2017
Annual Report
CONTENTS
Financial Highlights
Message to Shareholders
Management’s Discussion and Analysis
Consolidated Financial Statements
Annual Information Form
pg
3
4
8
31
83
FINANCIAL HIGHLIGHTS
(in millions of dollars, except share and per share amounts)
2017
2016
3
Financial Summary
Sales
Net earnings
Adjusted EBITDA(1)
Per Share Data
Net earnings per share
- basic and diluted
Price range per share
High
Low
Net book value per share
Operating cash flow (before working capital change) per share
Weighted average shares outstanding (millions)
Financial Position
Total assets
Net debt(1)
Total shareholders’ equity
Invested capital(1)
Financial Ratios (%)
Net debt as a % of invested capital
Return on invested capital(1)
Adjusted EBITDA margin(1)
Notes:
1. See Glossary for definition.
1,990.1
97.2
287.8
1.39
22.43
13.49
12.20
3.91
70.0
1,353.0
119.3
854.2
973.5
12.3%
28.1%
14.5%
1,792.7
65.6
199.6
0.94
15.99
8.67
11.23
2.75
70.0
1,301.6
289.6
786.7
1,076.2
26.9%
17.7%
11.1%
“With well-positioned mills, a strong balance sheet and a clear vision, Interfor is in
a great position to deliver on our goal of building long-term value for our
shareholders.”
Message to Shareholders – February 2018
For further highlights, please see the 2017 Message to Shareholders and
Management’s Discussion and Analysis on the following pages.
MESSAGE TO SHAREHOLDERS
4
Overview
2017 was a record-breaking year for Interfor. The combination of strong markets and gains
in operating performance resulted in new standards for production, sales revenue and
profitability. Equally important, we took steps during the year to build out the Company’s
organizational structure and to launch the next phase of our strategic plan which we believe
will deliver additional gains in the years ahead.
Highlights for the year included:
Production increased 4% to 2.6 billion board feet;
Sales revenue increased to $2.0 billion;
Earnings and cash flow increased significantly;
Net debt was reduced by $170 million;
Major investments were announced for our mills in Monticello, AR, and Meldrim, GA;
and
Plans were launched to determine the next steps in our investment program
including a feasibility study on a potential greenfield mill in the U.S. South.
We are pleased with the results delivered in 2017 and excited about the opportunities ahead
of us.
I invite you to review the material covered in the next few pages and later in this report and
to form your own views on our progress.
Please feel free to forward any comments you may have to me directly at
duncan.davies@interfor.com.
Production Continues to Increase; Record Sales Revenue and Profitability
Achieved
Interfor’s production volumes increased 4% to 2.6 billion board feet in 2017 as the
Company focused on digesting its recent growth and laying the foundation to capture
additional gains.
Sales volumes, including agency and wholesale activities, came in at 2.7 billion board feet.
Product prices were better across-the-board in 2017 as demand in the U.S. continued to
grow and supply disruptions and growing offshore sales limited availability.
All-in, Interfor made $97.2 million after tax in 2017 on sales of $2.0 billion compared with
earnings of $65.6 million on sales of $1.8 billion in 2016.
EBITDA reported before non-recurring items and share-based compensation expense came
in at an all-time high of $287.8 million versus $199.6 million in 2016.
Strong Cash Flow Contributes to $170 Million Reduction in Net Debt
Maintaining a strong balance sheet has been a hallmark of our management philosophy
since the beginning, with a target ratio of net debt to invested capital of 25-35% with the
flexibility to go up to 40% under certain circumstances.
At year-end 2015, our debt ratio was in the upper end of the range at 38.4%. Net debt was
reduced by $163 million in 2016, bringing the ratio down to 26.9%. In 2017, net debt was
reduced by an additional $170 million to $119 million, the equivalent of 12.3% of invested
capital, well below our target range.
Message to Shareholders
____________________
5
The reduction in debt over the last two years, along with the corresponding increase in
available liquidity which, at year-end, stood at $444 million (versus $128 million at the end
of 2015), provides protection against uncertainty and puts Interfor in a strong position to
pursue additional value-creating opportunities in the years ahead.
Next Phase of Strategic Plan Launched; Projects Approved at Monticello and
Meldrim
In November, we announced plans to proceed with the next phase of our strategy to build
value.
The plan includes a number of discretionary capital projects designed to capture the
potential within our existing platform of assets and to pursue opportunities for additional
growth.
The plan is entirely consistent with the strategy we employed in the B.C. Interior where we
invested more than $300 million over 10 years to transform three outdated plants into three
of the top-performing mills in North America.
The good news is the opportunity in some regions today is even better than the one we saw
in the B.C. Interior ten years ago.
In that regard, we intend to spend upwards of $500 million on high-return projects over the
next 5 years over-and-above our budget for roads and maintenance, with a focus on the
U.S. South. The average payback on these investments has been estimated using
conservative assumptions at less than 4 years.
As part of the 2018 program, we are proceeding with projects at our mills in Monticello, AR,
and Meldrim, GA.
The Monticello project has a capital cost of US$46.0 million and involves a complete rebuild
of the mill’s primary breakdown system, the installation of a new continuous dry kiln and an
upgrade to the planermill, including the installation of a computerized grading system.
The Meldrim project has been costed at US$16.5 million and includes the addition of a new
continuous dry kiln and a new autograder, along with other improvements to the planer.
In addition to delivering significant improvements in mill level productivity and product
quality, the Monticello and Meldrim projects will together add more than 150 million board
feet to Interfor’s production capacity. Both projects are scheduled for completion in the first
quarter of 2019.
Projects at other mills are being advanced from an engineering and feasibility standpoint
and will be sequenced as appropriate.
We’ve also completed a detailed feasibility study and business case for a greenfield sawmill
in the Central Region of the U.S. South that will produce in excess of 200 million board feet
per year. The capital cost of this facility is over-and-above the $500 million earmarked for
internal projects. A decision on this project will be made in the next few months.
All of these projects will be funded from internally generated cash flow or from the
Company’s existing financial resources.
We also remain interested in growing our platform in the U.S. South and elsewhere by way
of acquisitions, provided the economics make sense and other strict criteria are met.
Message to Shareholders
____________________
6
Changes to the Company’s Board of Directors Announced
In December, Paul Herbert, who had served on our Board of Directors since 2014, stepped
down as a result of Ilim Timber terminating its right to nominate a director to Interfor’s
Board. And, in January of this year, Peter Lynch, who has served on the Board since 2006,
announced he would not be standing for re-election at the upcoming AGM.
Paul and Peter made important contributions during their time on our Board. We would like
to thank them both for their wise counsel and wish them well in their future endeavours.
At the same time, we are pleased to announce that Curt Stevens, formerly the CEO of
Louisiana Pacific Corporation, has been nominated to stand for election as a director at the
Company’s AGM in May.
Curt is an outstanding individual with a long track record of success in the building products
industry in Canada, the U.S. and internationally.
We look forward to the benefit of Curt’s involvement going forward.
Senior Management Changes Announced
In November, John Horning, Interfor’s long-time CFO, announced his plan to retire at the
end of 2018. John, who is 63, has been with Interfor since 1997 and has played an
important role in our repositioning and growth initiatives over the last two decades. Those
of you who know or have worked with John over the years know we wouldn’t be the
company we are today without his involvement. I would personally like to extend my
gratitude for all he’s done and, especially, for the support he’s provided me over all these
years.
In February this year, our Board appointed Ian Fillinger as COO and Marty Juravsky as CFO.
Ian, who is 49, joined Interfor in 2005 as General Manager of our Adams Lake Division and
has served in a series of increasingly responsible positions since that time. He was
appointed Senior Vice President and Head of Operations in 2015.
Marty, who is 54 and a CPA, CA, joined Interfor in 2012 in a consulting capacity and took
formal responsibility for our corporate development activities in 2013. He has more than
twenty years of experience with some of North America’s largest investment banks including
Salomon Brothers/Citigroup and National Bank Financial. Immediately prior to his
appointment, Marty served as Interfor’s Senior Vice President, Corporate Development and
Strategy.
Ian and Marty join with Bart Bender, our Senior Vice President, Sales & Marketing, and Mark
Stock, our Senior Vice President, Human Resources and IT as the leaders of Interfor’s key
line and staff groups and as members of our Senior Management Group.
In my opinion, we’re fortunate to have such a talented group helping to drive our agenda.
Business Outlook Encouraging; Vision Intact
The first weeks of 2018 have shown continued strength in spite of poor weather in many
parts of North America, supporting the view that markets will remain strong throughout the
year.
With well-positioned mills, a strong balance sheet and a clear vision, Interfor is in great
shape to deliver on our goal of building long-term value for our shareholders.
Message to Shareholders
____________________
7
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, 2018
8
MANAGEMENT’S DISCUSSION AND ANALYSIS
Prepared as of February 8, 2018
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, 2017 (“Q4’17”
and “2017”, 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, 2017, 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 8, 2018.
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 2017 Annual Report.
Forward-Looking Information
This MD&A contains forward-looking information about the Company’s business outlook,
objectives, plans, strategic priorities and other information that is not historical fact. A
statement contains forward-looking information when the Company uses what it knows and
expects today, to make a statement about the future. Forward-looking information is
included under the headings “Overview of Fourth Quarter, 2017”, “Softwood Lumber
Duties”, “Outlook”, “Liquidity”, “Capital Resources”, “Off-Balance Sheet Arrangements”,
“Financial Instruments and Other Instruments”, “Accounting Policy Changes” and “Risks and
Uncertainties”. Statements containing forward-looking information may include words such
as: will, could, should, believe, expect, anticipate, intend, forecast, projection, target,
outlook, opportunity, risk or strategy.
Readers are cautioned that actual results may vary from the forward-looking information in
this report, and undue reliance should not be placed on such forward-looking information.
Risk factors that could cause actual results to differ materially from the forward-looking
information in this report, are described under the heading “Risks and Uncertainties”.
Material factors and assumptions used to develop the forward-looking information in this
report, include volatility in the selling prices for lumber, logs and wood chips; the
Company’s ability to compete on a global basis; the availability and cost of log supply;
natural or man-made disasters; currency exchange rates; changes in government
regulations; the availability of the Company’s allowable annual cut (“AAC”); claims by and
treaty settlements with Indigenous peoples; the Company’s ability to export its products;
the softwood lumber dispute between Canada and the U.S.; stumpage fees payable to the
Province of British Columbia (“B.C.”); environmental impacts of the Company’s operations;
labour disruptions; cyber-security measures; and the assumptions described under the
heading “Critical Accounting Estimates” herein.
Unless otherwise indicated, the forward-looking statements in this report are based on the
Company’s expectations at the date of this report. Interfor undertakes no obligation to
update such forward-looking information or statements, except as required by law.
Management’s Discussion and Analysis
9
____________________
Overview of Fourth Quarter, 2017
Q4’17 Results
Interfor recorded net earnings in Q4’17 of $36.2 million, or $0.52 per share, compared to
$16.8 million, or $0.24 per share in Q3’17 and $26.6 million, or $0.38 per share in Q4’16.
Adjusted net earnings in Q4’17 were $45.1 million or $0.64 per share, compared to $20.0
million, or $0.29 per share in Q3’17 and $17.7 million, or $0.25 per share in Q4’16.
Adjusted EBITDA was a record $89.5 million on sales of $532.8 million in Q4’17 versus
$60.5 million on sales of $489.2 million in Q3’17.
For the year, net earnings were $97.2 million, or $1.39 per share, compared to $65.6
million or $0.94 per share in 2016. Adjusted EBITDA and sales were both records at $287.8
million and $2.0 billion, respectively.
Notable items in the quarter included:
Strong Lumber Prices
o The key benchmark prices improved quarter-over-quarter with the SYP Composite,
Western SPF Composite and KD H-F Stud 2x4 9’ increasing by US$30, US$35 and
US$4 per mfbm, respectively. Interfor’s average lumber selling price increased $39
from Q3’17 to a record $650 per mfbm on 686 million board feet of lumber sales.
Increased Production
o Total lumber production was 655 million board feet or 10 million board feet more
than the prior quarter. Production in the U.S. South region increased to 296 million
board feet from 281 million board feet in the preceding quarter. The B.C. and U.S.
Northwest regions accounted for 219 million board feet and 140 million board feet,
respectively, compared to 225 million board feet and 139 million board feet in Q3’17,
respectively.
Significant Cash Flow
o
Interfor generated $83.4 million of cash from operations before changes in working
capital, or $1.19 per share, plus a $3.3 million reduction in working capital, for total
cash generated from operations of $86.7 million.
o Capital spending was $25.0 million on a mix of high-return discretionary,
maintenance and woodlands projects.
o Net debt ended the quarter at $119.3 million, or 12.3% of invested capital.
Tax Reform Impact
o The U.S. tax reform enacted in December 2017 reduced the effective tax rate on
Interfor’s U.S. operations from approximately 37% to 24%. As a result, Q4’17
deferred tax expense includes a $2.9 million recovery related to the preceding three
quarters of 2017. The Company continues to have significant tax loss carry-
forwards, with US$132.4 million and $66.7 million available as at December 31,
2017 in the U.S. and Canada, respectively.
Strategic Capital Plan
Interfor continues to make progress on its multi-year strategic capital plan that involves
a number of discretionary projects designed to capture the opportunities within its
current operating platform and to pursue opportunities for further growth.
Management’s Discussion and Analysis
10
____________________
The previously announced large scale projects at the Company’s Meldrim and Monticello
sawmills, which represent a total investment of approximately US$65 million, are on
track for completion in Q1’19. These two projects are designed to add annual lumber
production capacity of approximately 150 million board feet and enhance operating
margins at these operations. Positive progress on a series of smaller debottlenecking
and optimization projects is also being made.
Other large capital projects to enhance existing operations are continuing to be
advanced from an engineering and feasibility standpoint and will be sequenced after the
Meldrim and Monticello projects. These projects will be subject to Board approval in the
normal course.
Assessment of the greenfield sawmill opportunity in the Central Region of the U.S. South
continues with a decision on the project expected by mid-2018. This sawmill would
produce in excess of 200 million board feet of lumber per year for an estimated total
cost, including working capital and start-up costs, of approximately US$115 million.
Softwood Lumber Duties
In Q4’17, the U.S. Department of Commerce announced amended final rates for
countervailing and anti-dumping duties of 14.19% and 6.04% on softwood lumber
shipments from Canada, down from the preliminary rates set in Q2’17 of 19.88% and
6.87%, respectively. In addition, negative findings were made in respect of critical
circumstances for both countervailing and anti-dumping duties. To reflect lower
amended final rates set for U.S. countervailing and anti-dumping duties, Interfor
recorded a $3.7 million reduction to duties expense in Q4’17 relating to shipments in
Q2’17 and Q3’17.
In Q4’17, Interfor shipped approximately 109 million board feet from its Canadian
operations to the U.S. market, which represented approximately 16% of the Company’s
total lumber sales.
Interfor is of the view that these duties imposed by the U.S. are without merit and are
politically driven. Interfor will continue to work with the B.C. and Canadian governments
to vigorously defend Canada’s position through various appeal processes.
Executive Appointments Announced
At its meeting earlier today, the Company’s Board of Directors confirmed the appointments
of Ian Fillinger as Senior Vice-President & Chief Operating Officer, and Marty Juravsky as
Senior Vice-President & Chief Financial Officer, effective February 9, 2018. Fillinger, who is
49, joined Interfor in 2005 as General Manager of the Company’s Adams Lake Division and
has served in a series of increasingly responsible positions since that time. He was
appointed Senior Vice-President & Head of Operations with responsibility for all of the
Company’s operations and capital project activities in December 2015. Juravsky, who is 54,
and a CPA, CA, joined Interfor in 2012 in a consulting capacity and took formal
responsibility for the Company’s corporate development activities in 2013. He has more
than twenty years of experience working with some of North America’s largest investment
banks including Salomon Brothers/Citigroup and National Bank Financial. Immediately prior
to his appointment, Juravsky served as the Company’s Senior Vice-President, Corporate
Development & Strategy.
Management’s Discussion and Analysis
11
____________________
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 multi-year strategic capital plan 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.
Financial and Operating Highlights (1)
Financial Highlights(2)
Total sales
Lumber
Logs, residual products and other
Operating earnings (loss)
Net earnings (loss)
Net earnings (loss) per share, basic
Adjusted net earnings (loss)(3)
Adjusted net earnings (loss) per share,
basic(3)
Adjusted EBITDA(3)
Adjusted EBITDA margin(3)
Total assets
Total debt
Net debt to invested capital(3)
Operating Highlights
Lumber production
Total lumber sales
Lumber sales - Interfor produced
Lumber sales - wholesale and
commission
Lumber - average selling price(4)
For the three months ended
Dec. 31, Dec. 31, Sep. 30,
For the year ended Dec. 31
Unit
2017
2016
2017
2017
2016
2015
$MM
$MM
$MM
$MM
$MM
$/share
$MM
$/share
$MM
%
$MM
$MM
%
million fbm
million fbm
million fbm
million fbm
$/thousand
fbm
532.8
446.0
442.3
363.5
489.2
1,990.1
1,792.7
1,687.4
410.2
1,679.4
1,458.3
1,361.2
86.8
47.9
36.2
0.52
45.1
0.64
78.8
22.3
26.6
0.38
17.7
0.25
79.0
28.3
16.8
0.24
20.0
0.29
310.7
149.3
97.2
1.39
116.5
334.4
326.2
75.9
65.6
0.94
58.7
(35.9)
(30.4)
(0.44)
(18.9)
1.66
0.84
(0.27)
89.5
51.3
60.5
287.8
199.6
16.8%
11.6%
12.4%
14.5%
11.1%
91.7
5.4%
1,353.0
1,301.6
1,296.3
1,353.0
1,301.6
1,389.8
250.9
308.8
249.6
250.9
308.8
468.8
12.3%
26.9%
17.9%
12.3%
26.9%
38.4%
655
686
666
20
607
619
598
21
645
671
650
21
2,595
2,677
2,594
2,490
2,561
2,469
2,497
2,652
2,544
83
92
108
650
588
611
627
570
513
Average USD/CAD exchange rate(5)
Closing USD/CAD exchange rate(5)
1 USD in CAD
1 USD in CAD
1.2713
1.2545
1.3341
1.3427
1.2528
1.2480
1.2986
1.2545
1.3248
1.3427
1.2787
1.3840
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 duties.
(5) Based on Bank of Canada foreign exchange rates.
Management’s Discussion and Analysis
12
____________________
Summary of Fourth Quarter 2017 Financial Performance
Sales
Interfor recorded $532.8 million of total sales, up 20.5% from $442.3 million in the fourth
quarter of 2016, driven by the sale of 686 million board feet of lumber at an average price
of $650 per mfbm. Lumber sales volume increased 67 million board feet, or 10.8%, while
average selling price increased $62 per thousand board feet, or 10.6%, as compared to the
same quarter of 2016.
The increase in the average selling price of lumber reflects significantly higher prices across
all benchmark products in Q4’17 as compared to Q4’16. The Western SPF Composite
improved by US$134 to US$439 per mfbm, while the KD HF Stud 2x4 9’ benchmark and the
Southern Pine Composite improved US$87 to US$405 per mfbm and US$23 to US$416 per
mfbm, respectively. The positive impact of increased U.S. Dollar lumber prices was
somewhat reduced by the strengthening of the Canadian Dollar against the U.S. Dollar by
4.7% on average in Q4’17 as compared to Q4’16.
Sales generated from logs, residual products and other increased by $8.0 million or 10.2%
compared to the same quarter of 2016. Increased availability of surplus logs and higher
chip volumes resulted from increased log and lumber production as compared to Q4’16.
Operations
Production costs increased by $45.8 million, or 12.0% over Q4’16, explained primarily by an
increase of 67 million board in lumber sales volume and higher average log costs in the U.S.
Northwest, somewhat offset by the stronger Canadian Dollar in Q4’17 compared to Q4’16.
Lumber production of 655 million board feet in Q4’17 was 48 million board feet higher than
Q4’16, which supported the sales volume growth.
Production from the Company’s nine U.S. South sawmills totaled 296 million board feet in
Q4’17, up 36 million board feet compared to Q4’16, as the Company increased operating
schedules at several of the mills.
Canadian production totaled 219 million board feet in Q4’17, up 10 million board feet as
compared to Q4’16, primarily in the B.C. Interior where productivity was impacted by
winter-related issues in Q4’16.
Production from the Company’s U.S. Northwest operations totaled 140 million board feet in
Q4’17, representing an increase of 3 million board feet from Q4’16.
U.S. countervailing (“CV”) and anti-dumping (“AD”) duty deposits are levied on Interfor’s
shipments of softwood lumber from Canada into the U.S. Q4’17 charges of $1.9 million
represent an expense for AD duties, net of an adjustment of $4.2 million to correct the 2017
duty expense to the amended final CV and AD duty rates of 14.19% and 6.04%,
respectively. CV duties ceased in August, 2017, and did not resume again until December
28, 2017. AD duties were applicable throughout Q4’17 except for one day in December.
Depreciation of plant and equipment was $19.2 million, an increase of $0.7 million over
Q4’16, mostly as a result increased operating hours partially offset by the stronger average
Canadian Dollar. Depletion and amortization of timber, roads and other was $11.9 million,
up $4.1 million from Q4’16, as a result of increased conventional logging on the B.C. Coast
as compared to Q4’16 which was impacted by winter storms.
Management’s Discussion and Analysis
13
____________________
Corporate and Other
Selling and administration expenses were $14.0 million, up $4.4 million from Q4’16. The
fourth quarter, 2017, included an incremental accrual for short term incentive compensation
and certain IT project and improvement costs.
The $3.1 million long term incentive compensation expense mostly reflects the impact of a
6.8% increase in the market price for Interfor Common Shares during the quarter. The
Q4’16 long term incentive compensation expense of $0.2 million is due primarily to the
vesting of awards in the quarter.
Restructuring charges of $7.4 million in Q4’17 relate to impairment charges on operating
equipment to be replaced in conjunction with planned capital projects in the U.S. South in
2018. In Q4’16, the Company recorded $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.
Finance costs decreased to $3.1 million in Q4’17 from $4.1 million in the fourth quarter,
2016 as a result of a reduced average debt level.
Other foreign exchange gains of $0.4 million in Q4’17 and $1.1 million in Q4’16 resulted
primarily from unrealized gains on short-term intercompany funding.
Other income in Q4’17 decreased by $15.5 million as compared to 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 $8.0 million in Q4’17, comprised of $0.4
million of current income taxes and $7.6 million of deferred tax expense. Tax legislation
enacted in the U.S. at the end of 2017 substantially reduced the federal U.S. corporate tax
rate applicable to years after 2017. As a result, Interfor recorded deferred income tax
expense in respect of its U.S. operations at an income tax rate of 24% (2016 - 37.37%) in
Q4’17. Under pre-U.S. tax reform rates, the deferred income tax expense for Q4’17 would
have been $1.8 million higher. In addition, Interfor recorded a deferred income tax
recovery of $2.9 million in Q4’17 for the preceding three quarters previously recognized at a
higher rate.
Net Earnings
The Company recorded Net earnings of $36.2 million or $0.52 per share, compared to Net
earnings of $26.6 million or $0.38 per share in the comparable period, 2016. Adjusted net
earnings were $45.1 million or $0.64 per share compared with $17.7 million or $0.25 per
share in Q4’16.
Summary of 2017 Financial Performance
Sales
Interfor recorded $2.0 billion in total sales, up 11.0% from $1.8 billion in 2016, driven by
the sale of 2.7 billion board feet of lumber at an average price of $627 per mfbm. Lumber
sales volume increased 116 million board feet, or 4.5%, while average selling price
increased $57 per thousand board feet, or 10.1%, as compared to 2016.
Sales volume was up in 2017 as a result of returning to more normal shift schedules in the
U.S. South following temporary reductions taken for capital and business optimization
projects at several mills in 2016.
Management’s Discussion and Analysis
14
____________________
The increase in the average selling price of lumber reflects significantly higher prices across
all benchmark products in 2017 as compared to 2016. The Western SPF Composite
improved by US$95 to US$390 per mfbm, while the KD HF Stud 2x4 9’ benchmark and the
Southern Pine Composite improved US$56 to US$391 per mfbm and US$27 to US$409 per
mfbm, respectively. The positive impact of increased U.S. Dollar lumber prices was
somewhat reduced by the strengthening of the Canadian Dollar against the U.S. Dollar by
2.0% on average in 2017 as compared to 2016.
Sales generated from logs, residual products and other decreased by $23.7 million, or 7.1%
compared to 2016 due to reduced availability of surplus logs and lower chip prices in 2017.
Operations
Production costs increased by $82 million or 5.3% as compared to 2016, explained primarily
by the 4.5% increase in lumber sales volume and higher log costs on average at the
Company’s B.C. Interior and U.S. Northwest operations somewhat offset by a stronger
Canadian Dollar on average.
Lumber production of 2.6 billion board feet in 2017 was 105 million board feet higher than
in 2016.
Production from the Company’s nine U.S. South sawmills totaled 1.2 billion board feet in
2017, up 113 million board feet compared to 2016, as a result of returning to more normal
shift schedules in the U.S. South following temporary reductions taken for capital and
business optimization projects at several mills in 2016.
Canadian production totaled 875 million board feet in 2017, down 2 million board feet as
compared to 2016. Production from the Company’s U.S. Northwest operations totaled 564
million board feet in 2017, for a decline of 6 million board feet from 2016.
CV and AD duty deposits totalled $18.6 million in 2017, reflecting CV and AD amended final
duty rates of 14.19% and 6.04%, respectively, on Interfor’s shipments of softwood lumber
from Canada into the U.S. CV duties were in effect from April 28, 2017 through August, 26,
2017, and resumed again on December 28, 2017. AD duties were in effect from June 30,
2017 through December 26, 2017, and resumed again on December 28, 2017.
Depreciation of plant and equipment was $77.6 million, up 2.0% from 2016 due to
increased operating hours partially offset by the stronger average Canadian Dollar.
Depletion and amortization of timber, roads and other was $38.6 million, up 10.6% as
compared with 2016, as a result of increased conventional logging on the B.C. Coast as
compared to 2016.
Corporate and Other
Selling and administration expenses were $50.8 million, up $7.7 million from 2016. 2017
included an incremental accrual for short term incentive compensation, certain IT project
and improvement costs, and costs related to the softwood lumber dispute not reflected in
the 2016 comparative.
The $13.0 million long term incentive compensation expense in 2017 mainly reflects a
40.5% increase in the market price of Interfor Common Shares over the same period,
coupled with the impact of incentive awards maturing. The $4.6 million long term incentive
compensation expense in 2016 resulted from an increase of 7.6% in the market price of
Interfor Common Shares over the same period, coupled with the impact of incentive awards
maturing.
Management’s Discussion and Analysis
15
____________________
In 2017, the Company recognized restructuring charges of $9.2 million, related primarily to
the settlement of various human resource matters and a $7.0 million impairment charge on
operating equipment to be replaced in conjunction with planned capital projects in the U.S.
South in 2018. In 2016, Interfor recorded restructuring charges of $4.3 million for the
Tacoma site and $3.0 million related to a number of costs, the most significant of which was
a $1.2 million impairment charge on surplus equipment.
Finance costs decreased to $14.0 million from $18.6 million in 2016 as a result of lower
average levels of debt outstanding in 2017 as compared to 2016, together with the impact
of a stronger Canadian Dollar.
Other foreign exchange losses of $2.0 million in 2017 and gains of $1.5 million in 2016 are
comprised primarily of foreign exchange movements on short term intercompany funding.
Other expense of $2.0 million in 2017 is comprised of the disposal of surplus equipment.
Other income of $14.1 million in 2016 is comprised primarily of a gain on the sale of the
Tacoma sawmill property which completed on November 30, 2016.
Income Taxes
The Company recorded an income tax expense of $34.1 million in 2017, comprised of $1.1
million of current income taxes and $33.1 million in deferred income tax expense. Tax
legislation enacted in the U.S. at the end of 2017 substantially reduced the federal U.S.
corporate tax rate applicable to years after 2017. As a result, Interfor recorded deferred
income tax expense in respect of its U.S. operations at an income tax rate of 24% (2016 -
37.37%). Under pre-U.S. tax reform rates, the deferred income tax expense for 2017
would have been $4.7 million higher.
Net Earnings
The Company recorded Net earnings of $97.2 million or $1.39 per share, compared to Net
earnings of $65.6 million or $0.94 per share in 2016. Adjusted net earnings were $116.5
million or $1.66 per share in 2017 compared with Adjusted net earnings of $58.7 million or
$0.84 per share in 2016.
Management’s Discussion and Analysis
16
____________________
Summary of Quarterly Results(1)
Unit
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
2017
2016
Financial Performance(2)
Total sales
Lumber
Logs, residual products and other
Operating earnings
Net earnings
Net earnings per share, basic
Adjusted net earnings(3)
Adjusted net earnings per share,
basic(3)
Adjusted EBITDA(3)
Shares outstanding - end of period
$MM
$MM
$MM
$MM
$MM
$/share
$MM
$/share
$MM
million
Shares outstanding - weighted average million
Operating Performance
Lumber production
Total lumber sales
Lumber sales - Interfor produced
Lumber sales - wholesale and
commission
Lumber - average selling price(4)
Average USD/CAD exchange rate(5)
Closing USD/CAD exchange rate(5)
million fbm
million fbm
million fbm
million fbm
$/thousand
fbm
1 USD in
CAD
1 USD in
CAD
Notes:
532.8
489.2
511.4
456.8
442.3
457.6
458.8
433.9
446.0
410.2
433.7
389.6
363.5
374.8
371.1
348.9
86.8
47.9
36.2
0.52
45.1
79.0
28.3
16.8
0.24
20.0
77.7
42.7
24.5
0.35
28.7
67.2
30.4
19.7
0.28
22.7
78.8
22.3
26.6
0.38
17.7
82.8
20.1
15.1
0.22
20.7
87.7
30.0
23.2
0.33
17.5
85.0
3.5
0.8
0.01
2.7
0.64
0.29
0.41
0.32
0.25
0.30
0.25
0.04
89.5
70.0
70.0
60.5
70.0
70.0
77.4
70.0
70.0
60.3
70.0
70.0
51.3
70.0
70.0
58.1
70.0
70.0
56.9
70.0
70.0
33.4
70.0
70.0
655
686
666
20
645
671
650
21
655
675
654
21
640
645
624
21
607
619
598
21
628
647
627
20
637
658
634
24
618
637
609
28
650
611
642
604
588
580
564
548
1.2713 1.2528 1.3449 1.3238 1.3341 1.3050 1.2886 1.3732
1.2545 1.2480 1.2977 1.3322 1.3427 1.3117 1.3009 1.2971
(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 duties.
(5) Based on Bank of Canada foreign exchange rates.
The Company’s quarterly financial trends are most impacted by seasonality, levels of lumber
production, log costs, market prices for lumber and the USD/CAD foreign currency exchange
rate.
Logging operations are seasonal due to a number of factors including weather, ground
conditions and fire season closures. Generally, production from the Company’s B.C. Coastal
logging operations is relatively low in the second half of the fourth quarter and the first half
of the first quarter due to the impact of winter storms. Logging activity in the B.C. Interior
is typically reduced during the annual spring break-up. 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 lowest in the winter season due
to reduced construction and renovation activities.
Severe weather conditions impacted B.C. Coastal log production and lumber production at
certain sawmills in B.C. and the U.S. Northwest in Q4’16 and Q1’17 and in the U.S. South in
Q3’17. Countervailing and anti-dumping duties imposed on Canadian lumber shipments to
the U.S. affected results subsequent to Q1’17.
Management’s Discussion and Analysis
17
____________________
The volatility of the Canadian Dollar against the U.S. Dollar also impacted results. A
stronger Canadian Dollar decreases the lumber sales realizations of Canadian operations, all
else equal, and decreases net earnings of U.S. operations when translated to Canadian
Dollars.
Liquidity
Balance Sheet
Interfor strengthened its financial position throughout 2017, with strong cash flow
generated from operations used to repay debt and fund capital projects. Net debt at
December 31, 2017 was $119.3 million, or 12.3% of invested capital, representing a
decrease of $170.3 million from the level of net debt at December 31, 2016.
A strengthening of the Canadian Dollar against the U.S. Dollar by 6.6%, contributed $17.7
million to the net debt reduction in 2017 over 2016 as all debt held was denominated in
U.S. Dollars.
Thousands of Dollars
Net debt
Net debt, period opening, CAD
Net drawing (repayment) on credit facilities, CAD
Impact on U.S. Dollar denominated debt from (strengthening)
weakening CAD
For the three months ended
For the year ended
Dec. 31,
Dec. 31,
Sep. 30,
Dec. 31,
Dec. 31,
2017
2016
2017
2017
2016
$177,787 $346,929 $218,252 $289,551 $452,303
(1)
(66,178)
2
(40,217)
(143,882)
1,301
9,678
(9,942)
(17,704)
(16,056)
Increase in cash and cash equivalents, CAD
(59,787)
(878)
(30,525)
(112,330)
(2,814)
Net debt, period ending, CAD
$119,300
$289,551
$177,787
$119,300
$289,551
Net debt components by currency
U.S. Dollar debt, period opening, USD
Net repayment on credit facilities, USD
U.S. Dollar debt, period ending, USD
Spot rate, period end
U.S. Dollar debt expressed in CAD
Cash and cash equivalents, CAD
Net debt, period ending, CAD
$200,000 $274,709 $200,000 $230,000 $338,699
-
(44,709)
-
(30,000)
(108,699)
$200,000 $230,000 $200,000
200,000
230,000
1.2545
1.3427
250,900
308,821
(131,600)
(19,270)
$119,300
$289,551
As at December 31, 2017, the Company had net working capital of $257.1 million and
available liquidity of $443.8 million, including cash and borrowing capacity on operating and
term line facilities.
On May 12, 2017, the Company extended the maturity of its U.S. Operating Line from May 1,
2018 to May 1, 2019, with no other significant changes. On September 15, 2017, the
Company extended the maturity of its Operating Line and Revolving Term Line from May 19,
2019 to September 15, 2021 with an additional borrowing margin and stand-by fee tier,
reducing the cost for both drawn and undrawn amounts. There were no other significant
changes.
Management’s Discussion and Analysis
18
____________________
These resources, in addition to cash generated from operations, will be used to support
working capital requirements, debt servicing commitments and capital expenditures. We
believe that Interfor will have sufficient liquidity to fund operating and capital requirements
for the foreseeable future.
Cash Flow from Operating Activities
The Company generated $273.9 million of cash flow from operations before changes in
working capital in 2017, or a $81.3 million increase over 2016, driven by significant
improvements in lumber sales margins and volumes, and slightly offset by a strengthened
Canadian Dollar and countervailing and anti-dumping duties. In 2016, incremental cash
flow generated from increased sales margins coupled with the weaker Canadian Dollar and
elimination of export taxes were slightly offset by a reduction in sales volumes.
There was a net cash inflow from operations after changes in working capital of $258.2
million in 2017, with $15.7 million of cash used in operating working capital. In 2016,
$199.3 million of cash was generated from operations with $6.7 million of total cash
generated from operating working capital.
Cash Flow from Investing Activities
Investing activities totaled $91.1 million in 2017, net of $3.6 million in proceeds on the
disposal of property, plant and equipment and investments. Spending included $62.7
million for property, plant and equipment, timber licenses and other intangibles, and $32.2
million for development of roads. Discretionary mill improvements totalled $25.4 million in
2017, of which the majority was spent on U.S. South operations. Maintenance mill
improvements of $37.3 million in 2017 include a number of projects in the U.S. South, the
most significant of which was $5.0 million for completion of the kiln conversion project at
the Company’s Preston sawmill in Georgia.
In 2016, total investing activities of $36.2 million were 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
roads. Discretionary improvements of $17.8 million during 2016 included $7.6 million for
the finalization of the Castlegar sawmill rebuild. Maintenance mill improvements of $34.3
million during 2016 included $16.1 million for a kiln conversion project at the Company’s
Preston sawmill.
Cash Flow from Financing Activities
Net repayments under the Company’s credit facilities were $40.2 million, as the Company
utilized surplus cash generated from operations to reduce debt. Cash used for financing
activities totaled $53.3 million in 2017.
In 2016, net repayments on 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.
Management’s Discussion and Analysis
19
____________________
Summary of Contractual Obligations
The estimated cash payments due in respect of contractual and legal obligations as at
December 31, 2017, including major capital improvements are summarized as follows:
Payments due by Period
Up to
2-3
4-5
After 5
Thousands of Canadian Dollars
Total
1 Year
Years
Years
Years
Trade accounts payable and accrued liabilities
$141,013
$141,013
$ - $ - $ -
Income taxes payable
Reforestation liability
Long term debt
Provisions and other liabilities
Operating leases and capital commitments
224
224
-
-
-
42,550
12,873
13,112
7,580
8,985
307,317
10,469
20,937
101,078
174,833
44,278
96,927
11,226
50,097
8,041
2,140
20,459
11,630
22,871
14,741
Total obligations
$632,309
$225,902
$ 62,549
$122,428
$221,430
Capital Resources
The following table summarizes Interfor’s credit facilities and availability as of December 31,
2017:
Revolving
Senior
U.S.
Operating
Line
Term
Line
Secured Operating
Notes
Line
Total
$65,000
$200,000
$250,900
$62,725
$578,625
$65,000
$200,000
$250,900
$62,725
$578,625
Thousands of Canadian Dollars
Available line of credit
Maximum borrowing available
Less:
Drawings
Outstanding letters of credit included in line utilization
12,515
-
-
-
250,900
-
250,900
-
2,634
15,149
Unused portion of facility
$52,485
$200,000
$ -
$60,091
312,576
Add: Unrestricted cash and cash equivalents
Available liquidity at December 31, 2017
131,263
$443,839
As of December 31, 2017, the Company had commitments for capital expenditures totaling
$27.3 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,
2017.
Off-Balance Sheet Arrangements
The Company has off-balance sheet arrangements which include letters of credit and surety
performance and payment bonds, primarily for timber purchases. At December 31, 2017,
such instruments aggregated $41.0 million (December 31, 2016 - $45.7 million). Off-
balance sheet arrangements have not had, and are not reasonably likely to have, any
material impact on the Company’s current or future financial condition, results of operations
or cash flows.
Management’s Discussion and Analysis
20
____________________
Financial Instruments and Other Instruments
From time to time, the Company employs financial instruments, such as interest rate swaps
and foreign currency forward and option contracts, to manage exposure to fluctuations in
interest rates and foreign exchange rates. The Company also trades lumber futures from
time-to-time to manage price risk. The Company’s policy is not to use derivatives for
trading or speculative purposes. The risk management strategies and relationships are
formally documented and assessed on a regular, ongoing basis to ensure derivatives are
effective in offsetting changes in fair values or cash flows of hedged items.
The counter-parties for all derivative contracts except lumber futures are the Company’s
Canadian bankers who are highly-rated and, hence, the risk of credit loss on the
instruments is mitigated.
Lumber futures are traded through a well established financial services firm with a long
history of providing trading, exchange and clearing services for commodities and foreign
currencies. As trading activities are closely monitored by senior management and restricted
including a maximum number of outstanding contracts at any point in time, the risk of
credit loss on these instruments is considered low.
Interest Rate Swaps
As at December 31, 2017, Interfor had no floating rate debt on its credit facilities and
US$200,000,000 of fixed rate debt through the Senior Secured Notes.
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. The Company’s Senior
Secured Notes consist of Series A and Series B Senior Secured Notes (each US$50,000,000
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%).
In order to convert floating-rate interest expense to fixed-rate interest expense, the
Company held two interest rate swaps, each with a notional value of US$25,000,000, at
December 31, 2016. Both interest rate swaps matured on February 27, 2017, and were not
replaced.
Based on the Company’s average debt level during 2017, 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
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, 2017, the Company had no outstanding foreign currency exchange
contract obligations (2016 – nil).
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
Management’s Discussion and Analysis
21
____________________
losses arising from hedges of those net investment positions, to the extent effective, are
credited or charged to net change in unrealized foreign currency translation gains (losses) in
the Consolidated Statement of Comprehensive Income. Upon sale, reduction or substantial
liquidation of an investment position, the previously recorded net unrealized gains (losses)
thereon in the Translation reserve are reclassified to the Consolidated Statement of
Earnings.
As at December 31, 2017, the Company had designated the 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 $28.9 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 2017 (2016 - $7.9 million loss).
Lumber Futures
To manage price risk, the Company also traded lumber futures which were designated as
held for trading with changes in fair value recorded to Sales in Net earnings. At December
31, 2017, the Company recognized a gain of $254,000 (2016 - $nil) in Sales in respect of
lumber futures contracts and $6,000 (2016 - $nil) in Trade accounts payable and other in
respect of the fair value of outstanding contracts measured based on Level 2 of the fair
value hierarchy.
Outstanding Shares
As of December 31, 2017, 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, 2017.
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, 2017.
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, 2017,
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.
Management’s Discussion and Analysis
22
____________________
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 for 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.
Recoverability of Property, Plant and Equipment, Roads and Bridges, Timber licences, Other
Intangible Assets, and Goodwill. Interfor’s assessment of recoverability of property, plant
and equipment, 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 countervailing duty
and anti-dumping duty rates, 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 rates applied within the
cash flow projections represent the published Bank of Canada consumer price index and the
published Bureau of Labor Statistics consumer price index.
Interfor assesses the recoverability of Property, Plant and Equipment, 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, 2017 and concluded
that there was no impairment.
Management’s Discussion and Analysis
23
____________________
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
material 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 material charge against
operating earnings. Each of these estimates is reviewed regularly on an ongoing basis.
Pension and Other Post-retirement Benefits. The Company sponsors two defined benefit
pension plans for those hourly employees not covered by forest industry union plans. 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, assumed
rates of increase for employee compensation and health care costs, and mortality rates.
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
Management’s Discussion and Analysis
24
____________________
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
The Company adopted the disclosure requirements in Disclosure Initiative (Amendments to
IAS 7), which came into effect on January 1, 2017. Consequently, the Company has
provided additional disclosure in its financial statements in relation to the changes in
borrowings arising from financing activities for the three months and year ended December
31, 2017.
A number of new standards, and amendments to existing standards and interpretations,
were not yet effective for the year ended December 31, 2017, and have not been applied in
preparing the Company’s consolidated financial statements. The following pronouncements
are considered by the Company to be the most significant of several pronouncements that
may affect future 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.
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.
Neither IFRS 9, nor IFRS 15 will have a significant impact on the Company’s 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, which will be
depreciated. Lease expense, which is currently recorded as a Production cost in the
Statement of earnings, will be replaced by Depreciation and Finance costs. 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,
Adjusted net earnings per share, EBITDA, Adjusted EBITDA, Net debt to invested capital
and Operating cash flow per share (before working capital changes) 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.
Management’s Discussion and Analysis
25
____________________
The following table provides a reconciliation of these non-GAAP measures to figures as
reported in the Company’s audited consolidated financial statements (unaudited for interim
periods) prepared in accordance with IFRS:
Thousands of Canadian Dollars except number
of shares and per share amounts
Adjusted Net Earnings (Loss)
Net earnings (loss)
Add:
Restructuring (recovery) costs and capital
asset write-downs
Other foreign exchange loss (gain)
Long term incentive compensation expense
(recovery)
Other (income) expense
Post closure wind-down costs and losses
(recoveries)
Income tax effect of above adjustments
Recognition of previously unrecognized
deferred tax assets
Adjusted net earnings (loss)
Weighted average number of shares - basic
('000)
Adjusted net earnings (loss) per share
Adjusted EBITDA
Net earnings (loss)
Add:
Depreciation of plant and equipment
Depletion and amortization of timber, roads
and other
Restructuring (recovery) costs and capital
asset write-downs
Finance costs
Other foreign exchange loss (gain)
Income tax expense (recovery)
EBITDA
Add:
Long term incentive compensation expense
(recovery)
Other (income) expense
Post closure wind-down costs and losses
(recoveries)
Adjusted EBITDA
Net debt to invested capital
Net debt
Total debt
Cash and cash equivalents
Total net debt
Invested capital
Net debt
Shareholders' equity
Total invested capital
Net debt to invested capital(1)
For the three months ended
Sep. 30,
2017
Dec. 31,
2016
Dec. 31,
2017
For the year ended Dec. 31,
2015
2016
2017
$36,196
$26,550
$16,778
$97,153
$65,643
$(30,386)
7,422
(412)
2,281
(1,072)
3,110
995
199
(14,452)
(21)
1,353
3,004
347
9,203
2,035
7,280
(1,468)
12,829
1,651
12,977
1,987
4,551
(14,094)
(5,431)
(757)
5
(2,260)
115
4,895
(39)
(1,456)
(21)
(6,848)
909
2,008
11,374
(9,311)
-
$45,056
(769)
$17,747
-
$19,966
-
$116,486
(6,171)
$58,658
1,136
$(18,895)
70,030
$0.64
70,030
$0.25
70,030
$0.29
70,030
$1.66
70,030
$0.84
69,488
$(0.27)
$36,196
$26,550
$16,778
$97,153
$65,643
$(30,386)
19,217
18,534
18,836
77,623
76,092
71,492
11,879
7,833
10,435
38,635
34,895
37,478
7,422
3,139
(412)
7,968
85,409
2,281
4,074
(1,072)
7,236
65,436
(21)
3,294
1,353
6,559
57,234
9,203
14,030
2,035
34,136
272,815
7,280
18,602
(1,468)
7,207
208,251
12,829
17,569
1,651
(24,017)
86,616
3,110
995
199
(14,452)
3,004
347
12,977
1,987
4,551
(14,094)
(5,431)
(757)
5
$89,519
115
$51,298
(39)
$60,546
(21)
$287,758
909
$199,617
11,291
$91,719
$250,900
(131,600)
$119,300
$308,821
(19,270)
$289,551
$249,600
(71,813)
$177,787
$250,900
(131,600)
$119,300
$308,821
(19,270)
$289,551
$468,759
(16,456)
$452,303
$119,300
854,188
$289,551
786,667
$973,488 $1,076,218
26.9%
12.3%
$177,787
817,676
$995,463
17.9%
$119,300
854,188
$452,303
725,254
$973,488 $1,076,218 $1,177,557
38.4%
$289,551
786,667
12.3%
26.9%
Operating cash flow per share (before working capital changes)
Cash provided by operating activities
Cash used in (generated from) operating
$86,749
$48,981
$60,977
$258,224
$199,272
$101,377
working capital
(3,332)
1,399
(3,474)
15,696
(6,695)
(34,531)
Operating cash flow (before working capital
changes)
$83,417
$50,380
$57,503
$273,920
$192,577
$66,846
Weighted average number of shares - basic
('000)
70,030
70,030
70,030
70,030
70,030
69,488
Operating cash flow per share (before
working capital changes)
$1.19
$0.72
$0.82
$3.91
$2.75
$0.96
Notes:
(1) Net debt to invested capital as of the period end.
Management’s Discussion and Analysis
26
____________________
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), duty
rates, 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 duties 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. As a result, fluctuations in the price, quality or
availability of log supply can have a material effect on the Company’s business, financial
position, results of operations and cash flow. In addition, weather-related issues can
restrict timely access to log supply.
The Company relies on third-party independent contractors to harvest timber in areas over
which it holds timber tenures. Increases in rates charged by these independent contractors
or the limited availability of these independent contractors may increase the Company’s
timber harvesting costs.
Management’s Discussion and Analysis
27
____________________
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 also relies on third-party independent contractors to construct roads 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.
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
28
____________________
Allowable Annual Cut (“AAC”)
The Company holds cutting rights in B.C. that represent an AAC of approximately of 3.46
million cubic metres. Of this amount, 3.41 million cubic metres is in the form of replaceable
tenures (4 Tree Farm Licences and 27 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, such as timber inventory,
operable land base, growth rates, regulations, forest health, land use and environmental
and social considerations.
In 2017, the B.C. Government formally set aside some additional area for conservation
purposes in the Great Bear Rainforest Forest Management Area that affected some of the
Company’s Timber Licences, triggering a claim for compensation in accordance with the
Forest Act. The Company and the Government have not agreed to a fair market value at
this time. In late 2017, the Company initiated arbitration proceedings, but is currently still
in active negotiations with the Government.
Regulatory changes made to meet new Ecosystem Based Management (“EBM”)
requirements in the Central Coast of B.C. have also impacted the Company’s timber supply,
and these are not compensable. The AAC impact represents 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, though a material impact on our internal supply
is not expected.
Indigenous Peoples
Indigenous peoples have claimed 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 Indigenous peoples throughout B.C. in order to
resolve their rights and title claims. In addition, the governments have entered, and may
continue to enter, into interim measure (reconciliation) agreements with Indigenous
peoples. 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 Indigenous peoples
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 Indigenous
peoples and, where appropriate, accommodate their 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 Indigenous
peoples prior to treaty settlement. The Province of B.C. and some Indigenous peoples 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
29
____________________
Softwood Lumber Trade
The Company’s financial results are dependent upon continued access to the U.S. market
for approximately 15% of the Company’s total lumber production that is 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.
In October, 2016, the U.S. industry made a request to the U.S. Government to take trade
action involving in the imposition of U.S. protective measures such as countervailing (“CV”)
and anti-dumping (“AD”) duties leveled against Canadian softwood lumber producers.
In Q2’17, the U.S. Department of Commerce (“DoC”) made preliminary duty rate
determinations of 19.88% and 6.87% for CV and AD duties, respectively, for a combined
total 26.75% applicable to Interfor. In Q4’17, the DoC made a final determination on duties
that lowered the combined rate to 20.83%, which it subsequently amended to 20.23%. The
U.S. International Trade Commission ruling that the U.S. industry was materially injured by
Canada’s trade practices has set the stage for ongoing litigation. The Government of
Canada has indicated it will appeal the U.S. findings and defend itself vigorously against all
claims of unfair trade practices made by the U.S. As in previous trade cases, the softwood
lumber dispute may take years to resolve through the legal process, and remains open to a
negotiated settlement at any time.
In 2017, Interfor paid $22.8 million to the U.S. in duties, which includes $4.2 million paid in
excess of the amended final rates, which Interfor is seeking to recover following a
successful appeal or through settlement. It is unclear at this time when any duty amounts
paid will be recovered or if amounts in excess of the amended final rates will be refunded.
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 future changes will not have a material impact on stumpage rates.
Environment
The Company has incurred, and will continue to incur, costs to minimize environmental
impact, prevent pollution and for continuous improvement of its environmental
performance. The Company may discover currently unknown environmental problems or
conditions relating to its past or present operations, or it may be faced with an unforeseen
environmental liability in the future. This may require site or other remediation costs to
maintain compliance or correct violations of environmental laws and regulations or result in
governmental or private claims for damage to person, property or the environment, which
could have a material adverse effect on the Company’s financial condition and results of
operations.
Management’s Discussion and Analysis
30
____________________
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 14, 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.
Information Systems Security
The Company’s operations and administration are dependent on both internal and third-
party information technology (“IT”) systems. The impact of a cyber-security breach or the
non-availability of a key Company IT system could be significant, including but not limited
to operational delays, financial loss, reputational damage or unauthorized access to
confidential or sensitive information. The Company’s Audit Committee, in conjunction with
management, is responsible for reviewing cyber-security risks and ensuring that an effective
risk management strategy is in place. The Company has implemented controls, processes
and practices to reduce its risk of a cyber-security breach and the impact on business
continuity. These include staying updated on the latest threats, threat agents and attack
vectors, the use of firewall and monitoring software as well as regular system back-up
protocols. However, the nature of cyber threats continues to evolve and the Company’s
exposure to this risk cannot be fully mitigated.
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.
31
INTERFOR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the integrity and fair presentation of the accompanying
consolidated financial statements. The consolidated 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 2017 Annual Report is consistent with that disclosed in the
consolidated financial statements.
Management maintains a system of internal accounting controls 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 8, 2018
32
KPMG LLP
PO Box 10426, 777 Dunsmuir Street
Vancouver, BC V7Y 1K3
Canada
Telephone (604) 691-3000
Fax (604) 691-3031
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Interfor Corporation,
We have audited the accompanying consolidated financial statements of Interfor
Corporation, which comprise the consolidated statements of financial position as at
December 31, 2017 and 2016, the consolidated statements of earnings, comprehensive
income, changes in equity and cash flows for the years then ended, and notes, comprising a
summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with International Financial Reporting Standards, and for
such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to
fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based
on our audits. We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on
our judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the entity’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.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG
International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.
33
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, 2017 and
2016, and its consolidated financial performance and its consolidated cash flows for the years
then ended in accordance with International Financial Reporting Standards.
KPMG LLP (signed)
Chartered Professional Accountants
February 8, 2018
Vancouver, Canada
34
Interfor Corporation
Consolidated Statements of Financial Position
(Expressed in thousands of Canadian Dollars)
As at December 31, 2017 and 2016
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable and other
Income tax receivable
Inventories
Prepayments and other
Investments and other assets
Employee future benefits
Investments and other assets
Property, plant and equipment
Roads and bridges
Timber licences
Other intangible assets
Goodwill
Deferred income taxes
Note
December 31
2017
December 31
2016
8
17
4
5
20(d)
5
6
7
7
7
7
17
$ 131,600
112,470
1,289
165,156
12,562
-
423,077
502
6,404
670,830
24,092
66,589
14,170
147,081
251
$
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
$1,352,996
$ 1,301,648
Liabilities and Shareholders' Equity
Current liabilities:
Trade accounts payable and provisions
Reforestation liability
Income taxes payable
9, 20(c), 20(d)
10
17
Reforestation liability
Long term debt
Employee future benefits
Provisions and other liabilities
Deferred income taxes
Equity:
Share capital
Contributed surplus
Translation reserve
Hedge reserve
Retained earnings
10
8
20(c), 20(d)
9
17
11
$ 152,854
12,873
224
165,951
27,535
250,900
8,249
26,976
19,197
$ 138,029
11,609
317
149,955
25,931
308,821
8,136
21,290
848
555,388
8,582
40,720
-
249,498
854,188
555,388
7,999
69,574
11
153,695
786,667
$ 1,352,996
$ 1,301,648
Commitments and contingencies (note 18).
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board of Directors:
“L. Sauder”, Director
“D.W.G. Whitehead”, Director
35
Interfor Corporation
Consolidated Statements of Earnings
(Expressed in thousands of Canadian Dollars, except earnings per share)
Years ended December 31, 2017 and 2016
Sales
Costs and expenses:
Note
2017
2016
$1,990,106
$1,792,712
Production
Selling and administration
9
Long term incentive compensation
5, 18
U.S. countervailing and anti-dumping duty deposits
Depreciation of plant and equipment
6, 12
Depletion and amortization of timber, roads and other 7, 12
Operating earnings before restructuring costs
Restructuring costs
Operating earnings
Finance costs
Other foreign exchange gain (loss)
Other income (expense)
Earnings before income taxes
Income tax expense:
Current
Deferred
16
14
15
17
1,632,922
50,775
12,977
18,630
77,623
38,635
1,831,562
158,544
(9,203)
149,341
(14,030)
(2,035)
(1,987)
(18,052)
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)
131,289
72,850
1,064
33,072
34,136
853
6,354
7,207
Net earnings
$ 97,153
$ 65,643
Net earnings per share, basic and diluted
19
$
1.39
$
0.94
See accompanying notes to consolidated financial statements.
36
Interfor Corporation
Consolidated Statements of Comprehensive Income
(Expressed in thousands of Canadian Dollars)
Years ended December 31, 2017 and 2016
Note
2017
2016
Net earnings
$ 97,153
$ 65,643
Other comprehensive income (loss):
Items that will not be recycled to Net earnings:
Defined benefit plan actuarial gains (losses), net of tax 17, 20
(1,350)
1,509
Items that are or may be recycled to Net earnings:
Foreign currency translation differences for
foreign operations, net of tax
Loss in fair value of interest rate swaps
14, 24
Total items that are or may be recycled to Net earnings
Total other comprehensive loss, net of tax
(28,854)
(11)
(28,865)
(30,215)
(7,851)
(51)
(7,902)
(6,393)
Comprehensive income
$ 66,938
$ 59,250
See accompanying notes to consolidated financial statements.
Interfor Corporation
Consolidated Statements of Changes in Equity
(Expressed in thousands of Canadian Dollars)
Years ended December 31, 2017 and 2016
37
Balance at December 31, 2015
$ 553,559 $
7,665 $ 77,425 $
62 $ 86,543 $ 725,254
Note
Common Contributed
Surplus
Shares
Translation
Reserve
Hedge
Reserve
Retained
Earnings
Total
Equity
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
20(d)
24(b)
-
-
-
-
-
-
-
-
(7,851)
-
-
Contributions:
Deferred income tax on share issues costs
Stock options
11(a)
11(b)
1,829
-
-
334
-
-
-
-
65,643
65,643
-
-
(51)
-
-
-
1,509
-
(7,851)
1,509
(51)
-
-
1,829
334
Balance at December 31, 2016
555,388
7,999
69,574
11
153,695
786,667
Net earnings:
Other comprehensive 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:
Stock options
20(d)
24(b)
11(b)
-
-
-
-
-
-
-
-
-
-
-
97,153
97,153
(28,854)
-
-
-
-
(11)
-
(1,350)
-
(28,854)
(1,350)
(11)
583
-
-
-
583
Balance at December 31, 2017
$ 555,388 $
8,582 $ 40,720 $
- $ 249,498
$ 854,188
See accompanying notes to consolidated financial statements.
38
Interfor Corporation
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian Dollars)
Years ended December 31, 2017 and 2016
Cash provided by (used in):
Operating activities:
Net earnings
Items not involving cash:
Note
2017
2016
$ 97,153
$ 65,643
Depreciation of plant and equipment
Depletion and amortization of timber, roads and other
Income tax expense
Finance costs
Other assets
Reforestation liability
Other liabilities and provisions
Stock options
Write-down of property, plant and equipment
and intangibles
Unrealized foreign exchange losses and other
Other expense (income)
6
7
17
14
10
11(b)
6, 16
15
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 roads and bridges
Additions to timber and other intangible assets
Proceeds on disposal of property, plant and equipment
Proceeds on disposal of investments
Investments and other assets
6
7
7
15
15
77,623
38,635
34,136
14,030
(4,203)
1,109
5,629
583
7,091
147
1,987
273,920
(19,845)
(14,243)
919
19,688
(2,215)
258,224
(60,370)
(32,211)
(2,360)
561
3,077
202
(91,101)
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)
Financing activities:
Interest payments
Debt refinancing costs
Change in operating line components of long term debt
Additions to long term debt
Repayments of long term debt
Foreign exchange gain (loss) on cash and cash equivalents held
in a foreign currency
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to consolidated financial statements.
(12,240)
(807)
(64)
76,107
(116,260)
(53,264)
8
8
8
(1,529)
112,330
19,270
$ 131,600
(17,174)
(1,112)
(11,663)
56,974
(189,193)
(162,168)
1,961
2,814
16,456
$ 19,270
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
39
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, 2017 and 2016 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 8, 2018.
(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, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
40
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 and judgements that have the
most significant effect on the amounts recognized in the consolidated financial
statements is included in the following notes:
Note 3(e)
Inventories
Note 3(i)
Impairment of non-financial assets
Note 3(j)
Reforestation and other decommissioning provisions
Note 3(m)
Cash-settled share based compensation
Note 3(n)
Equity-settled share based compensation
Note 7
Roads and bridges, timber tenures, other intangible assets and
goodwill
Note 10
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, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
41
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, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
42
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.
From time to time, the Company also trades lumber futures in managing price
risk and which are designated as held for trading with changes in fair value being
recorded in Other income (expense) in Net earnings. Trading activities are
closely monitored and restricted including a maximum number of outstanding
contracts at any point in time.
The risk management strategies and relationships are formally documented and
assessed on a regular, on-going basis.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
43
3. Significant accounting policies (continued):
(c) Financial instruments (continued):
(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.
(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) Property, plant and equipment:
Property, plant and equipment are recorded at cost less accumulated depreciation
and impairment losses. Depreciation on machinery and equipment is provided on
the basis of hours operated relative to the asset’s lifetime estimated operating hours.
Depreciation on all other assets is provided on a straight-line basis (ranging from
2.5% to 33% per year) over the estimated useful lives of the assets.
Depreciation methods, useful lives and residual values are reviewed annually and
adjusted, if appropriate.
Maintenance costs are recorded as expenses as incurred, with the exception of
programs that extend the useful life of an asset or increase its value, 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
44
3. Significant accounting policies (continued):
(g) Logging roads and bridges:
Logging roads and bridges are recorded at cost less accumulated amortization and
impairment losses. Road and bridge amortization is computed on the basis of timber
cut relative to available timber.
Amortization methods, useful lives and residual values are reviewed annually and
adjusted, if appropriate.
(h) Intangible assets:
(i) Timber licences:
Timber licences are recorded at cost less accumulated depletion and impairment
losses. Timber licence depletion is computed on the basis of timber cut relative
to available timber. Tree farm and forest licences are depleted on a straight-line
basis over 40 years. Amortization rates are reviewed annually to ensure they are
aligned with estimates of remaining economic useful lives of the associated
intangible assets.
(ii) Goodwill:
Goodwill is measured at cost less accumulated impairment losses. See note 3(a)
for the policy on measurement of goodwill at initial recognition.
(iii) Other intangible assets:
Other intangible assets are recorded at cost less accumulated amortization and
impairment losses. Amortization on other intangible assets is provided on a
straight-line basis ranging from five to ten years, being the estimated useful lives
of the assets. Amortization rates are reviewed annually to ensure they are
aligned with estimates of remaining economic useful lives of the associated
intangible assets.
(i) Impairment of non-financial assets:
The Company’s non-financial assets are reviewed for impairment whenever events or
circumstances indicate that the carrying amount may not be recoverable.
Impairment tests are carried out annually for goodwill 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.
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
45
3. Significant accounting policies (continued):
(i) Impairment of non-financial assets (continued):
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 (a cash generating unit or
“CGU”). Goodwill is allocated to a CGU or group 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.
(j) Reforestation and other decommissioning provisions:
Forestry legislation in British Columbia requires the Company to incur the cost of
reforestation on its forest, timber and tree farm licences and to deactivate logging
roads once harvesting is complete and access is no longer required. Accordingly, the
Company records the fair value of the costs of reforestation and road deactivation in
the period in which the timber is cut, with the fair value of the liability determined
with reference to the present value of estimated future cash flows.
Provisions are measured at the expected value of future cash flows, discounted to
their present value and determined according to the probability of alternative
estimates of cash flows occurring for each operation. The measurement under IAS
37, Provisions, Contingent Liabilities and Contingent Assets, is based on best
estimates and can be based on internal or external costs, depending upon which is
most likely. Significant judgements and estimates are involved in forming
expectations of future activities and the amount and timing of the associated cash
flows. Those expectations are formed based on existing regulatory requirements and
the expertise of Registered Professional Foresters and Engineers employed or
contracted by the Company. Examples of considerations include the specifics of the
areas logged and the treatments prescribed for those areas, as well as the timing
and success rates of the planned activities in terms of reforestation; and road
structure and terrain for road deactivation.
Cash flows reflect the risks specific to the decommissioning provision. As such, the
discount rate reflects the current risk-free rate given that risks are incorporated into
the future cash flow estimates. 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.
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
46
3. Significant accounting policies (continued):
(k) Environmental costs:
Environmental expenditures are expensed or capitalized depending upon their future
economic benefit. Expenditures to prevent future environmental contamination are
capitalized as plant and equipment. Expenditures that relate to an existing condition
caused by past operations are expensed. Liabilities are recorded when rehabilitation
efforts are likely to 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.
(l) Employee benefits:
Defined benefit pension and other post-retirement benefit obligation accruals are
estimated using actuarial methods and assumptions, including management’s best
estimates of the discount rate, 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 arising 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.
(m) Cash-settled share based compensation:
The Company has a Share Appreciation Rights (“SAR”) Plan, a Deferred Share Unit
(“DSU”) Plan and a Total Shareholder Return (“TSR”) Plan for directors, officers and
certain other eligible employees. The Company uses the fair value method of
accounting for obligations under the SAR, DSU and TSR Plans.
Compensation expense is recorded for SARs over the vesting period based on the
estimated fair value of the SARs at the date of grant. Fair value is measured using a
Black-Scholes option pricing model and is adjusted to reflect the number of SARs
expected to vest.
Compensation expense is recorded for DSUs either at the time of the grant, in the
case of DSUs which vest immediately, or over the performance period, in the case of
DSUs with deferred vesting, based on the fair value at the date of the grant.
Compensation expense is recorded for TSRs over the performance period based on
the estimated fair value of the TSRs at the date of the grant. Fair value is measured
using a combination of call options which are valued using a Black-Scholes pricing
model.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
47
3. Significant accounting policies (continued):
(m) Cash-settled share based compensation (continued):
The fair value of the SARs, DSUs and TSRs are subsequently measured at each
reporting date with any changes in fair value reflected as Long term incentive
compensation in Net earnings. Liabilities are recorded in Trade accounts payable
and provisions and Provisions and other liabilities on the Statements of Financial
Position.
(n) 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 Long term incentive
compensation, 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 when an option is
exercised is credited to share capital, as is the previously calculated fair value
included in contributed surplus.
(o) Sales revenue:
The Company recognizes sales when the significant risks and rewards of ownership
have been transferred to the buyer, recovery of the consideration is probable, the
associated costs can be reliably estimated, there is no continuing management
involvement, and the amounts of revenue can be measured reliably. Revenue is
measured at the fair value of the consideration received or receivable net of
applicable sales taxes, returns, rebates and discounts and after eliminating sales
within the Company.
Sales are recorded on a gross basis and include amounts charged to customers for
freight, wharfage and handling costs. Actual costs of freight, wharfage and handling
and duties are recorded to Production cost and U.S. countervailing and anti-dumping
duty deposits, respectively, in Net earnings.
(p) Finance income and costs:
Finance income comprises net interest income on funds invested.
Finance costs comprise net interest expense on borrowings, the unwinding of the
discount on decommissioning provisions, net interest on defined benefit plans, the
amortization of prepaid finance costs and other related transaction costs.
(q) 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, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
48
3. Significant accounting policies (continued):
(q) 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.
(r) 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.
(s) New standards and interpretations not yet adopted:
A number of new standards, and amendments to standards and interpretations, are
not yet effective for the year ended December 31, 2017, 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.
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
49
3. Significant accounting policies (continued):
(s) New standards and interpretations not yet adopted (continued):
Neither IFRS 9 nor IFRS 15, will have a significant impact on the Company’s 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,
which will be depreciated. Lease expense, which is currently recorded as a
Production cost in the Statement of earnings, will be replaced by Depreciation and
Finance costs. 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.
(t) Change in accounting policy:
The Company has adopted the disclosure requirements in Disclosure Initiative
(Amendments to IAS 7), which came into effect on January 1, 2017. Consequently,
the Company has provided additional disclosure in relation to the changes in
borrowings arising from financing activities for the year ended December 31, 2017
(see note 8).
4. Inventories:
Lumber
Logs
Other
2017
2016
$
82,850
67,815
14,491
$
80,726
58,739
15,070
$
165,156
$
154,535
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, 2017, was $9,292,000 (2016 - $7,922,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
50
5. Investments and other assets:
Note
Countervailing and anti-dumping duty receivable
18(c)
Deferred financing fees, net of accumulated amortization
Timber deposits and other
Investments designated as fair value through profit and loss
Current
Long term
2017
3,769
2,094
541
-
6,404
-
6,404
$
$
$
$
$
$
2016
-
2,078
263
2,911
5,252
2,911
2,341
$
6,404
$
5,252
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
51
6. Property, plant, and equipment
Cost
Note
Land
Buildings
Machinery and
Equipment
Mobile
Equipment
Computer
Equipment Improvements
Site
Other
Projects in
Process
Total
$
51,950 $ 131,131 $ 860,612 $
Balance at December 31, 2015
Additions
Disposals
Transfers
Transfers to other intangibles
Exchange rate movements
Balance at December 31, 2016
-
-
Additions
(248)
(17)
Disposals
1,795
-
Transfers
-
Transfers to other intangibles
-
-
Impairment 16 (234)
(1,234)
Exchange rate movements
(4,514)
49,823 $ 130,683 $ 877,081 $
Balance at December 31, 2017
(2)
(2,396)
19,368
-
(16,039)
861,543
-
(150)
4,771
-
(2,102)
133,650
-
(64)
-
-
(578)
51,308
-
(3,852)
56,339
-
-
(36,949)
7
7
$
32,005 $
-
(740)
351
-
(414)
31,202
-
(1,427)
944
-
-
(802)
29,917 $
Mobile
Equipment
41,561 $
133
(860)
3,505
-
(626)
43,713
-
(523)
6,762
-
-
(1,913)
48,039 $
69,732 $
-
-
1,706
-
(1,000)
70,438
-
(43)
2,485
-
-
(2,341)
70,539 $
Site
Accumulated Depreciation
Balance at December 31, 2015
Depreciation
Disposals
Transfers
Impairment
Exchange rate movements
Balance at December 31, 2016
Depreciation
Disposals
Transfers
Impairment
Exchange rate movements
Balance at December 31, 2017
Net book value at
December 31, 2016
December 31, 2017
16
16
Buildings
Machinery and
Equipment
Computer
Equipment Improvements
$
43,689 $ 318,152 $
6,796
(86)
-
-
(463)
49,936
7,003
(135)
-
26
(1,460)
55,370 $ 414,157 $
53,527
(1,564)
(27)
1,155
(4,390)
366,853
56,254
(1,598)
-
6,713
(14,065)
$
18,111 $
3,276
(596)
-
-
(162)
20,629
2,856
(1,298)
-
-
(511)
21,676 $
23,639 $
6,072
(677)
27
-
(344)
28,717
6,136
(523)
-
84
(1,228)
33,186 $
33,647 $
5,003
-
-
-
(329)
38,321
4,061
(43)
-
-
(1,062)
41,277 $
13,958 $
23
(304)
23
-
(139)
13,561
154
(1,562)
532
-
-
(273)
12,412 $
18,386 $ 1,219,335
49,296
49,142
(4,614)
(100)
-
(29,724)
(1,637)
(1,637)
(21,334)
(436)
35,631 1,241,046
59,788
59,634
(7,672)
-
-
(551)
- (234)
(2,161)
(50,187)
23,696 $ 1,242,190
(68,857)
(551)
Other
4,507
1,418
(284)
-
-
(32)
5,609
1,313
(1,111)
-
-
(117)
5,694
Total
$ 441,745
76,092
(3,207)
-
1,155
(5,720)
510,065
77,623
(4,708)
-
6,823
(18,443)
$ 571,360
There were no borrowing costs capitalized in 2017 or 2016. Additions in 2017 include $2,330,000 of accrued contract costs (2016 - $2,912,000)
$
51,308 $
49,823
83,714 $ 494,690 $
75,313
462,924
10,573 $
8,241
14,996 $
14,853
32,117 $
29,262
7,952 $
6,718
35,631 $ 730,981
670,830
23,696
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
52
7. Roads and bridges, timber tenures, other intangible assets and goodwill:
Cost
Roads and
Bridges
Timber
Licences
Other
Intangibles
Balance at December 31, 2015
Additions
Transfers
Disposals
Exchange rate movements
Balance at December 31, 2016
Additions
Transfers
Disposals
Exchange rate movements
$
95,042 $
24,631
-
(824)
(69)
118,780
32,211
-
(2,292)
10
118,434 $
195
-
-
-
118,629
267
-
-
-
40,269 $
1,487
1,637
(18)
(916)
42,459
2,093
551
(10)
(1,954)
Goodwill
161,791
-
-
-
(4,412)
157,379
-
-
-
(9,421)
Balance at December 31, 2017
$
148,709 $
118,896 $
43,139 $
147,958
Accumulated amortization
Roads and
Bridges
Timber
Licences
Other
Intangibles
Goodwill
$
Balance at December 31, 2015
Amortization
Disposals
Exchange rate movements
Balance at December 31, 2016
Amortization
Disposals
Impairment
Exchange rate movements
74,431 $
24,478
(824)
(44)
98,041
28,846
(2,292)
-
22
46,005 $
16,668 $
3,351
-
-
49,356
2,951
-
-
-
7,066
(6)
(286)
23,442
6,838
(5)
34
(1,340)
877
-
-
-
877
-
-
-
Balance at December 31, 2017
$
124,617 $
52,307 $
28,969 $
877
Net book value at
December 31, 2016
December 31, 2017
$
20,739 $
24,092
69,273 $
66,589
19,017 $
14,170
156,502
147,081
For the purpose of impairment testing, goodwill components of $13,078,000 and
$134,003,000 are attributable to the Coastal Whitewood cash-generating unit (“CWW
CGU”) and the U.S. South cash-generating unit (“S CGU”), 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 2016 and 2017. 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 S CGU as at December 31,
2017, and December 31, 2016 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, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
53
7. 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,
duty rates and the future capital required to maintain the assets in their current
operating condition.
A post-tax discount rate of 10.5 percent (2016 – 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
targeted capital structure. Inflation rates of 1.6 percent (2016 – 1.3 percent) and 2.2
percent (2016 – 1.3 percent) for Canadian and U.S. CGU’s, respectively, were 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.
8. Cash and borrowings:
2017
Available line of credit
Maximum borrowing available
Drawings
Outstanding letters of credit
included in line utilization
2016
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 $ 250,900 $ 62,725 $ 578,625
62,725 578,625
- 250,900
65,000 200,000 250,900
- 250,900
-
Unused portion of line
$ 52,485 $ 200,000 $
12,515
-
2,634
-
15,149
- $ 60,091 $ 312,576
$ 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
Minimum principal amounts due on long term debt are follows:
2018
2019
2020
2021
2022
Thereafter
$
-
-
-
41,816
41,816
167,268
$ 250,900
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
54
8. Cash and borrowings (continued):
Reconciliation of movements in borrowings to cash flows arising from financing
activities:
Drawings at January 1
Operating line net repayments
Additions to long term debt
Repayments of long term debt
Effects of changes in foreign exchange rates
2017
2016
$
308,821
(64)
76,107
(116,260)
(17,704)
$ 468,759
(11,663)
56,974
(189,193)
(16,056)
Drawings at December 31
$
250,900
$ 308,821
(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 net
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 Canadian accounts receivable and inventories, charges against timber
tenures and mortgage security on certain assets. The Lines are subject to certain
financial covenants including a minimum working capital requirement, a maximum
ratio of debt to capitalization and a minimum net worth calculation.
On September 15, 2017, the Company extended the maturity of the Lines from May
19, 2019 to September 15, 2021 with an additional borrowing margin and stand-by
fee tier, reducing the cost for both drawn and undrawn amounts. There were no
other significant changes.
As at December 31, 2017, including letters of credit, the Lines were drawn by
$12,333,000 (2016 - $10,026,000) and US$145,000 (2016 – US$30,000,000)
revalued at the year-end exchange rate to $182,000 (2016 - $40,281,000) for total
borrowings of $12,515,000 (2016 - $50,307,000).
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 $128,000 for the year ended December 31, 2017 (2016 - $7,420,000 gain)
arising on revaluation of the Lines were recognized in Foreign currency translation
differences in Other comprehensive income.
As at December 31, 2017, unused available credit on the Lines was $252,485,000
(2016 - $214,693,000).
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, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
55
8. Cash and borrowings (continued):
(b) Senior Secured notes:
The Company’s Senior Secured Notes consist of Series A and Series B Senior
Secured Notes (each US$50,000,000 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, 2017, US$200,000,000 of Senior Secured
Notes were outstanding (2016 – US$200,000,000) and revalued at the year-end
exchange rate to $250,900,000 (2016 - $268,540,000).
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.
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
$17,640,000 (2016 - $8,260,000 gain) arising on their revaluation were recognized
in Foreign currency translation differences in Other comprehensive income for the
year ended December 31, 2017.
(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 May 17, 2017, the Company
extended the maturity of its U.S. Operating Line from May 1, 2018 to May 1, 2019
with no other significant changes.
As at December 31, 2017, the U.S. Operating Line was drawn by US$2,100,000
including outstanding letters of credit, revalued at the year-end exchange rate to
$2,634,000 (2016 – US$2,455,000 revalued at the year-end exchange rate to
$3,296,000).
As at December 31, 2017, $60,091,000 (US$47,900,000) of the available U.S.
Operating Line was unused (2016 - $62,331,000; US$46,422,000).
(d) Cash and cash equivalents:
At December 31, 2017, $337,000 of the Company’s cash balance is restricted (2016
- $515,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
56
9. Provisions and other liabilities:
2017
Note
Current
Non-current
9(a), 16
Restructuring
9(a)
Road deactivation
Environmental
9(a)
Cash-settled share based compensation
9(b)
9(c)
9(d)
9(e)
SAR Plan
TSR Plan
DSU Plan
Retained compensation liabilities
Lease incentives and other
298
$
776
56
$
1,026
3,840
747
$
5,355
1,390
547
1,451
766
186
5,277
13,566
-
2,334
Total
1,324
4,616
803
5,541
6,667
14,113
1,451
3,100
$ 10,639
$ 26,976
$ 37,615
2016
Note
Current
Non-current
9(a), 16
Restructuring
9(a)
Road deactivation
Environmental
9(a)
Cash-settled share based compensation
9(b)
9(c)
9(d)
9(f)
9(e)
Contingent future payment
Retained compensation liabilities
Lease incentives and other
SAR Plan
TSR Plan
DSU Plan
987
$
221
56
$
5,904
1,188
1,515
13,427
-
1,295
1,618
4,158
753
385
1,625
9,468
-
1,076
2,207
$
Total
2,605
4,379
809
6,289
2,813
10,983
13,427
1,076
3,502
$ 24,593
$ 21,290
$ 45,883
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, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
57
9. Provisions and other liabilities (continued):
(a) Provisions (continued):
Balance at December 31, 2015
$
2,175
$
4,168
$
826
Note
Restructuring Road deactivation
Environmental
Provisions made during year
Expenditures made during year
Unwind of discount
Changes in estimated future expenditures
Exchange rate movements
16
1,370
(895)
-
-
(45)
446
(143)
46
(138)
-
Balance at December 31, 2016
2,605
4,379
Provisions made during year
Expenditures made during year
Unwind of discount
Changes in estimated future expenditures
Exchange rate movements
16
2,091
(3,242)
-
-
(130)
446
(206)
71
(74)
-
-
-
8
(25)
-
809
-
-
11
(17)
-
Balance at December 31, 2017
$
1,324
$
4,616
$
803
(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.
Details of the Company’s SAR Plan for the years ended December 31 are as follows:
2017
Weighted
average
strike price
Units
Outstanding, beginning of year 738,199
6,405
Granted
(312,582)
Exercised
(10,763)
Expired or cancelled
$ 8.02
14.99
6.38
12.58
2016
Weighted
average
strike price
$ 7.52
15.01
4.96
12.63
Units
929,808
6,053
(173,800)
(23,862)
Outstanding, end of year
421,259
$ 9.23
738,199
$ 8.02
Units exercisable, end of year
323,263
$ 7.80
533,389
$ 6.73
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
58
9. Provisions and other liabilities (continued):
(b) Share Appreciation Rights Plan (continued):
Weighted average fair value assumptions for grants made in 2017 and 2016 are as
follows:
Risk-free interest rate
Expected life
Annualized volatility
Dividend rate
Termination rate
Grant date fair value per unit
2017
1.24%
6.7 years
41%
0%
6%
$6.43
2016
0.87%
6.7 years
41%
0%
6%
$6.33
Details of units outstanding under the SAR Plan at December 31, 2017 are as
follows:
Units outstanding
Weighted
Number
outstanding,
December 31,
remaining
2017 unit life (yrs.)
average Weighted
average
strike price
Strike
price
95,600
$1.38-$4.64
47,500
$4.77-$5.40
$6.01-$9.18
164,600
$14.99-$17.43 113,559
3.2
2.4
4.6
6.5
$ 3.61
4.84
8.27
17.16
Units exercisable
Number
exercisable,
December 31,
2017
95,600
47,500
126,600
53,563
Weighted
average
strike price
$ 3.61
4.84
8.00
17.43
421,259
$ 9.23
323,263
$ 7.80
For the year ended December 31, 2017, the Company recorded Long term incentive
compensation in respect of the SAR Plan of $3,120,000 (2016 – $1,010,000).
(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 are as follows:
Outstanding, beginning of year
Granted
Matured
2017
546,049
226,636
(163,577)
2016
518,199
237,497
(209,647)
Outstanding, end of year
609,108
546,049
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 in Net earnings.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
59
9. Provisions and other liabilities (continued):
(c) Total Shareholder Return Plan (continued):
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 per unit
2017
2016
1.17%
3 years
35% to 39%
0.00%
0.00%
$10.86
0.8%
3 years
46% to 56%
0.00%
0.00%
$6.45
For the year ended December 31, 2017, the Company recorded Long term incentive
compensation under the TSR Plan of $5,042,000 (2016 – $1,289,000).
(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 2017, 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.
The number of DSUs outstanding at December 31 are as follows:
2017
2016
Outstanding, beginning of year 724,918
45,817
Granted¹
(99,987)
Exercised
Units
Average
unit value
$15.15
18.90
15.08
Units
622,951
116,124
(14,157)
Average
unit value
$14.06
13.62
11.67
Outstanding, end of year
670,748
$21.04
724,918
$15.15
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 in Net earnings. For the year ended December 31,
2017, the Company recorded an expense of $4,637,000 (2016 –$1,775,000) in
respect of the DSU Plan, of which $3,771,000 (2016 – $916,000) was recorded in
Long term compensation and $866,000 (2016 - $860,000), related to payment for
directors’ fees, was recorded in Selling and administration.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
60
9. Provisions and other liabilities (continued):
(e) 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, 2017, the Company recorded Long term incentive
compensation of $461,000 (2016 - $1,029,000) in respect of the retained
compensation liabilities. The liability of US$1,157,000 (2016 – US$801,000) was
revalued at the year-end exchange rate to $1,451,000 (2016 - $1,076,000) and will
be paid in April, 2018.
(f) Contingent future payment:
In conjunction with the acquisition of sawmill operations in the U.S. in 2015, the
Company recorded a provision of US$10,000,000 for additional compensation
payable under the Asset Purchase Agreement. This amount was fully paid in early
2017.
10. 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
2017
2016
$ 37,540
$ 36,126
13,780
(10,774)
500
(638)
12,605
(10,924)
302
(569)
$ 40,408
$ 37,540
$ 12,873
27,535
$ 11,609
25,931
$ 40,408
$ 37,540
The total undiscounted amount of the estimated future expenditures required to settle
the reforestation obligation, adjusted for inflation, at December 31, 2017 is $42,549,000
(2016 - $39,419,000). 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% (2016 – 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
61
11. Share capital:
(a) Share transactions:
Authorized capital at December 31, 2017 consists of:
150,000,000 Common Shares (“Shares”) without par value; and
5,000,000 Preference Shares without par value.
Common Share transactions were as follows:
Issued and Fully Paid
Balance, December 31, 2015
Deferred income tax on share issue costs
Balance, December 31, 2016 and 2017
Note
17
Number
70,030,455
-
70,030,455
Amount
$ 553,559
1,829
$ 555,388
On March 2, 2017, the Company announced a normal course issuer bid (“NCIB”)
whereby it can purchase for cancellation up to 3,500,000 Shares, representing
approximately 5% of its Shares issued and outstanding as at March 2, 2017. This
NCIB began on March 7, 2017 and expires on March 6, 2018. During 2017, Interfor
did not purchase any of its Shares.
At December 31, 2017, 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
1,299,093 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 are as
follows:
2017
2016
Weighted
average
exercise price
Options
Outstanding, beginning of year 181,525
154,469
Granted
-
Exercised
(3,347)
Expired or cancelled
$
14.10
15.44
-
22.22
Weighted
average
exercise price
$
21.77
10.61
-
16.76
Options
64,175
130,879
-
(13,529)
Outstanding, end of year
332,647
$
14.64
181,525
$
14.10
Options exercisable, end of year 21,297
$
21.67
-
$
-
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
62
11. Share capital:
(b) Equity-settled share based compensation (continued):
Weighted average fair value assumptions for grants made in 2017 and 2016 are as
follows:
Risk-free interest rate
Expected life
Annualized volatility
Dividend rate
Termination rate
Grant date fair value per unit
2017
1.24%
6.7 years
41%
0%
6%
$6.62
2016
0.8%
6.7 years
43%
0%
6%
$4.63
Details of options outstanding under the option plan at December 31, 2017 are as
follows:
Number
outstanding,
December 31,
Units outstanding
Weighted
average
remaining
Weighted
Number
exercisable,
average December 31,
2017
2017 unit life (yrs.) exercise price
Units exercisable
Weighted
average
strike price
Strike
price
$9.77-$13.72
118,564
$15.01-$15.44 160,841
53,242
$17.26-$22.22
8.2
9.1
7.2
$
10.42
15.42
21.70
$
-
-
21,297
-
-
21.67
332,647
$
14.64
21,297
$
21.67
The Company recognized an expense of $583,000 for the year ended December 31,
2017 (2016 – $334,000) in Long term incentive compensation.
12. Depreciation, depletion, and amortization:
Depreciation, depletion and amortization expense allocated by function is as follows:
Production
Selling and administration
2017
2016
$ 108,718
7,540
$ 102,539
8,448
$ 116,258
$ 110,987
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
63
13. Personnel expenses:
Note
2017
2016
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
20
20
9
$ 263,318
$ 232,342
15,875
7,975
10,804
1,195
12,977
28,117
13,071
6,182
9,866
1,648
4,551
35,416
$ 340,261
$ 303,076
14. Finance costs:
Recognized in Net earnings:
Note
2017
2016
Interest on borrowings
Net interest on defined benefit plans
Unwind of discount on provisions
Amortization of deferred finance costs
9(a), (10)
$ (12,203)
(505)
(582)
(740)
$ (16,659)
(428)
(832)
(683)
$ (14,030)
$ (18,602)
Recognized in Other comprehensive income:
Effective portion of changes in fair value of interest rate swap
$
(11)
$
2017
2016
(51)
15. Other income (expense):
Gain (loss) on disposal of surplus property, plant and
equipment
Gain on disposal of investments and other
2017
2016
$
(2,408)
421
$ 14,072
22
$
(1,987)
$ 14,094
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 2017, Interfor sold fixed income investments for proceeds of $3,077,000 (2016 -
$10,324,000) and recognized a gain of $421,000 (2016 – $23,000 gain).
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
64
16. Restructuring costs:
Write-down of property, plant, equipment
and intangibles
Severance and legal
Write-down of inventories
Onerous contracts (recovery)
Site closure costs
Other
Note
6
9(a)
9(a)
$
2017
7,091
2,427
-
(336)
21
-
$
2016
2,173
955
1,533
415
1,738
466
$
9,203
$
7,280
In 2016, the Company recorded restructuring charges related to its Tacoma sawmill
which was sold in November, 2016 (see note 15). Inventory write-downs reflect
extraordinary declines in fair value of inventory subsequent to the decision to exit the
Tacoma sawmill. The Company also recorded an impairment against surplus operating
equipment.
In December, 2017, the Company recorded an impairment against operating equipment
to be replaced in conjunction with planned capital projects in 2018.
17. 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
2017
2016
$
1,007
57
1,064
$
802
51
853
33,072
-
33,072
12,525
(6,171)
6,354
$ 34,136
$
7,207
Income tax expense (recovery) recognized in Other comprehensive income is as follows:
Defined benefit plan actuarial losses
Foreign currency translation differences for foreign operations
$
2017
(504)
(168)
$
2016
-
691
Income tax recovery recognized in Equity is as follows:
$
(672)
$
691
2017
2016
Amortized and unamortized share issuance costs
$
-
$
(1,829)
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
65
17. Income taxes (continued):
The reconciliation of income taxes at the statutory rate to the income tax expense is as
follows:
Income tax expense at the statutory rate of
26.00% (2016 – 26.00%)
Change in unrecognized deferred income tax assets
Entities with different tax rates and foreign rate adjustments
Change of U.S. statutory rate
Change of Canadian statutory rate
Income Tax Credit
Other
2017
2016
$ 34,135
-
3,632
(4,740)
445
488
176
$ 18,941
(6,171)
(4,884)
-
-
(715)
36
$ 34,136
$
7,207
The Company recorded a deferred income tax expense of $445,000 in 2017 to reflect
the increase in the Canadian statutory tax rate from 26% in 2017 to 27% in 2018.
As a result of tax legislation enacted in the U.S. at the end of 2017, the federal U.S.
corporate tax rate applicable to years after 2017 was substantially reduced. As a result,
Interfor recorded a deferred income tax expense in respect of its U.S. operations in 2017
at a combined federal and state income tax rate of 24% (2016 - 37.37%).
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 $66,657,000
(2016 - $101,215,000), and expire between 2032 and 2036; and
(b) U.S. net operating loss carry-forwards which total approximately US$132,408,000
(2016 - US$175,176,000), and expire between 2024 and 2035.
Unrecognized deferred income taxes:
As at December 31, 2017, 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.
Deferred income tax assets related to the Company’s Canadian operations are not
recognized in respect of deductible temporary differences of $7,940,000 (2016 -
$8,009,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
66
17. Income taxes (continued):
Recognized deferred income taxes:
Recognized
December 31, 2017
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
Defined benefit plan
Other
$ 114,778 $
21,364
870
692
-
4,672
(56,492) $
1,539
(536)
(353)
-
(524)
- $
-
-
-
504
-
Deferred income tax liabilities
Capital assets
Foreign currency
(128,377)
23,294
-
translation differences
for foreign operations
(536)
-
159
- $ 58,286
22,903
-
334
-
339
-
504
-
4,148
-
-
-
(105,083)
(377)
Total
$
13,463 $
(33,072) $
663 $
- $
(18,946)
Recognized in
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
- $
-
-
-
-
1,137 $ 114,778
21,364
870
692
4,672
-
-
692
-
Deferred income tax liabilities
Capital assets
Foreign currency
(122,228)
(6,149)
-
-
(128,377)
translation differences
for foreign operations
145
-
(681)
-
(536)
Total
$
18,669 $
(6,354) $
(681) $
1,829 $
13,463
Represented by the following:
Deferred income tax assets
Deferred income tax liabilities
2017
2016
$
251
(19,197)
$ 14,311
(848)
$ (18,946)
$ 13,463
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
67
18. 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:
2018
2019
2020
2021
2022
(b) Surety bonds:
$ 50,100
13,270
7,190
6,460
5,170
The Company has posted $41,041,000 in surety performance and payment bonds,
with various expiry dates extending through January, 2025.
(c) U.S. countervailing and anti-dumping duty deposits:
In late 2016, a petition was filed by the U.S. Lumber Coalition and other petitioners
seeking countervailing (“CV”) and anti-dumping (“AD”) duties on Canadian softwood
lumber imports to the U.S. and on January 6, 2017, a preliminary determination was
announced by the U.S. International Trade Commission (“ITC”) that there was
reasonable indication that the U.S. industry is materially injured by imports of
softwood lumber products from Canada.
In the first half of 2017, the U.S. Department of Commerce (“DoC”) made
preliminary duty rate determinations of 19.88% and 6.87% for CV and AD duties,
respectively, for a combined total of 26.75% applicable to Interfor’s shipments of
softwood lumber from Canada into the U.S. On November 2, 2017, the DoC made a
final determination on duties that lowered the combined rate applicable to Interfor to
20.83%, which it subsequently amended to 20.23%, comprised of 14.19% and
6.04% for CV and AD duties, respectively. In addition, the DoC concluded that
critical circumstances did not exist for CV duties, but did exist for AD duties.
On December 7, 2017, the ITC ruled that the U.S. lumber industry was injured by
Canadian lumber imports and finalized the CV and AD duties. The ITC made a
negative finding with regard to critical circumstances in the AD investigation. As a
result, Interfor will not be subject to retroactive AD duty deposits for the 90-day
period from April 1 to June 29, 2017. As Interfor expected that the ITC would rule
against the retroactive application, no associated liability had been recognized in the
financial statements.
CV duties were applicable from April 28, 2017 until August 26, 2017 and from
December 28, 2017 onwards. AD duties were applicable from June 30, 2017 through
December 26, 2017 and from December 28, 2017 onwards.
The Company recorded an adjustment to its U.S. CV and AD duty deposits in the
Statement of earnings to correct the duties expense to the amended final rates.
Interfor recorded US$3,004,000 ($3,920,000) in Investments and other assets on
the Statement of financial position (see note 5) in respect of this adjustment. This
amount is subject to dispute resolution.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
68
18. Commitments and contingencies (continued):
(c) U.S. countervailing and anti-dumping duty deposits (continued):
Interfor recorded US$187,000 ($239,000) in Trade accounts receivable and other for
amounts overpaid from November 8 through December 26, 2017 as a result of DoC
arithmetic errors in the duty rates. This amount is fully refundable and not subject
to any dispute resolution.
The current and long term U.S. duty deposit receivables were revalued at the year-
end exchange rate to $235,000 and $3,769,000, respectively.
Interfor is of the view that the DoC’s positions are without merit and politically
driven. As such, Interfor will continue to work with the B.C. and Canadian
Governments to vigorously defend the Company’s and industry’s positions through
various appeal processes. The final amount and effective date of countervailing and
anti-dumping duties that may be assessed on Canadian softwood lumber exports to
the U.S. cannot be determined at this time and will depend on decisions yet to be
made by any reviewing courts, NAFTA or WTO panels to which the DoC and ITC
determinations may be appealed.
All duties paid remain held in trust by the U.S. pending the First Administrative
Review and conclusion of all appeals of U.S. decisions.
(d) Timber licence:
A Timber licence held by Interfor for harvesting within the B.C. Coast region (the
“Licence”) was cancelled (or taken) by the Government of B.C., following the passing
into law of the Great Bear Rainforest (Forest Management) Act and regulations,
which took effect January 1, 2017.
Interfor is entitled to compensation from the Government of B.C. based upon the
value of the harvesting rights under the Licence. In late 2017, the Company initiated
arbitration proceedings, but is currently still in active negotiations with the
Government. Although it is not practicable to estimate the value or form of
compensation that would be received by Interfor, it is expected that such
compensation would exceed the net book value of the Licence as at December 31,
2017.
(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, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
69
19. 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 11, outstanding for the year.
The reconciliation of the numerator and denominator is determined as follows:
2017
Weighted
average
Net number of
earnings
shares Per share
2016
Weighted
average
Net number of
shares
earnings
Per share
Basic earnings
per share
$ 97,153
70,030 $
1.39
$ 65,643
70,030
$
0.94
Effect of dilutive securities:
Stock Options
Diluted earnings
-
44
-
3
per share
$ 97,153
70,074 $
1.39
$ 65,643
70,033
$
0.94
20. 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 2017, the pension expense for this plan
is equal to the Company’s contribution of $1,891,000 (2016 - $1,639,000).
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 2017, the pension expense is equal to the Company’s
contribution of $39,000 (2016 - $49,000).
Employees of the Company’s 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 2017, the pension expense
for this plan is equal to the Company’s contribution of $4,652,000 (2016 -
$4,267,000).
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
70
20. Employee future benefits and other post-retirement plans (continued):
(b) Unionized employees’ pension plan:
The Company contributes to an industry-wide benefit plan for unionized employees
based on a predetermined amount per hour worked by an employee. For 2017, the
pension expense for this plan is equal to the Company’s contribution of $3,295,000
(2016 - $3,352,000). As there is insufficient information available to enable the
Company to account for this plan as a defined benefit plan, the plan has been
accounted for as a defined contribution plan. The Company’s liability is limited to its
contributions.
(c) Supplementary pension plans:
The Company provides supplementary pension benefits to certain members of its
senior management in the form of a notional extension to the DPSP in Canada and
the 401(k) plan in the U.S. These commitments are not funded but are fully accrued
by the Company, with a portion of the commitments being secured by irrevocable
letters of credit.
During 2017 the Company recorded an expense of $927,000 (2016 - $559,000) 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:
$
2017
799
5,493
$
2016
721
5,499
$
6,292
$
6,220
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.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
71
20. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit pension plans (continued):
The Company measures its defined benefit obligations and the fair value of plan
assets for accounting purposes as at December 31 of each year.
The 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, 2016
December 31, 2016
December 31, 2019
December 31, 2019
Most Recent Valuation
Next Scheduled Valuation
The significant pension plans are subject to the statutory requirements (including
minimum funding requirements) of their respective jurisdictions and the Income Tax
Act. Each plan’s pace of funding is determined by the Company, subject to the
statutory minimums and maximums.
In 2017, the Company paid contributions of $961,000 (2016 - $1,150,000), and in
lieu of making cash special payments to fund certain deficits, posted letters of credit
totaling $3,699,000 (2016 - $2,555,000). In 2018, the Company expects to pay
contributions of $900,000 to its defined benefit plans, and post a total of $4,419,000
in letters of credit.
The Company has determined that, in accordance with statutory requirements of the
plans (such as minimum funding requirements), the present value of refunds or
reductions in future contributions for all plans is not lower than the balance of the
total fair value of the plan assets less the total present value of obligations.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
72
20. Employee future benefits and other post-retirement plans (continued):
(d) Defined benefit plans (continued):
The following summarizes the pension and other post-retirement obligations:
Pension Benefits
Other Post-retirement Benefits
2017
2016
2017
2016
Defined benefit obligation:
$
Beginning of year
Service cost
Employee contributions
Interest cost
Benefit payments
Actuarial loss (gain) due to:
Demographic assumptions
Financial assumptions
Experience adjustment
Settlements
51,209 $
935
385
1,921
(2,721)
51,505 $
944
377
1,875
(1,986)
1,889 $
53
-
71
(66)
1,813
51
-
91
(66)
253
3,688
1,326
-
-
48
126
(1,680)
9
(288)
-
-
-
-
-
-
End of year
$
56,996 $
51,209 $
1,668 $
1,889
Plan assets:
Beginning of year
Interest on plan assets
Employer contributions
Employee contributions
Benefit payments
Administration costs
Actuarial gain
Settlements
$
52,811 $
52,020 $
1,950
895
385
(2,721)
(165)
3,134
-
1,925
1,084
377
(1,986)
(146)
1,683
(2,146)
- $
-
66
-
(66)
-
-
-
-
-
66
-
(66)
-
-
-
End of year
$
56,289 $
52,811 $
- $
-
Net employee future
benefits asset (liability)
$
(707) $
1,602 $
(1,668) $
(1,889)
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
73
20. 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:
2017
2016
2017
2016
Pension Benefits
Other Post-retirement Benefits
Fair value of plan assets
Present value of unfunded
$
56,289 $
52,811 $
- $
-
obligations
(331)
Present value of funded obligation (56,665)
(345)
(50,864)
(1,668)
-
(1,889)
-
Net employee future benefits
asset (liability)
$
Employee future benefits
(707) $
1,602 $
(1,668) $
(1,889)
asset
$
502 $
2,471 $
- $
-
Trade accounts payable and
provisions
(71)
Employee future benefits obligation (1,138)
Net employee future benefits
asset (liability)
$
(707) $
(71)
(798)
(50)
(1,618)
(50)
(1,839)
1,602 $
(1,668) $
(1,889)
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
2017
2016
2017
2016
$
1,100 $
(29)
-
1,090 $
(50)
466
53 $
71
-
51
91
-
$
1,071 $
1,506 $
124 $
142
Other comprehensive income (loss)
Actuarial gains (losses)
$
(2,133) $
1,509 $
279 $
-
Plan assets consist of:
Asset category
Investment Funds
Canadian Equity
Global
Money Market
Fixed Income
Balanced
Cash
Total
2017
2016
$
17,704 $
18,351
977
18,718
433
106
15,787
16,766
985
18,715
457
101
$
56,289 $
52,811
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
74
20. 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
2017
2016
Other Post-retirement Benefits
2017
2016
Defined benefit obligation as of December 31
Discount rate
Compensation increases¹
3.25%
3.50%
Pension expense
Discount rate
Compensation increases¹
3.75%
3.50%
3.75%
3.50%
3.75%
3.50%
3.25%
-
3.75%
-
3.75%
-
3.75%
-
¹Compensation increases only relate to the CMSG plan.
For measurement purposes at December 31, 2017, the Company has assumed a
5.11% health care cost trend in 2018 grading down to 4.38% in 2021 (2016 –
5.36% health care cost trend in 2017 grading down to 4.38% in 2021).
Effect of 1% decrease in discount rate
on defined benefit obligation
$
8,750
$
212
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, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
75
21. 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
$
2017
6,898
661
8,833
$
2016
6,013
512
3,112
$ 16,392
$
9,637
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
$
2017
4,921
3,986
18,264
$
2016
5,552
3,998
10,840
$ 27,171
$ 20,390
22. 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 South regions of the U.S.
The Company sells to both foreign and domestic markets as follows:
United States
Canada
Japan
China/Taiwan
Other export
2017
2016
$ 1,364,294
254,941
145,324
121,238
104,309
$ 1,248,684
234,308
137,795
91,606
80,319
$ 1,990,106
$ 1,792,712
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
76
22. Segmented Information (continued):
Sales by product line are as follows:
Lumber
Logs
Wood chips and other by products
Ocean freight and other
2017
2016
$ 1,679,428
157,641
146,452
6,585
$ 1,458,296
179,275
145,608
9,533
$ 1,990,106
$ 1,792,712
Non-current assets by geographic location are as follows:
United States
Canada
23. Capital management:
2017
2016
$ 679,951
249,968
$ 666,839
348,796
$ 929,919
$ 1,015,635
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 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 2017.
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 minimum 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.
24. Financial instruments:
(a) Fair value of financial instruments:
At December 31, 2017, the fair value of the Company's long term debt exceeded its
carrying value by $6,937,000 (2016 – $7,378,000), 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.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
77
24. Financial instruments (continued):
(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.
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, interest rate swaps, and lumber futures.
Two of the Company’s interest rate swaps matured on April 14, 2016 and its
remaining two interest rate swaps matured on February 27, 2017.
The Company did not trade any foreign exchange contracts in 2017 or 2016.
To manage price risk, the Company also traded lumber futures which were
designated as held for trading with changes in fair value recorded in Sales in Net
earnings. As at December 31, 2017 the Company recognized $6,000 (2016 - $nil) in
Trade accounts payable and other in respect of the fair value of the outstanding
contracts measured based on Level 2 of the fair value hierarchy.
Lumber futures are traded through a well-established financial services firm with a
long history of providing trading, exchange and clearing services for commodities
and foreign currencies. As trading activities are closely monitored by senior
management and restricted including a maximum number of outstanding contracts at
any point in time the risk of credit loss on these instruments is low.
The following table summarizes the gain (loss) on derivative financial instruments for
the years ended December 31, 2017 and 2016.
Interest rate swaps¹
Lumber futures²
Total gain, net
1
Recognized in Other comprehensive income.
2 Recognized in Sales in Net earnings.
(c) Hedge of investment in foreign operations:
$
2017
(11)
254
$
243
2016
(51)
(1)
(52)
$
$
U.S. Dollar drawings under the Revolving Term Line and Senior Secured Notes were
designated as hedges against the Company’s investment in its U.S. operations and
repayments were de-designated as a hedge. Interfor recorded unrealized foreign
exchange gains of $17,768,000 (2016 - $15,680,000) arising on revaluation of
hedged U.S. Dollar debt in Other comprehensive income for the year ended
December 31, 2017.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
78
24. Financial instruments (continued):
(d) Financial risk management:
The use of financial instruments exposes the Company to credit, liquidity and market
risk.
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 terms which are secured by guarantee or cash deposits.
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, 2017 (2016 - $nil).
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.
Accounts receivable carrying values at the reporting date by geographic region
were as follows:
United States
Canada
Japan
China/Taiwan
Other
2017
$ 50,555
33,132
4,823
15,130
8,830
2016
$ 61,755
14,243
5,312
7,397
6,352
$ 112,470
$ 95,059
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
79
24. Financial instruments (continued):
(d) Financial risk management (continued):
(i) Credit risk (continued):
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 2017.
(ii) Liquidity risk:
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 following table summarizes Interfor’s credit facilities and available liquidity as
of December 31, 2017:
Thousands of Canadian Dollars
Operating
Line
Revolving
Term
Line
Senior
U.S.
Secured Operating
Line
Notes
Total
Available line of credit
Maximum borrowing available 65,000 200,000 250,900
Less:
$ 65,000 $ 200,000 $ 250,900 $ 62,725 $ 578,625
62,725 578,625
-
- 250,900
- 250,900
Drawings
Outstanding letters of credit
included in line utilization
12,515
-
Unused portion of facility
$ 52,485 $ 200,000 $
Add: Unrestricted cash and cash equivalents
Available liquidity at December 31, 2017
2,634
-
15,149
- $ 60,091 $ 312,576
131,263
$ 443,839
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
80
24. Financial instruments (continued):
(d) Financial risk management (continued):
(ii) Liquidity risk (continued):
The estimated cash payments due in respect of contractual and legal obligations
including capital commitments are summarized as follows:
Payments due by period
Up to
1 year
2-3
years
4-5
years
After 5
years
Total
Trade accounts payable and
accrued liabilities
224
Income taxes payable
42,550
Reforestation liability
Long term debt
307,317
Provisions and other liabilities 44,278
Operating leases and
capital commitments
96,927
$ 141,013 $ 141,013 $
224
12,873
10,469
11,226
- $
-
13,112
20,937
8,041
- $
-
7,580
101,078
2,140
-
-
8,985
174,833
22,871
50,097
20,459
11,630
14,741
Total obligations
$ 632,309 $ 225,902 $ 62,549 $ 122,428 $ 221,430
(iii) Market risk:
Market risk is the risk that changes in market prices, such as foreign exchange
rates, interest rates and equity prices, will affect the Company’s income or the
value of its holdings of financial instruments. The objective of market risk
management is to manage and control market risk exposures within acceptable
parameters, while optimizing the return relative to risk.
Currency risk
The Company is exposed to currency risk on cash and cash equivalents, accounts
receivable, accounts payable and provisions, 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.
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, 2017, the Company has U.S. Dollar drawings under its Senior
Secured Notes of US$200,000,000 (2016 - Senior Secured Notes –
US$200,000,000; Revolving Term Line – US$30,000,000). These U.S. Dollar
drawings have been designated as a hedge against the Company’s net
investment in its U.S. operations.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
81
24. Financial instruments (continued):
(d) Financial risk management (continued):
(iii) Market risk:
Currency risk (continued)
As at December 31, the Company’s accounts receivable were denominated in the
following currencies (in thousands):
2017
Accounts receivable
Accounts receivable held by foreign
CAD
USD
Japanese ¥
36,320
28,452
13,559
subsidiaries with USD functional currency
-
32,129
-
2016
Accounts receivable
Accounts receivable held by foreign
36,320
60,581
13,559
CAD
USD
Japanese ¥
18,072
20,614
19,230
subsidiaries with USD functional currency
-
36,559
-
18,072
57,173
19,230
As at December 31, 2017, the domestic operations of the Company held cash and
cash equivalents of US$2,397,000 (2016 – US$7,503,000). Cash and cash
equivalents held by foreign subsidiaries totaled US$48,965,000 (2016 -
US$5,195,000).
Based on the Company’s net exposure to foreign currencies as at December 31,
2017, 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
$380,000 increase in Net earnings
Based on the Company’s net exposure to foreign currencies as at December 31,
2017, 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
$2,959,000 increase in OCI
Interest rate risk
Until they matured on February 27, 2017, the use of interest rate swaps, which
convert floating rate interest expense to fix rate interest expense, reduced the
Company’s exposure to changes in interest rates on borrowings. Exposure to
floating rate interest was further reduced in 2017, with the repayment of all
drawings under its Revolving Term Line.
The remaining US$200,000,000 borrowings under the Senior Secured Notes were
outstanding for the entire year (note 8(b)) and bear interest at fixed rates
ranging from 4.02% to 4.33%.
Based on the Company’s average debt level during 2017, the sensitivity of a 100
basis point increase in interest rates would result in an approximate decrease of
$287,000 in Net earnings.
Notes to Consolidated Financial Statements
Years ended December 31, 2017 and 2016
(Tabular amounts expressed in thousands of Canadian Dollars, except number of shares and per share amounts)
____________________
82
24. Financial instruments (continued):
(d) Financial risk management (continued):
(iii) Market risk (continued):
Other market price risk
The Company does not enter into commodity contracts other than to meet the
Company’s expected usage and sale requirements.
ANNUAL INFORMATION FORM
Prepared as of February 8, 2018
83
In this Annual Information Form, the term “Company”, “Interfor”, “we” or “our” means
Interfor Corporation together with its subsidiaries. The results reported herein have been
prepared in accordance with International Financial Reporting Standards (IFRS). All
information in this Annual Information Form is presented as at December 31, 2017, and all
amounts are in Canadian Dollars, unless otherwise specified herein.
Forward-Looking Information
This Annual Information Form contains forward-looking information about the Company’s
business outlook, objectives, plans, strategic priorities and other information that is not
historical fact. A statement contains forward-looking information when the Company uses
what it knows and expects today, to make a statement about the future. Forward-looking
information is included under the headings “Recent Developments”; “Manufacturing and
Timber Supply”, “Sales, Marketing and Competitive Position”, “Distribution”, “Human
Resources”, “Environment and Social”, “Research and Development”, and ”Risk Factors”.
Statements containing forward-looking information may include words such as: will, could,
should, believe, expect, anticipate, intend, forecast, projection, target, outlook, opportunity,
risk or strategy.
Readers are cautioned that actual results may vary from the forward-looking information in
this report, and undue reliance should not be placed on such forward-looking information.
Risk factors that could cause actual results to differ materially from the forward-looking
information in this report are described in Interfor’s annual Management’s Discussion &
Analysis under the heading “Risks and Uncertainties”, which is available on
www.interfor.com and under Interfor’s profile on www.sedar.com. Material factors and
assumptions used to develop the forward-looking information in this report include volatility
in the selling prices for lumber, logs and wood chips; the Company’s ability to compete on a
global basis; the availability and cost of log supply; natural or man-made disasters;
currency exchange rates; changes in government regulations; the availability of the
Company’s allowable annual cut (“AAC”); claims by and treaty settlements with Indigenous
peoples; the Company’s ability to export its products; the softwood lumber dispute between
Canada and the U.S.; stumpage fees payable to the Province of British Columbia (“B.C.”);
environmental impacts of the Company’s operations; labour disruptions; and cyber-security
measures.
Unless otherwise indicated, the forward-looking information in this report is based on the
Company’s expectations at the date of this report. Interfor undertakes no obligation to
update such forward-looking information, except as required by law.
Description of Business
Interfor is a leading global supplier of lumber products. The Company has annual
production capacity of approximately 3.1 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.
Annual Information Form
____________________
Company History and Description
84
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.
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
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.
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.
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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 19, 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.
2017
In 2017, the U.S. Department of Commerce and the U.S. International Trade Commission
determined that the U.S. industry is materially injured by imports of softwood lumber
products from Canada and imposed amended final countervailing (“CV”) and anti-dumping
(“AD”) duties of 14.19% and 6.04%, respectively, on Interfor’s shipments of softwood
lumber from Canada into the U.S. These duties only impact approximately 15% of
Interfor’s total lumber sales, on average. CV duties were applicable from April 28, 2017
until August 26, 2017 and from December 28, 2017 onwards. AD duties were applicable
from June 30, 2017 through December 26, 2017 and from December 28, 2017 onwards.
The U.S. International Trade Commission ruling that the U.S. industry was materially
injured by Canada’s trade practices has set the stage for ongoing litigation. The
Government of Canada has indicated it will appeal the U.S. findings and defend itself
vigorously against all claims of unfair trade practices made by the U.S. As in previous trade
cases, the softwood lumber dispute may take years to resolve itself through the legal
process, and remains open to a negotiated settlement at any time.
On March 7, 2017, the Company launched a normal course issuer bid (“NCIB”) to purchase
for cancellation up to 3,500,000 of its common shares, representing approximately 5% of
the common shares issued and outstanding as of March 2, 2017. As of the date of this
report, no shares have been purchased by the Company under the NCIB. The NCIB will
expire on March 6, 2018.
On May 17, 2017, the Company extended the maturity of its U.S. Operating Line from May
1, 2018 to May 1, 2019, without significant change to other terms.
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On September 15, 2017, the Company extended its Canadian Operating Line of credit and
Revolving Term Line from May 19, 2019 to September 15, 2021 with an additional
borrowing margin and stand-by fee tier, reducing the cost for both drawn and undrawn
amounts. There were no other significant changes.
On November 2, 2017, Interfor announced large scale projects at its Meldrim and Monticello
sawmills, which represent a total investment of approximately US$65 million, and are
expected to be completed in Q1’19. These two projects are designed to add annual lumber
production capacity of approximately 150 million board feet and enhance operating margins
at these operations.
The U.S. tax reform enacted in December 2017 reduced the effective tax rate on Interfor’s
U.S. operations from approximately 37% to 24%.
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.
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)
U.S. Southeast(4)
Total
Present
Rated
Capacity
(1)
Production for years
ended
December 31,
2017
2016
2015
(millions of board feet)
320
750
640
148
727
564
159
717
570
164
620
655
1,400
1,156
1,042
1,058
3,110
2,595
2,488
2,497
(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 Interfor
management amounting to 13, 14 and 13 million board feet in 2015, 2016 and 2017,
respectively.
(3) 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 present rated capacity. Volumes
reported reflect Interfor production only.
(4) The Meldrim and Georgetown sawmills were acquired on March 1, 2015. The Monticello
sawmill was acquired on June 19, 2015. Volumes reported reflect Interfor production only.
Annual Information Form
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CANADIAN OPERATIONS
B.C. Coast
87
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 1.66 million 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.
B.C. Timber Supply
In the Province of British Columbia, the government or “Crown” owns 95% of the
timberlands from which the majority of our timber is harvested. 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 harvest levels, approving forest stewardship 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 and stumpage fees payable to the Crown.
Interfor 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
tenures that currently provide for an AAC of approximately of 3.46 million cubic meters.
The majority of Interfor’s tenures are long-term (15 and 25 year) renewable agreements
that are generally replaced every five to ten 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
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old growth and second growth stands. Whereas one-half of the harvest currently comes
from second growth stands on the B.C. Coast, this amount is expected to increase over the
next several decades. Logging operations are seasonal due to a number of factors including
weather, ground conditions and fire season closures.
The following table shows our AAC under our FL and TFL tenures and other cutting rights
and the volume of timber harvested under our FLs and TFLs and other cutting rights for the
periods specified. It also presents the volume of log purchases and sales during the period.
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,
2018
2017
2016
2015
(thousands of cubic metres)
2,566
2,775
2,775
2,775
840
875
875
-
50
-
50
-
50
875
220
80
3,456
3,700
3,700
3,950
1,296
1,308
1,331
1,725
1,657
1,708
3,021
2,965
3,039
Log Purchases
1,271
1,199
1,112
Log Sales
1,203
1,296
1,453
(1) AAC status at the beginning of each year (includes a provision for non-recoverable fibre).
(2) Includes Timber Licence tenures.
(3) 2017 volumes include production volume of 25,000 cubic metres of third party timber sales
managed by Interfor (2016 – 16,000 cubic metres, 2015 – 30,000 cubic metres).
Forest Health
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.
Indigenous Peoples
Indigenous peoples have claimed title and rights over substantial portions of B.C. The
Governments (Federal and Provincial) have been seeking to negotiate settlements with
Indigenous peoples to address these claims. In addition, the Government has a duty to
consult and, where appropriate, accommodate Indigenous peoples interests as this process
continues.
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Interfor tenures overlap with the traditional territories of over 60 different First Nations, and
the Company has numerous agreements and initiatives in place to develop economic
opportunities of mutual benefit. The Company is committed to working with Indigenous
peoples and each Indigenous group is notified prior to development activities as part of the
Forest Stewardship Planning process.
U.S. OPERATIONS
U.S. Northwest
We own and operate four sawmill operations in the U.S. Northwest (“NW”). 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
logs to produce a wide range of specialty and industrial lumber products. This sawmill has
an onsite 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.
U.S. South
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 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 2017, 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.
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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. South
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 2018 log supply requirement for the mills in the U.S. is estimated to be supplied
from the following sources:
Expected Sources of Timber 2018
State, Federal and tribal lands
Industrial lands
Private lands
U.S.
Northwest
42%
45%
13%
100%
U.S.
South
1%
29%
70%
100%
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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,
2017
2016
2015
(thousands of dollars)
$1,231,279
$ 1,098,106
$ 996,683
130,817
128,437
81,146
77,593
30,157
123,878
124,252
92,248
59,102
60,179
24,783
94,483
66,581
47,104
32,089
1,679,428
1,458,296
1,361,192
157,641
146,452
179,275
145,608
174,090
141,717
6,585
9,533
10,376
$1,990,106
$1,792,712
$1,687,375
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 in the Japan
market. We also have an office in France to serve Continental Europe and Middle Eastern
markets, and an office 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.
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Gains have been made, however, in diversifying cedar sales into offshore markets in
Europe, China, Japan and Australia.
In North America, we currently service our customer base from two sales locations. Our
products produced by our sawmills in Canada and the U.S. Northwest are sold out of our
office in Burnaby, B.C. Our products produced by our sawmills in the U.S. South are sold
out of our office in Peachtree City, Georgia.
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 and Longview 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 2017, break-bulk shipments were
transported under contract with an independent ocean carrier and this same arrangement is
in place for 2018. 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 1,187 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 1,875 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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Environment
93
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
Extensive provincial, state, federal or other laws and regulations apply to most aspects of
our business activities. Interfor has incurred and will continue to incur, capital expenditures
and operating costs to comply with environmental laws and regulations, including U.S.
Maximum Achievable Control Technology (“MACT”) and continuous monitoring requirements
applicable to certain of our boilers. These costs have not and are not expected to have a
material financial or operational effect on the Company or its competitive position.
Forest Management Certification
Interfor has achieved the internationally recognized Sustainable Forestry Initiative 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 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”). The joint work done by JSP was a major part of the
landmark Great Bear Rainforest agreement announced by the province in 2016.
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 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
Annual Information Form
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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 and in our sustainability report, which will be made
available on our website in due course.
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 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 2017 annual Management’s Discussion and
Analysis prepared as of February 8, 2018, 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 8, 2018 there were 70,030,455 Common Shares outstanding. There were
no Preference Shares outstanding.
Common Shares
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.
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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.
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)
2017 Trading Volumes
Ticker: IFP
$ Low
$ High
Volume
13.52
13.49
16.21
16.77
17.43
17.47
17.10
17.01
17.29
19.65
20.60
19.70
15.21
18.75
18.74
20.34
20.33
19.08
19.83
20.40
20.09
22.14
22.43
21.80
2,733,084
7,654,157
5,143,021
4,775,609
5,135,148
2,884,223
3,053,848
3,961,723
5,371,349
5,259,343
4,918,468
3,136,685
Month
January
February
March
April
May
June
July
August
September
October
November
December
Annual Information Form
____________________
96
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”)
ceased to be a director of Interfor (i.e. December 5, 2018), 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 2017, or
before 2017 but are still in effect:
1. Interfor September 2016 Amended and Restated Credit Agreement, dated for
reference September 22, 2016, between the Company, each of the lenders named
therein and Royal Bank of Canada in its capacity as the arranger and agent, as
amended on September 15, 2017 to extend the maturity of the Company’s Canadian
Operating Line of credit and Revolving Term Line from May 19, 2019 to September
15, 2021.
2. Amended and Restated Note Purchase and Private Shelf Agreement dated as of
March 16, 2015, between the Company, PGIM, Inc. and the purchasers named
therein, as amended on April 20, 2015, February 9, 2016, September 22, 2016 and
September 15, 2017. The Series A senior secured notes issued under this
agreement are for a principal amount of US$50 million, carry an annual interest rate
of 4.33% and have a final maturity date of June 26, 2023. The Series B senior
secured notes issued under this agreement are for a principal amount of US$50
million, carry an annual interest rate of 4.02% and have a final maturity date of June
26, 2023. The Series C senior secured notes issued under this agreement are for a
principal amount of US$100 million, carry an annual interest rate of 4.17% and have
a final maturity date of March 26, 2026.
All of these contracts are available on www.sedar.com.
Annual Information Form
____________________
Directors and Officers
Directors of the Company
97
The following table sets out the Company’s directors as of February 8, 2018, 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
JEANE HULL
Sheridan, WY, USA
May 2014
Director
Epiroc AB
2017
Present
PETER M. LYNCH
Toronto, ON, Canada
October 2006
GORDON. H. MacDOUGALL
West Vancouver, BC, Canada
February 2007
Director
Cloud Peak Energy Inc. (NYSE: CLD)
2016
Present
Executive Vice President and Chief
Technical Officer
Peabody Energy Corporation, a
private-sector coal company
Chair
Dieffenbacher USA, Inc., a
manufacturer and designer of press
and forming systems
2011
2015
2017
Present
President & CEO
Dieffenbacher USA, Inc.
2013
2016
Independent Business Consultant
2010
2013
Director
Connor, Clark & Lunn Financial
Group, an asset management
company.
Vice Chair
Connor, Clark & Lunn Investment
Management Ltd.
Partner
Connor, Clark & Lunn Investment
Management Partnership
2014
Present
2006
2014
1986
2014
J. EDDIE McMILLAN
Pensacola, FL, USA
October 2006
Independent Business Consultant
2002
Present
Annual Information Form
____________________
98
THOMAS V. MILROY
Toronto, ON, Canada
February 2016
Director
Restaurant Brands International Inc.
(TSX/NYSE: QSR, TSX: QSP)
2014
Present
GILLIAN PLATT
Kelowna, BC, Canada
October 2016
E. LAWRENCE SAUDER
Vancouver, BC, Canada
April 1984
DOUGLAS W.G.
WHITEHEAD
West Vancouver, BC, Canada
April 2007
Director
Tim Hortons Inc.
Managing Director
Generation Capital Limited, a private
investment company
Chief Executive Officer
BMO Capital Markets
Director
J2 Acquisition Limited
(LSE: JTWO)
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
2013
2014
2015
Present
2008
2014
2017
Present
2017
Present
2014
2016
Principal
Gillian Platt & Associates, executive
advisory and coaching practice
2013
2014
Executive Vice President, Human
Resources
Aviva North America, a multi-national
insurance company
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
Chair Hardwoods Distribution Inc.
(TSX: HWD), a distributor of wood
products
Chair and Director
Finning International Inc. (TSX:
FTT), a distributor of Caterpillar
products and support services
2011
2012
2010
Present
2010
2014
2008
Present
2008
Present
Director
Belkorp Industries Inc.
2000
Present
Director
Kal Tire
2012
Present
Annual Information Form
____________________
99
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 and emerged from Chapter 11 protection on April 3, 2017.
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 3, 2018.
Committees of the Board
The table below lists the committees of Interfor’s board of directors and their members as of
February 8, 2018:
Committees
Audit
Corporate Governance & Nominating Committee
Management Resources & Compensation Committee
Environment & Safety Committee
Members
Doug Whitehead (Chair)
Jeane Hull
Eddie McMillan
Tom Milroy
Eddie McMillan (Chair)
Gord MacDougall
Peter Lynch
Gord MacDougall (Chair)
Lawrence Sauder
Peter Lynch
Gillian Platt
Doug Whitehead
Jeane Hull (Chair)
Tom Milroy
Gillian Platt
Lawrence Sauder
Officers of the Company
The following table sets out the Company’s officers as of February 8, 2018, 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
Annual Information Form
____________________
100
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.
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.
2005
2012
2014
Present
2012
2014
2007
2012
2015
Present
2014
2015
2012
2014
2002
2012
2015
Present
2013
2015
2009
2013
As at December 31, 2017, the directors and officers of the Company as a group owned,
directly or indirectly, or exercised control of or direction over 786,452 Common Shares
representing approximately 1.12% of the outstanding Common Shares[1].
[1] Based on Insider Reports filed on SEDI.
Annual Information Form
____________________
101
Interest of Management and Others in Material Transactions
Since the commencement of our current 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 2017, 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, 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.
Interests 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
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;
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;
Annual Information Form
____________________
102
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 external
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 2017, 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
2017 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:
Relevant Education and Experience
Director
Past Occupation
Douglas W.G.
Whitehead
Chair of the Audit
Committee since May
2012
Jeane Hull
Member since April 2016
Mr. Whitehead is currently the Chair and a director of Finning International Inc. (TSX:
FTT) (“Finning”). He is also currently a director of 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) and Epiroc AB.
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.
Annual Information Form
____________________
103
Eddie McMillan
Member since April 2016
Thomas V. Milroy
Member since April 2016
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, as well as one of its predecessor companies since
2013. He also serves as a director of J2 Acquisition Limited (LSE: JTWO) since
2017. He is currently Managing Director of Generation Capital Limited, a private
investment company. Prior to that, Mr. Milroy worked for BMO Financial Group from
1993 to 2015, most recently serving as Chief Executive Officer of BMO Capital Markets
from 2008 to 2014, 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.
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, 2016 and 2017, 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.
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.
All Other fees
Forestry certification.
TOTAL
Code of Ethics
2017
2016
$555,900
$538,200
47,700
46,826
98,059
43,177
68,850
66,300
$770,509
$694,503
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.
Annual Information Form
____________________
Additional Information
104
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, 2017.
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
____________________
Appendix “A”
PURPOSE
AUDIT COMMITTEE
Terms of Reference
105
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
____________________
106
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
certifications made by the CEO and CFO.
Review all news releases announcing financial results, containing financial information
based on unreleased financial results or non-GAAP financial measures or providing
earnings guidance, forward-looking financial information and future-oriented financial
information or financial outlooks before the public disclosure of same by the Company.
Review financial information contained in any prospectus, take-over bid circular, issuer
bid circular, rights offering circular and any other document that the Audit Committee
is to review before the public disclosure of same by the Company, and, if appropriate,
recommend approval by the Board.
Review matters related to internal controls over financial reporting of the Company
and ensure the Company has adequate procedures in place in respect thereof. Ensure
that the necessary measures are taken to follow up suggestions from the Auditor’s
reports.
Review the principal risks of the Company, 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
107
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
108
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.
109
GLOSSARY
Unless otherwise noted, all financial references in this Annual Report are in Canadian
Dollars.
“Adjusted EBITDA” EBITDA excluding long term incentive compensation, other income
(expense), and post-closure wind-down costs and losses (recoveries).
“Adjusted EBITDA margin” Adjusted EBITDA divided by total sales.
“Adjusted net earnings” Net earnings (loss) before restructuring costs, capital asset write-
downs and other costs, other foreign exchange gains (losses), long term incentive compensation,
other income (expense), post-closure wind-down costs and losses (recoveries), 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.
“Return on invested capital” Adjusted EBITDA divided by average invested capital.
“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 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.
110
DIRECTORS
As of March 27, 2018
Duncan K. Davies
Vancouver, BC, Canada
Jeane Hull
Sheridan, WY, US
Peter M. Lynch
Toronto, ON, Canada
Gordon H. MacDougall
Thomas V. Milroy
Toronto, ON, Canada
Gillian Platt
Kelowna, BC, Canada
E. Lawrence Sauder
Vancouver, BC, Canada
Douglas W.G. Whitehead
West Vancouver, BC, Canada
West Vancouver, BC, Canada
J. Eddie McMillan
Pensacola, FL, US
OFFICERS
As of March 27, 2018
E. Lawrence Sauder
Chair
John A. Horning
Duncan K. Davies
President & Chief Executive Officer
Martin L. Juravsky
Executive Vice President
Senior Vice President & Chief Financial Officer
Ian M. Fillinger
Mark W. Stock
Senior Vice President & Chief Operating Officer
Senior Vice President, Human Resources & IT
Bart Bender
Xenia Kritsos
Senior Vice President, Sales & Marketing
General Counsel & Corporate Secretary
111
Transfer Agent
Computershare Investor
Services Inc.
Vancouver, BC and Toronto, ON
CORPORATE INFORMATION
Stock Exchange
Common Shares listed on
The Toronto Stock Exchange
Symbol: IFP
Investor Contact
Martin Juravsky
Senior Vice President & Chief
Financial Officer
Tel: (604) 689-6873
martin.juravsky@interfor.com
Auditors
KPMG LLP, Vancouver, BC
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 – Specialty
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, Suite 100
Peachtree City, GA, US 30269
North America – Western
Commodity Lumber
Tel: 1-844-702-2860
Fax: (604) 422-3232
1600 - 4720 Kingsway
Metrotower II
Burnaby, BC, Canada V5H 4N2
Export – All Species/Inquiries
Tel: (604) 422-3468
Fax: (604) 422-3250
1600-4720 Kingsway
Metrotower II
Burnaby, BC, Canada V5H 4N2
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
OPERATIONS AND LOCATIONS
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) 584-7099
P.O. Box Drawer A
Meldrim, GA 31318
(mailing address)
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
Cedarprime
(Remanufacturing)
Interfor Cedarprime Inc.
Tel: (360) 988-2120
Fax: (360) 988-2126
601C West Front Street
Sumas, WA 98295
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
112
Baxley Division
(Sawmill)
Tel: (912) 367-3671
Fax: (912) 367-1500
1830 Golden Isles East
Baxley, GA 31513
Coastal Woodlands Division
(Woodlands)
Tel: (250) 286-1881
Fax: (250) 286-3412
1250A Ironwood Street
Campbell River, BC V9W 6H5
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
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
Preston Division
(Sawmill)
Tel: (229) 828-4265
Fax: (229) 828-4370
378 Tolleson Road
Preston, GA 31824
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