each series.
The Preference Shares rank in priority over the Common Shares and any other shares ranking
junior to the Preference Shares with respect to the payment of dividends and the distribution
of assets of the Company in the event of the liquidation, dissolution or winding-up of the
Company.
The registered holders of the Preference Shares shall not be entitled as a class to receive
notice of or to attend or to vote at any meeting of shareholders of the Company, except in the
event of matters affecting the priority rights or any other rights or restrictions attaching to the
Preference Shares.
Annual Information Form
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93
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)
2016 Trading Volumes
Ticker: IFP
$ Low
$ High
Volume
8.96
8.67
11.05
10.75
10.48
10.21
10.90
14.32
13.79
14.18
13.54
14.16
14.19
11.24
14.52
14.53
13.74
13.33
14.94
15.99
15.94
15.83
15.20
15.85
9,288,577
7,512,936
7,401,891
9,241,946
7,090,033
7,243,624
5,838,105
6,393,442
4,685,717
4,770,610
3,531,182
2,427,988
Month
January
February
March
April
May
June
July
August
September
October
November
December
SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER
Designation of class
Number of securities that
are subject to a
contractual restriction on
transfer
Percentage of class
Common Shares
3.68 million 1
5.25%
Note 1: Until one year after the date that the Interfor director designated by Ilim Timber Continental, S.A. (“Ilim”) has
ceased to be a director of Interfor, Ilim may not sell or otherwise transfer its Common Shares (other than a pledge to
an acceptable third party lender) without the prior written consent of Interfor.
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 following material contracts were entered into by the Company during or after 2016, or
before 2016 but are still in effect:
1. First Amendment dated February 6, 2015, and Second Amendment dated February 23,
2015, to the Asset Purchase Agreement between Simpson Lumber Company, LLC and
Interfor U.S. Inc., amending the 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 total consideration of approximately US$94.7
million, plus working capital and contingent future payments. The transaction closed on
March 1, 2015.
Annual Information Form
____________________
94
2. Interfor February 2016 Amended and Restated Credit Agreement, dated for reference
February 9, 2016, between the Company, each of the lenders named therein and Royal
Bank of Canada in its capacity as the arranger and agent, which extended the maturity
of the Company’s US Operating Line and Revolving Term Line from February 27, 2017
to May 19, 2019. All other terms remained substantially unchanged except for an
increase in the maximum ratio of total debt to total capitalization, which resulted in an
increase in the maximum borrowing available under the credit agreement.
3. Second Amendment dated as of February 9, 2016 to Amended and Restated Note
Purchase and Private Shelf Agreement dated as of March 16, 2015, between the
Company and the Prudential Capital Group for a US$100 million term debt financing
with Prudential Capital Group. The senior secured notes carry an annual interest rate of
4.17% and have a final maturity date of March 26, 2026. The proceeds were used to
reduce drawings under the Company’s bank credit facilities.
All of these contracts are available on www.sedar.com.
DIRECTORS AND OFFICERS
Directors of the Company
The following table sets out the Company’s directors as of February 9, 2017, their respective
municipalities of residence, positions and offices held with the Company, 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
Positions Held and 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
Director
Ilim Timber Incorporated, Ilim Timber Europe
and Ener1 Inc., all private companies owned
by a shareholder of Ilim Group, Russia’s
largest forest pulp & paper company
2013
Present
Chief Executive Officer
Ilim Group
2007
2013
JEANE HULL
Sheridan, WY, USA
May
2014
Director
Cloud Peak Energy Inc. (NYSE: CLD)
2017
Present
Executive Vice President and Chief Technical
Officer
Peabody Energy Corporation, a private-sector
coal company
2011
2015
PETER M. LYNCH
Toronto, ON, Canada
October
2006
Chair
Dieffenbacher USA, Inc., a manufacturer and
designer of press and forming systems
2017
Present
President & CEO
Dieffenbacher USA, Inc.
2013
2016
Independent Business Consultant
2010
2013
Annual Information Form
____________________
Name and
Municipality of Residence
Director
Since
GORDON. H. MacDOUGALL
West Vancouver, BC, Canada
February
2007
J. EDDIE McMILLAN
Pensacola, FL, USA
THOMAS V. MILROY
Toronto, ON, Canada
October
2006
February
2016
95
Positions Held and Principal Occupations
From
To
Director
Connor, Clark & Lunn Financial Group, an
asset management company.
2014
Present
Vice Chair
Connor, Clark & Lunn Investment
Management Ltd.
Partner
Connor, Clark & Lunn Investment
Management Partnership
2006
2014
1986
2014
Independent Business Consultant
2002
Present
Director
Restaurant Brands International Inc.
(TSX/NYSE: QSR, TSX: QSP)
Director
Tim Hortons Inc.
Managing Director
Generation Capital Limited, a private
investment company
Chief Executive Officer
BMO Capital Markets
2014
Present
2013
2014
2015
Present
2008
2014
2017
Present
2014
2016
GILLIAN PLATT
Kelowna, BC, Canada
October
2016
Director
CRH plc (LSE: CRH, ISE: CRG, NYSE: CRH),
an Irish based building materials group
Executive Vice President and Chief Human
Resources Officer
Finning International Inc., a distributor of
Caterpillar products and support services
E. LAWRENCE SAUDER
Vancouver, BC, Canada
April
1984
Principal
Gillian Platt & Associates, executive advisory
and coaching practice
2013
2014
Executive Vice President, Human Resources
Aviva North America, a multi-national
insurance company
2011
2012
Chair
Metrie Canada Ltd. (formerly Sauder
Industries Limited), a manufacturer and
distributor of interior finishings
Chief Executive Officer, Metrie Canada Ltd.
(formerly Sauder Industries Limited), a
manufacturer and distributor of building
products
2010
Present
2010
2014
Chair Hardwoods Distribution Inc. (TSX:
HWD), a distributor of wood products
2008
Present
Annual Information Form
____________________
Name and
Municipality of Residence
Director
Since
DOUGLAS W.G. WHITEHEAD
West Vancouver, BC, Canada
April
2007
96
Positions Held and Principal Occupations
From
To
Director
Finning International Inc. (TSX: FTT), a
distributor of Caterpillar products and support
services
2008
Present
Director
Belkorp Industries Inc.
Director
Kal Tire
2000
Present
2012
Present
To our knowledge, two of the Company’s directors have in the last 10 years been an officer or
director of a company that was subject to bankruptcy or similar proceedings or securities
regulatory sanctions described in National Instrument 51-102 Continuous Disclosure
Obligations while that person was acting in that capacity, or that resulted from an event that
occurred while that person was acting in that capacity. From 1993 to 2010, Mr. Lynch was an
executive officer and director of Grant Forest Products Inc. (“Grant Forest”). On June 25,
2009, Grant Forest and certain affiliated entities filed and obtained protection under the
Companies’ Creditors Arrangement Act in order to restructure their business affairs and on
November 27, 2015, Grant Forest filed for bankruptcy. From April 2011 to July 31, 2015, Ms.
Hull was the Executive Vice President and Chief Technical Officer of Peabody Energy
Corporation (“Peabody”). Peabody filed for Chapter 11 bankruptcy protection on April 13,
2016.
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, May 4, 2017.
Committees of the Board
The table below lists the committees of Interfor’s board of directors and their members as of
February 9, 2017:
Committees
Audit
Corporate Governance & Nominating Committee
Management Resources & Compensation Committee
Environment & Safety Committee
Members
Douglas Whitehead (Chair)
Jeane Hull
Eddie McMillan
Tom Milroy
Eddie McMillan (Chair)
Gord MacDougall
Peter Lynch
Paul Herbert
Gord MacDougall (Chair)
Lawrence Sauder
Peter Lynch
Gillian Platt
Doug Whitehead
Jeane Hull (Chair)
Paul Herbert
Tom Milroy
Gillian Platt
Lawrence Sauder
Annual Information Form
____________________
Officers of the Company
97
The following table sets out the Company’s officers as of February 9, 2017, their respective
municipalities of residence and their principal occupations for at least the last five years:
Name and
Municipality of Residence
Positions Held and Principal Occupations
From
To
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
2000
Present
2014
Present
2002
2014
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
2013
2014
Business Consultant
IAN M. FILLINGER
Kamloops, BC, Canada
Senior Vice President, Head of Operations
Interfor Corporation
Senior Vice President, Canadian Operations
Interfor Corporation
Vice President, Canadian Operations
Interfor Corporation
Senior General Manager
Interfor Corporation
2012
2013
2015
Present
2014
2015
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.
BART BENDER
West Vancouver, BC, Canada
Senior Vice President, Sales & Marketing
Interfor Corporation
Senior Vice President, Operations
Ainsworth Lumber Co.
Vice President, Sales
Ainsworth Lumber Co.
General Manager, Sales
Ainsworth Lumber Co.
2005
2012
2014
Present
2012
2014
2007
2012
2015
Present
2014
2015
2012
2014
2002
2012
Annual Information Form
____________________
XENIA KRITSOS
Vancouver, BC, Canada
General Counsel & Corporate Secretary
Interfor Corporation
General Counsel & Corporate Secretary
Coalspur Mines Limited
Senior Legal Counsel
Hunter Dickinson Services Inc.
98
2015
Present
2013
2015
2009
2013
SHAREHOLDINGS OF DIRECTORS AND OFFICERS
As at December 31, 2016, the directors and officers of the Company as a group owned,
directly or indirectly, or exercised control of or direction over 921,657 Common Shares
representing approximately 1.32% 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.
LEGAL PROCEEDINGS
We are not a party to, and our property is not the subject of, any material legal proceedings
that took place in 2016, are currently underway, or which we know to be contemplated. In
November 2016, U.S. softwood lumber producers filed antidumping and countervailing duty
petitions with the U.S. Department of Commerce (“DOC”), alleging that dumped and
subsidized Canadian imports are causing material injury to the U.S. domestic industry.
Although Interfor has not been selected as a mandatory respondent in either of the
antidumping or countervailing duty investigations, the outcome of these investigations will
likely affect Interfor.
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 Professional Accountants of British Columbia and the
applicable rules and regulations thereunder.
AUDIT COMMITTEE INFORMATION
The Company’s Audit Committee (the "Committee") is mandated to oversee the accounting
The Company’s Audit Committee (the "Committee") is mandated to oversee the accounting
and financial reporting processes of the Company and audits of its financial statements in
accordance with the Board’s objectives. The Committee’s functions include:
reviewing and, if appropriate, recommending approval by the Board of the Company’s
annual and quarterly financial statements, management’s discussion and analysis and
earnings press releases;
reviewing and approving disclosures required 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;
reviewing the process for certification, and the certification, of the interim and annual
financial statements by the Chief Executive Officer and Chief Financial Officer;
Annual Information Form
____________________
99
reviewing all public disclosure containing financial results or financial information;
reviewing matters related to internal controls over financial reporting of the Company
and ensuring the Company has adequate internal controls procedures in place;
reviewing the principal risks of the Company, other than the risks associated with the
Company’s compensation policies and practices, and ensuring that an effective risk
management strategy is in place;
reviewing the Company’s derivatives policies and activities, including details of
exposures to banks and other counterparties;
overseeing the activities of and directly communicating with the Company’s external
auditor;
satisfying 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 assessing the adequacy of those procedures;
establishing and periodically reviewing 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;
reviewing and approving the Company’s hiring policies regarding partners, employees
and former partners and employees of the former and present Auditor; and
reviewing the Company’s insurance programs, including the Company’s directors’ and
officers’ insurance coverage, and making recommendations for their renewal or
replacement.
The Committee’s Terms of Reference, attached as Appendix “A” to this Annual Information
Form, sets out its duties and responsibilities.
The Committee met four times in 2016, 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 2016
were, and all current members of the Audit Committee are, financially 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:
Annual Information Form
____________________
Relevant Education and Experience
Director
Past Occupation
100
Douglas W.G.
Whitehead
Chair of the Audit
Committee since May
2012
Jeane Hull
Member since April 2016
Eddie McMillan
Member since April 2016
Tom Milroy
Member since April 2016
Mr. Whitehead is currently a director of Finning International Inc. (TSX: FTT)
(“Finning”), Belkorp Industries Inc. and Kal Tire. From 2008 to 2016 Mr. Whitehead
was Board Chair, and from 2000 to 2008 he was the President and Chief Executive
Officer, of Finning. Prior to joining Finning, Mr. Whitehead held a number of senior
executive positions with Fletcher Challenge Canada, including President and Chief
Executive Officer, Senior Vice President and Chief Operating Officer and Vice President
of the Crown Packaging Division. 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. Mr. Whitehead holds a
Bachelor of Applied Science (Engineering) from the University of British Columbia and a
Master of Business Administration from the University of Western Ontario.
Ms. Hull is currently a director of Cloud Peak Energy Inc. (NYSE: CLD). From 2011 to
2015, she was Executive Vice President and Chief Technical Officer at Peabody Energy
Corporation, a private-sector coal company. Prior to joining Peabody in 2007, she held
numerous management, engineering and operations positions with Rio Tinto and its
affiliates, lastly as COO of the Kennecott Utah Copper business. Prior thereto, she
spent 12 years with Mobil Mining and Minerals, and Mobil Chemical Company. She is
Chair of the University of Wyoming School of Energy Resources Council. She also
serves on the Advisory Board for South Dakota School of Mines and Technology. She
holds a Bachelor of Science (Civil Eng.) from South Dakota School of Mines &
Technology and a Master of Business Administration from Nova Southeastern
University.
Mr. McMillan is an independent business consultant. From 1998 until his retirement in
2002, he was Executive Vice President – Wood Products Group of Willamette Industries
Inc., a forest products company. Prior to 1998, Mr. McMillan held various management
positions with Willamette Industries Inc. Over the years, he has served as a director of
Forest Express, Inc. and has been associated with numerous industry association
boards, including the American Plywood Association, National Particleboard Association,
Particleboard and MDF Institute, Southern Forest Products Association, Western Wood
Products Association, National Association of Lumber Wholesalers and the American
Forest and Paper Association. He holds a Bachelor of Science (Accounting/Business
Administration) from Louisiana Tech University.
Mr. Milroy is a director of Restaurant Brands International Inc. (TSX/NYSE: QSR, TSX:
QSP) and has served on that board since 2014. Prior to that, he was a director of Tim
Hortons Inc. from August 2013 to December 2014. He is currently Managing Director
of Generation Capital Limited, a private investment company. From March 2008 to
October 2014, he served as Chief Executive Officer of BMO Capital Markets, where he
was responsible for all of BMO’s business involving corporate, institutional and
government clients globally. Mr. Milroy holds a Bachelor of Law and Master of Law
from Cambridge University, an LLB from Dalhousie University, and a Bachelor of Arts
from McGill University. He has also completed the Advanced Management Program at
the Harvard Business School. Mr. Milroy is a member of the Law Society of Upper
Canada.
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
____________________
101
KPMG LLP, Chartered Professional 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, 2015 and December 31, 2016, 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 and subsidiary
companies (2016 and 2015) and bought deal financing involvement (2015).
Tax fees
Tax fees consist of fees for tax compliance services, planning and related
services, personal tax (foreign and domestic) compliance and planning advice,
indirect tax recovery audit contingency fees which are based on percentage of
recoveries (2016 and 2015), and advice on setup of Insurance Captive (2015).
All Other fees
Forestry certification (2016 and 2015); advice on leading practice for IT
procurement (2015).
TOTAL
CODE OF ETHICS
2016
2015
$538,200
$581,256
46,826
183,738
43,177
88,731
66,300
99,800
$694,503
$953,525
We have adopted a code of ethics that applies to our directors, officers and employees. A copy
of the code, entitled “Code of Conduct & Ethics”, 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
for its most recent annual meeting of shareholders that involved the election of directors.
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, 2016.
Copies of the documents referred to above and additional information relating to the Company
are available on SEDAR at www.sedar.com, on the Company’s website www.interfor.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
____________________
PURPOSE
Appendix “A”
AUDIT COMMITTEE
Terms of Reference
102
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.
The Audit Committee shall consist of four or more Directors.
2.
3.
4.
All members of the Audit Committee shall be independent within the meaning of National
Instrument 52-110 (“NI 52-110”).
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
____________________
103
3.
4.
5.
6.
7.
8.
Review the process for certification 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
104
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
105
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.
106
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),
Beaver sawmill post-closure wind-down costs and Tacoma sawmill post-acquisition losses and closure
costs.
“Adjusted Net Earnings” Net earnings (loss) before restructuring costs, asset write-downs and other
costs, other foreign exchange gains (losses), long term incentive compensation, other income (expense),
Beaver sawmill post-closure wind-down costs, Tacoma sawmill post-acquisition losses and closure costs,
the income tax effect of the aforementioned adjustments, and recognition of previously unrecognized
deferred tax assets.
“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.
“Cash flow from operations” Cash flow provided by operating activities before considering changes in
operating working capital.
“Custom cutting” An arrangement under which a mill contracts to cut logs owned by a customer into
products of specifications defined by the customer.
“Crown” Administrative agency of the provincial government of British Columbia
“EBITDA” Earnings before finance costs, income taxes, depreciation, depletion, amortization,
restructuring costs, asset write-downs and other costs, and other foreign exchange gains (losses).
“Forest Licence” Replaceable, volume-based timber cutting rights for a specific volume of Crown
timber within a Timber Supply area.
“Invested Capital” The total of Net debt and shareholders’ equity.
“m³” A measure of one cubic metre of solid wood, British Columbia metric scale, as determined under
the Forest Act, equal to 35.3 cubic feet of solid wood.
“mfbm” or “Mbf” One thousand foot board measure equal to one thousand square feet of lumber, one
inch thick.
“Net debt” The total of long term debt and bank indebtedness, less cash and cash equivalents.
“Pre-tax return on total assets” Earnings (loss) before income taxes, restructuring costs, asset write-
downs and other costs, other foreign exchange gains (losses) and other income (expense), divided by the
average of opening and closing total assets for annual periods or 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.
“Whitewood” Includes the Coastal species Hemlock, Balsam Fir, Douglas-Fir and Spruce; the term
whitewood is used on the British Columbia Coast to differentiate the above species from Western Red
Cedar and Yellow Cedar.
DIRECTORS
As of March 15, 2017
Duncan K. Davies
Vancouver, BC, Canada
Jeane Hull
Sheridan, WY, US
Gordon H. MacDougall
West Vancouver, BC, Canada
Thomas V. Milroy
Toronto, ON, Canada
E. Lawrence Sauder
Vancouver, BC, Canada
OFFICERS
As of March 15, 2017
E. Lawrence Sauder
Chair
John A. Horning
Executive Vice President &
Chief Financial Officer
Ian M. Fillinger
107
Paul Herbert
Germantown, TN, US
Peter M. Lynch
Toronto, ON, Canada
J. Eddie McMillan
Pensacola, FL, US
Gillian Platt
Kelowna, BC, Canada
Douglas W.G. Whitehead
West Vancouver, BC, Canada
Duncan K. Davies
President & Chief Executive Officer
Martin L. Juravsky
Senior Vice President, Corporate
Development & Strategy
Mark W. Stock
Senior Vice President, Head of Operations
Senior Vice President, Human Resources
Bart Bender
Xenia Kritsos
Senior Vice President, Sales & Marketing
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
108
Investor Contact
Martin Juravsky
Senior Vice President,
Corporate Development & Strategy
Tel: (604) 689-6873
martin.juravsky@interfor.com
Corporate Office
Tel: (604) 689-6800
Fax: (604) 688-0313
P.O. Box 49114
3500-1055 Dunsmuir Street
Vancouver, BC V7X 1H7
SALES AND MARKETING
North America – Cedar
Tel: (604) 422-3400
Fax: (604) 422-3244
1600 - 4720 Kingsway
Metrotower II
Burnaby, BC, Canada V5H 4N2
North America – Southern
Yellow Pine
Tel: (770) 282-3250
Fax: (770) 486-6837
700 Westpark Drive
Peachtree City, GA, US 30269
North America - Whitewood
Tel: (360) 788-2200
Fax: (360) 788-2210
2211 Rimland Drive, Suite 220
Bellingham, WA, US 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 – All Species/Inquiries
Tel: (604) 422-3468
Fax: (604) 422-3250
1600-4720 Kingsway
Metrotower II
Burnaby, BC, Canada V5H 4N2
OPERATIONS AND LOCATIONS
109
Acorn Division
(Sawmill)
Tel: (604) 581-0494
Fax: (604) 581-5757
9355 Alaska Way
Delta, BC V4C 4R7
Castlegar Division
(Sawmill and Woodlands)
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
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
Meldrim Division
(Sawmill)
Tel: (912) 748-7310
Fax: (912) 748-8354
911 Old River Road
Bloomingdale, GA 31302
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
Cedarprime
(Remanufacturing)
Tel: (360) 988-2120
Fax: (360) 988-2126
601C West Front Street
Sumas, WA 98295
Coastal Woodlands Division
(Woodlands)
Tel: (250) 286-1881
Fax: (250) 286-3412
1250A Ironwood Street
Campbell River, BC V9W 6H5
Georgetown Division
(Sawmill)
Tel: (843) 546-6138
Fax: (843) 527-4033
2701 Indian Hut Road
Georgetown, SC 29440-9146
Hammond Division
(Sawmill)
Tel: (604) 465-5401
Fax: (604) 422-3221
20580 Maple Crescent
Maple Ridge, BC V2X 1B1
Molalla Division
(Sawmill)
Tel: (503) 829-9131
Fax: (503) 829-5481
15555 S. Hwy. 211
Molalla, OR 97038
Gilchrist Division
(Sawmill)
Tel: (541) 433-2222
Fax: (541) 433-9581
P.O. Box 638
#1 Sawmill Road
Gilchrist, OR 97737
Longview Division
(Sawmill)
Tel: (360) 575-3600
Fax: (360) 575-3628
540 3rd Ave.
Longview, WA 98632
Monticello Division
(Sawmill)
Tel: (870) 224-7200
Fax: (870) 367-7924
211 Old Troy Road
Monticello, AR 71655
Preston Division
(Sawmill)
Tel: (229) 828-4265
Fax: (229) 828-4370
378 Tolleson Road
Preston, GA 31824
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) 648-4900
Fax: (706) 646-3534
75 Ben Hill Road
Thomaston, GA 30286
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