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PFB Corporation2018 Annual Report PFB Corporation Letter to shareholders The year 2018 was transformative for PFB Corporation. Consolidated net revenue for the year was a record $128,345,000, a 21.6% increase of $22,788,000 from $105,557,000 recorded in 2017. Consolidated net income was $6,189,000 for the year ended December 31, 2018 resulting in basic earnings per share of $0.92, compared to consolidated net income of $2,281,000 and basic earnings per share of $0.34, in the year ended December 31, 2017. Adjusted EBITDA for the year ended 2018 was $12,978,000 or $1.93 per share, compared to $7,693,000 or $1.14 per share in the comparative year ended of 2017. A complete review of operations is available in the Management’s Discussion and Analysis. At the 2018 Annual and General Meeting of Shareholders we announced the appointment of Robert Graham as the Chief Executive Officer of the Corporation. As part of his previous responsibilities with the Corporation, Mr. Graham had developed a multi-year growth strategy the effects of which are now being felt throughout our operations. Additionally Mr. Bruce Carruthers, Chief Operating Officer, announced his intended retirement effective December 31, 2018 which has now taken effect. Mr. Carruthers continues as a director of the Corporation and in that regard received a Restricted Share Unit award effective January 1, 2019, the financial effects of which will be recorded in the first quarter of 2019. In late December 2018, Mr. Gregory Mackenzie, Vice President of Manufacturing Plasti-Fab, announced his intended retirement effective March 31, 2019. These two retiring gentlemen are the longest serving employees in the history of the Corporation, both serving in various roles from time to time, and have made significant contributions in its development for which, on behalf of all shareholders, we are most sincerely grateful. Additionally, at the 2018 Annual General Meeting, Ms. Leslie Lundquist was elected to the board of directors and joined the audit committee. Our core business focus is to manufacture building insulation and insulating building products in fourteen locations in Canada and the United States. We strive for industry leadership with our products and for a corporate culture of sustainable operations that we report transparently on our www.pfbsustainability.com website. Strategically, it is our focus to annually increase revenues and funds flow from our operating activities, while maintaining strong balance sheet integrity and providing a reliable stream of dividends to our shareholders. Quarterly dividends have been established at $0.08 per share since November 2017. The previous quarterly dividend increase occurred in the second quarter of 2016. We continue to pursue expansion of our USA based operations and the focus is to expand our revenue base in the United States. Thank you to all our customers and our employees for their past and continuing support. C. Alan Smith Executive Chairman 1 PFB Corporation Annual Report 2018 PFB’s Commitment to Sustainability At PFB Corporation, we are concerned with the future of the planet and the effects that modern life styles may be having on climate change. PFB Corporation is committed to conducting its operations responsibly, mindful of the economic, environmental and social impacts of its operations. In 2018, PFB Corporation maintained its focus on the Health and Safety performance of our operations by continuing with safety initiatives and focusing on improving our safety culture. Environmental Performance PFB Corporation has taken a transparent approach and reports its performance metrics in the Annual Report. PFB measures and reports inputs including raw materials, energy and water and our outputs; GHG, VOC’s and waste. More detailed information is available on our web site devoted to sustainability at the following address: www.pfbsustainability.com. The following extracts are a brief summary of some of the key metrics that we use to track our performance. Health and Safety Performance Occupational Health and Safety is of paramount importance at PFB Corporation. Starting in 2016, PFB Corporation introduced a new safety program called Goal:Zero. During 2018, significant effort was made to implement safety initiatives in line with our Goal:Zero objectives targeting a reduction to injury rates and severity. As a result of our efforts, lost time injury frequency and severity decreased for the second consecutive year. Our objective is to establish a sustainable safety culture by encouraging all employees to be active in our safety program and take responsibility for their safety and the safety of others. PFB’s call to action and challenge to all our employees continues to be See It · Own It · Make It Safer. PFB Corporation Annual Report 2018 2 PFB Corporation Management’s discussion and analysis for 2018 1. Advisory regarding forward-looking statements Securities laws encourage public issuers to disclose forward-looking information in their management’s discussion and analysis (MD&A) so that investors can get a better understanding of the company’s future prospects and make informed investment decisions. Forward-looking information and statements included in this MD&A about PFB’s objectives and management’s expectations, beliefs, intentions or strategies for the future are not guarantees of future performance and should not be unduly relied upon. All forward-looking statements reflect management’s current views as at March 8, 2019, with respect to future events, and they are subject to certain risks, uncertainties and assumptions that may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and assumptions include, but are not limited to: general economic conditions; the cost and availability of capital; actions by government authorities; actions by regulatory authorities; availability of raw materials; changes in raw materials prices; currency exchange rates; interest rates; competitor activity; industry pricing pressures; seasonality of the construction industry; and weather related factors. You will find a more detailed assessment of the risks that could cause actual results to materially differ from our current expectations in the Risk Management and Assessment section of this MD&A. 2. Other advisories regarding this MD&A The following MD&A of the operating results and financial condition of PFB Corporation (“PFB” or the “Corporation”) for the years ended December 31, 2018 and 2017 should be read in conjunction with PFB’s audited consolidated financial statements and related notes which is available on SEDAR at www.sedar.com and on PFB’s website at www.pfbcorp.com. Additionally, PFB maintains a website at www.pfbsustainability.com that provides our measurement and reporting of sustainable development data in accordance with the Global Reporting Initiative. The audited consolidated financial statements of PFB, for the years ended December 31, 2018 and 2017, have been prepared in accordance with International Financial Reporting Standards (“IFRS” or “GAAP”) as issued by the International Accounting Standards Board (“IASB”). This MD&A was reviewed by the Audit Committee and approved by PFB’s Board of Directors on March 8, 2019. Any events occurring after that date may affect the usefulness of the information contained in this document. The currency presented in this MD&A is Canadian dollars ($ thousands) unless otherwise stated. 3. Business overview PFB Corporation is a Canadian publicly-traded company incorporated under the Alberta Business Corporations Act. PFB’s corporate office is located at 300, 2891 Sunridge Way NE, Calgary, Alberta, Canada T1Y 7K7. The principal business activity of PFB is manufacturing insulating building products made from expanded polystyrene materials and marketing those products in North America. We report our results of operations under two segments; Canada and the United States of America (“USA”). Plasti-Fab Ltd., the Corporation’s Canadian wholly-owned subsidiary, operates manufacturing and sales facilities in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, and Ontario in Canada. PFB America Corporation, the Corporation’s wholly-owned subsidiary in the USA, operates manufacturing and sales facilities in the states of Minnesota, Michigan, Ohio, and Idaho. Our operations are vertically-integrated in that expandable polystyrene resin is manufactured at PFB’s polymer plant located in Crossfield, Alberta, for use exclusively in our downstream expanded polystyrene (“EPS”) manufacturing operations. Expandable polystyrene resin is also sourced from other suppliers to supplement internally produced raw materials. Plasti-Fab® EPS Product Solutions® supplies EPS foam cores used to manufacture Insulspan® SIPS (Structural 3 PFB Corporation Annual Report 2018 Insulating Panel Systems). The PFB Custom Homes Group provides a complete design, supply and installation capability for Point Zero ® Homes, Precision Craft Log & Timber Homes® and Riverbend® Timber Framing structures which are typically sold with an accompanying Insulspan® SIPS enclosure package and Advantage ICF Systems® (Insulating Concrete Forming System) foundation. Complete design services are provided by M.T.N. DesignSM to compliment the product offering. Plasti-Fab EPS Product Solutions are products manufactured using EPS as base raw materials, that are delivered to customers’ in five market categories: rigid insulation board; insulating building systems; geotechnical engineered applications; buoyancy, and products for packaging and display applications. Advantage ICF Systems® are insulating concrete forming systems which, by incorporating concrete and steel, are employed to build insulated foundations and walls in both residential and commercial construction markets. Insulspan SIPS are used to create a building’s structural wall frame and to replace trusses on roof systems to form an energy-efficient structural envelope. 4. Financial information 4.1 Financial highlights summary – quarterly Years ended December 31, 2018 and 2017 $ Thousands, except per share amounts Sales Gross profit Gross profit margin %1 Operating income (loss) Net income (loss) Earnings (loss) per share: Basic and diluted Adjusted EBITDA 1 Adjusted EBITDA per share 1 2018 Q4 2018 Q3 2018 Q2 2018 Q1 2017 Q4 2017 Q3 2017 Q2 2017 Q1 $ 35,283 $ 39,374 $ 32,640 $ 21,048 $ 28,045 $ 28,649 $ 29,376 $ 19,487 8,055 22.8 2,988 2,080 0.31 3,931 0.59 9,659 24.5 4,668 3,265 0.48 5,607 $ 0.83 7,428 22.8 2,361 1,545 0.23 3,309 $ 0.49 3,659 17.4 (805) (701) (0.10) 131 $ 0.02 6,266 22.3 1,712 1,240 0.18 2,659 $ 0.40 6,645 23.2 2,273 1,519 5,473 18.6 745 412 2,944 15.1 (1,212) (890) 0.23 0.06 (0.13) 3,240 1,762 $ 0.48 $ 0.26 32 $ - 1 Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. Definitions of non-IFRS measures used in the above table along with relevant other notes are detailed in Section 20 of this MD&A. PFB’s operations exhibit seasonal variations concurrent with those that generally influence the construction industry, including variability in weather patterns. Typically, sales revenues are lowest in the first and fourth quarters and highest in the second and third quarters of the fiscal cycle. PFB Corporation Annual Report 2018 4 4.2 Selected annual financial information for years ended December 31, 2018, 2017, and 2016 $ Thousands except where indicated 2018 2017 2016 Operating results Consolidated results: Sales Gross profit Operating income Net income Adjusted EBITDA 1 Sales by operating segment: Canada USA Operating income (loss) by segment: Canada USA Per common share data Earnings per share – Basic and diluted Dividend paid per share – Regular Adjusted EBITDA per share - Basic 1 Book value 1 Financial condition Total assets Current assets Current liabilities Non-cash working capital 1 Property, plant and equipment (net) Intangible assets (net) Goodwill Finance lease obligations including current portion Long-term debt including current portion Other long-term liabilities Shareholders’ equity Financial ratios Gross profit margin 1 Operating margin 1 Net income margin 1 Current ratio 1 Return on equity 1 $ 128,345 $ 105,557 $ 101,533 24,675 8,267 4,688 12,105 21,328 3,518 2,281 7,693 28,801 9,212 6,189 12,978 78,346 49,999 68,970 36,587 64,962 36,571 4,602 4,026 1,746 1,319 5,725 2,672 0.92 0.32 1.93 8.43 88,832 44,053 18,644 8,211 39,209 1,447 2,360 3,239 8,568 2,350 56,636 22.4% 7.2% 4.8% 2.36x 12.2% 0.34 0.29 1.14 7.57 78,771 33,363 14,522 6,913 40,099 1,405 2,217 3,232 8,906 1,874 50,825 20.2% 3.3% 2.2% 2.30x 4.4% 0.70 0.27 1.80 7.69 78,837 36,440 11,520 7,560 35,041 1,496 2,332 14,220 - 1,767 51,646 24.3% 8.1% 4.6% 3.16x 9.1% 1 Non-IFRS financial measures do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. Definitions of non-IFRS measures used in the above table along with relevant other notes are detailed in Section 20 of this MD&A. 5 PFB Corporation Annual Report 2018 5. Consolidated results of operations The results of PFB’s operations in the United States of America are translated into Canadian dollars on a periodic basis for inclusion in the consolidated financial statements. Sales Consolidated sales in 2018 increased by 21.6% or $22,788 to $128,345 as compared to sales of $105,557 in 2017. This was a record high of consolidated sales for the Corporation. Sales in each quarter of the current year exceeded the sales in the comparative quarter, resulting in strong sales momentum through 2018. Sales Growth was driven by increased business activity in both Canadian and USA segments across a broad range of product and service offerings. Price increases implemented during 2018 also contributed to increased sales. As described in the reportable operating segments section which follows, both the Canadian and USA segments reported increased sales in 2018 as compared to sales in 2017. Gross profit Consolidated gross profit in 2018 was $28,801, an increase of 35.0% or $7,473 as compared to gross profit of $21,328 reported in 2017. The gross profit margin of 22.4% of sales in 2018 was higher than a gross profit margin of 20.2% of sales reported in 2017. The increase in gross profit margin in the current year was predominantly influenced by operational gains realized through increased production and sales volumes offset somewhat by higher material cost as a percent of sales compared to prior year. The Corporation implemented resin production and procurement strategies in the first half of 2018 to mitigate the impact of rising raw material input costs. The cost of inventories recognized as an expense in cost of sales during the year was $80,184, and contrasted with $68,263 in the prior year. The incremental increase in sales of $22,788 compared to the incremental increase in cost of goods sold of $15,315 over the course of the year resulted in increased gross profit of $7,473. Selling expenses Consolidated selling expenses increased to $11,985 in 2018 from $11,424 in 2017, an increase of $561. The increases were mainly related to additional sales staff, commissions, and marketing initiatives intended to drive top line growth. Overall, selling expenses remain in proportion to sales and lower than prior year when expressed as a percent of sales. Administrative expenses Consolidated administrative expenses increased to $7,452 in 2018 from expenses of $6,399 reported in 2017, an increase of $1,053. The increases were primarily a result of additional administrative staff, increased employee profit sharing on strong performance and higher realized foreign currency exchange losses, compared to prior year. Administrative expenses remain in proportion to overall sales and in line with strategic initiatives and corporate succession plans. Other losses and gains Other losses in 2018 of $152 versus gains of $13 in 2017 were principally currency related. Foreign currency losses in 2018 of $166 compared to losses of $16 in the comparative year. Over the last twelve months, the value of the Canadian dollar versus the U.S. dollar has progressively weakened overall. A gain of $58 was realized on the disposals of property, plant and equipment in the current year as compared to a small gain on disposals of $51 in 2017. In addition, share-based payments expenses of $44 in the current year compared to $nil in the prior year and reflect the immediate expense related to the vested portion of options to a director and the straight-lining expense of the unvested portion of options related to senior management. Gain on sale of marketable securities There were no dispositions of marketable securities in the current year. During the first quarter of 2017, 318,421 restricted trust units were released from escrow and were sold in the open market for proceeds of $1,883, resulting in a gain of $275. Investment income Investment income reported in 2018 was $67 versus $114 in 2017. Investment income consisted of $19 (2017 - $74) received on distributions of restricted marketable securities, $25 (2017 - $17) for interest earned on bank balances, and $23 (2017 - $23) of interest collected from customers on past due trade receivables. The decreased trust units held and a final distribution in the second quarter of 2018 resulted in $55 less investment income in 2018 compared to 2017. No further trust distributions will occur on the marketable securities held in escrow. Interest earned on bank balances increased by $8 as a result of higher cash balances in the second half of 2018. PFB Corporation Annual Report 2018 6 Finance costs Finance costs decreased by $66 from $832 in the prior year to $766 in the current year and are primarily related to building lease obligations being extinguished in March 2017 and replaced by a lower interest rate and less long-term debt attributable to a mortgage on a repurchased property. During the first half of 2018 the operating line was drawn to fund working capital requirements in the Canadian Segment and resulted in finance costs of $77 (2017 - $39) over the course of the year. The operating line was fully repaid during the third quarter of 2018. Income before taxes Income before taxes in 2018 was $8,513 as compared to income before taxes of $3,075 in 2017, an increase of $5,438 and primarily attributable to higher gross margin from record sales in the year. Income taxes Income tax expense in the current year was $2,324 as compared to income tax expense of $794 in 2017. The effective tax rate in 2018 was 27.3% (2017 – 25.8%) and is higher in the current year due to a one-time tax recovery in 2017 which had the effect to decrease the effective tax rate. The current tax expense increased from $401 in 2017 to $2,027 in 2018 as a result of record sales and higher taxable income. The deferred tax expense decreased by $96 from an expense of $393 in 2017 to an expense of $297 in 2018. On December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The reduction of the U.S. corporate rate caused an adjustment to the USA segment’s deferred tax assets and liabilities to the lower base rate of 21%. Based on the Corporation’s current understanding of the Tax Act, the impact of enacted tax changes in the USA segment resulted in a tax expense of $1 for enacted rate changes. The lower US corporate tax rate and additional deductions for bonus depreciation, is expected to have a positive effect on future earnings in the USA. In the current year the full effect of the tax reductions were reflected in the current and deferred income taxes. Net income and earnings per share Consolidated net income in 2018 was $6,189 as compared to consolidated net income of $2,281 in 2017. Basic and diluted earnings per share of $0.92 in 2018 compared to basic and diluted earnings per share of $0.34 in 2017. Increased sales from higher volumes and selling prices, raw material supply strategies and efficiencies from economies of scale contributed to higher net income and earnings per share in the current year. The weighted average number of basic common shares outstanding in the current year was unchanged at 6,716,003 common shares and diluted common shares outstanding in the current year was 6,732,470 (2017 – 6,716,003). 6. Reportable operating segments The Corporation has two reportable operating segments: Operating segments Canada United States of America (USA) Description of segments Manufacturing and sales operations located in Canada for expanded polystyrene (EPS) products and structural insulating panels Brands: Plasti-Fab® EPS Product Solutions®; Advantage ICF System®; Insulspan® SIPS; DuroFoam® Manufacturing and sales operations located in the USA for EPS products, building systems and structures, design services and installations Brands: Plasti-Fab® EPS Product Solutions®; DuroSpan; Insulspan® SIPS; Riverbend® Timber Framing; Precision Craft® Log & Timber Homes; M.T.N. DesignSM; Total Home Solution®; Point ZeroTM; TimberScape TM The Corporation operates individual legal entities in Canada and the USA which are reported as operating segments and revenue is reported in accordance with that segmentation. Each operating segment mirrors the Corporation’s accounting policies (as described in Note 2 to the audited consolidated financial statements for the years ended December 31, 2018 and 2017) and its internal controls and reporting systems. Segment performance predominantly focuses on operating results and the manner in which resources are allocated based on Canadian and USA operations, respectively. The Canadian segment primarily derives its revenues from the sale of expanded polystyrene (“EPS”) foam products, which it manufactures at its facilities in Canada. The USA segment 7 PFB Corporation Annual Report 2018 primarily derives its revenues from the sale of EPS foam products, customized log and timber structures made at its facilities in the United States which typically include design and installation services that together provide the basis for a bundled sale of its manufactured products. The chief operating decision maker evaluates performance on the basis of operating income or loss, as reported on a periodic basis. This performance measure is considered to be the most relevant in evaluating the results of each operating segment. 6.1 Segment sales revenues and operating income Segment sales represent sales revenues directly attributable to each segment after inter-segment sales have been eliminated (see supplemental disclosures in the other segment information table). There are varying levels of integration between each segment. Segment operating income or loss represents the income or loss reported by each segment excluding any allocations of corporate income or expenses, and foreign exchange gains or losses arising on inter-segment settlements. Information regarding each reportable operating segment for years ended December 31, 2018 and 2017 is set out below: Canada USA Sales revenues 2018 2017 Operating income 2018 2017 $ 78,346 $ 68,970 49,999 36,587 $ 4,602 4,026 $ 1,746 1,319 Total for segments $ 128,345 $ 105,557 8,628 3,065 Corporate – income Foreign exchange (loss) gain on inter-segment settlements Consolidated operating income 586 (2) 452 1 $ 9,212 $ 3,518 Canada Sales Sales reported by the Canadian operating segment increased to $78,346 in 2018 from $68,970 in 2017, an increase of $9,376 or 13.6%. In the three-month period ended December 31, 2018, the Canadian segment sales were $19,312 compared to $17,230 in the three-month period of 2017, an increase of 12.1%. Canadian sales were strongest in the oil producing markets in which we operate as they continue to shows signs of recovery and overall stability. Operating income Operating income generated by the Canadian segment in the current year was $4,602, an increase of $2,856 or 164% from operating income of $1,746 in 2017. Operating income increase was driven by operational leverage realized on higher sales volumes as well as the positive impact of price increases implemented in the first half of 2018. Improvements in labour, overhead and freight were offset slightly by higher average material costs compared to prior year when measured as a percent of sales. USA Sales As reported in Canadian dollars, sales in the current year were $49,999 versus sales of $36,587 in 2017, an increase of $13,412 over prior year or 36.7%. Year-over-year comparisons of USD sales revenue when translated into Canadian dollars for reported purposes are impacted by currency movements. The average foreign exchange rates experienced by the Corporation in 2018 and 2017 showed no movement at an average rate of $1.30 per US$1.00 in the 2017 comparative year to an average rate of approximately $1.30 per US$1.00 in the current year, despite an overall weakening of the Canadian dollar over the last twelve months. Eliminating the marginal effect of foreign exchange fluctuations, sales, expressed in USA dollars, were $38,366 for the 2018 year or 35.8% higher than sales of $28,247 in the comparative 2017 year. In the fourth quarter of 2018, the USA segment sales showed strong growth with sales of $15,971 compared with $10,815 in the three month period of 2017, an increase of approximately 47%, supported by a favourable foreign currency translation adjustment during the last three months in a strengthening US dollar. The average foreign PFB Corporation Annual Report 2018 8 exchange rates experienced by the Corporation reflected the depreciation of the Canadian currency from an average rate of $1.27 per US$1.00 in the 2017 comparative three month period to an average rate of $1.32 per US$1.00 in the current three month period,. Eliminating the effect of foreign exchange fluctuations, sales, expressed in USA dollars, were $12,080 for Q4/18 or 42% higher than sales of $8,501 in the comparative quarter. Operating income The USA segment generated operating income in the current year of $4,026, compared to operating income of $1,319 in 2017, an increase of $2,707 on a year-over-year basis. Operating income increased primarily due to operational efficiencies realized on higher sales. Improvements in labour and overhead were offset somewhat by increased material and freight costs as a percent of sales, when compared to prior year. 6.2 Segment assets and liabilities Management measures capital employed using net segmented assets. The reconciliation of segmented assets and segmented liabilities in relation to total consolidated assets and liabilities is set out in the table below: Assets Liabilities Segment assets Assets not allocated to segments: Cash and cash equivalents Freehold land and buildings Restricted marketable securities Corporate taxes 1 Total assets Segment liabilities Liabilities not allocated to segments: Finance lease obligations Long term debt Corporate taxes 1 Total liabilities Net segment assets Canada USA 1 Current and deferred taxes. 6.3 Other segment information Additions to non-current assets: Canada USA Corporate Total Depreciation and amortization: Canada USA Corporate Total Inter-segment sales 9 PFB Corporation Annual Report 2018 As at Dec 31, 2018 As at Dec 31, 2017 $ 47,366 $ 41,658 16,944 22,750 1,483 289 12,180 23,386 1,239 308 $ 88,832 $ 78,771 $ 20,389 $ 15,788 3,239 8,568 - 3,232 8,906 20 $ 32,196 $ 27,946 $ 19,970 7,007 $ 19,802 6,068 2018 2017 $ 795 1,007 31 $ 914 648 7,724 $ 1,833 $ 9,286 $ 2,066 627 1,073 $ 3,766 $ 2,177 675 1,048 $ 3,900 $ 7,052 $ 5,657 7. Results of operations - fourth quarters ended December 31, 2018 and 2017 $ Thousands, except where indicated Consolidated results: Sales Gross profit Operating income Net income Earnings per share – basic Weighted average number of shares outstanding Basic Diluted Sales by operating segment: Canada USA Operating income by segment: Canada USA 2018 2017 $ 35,283 8,055 2,988 2,080 $ 28,045 6,266 1,712 1,240 0.31 0.18 6,716,003 6,732,470 6,716,003 6,716,003 19,312 15,971 17,230 10,815 852 2,005 544 922 Sales Consolidated sales in the fourth quarter of 2018 were $35,283, an increase of $7,238 or 25.8% as compared to sales of $28,045 reported in the fourth quarter of 2017. The increase in fourth quarter sales was attributed to both the Canadian and USA operating segments, which both delivered robust sales in the final quarter of the year. Mild weather in the Canadian and USA segments during the months of October and November resulted in favourable conditions for project activity and continued shipments of materials. Gross profit Gross profit, expressed as a percentage of sales was 22.8% in the current year quarter, a slight increase from 22.3% in the fourth quarter of 2017. The higher gross profit in the fourth quarter of 2018 is reflective of the trend experienced throughout the year as operational efficiencies from higher sales volumes drove improvements in labour and overhead, which were offset somewhat by higher average material costs, when expressed as a percent of sales, compared to the prior year period. Operating income Operating income was $2,988 in the current quarter as compared to $1,712 in Q4/17, a favourable variance of $1,276. Net income and earnings per share Net income in the current quarter was $2,080 as compared to a net income of $1,240 in the comparative quarter of 2017, a favourable variance of $840. Basic earnings per share in the current quarter were $0.31 as compared to $0.18 reported for the fourth quarter of 2017. 8. Liquidity and capital resources Sources of liquidity PFB ended 2018 with cash and cash equivalents of $16,944, adjusting for increases in restricted cash in the current and prior year. PFB’s liquidity position increased from the beginning of the current year reflecting strong sales and an efficient cash conversion cycle from both operating segments. Net cash from operating activities increased by $2,638 compared to the prior year. Future liquidity depends on PFB being able to sustain cash flows from operating activities; additionally the Corporation maintains availability of bank credit facilities. The Corporation’s credit facilities and long-term debt contain certain covenants, with which the Corporation was in compliance as at December 31, 2018 and 2017. PFB anticipates that future liquidity will be adequate to fund its ongoing business activities including anticipated changes in non-cash working capital, capital expenditures, payment of financial obligations, and payment of regular dividends over the next twelve months. PFB Corporation Annual Report 2018 10 PFB’s revolving credit facility in Canada and the USA were unused as at December 31, 2018. Cash and cash equivalents Cash and cash equivalent balances as at December 31, 2018 and 2017 were as follows: Cash held with banks Short-term investments December 31, 2018 December 31, 2017 $ 13,744 3,200 $ 12,180 - $ 16,944 $ 12,180 As at December 31, 2018, PFB held net cash balances of $16,944, an increase from the cash position as at December 31, 2017, which was $12,180. A significant proportion of the cash on hand, resides in the USA segment. Cash - restricted Restricted cash amounted to $1,347, an increase of $1,259 from $88 in 2017. Restricted cash comprises cash collected from certain customers of the USA segment that is contractually segregated from other cash and not comingled, as it is held exclusively for disbursements to suppliers and service providers specific to those individual customer contracts. PFB’s cash and restricted cash balances typically fluctuate throughout the year in line with seasonality and contracts with customers for bundled construction contracts. Borrowings During 2018 there were no additional borrowings of long-term debt. During 2017, the Corporation obtained long-term debt in a form of a mortgage in the amount of $9,152 from a Canadian bank to fund the purchase of a real estate transaction. The terms of the debt are a fixed interest rate of 3.25% for a 5-year period, with a 20-year amortization. The Corporation is subject to certain covenants on its outstanding long-term debt, one of which is a financial covenant to maintain a Debt Service Coverage Ratio of not less than 1.25:1. The Debt Service Coverage Ratio is defined as adjusted EBITDA for the current year, less dividends, divided by the sum of all principal and interest payments during the course of the year. The calculated Debt Service Coverage Ratio at December 31, 2018 and 2017 exceeded the minimum requirement of 1.25:1. Total balance of current and non-current portions of long-term debt was $8,568 as at December 31, 2018, which has decreased by $338 for principal repayments. Bank credit facilities Canada The Corporation’s Canadian subsidiary has a $10,000 revolving facility secured by a first ranking security interest in trade receivables and inventories of the Canadian subsidiary. The Corporation provides a guarantee and postponement of claim to the bank in the amount of $10,000. The interest rate applicable on draws made against the facility is the Canadian bank’s prime rate plus 0.5% and the facility carries a monthly standby fee when not being utilized. The credit facility was not drawn as at December 31, 2018 and 2017. USA In December 2018, the Corporation’s USA subsidiary renewed credit facility arrangements with a US bank for a variable rate revolving facility in the amount of $1,250. The revolving facility is secured by all inventory and equipment of the USA subsidiary. The interest rate applicable on draws made against the facility is a variable rate based on an index plus 0.25%. Under the facility, the USA subsidiary is subject to certain covenants, including financial covenants to maintain an Operating Cash Flow to Fixed Charge Coverage ratio of not less than 1.20:1 and to maintain a Total Debt to Tangible Net Worth Ratio of less than 3.00 to 1.00. The credit facility was not drawn as at December 31, 2018 and 2017. 11 PFB Corporation Annual Report 2018 Change in non-cash working capital Changes in the principal components of non-cash working capital in 2018 and 2017 are highlighted in the following table. Trade receivables Inventories Prepaid expenses Contract cost Trade and other payables Contract liabilities 2018 $ 13,082 11,638 374 475 (10,894) (6,464) $ 8,211 2017 $ 9,809 9,998 474 527 (8,737) (5,158) $ 6,913 Change $ 3,273 1,640 (100) (52) (2,157) (1,306) $ 1,298 In 2018, non-cash working capital increased by an amount of $1,298 to $8,211 at the end of the current year from $6,913 in 2017, primarily attributed to changes in trade receivables and inventories on higher sales activity. Trade receivables increased by $3,273 in 2018 and was commensurate with the increase experienced in fourth quarter sales revenues. Inventory carrying costs at the end of 2018 increased from the prior year with higher raw materials, work-in-progress and finished goods on higher sales activity. The carrying cost of inventories at the end of 2018 was $11,638 as compared to $9,998 at the end of 2017, an increase of $1,640. Trade and other payables were $2,157 higher at the end 2018 as compared to at the end of 2017, consistent with a general increase in trading activities in the latter part of the fourth quarter and higher sales activity throughout the year. Customer deposits collected, mainly in the USA segment, represent future contract liabilities to transfer goods or services to a customer for which consideration has been received and the Corporation remains obligated to perform. Contract liabilities increased by $1,306 in 2018 and mirrored the increase in sales that the USA segment experienced in the fourth quarter of 2018. Summary of cash flows A summary of cash flows for the years ended December 31, 2018 and 2017 are included in the following table: Net cash flows from (used in): Cash from operating activities, before income taxes paid Income taxes paid, net Net cash from operating activities Net cash used in investing activities Net cash used in financing activities Effects of exchange rates on cash and cash equivalents held in foreign currencies Net increase (decrease) in cash and cash equivalents Cash and cash equivalents – beginning of the year Cash and cash equivalents – end of the year (a) Operating activities 2018 2017 $ 11,749 (1,312) 10,437 (2,943) (3,533) 803 4,764 12,180 16,944 $ 7,943 (144) 7,799 (9,165) (3,219) (369) (4,954) 17,134 $ 12,180 In 2018, cash from operating activities before income taxes paid, was $11,794 as compared to $7,943 in the comparative year, an increase of $3,851. The year-over-year increase was primarily due to higher net income in the current year from record sales. Income taxes paid of $1,312 in the current compared to $144 in the prior year as a result of higher taxable income, resulting in net cash from operating activities of $10,437 in 2018 compared to $7,799 in 2017. (b) Investing activities Net cash used in investing activities in 2018 was $2,943 as compared to cash used in investing activities of $9,165 in 2017, a decrease of $6,222. Investing activities decreased primarily to the repurchase of net leased assets of $7,675 in the prior year, offset by higher restricted cash balances and purchases of capital assets. PFB Corporation Annual Report 2018 12 (c) Financing activities Cash used in financing activities in 2018 was $3,533 as compared to $3,219 in 2017. Financing activities were comparable in the current year to the prior year, except for the repurchase of leased assets in the prior year. In 2017, as part of the acquisition of the Crossfield, Alberta property, the Corporation extinguished finance lease obligations in the amount of $10,982 relating to the property. The net cash inflows from long-term debt, net of payments, related to the Crossfield, Alberta acquisition was $8,906. Repayment of finance lease obligations in 2018, which included buildings and vehicles leases, amounted to $279 as compared to lease repayments of $246 in 2017. Finance costs incurred in 2018 declined significantly to $766 compared to finance costs of $832 incurred in 2017, a favourable reduction by $66. As a significant one-time event in 2017, the Corporation sold 318,421 trust units resulting in cash flow from financing activities in the amount of $1,883. During 2018, PFB paid regular quarterly dividends of $0.08 per common share in February, May, August and in November, resulting in dividends paid of $2,150 (2017 - $1,948). Outstanding share data The issued and outstanding number of common shares as at March 8, 2019 was 6,716,003. Capital structure and capital management PFB manages its capital structure to ensure its consolidated operations continue to operate as a going concern, to optimize returns to shareholders, and to safeguard corporate assets. PFB’s capital structure consists of net debt (long-term debt offset by cash and cash equivalents) and equity of the Corporation (comprising issued share capital, reserves, and retained earnings as detailed in the consolidated statement of changes in equity). PFB’s capital structure, net of cash and cash equivalents, as at December 31, 2018 and 2017, is as outlined in the following table: Borrowings Less: cash and cash equivalents Surplus cash As at December 31, 2018 As at December 31, 2017 $ 8,568 16,944 $ (8,376) $ 8,906 12,180 $ (3,274) Shareholders’ equity $ 56,636 $ 50,825 Net borrowings to equity ratio N/A N/A PFB considers the amount of capital it requires in proportion to the associated risks. Adjustments may be made to PFB’s capital structure in light of changes in economic conditions and the risk characteristics of the underlying assets. The capital structure can be maintained or adjusted in a variety of ways as circumstances change, including: adjusting the amount of dividends paid to shareholders; purchasing shares for cancellation (under Normal Course Issuer Bids); issuing new shares; and increasing or repaying debt financing. PFB pursues its capital management objectives by prudently managing the capital generated through internal growth of its operations, optimizing the use of lower cost capital when required, and raising share capital when deemed appropriate, to fund significant strategic growth initiatives. Entities within PFB’s consolidated group have non-capital tax losses carried forward to be utilized against future taxable income that is expected to be generated by those entities. Share-based options The Corporation granted 400,000 share-based options in the year ended December 31, 2018, and no share options were exercised in the year. 13 PFB Corporation Annual Report 2018 Dividends The Board of Directors declared regular quarterly dividends of $0.08 per common share in February, May and August, and November of 2018. Aggregate dividends paid in the year ended December 31, 2018, amounted to $2,150 (2017 - $1,948). Dividends paid by PFB qualify as eligible dividends and satisfy the enhanced gross-up and dividend tax credit change enacted under Canadian tax law. Normal course issuer bid In January 2018, PFB obtained approval from the Toronto Stock Exchange to renew its Normal Course Issuer Bid (“issuer bid”) for a 12-month period, which commenced on January 10, 2018, and ended January 9, 2019. During the year ended December 31, 2018 and 2017, the Corporation did not purchase any of its common shares for cancellation under the Normal Course Issuer Bid. The Normal Course Issuer Bid lapsed on January 11, 2019, without renewal. Comprehensive income Comprehensive income consists of net income or loss, together with certain other economic gains and losses that, collectively, are described as “other comprehensive income” and those items are excluded from the consolidated statements of income. A summary of comprehensive income for the three and twelve month periods ended December 31, 2018 and 2017 is as follows: Net income for the period Other comprehensive income (loss) 2018 Three month periods ended December 31 2017 $ 1,240 162 $ 2,080 1,004 Twelve month periods ended December 31 2017 2018 $ 6,189 1,728 $ 2,281 (1,154) Comprehensive income for the period $ 3,084 $ 1,402 $ 7,917 $ 1,127 In the fourth quarter of 2018, comprehensive income was $3,084 as compared to a comprehensive income of $1,402 in the comparative quarter of 2017. Other comprehensive income of $1,004 (Q4/17 – income of $162) in the current quarter consisted of income of $1,142 (Q4/17 – income of $84) attributed to foreign currency translation when consolidating PFB’s USA operations, a gain of $nil (Q4/17 – gain of $62) representing unrealized gain on restricted marketable securities, net of tax, and a loss of $138 (Q4/17 – gain of $16) from pension plan valuation changes. Included in accumulated comprehensive income at December 31, 2018, were foreign currency translation adjustments totaling $1,689, marketable securities adjustments of $177, net of tax, and $(138) of defined benefit valuation changes, net of tax, for total accumulated other comprehensive income of $1,728. The $2,898 increase in foreign currency translation adjustments from December 31, 2017 loss of $1,209, to $1,689 gain, reflects the weakened Canadian dollar throughout 2018 when retranslating USA segment from US dollars into Canadian dollars. The marketable securities, in the form of units of a Canadian REIT, represent $177 of accumulated unrealized gains since March 2013 as part of a sale-leaseback arrangement and have decreased for 318,421 units disposed of in 2017. The $154 loss in pension plan valuation changes from a gain of $16 at December 31, 2017, to a net loss of $138 at December 31, 2018, reflects valuation changes in accumulated other comprehensive income. PFB Corporation Annual Report 2018 14 9. Contractual obligations and commitments In the normal course of business, PFB is obligated to make future contractual payments. As at December 31, 2018, PFB’s contractual obligations and commitments are as outlined in the following table: Contractual obligations (Payment due periods) Long-term debt Finance lease obligations Operating leases Commitments for PP&E and intangible assets Total Within 1 year 2-3 years 4–5 years Over 5 years $ 11,369 $ 623 $ 1,246 $ 1,246 $ 8,254 7,030 11,381 649 1,404 1,054 2,548 922 2,463 4,405 4,966 252 252 - - - Total contractual obligations $ 30,032 $ 2,928 $ 4,848 $ 4,631 $ 17,625 Long-term debt obligations are a result of significant one-time events in 2017 and represent a mortgage on the purchase of certain leased assets in 2017. Finance lease obligations are with respect to buildings in Canada used for manufacturing operations, automobiles used by employees, and materials handling equipment. Operating leases are with respect to leases for land, certain facilities used in PFB’s operations, and general items of office equipment. From time-to-time, under the terms of certain sales contracts, PFB’s subsidiaries may be required to provide performance bonds as security. Performance bonds are considered normal practice for suppliers and contractors participating in larger construction projects, usually of a public nature. In the USA, government agencies in certain states have requirements for bonds to be posted when certain types of licensing applications are made in those states. As at December 31, 2018, the USA, performance bonds in the amount of $651 (2017 - $598) were pledged to various government agencies. 10. Financial instruments and financial risks Fair value of financial instruments PFB’s financial assets and liabilities that are recorded at fair value on a recurring basis have been classified into one of three categories based upon the following fair value hierarchy: Level 1: Fair value is based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. Level 2: Fair value is based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Fair value is based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. A summary of the categories and fair values of financial instruments held by PFB as at December 31, 2018 and 2017, are stated in the following table. The carrying costs of each financial instrument for each year in the consolidated balance sheets are equal to their fair values. Financial instrument Cash and cash equivalents Cash - restricted Restricted marketable securities FVOCI Trade receivables Category Measurement Assets at amortized cost Amortized cost Assets at amortized cost Amortized cost Fair value Hierarchy Level 1 Level 1 Level 2 Assets at amortized cost Amortized cost N/A Financial liabilities at amortized cost Financial liabilities at amortized cost Amortized cost Amortized cost N/A Level 2 Trade and other payables Long-term debt 15 PFB Corporation Annual Report 2018 2018 Fair Value $ 16,944 1,347 1,483 13,082 2017 Fair Value $ 12,180 88 1,239 9,809 (10,894) (8,737) (8,568) (8,906) Credit risk Credit risk is defined as the risk that PFB’s counterparties in a transaction fail to meet or discharge their obligation to PFB. The Corporation’s exposure to credit risk is associated with trade receivables and the potential risk that any customer is unable to pay amounts when due. Allowances for doubtful accounts and bad debts are estimated and maintained as at the balance sheet date. The amounts reported for trade receivables on the balance sheet are net of allowances for doubtful accounts and the net carrying value represents PFB’s maximum exposure to credit risk. The Corporation’s subsidiaries provide trade credit to their customers in the normal course of business and PFB’s credit policy is universally adopted across all its businesses. The policy requires the credit history of each new customer to be closely examined before credit is granted, which may involve performing solvency tests if a particular account is expected to become significant. It is not normal practice to require customers’ to provide collateral or security as a condition of approving trade credit. The diversity of PFB’s customer base and product offering combine to minimize overall exposures to credit risks. Customers ordering highly-customized manufactured products are required to make advance payments at various predefined stages of a sales contract. All payments received in advance of invoicing are reported as contract liabilities under the current liability section of the balance sheet. Final contract balances are typically required to be paid in full before products are shipped. Management diligently reviews past due trade receivables balances on a weekly basis to monitor potential credit risks. Accounts are considered for impairment on a case-by-case basis when they are past due or when objective evidence is received that a customer may default. A number of factors are considered in determining the likelihood of impairment. All bad debt write-offs and changes in the doubtful trade receivables reserve are expensed or credited, as applicable, to selling expenses in the consolidated statement of income. PFB believes that credit risk associated with its trade receivables is limited for the following reasons: Trade receivables balances are spread amongst a broad customer base which is dispersed across a wide geographic range; The aging profile of trade receivables balances are systematically monitored by management; Larger customers are offered a discount off invoice for prompt payment which is strictly enforced; and Payments for highly-customized orders are received in advance of products being shipped. Potential credit risk associated with contractual holdback amounts pertaining to certain large projects is considered to be low as the customers involved are required to provide bonding to the owners of the projects. The credit risk on cash balances is limited because the counterparties are large commercial banks in Canada and the United States. Payments of interest collected from customers on past due trade receivables balances is included as part of investment income in the consolidated statement of income. Foreign currency risk Currency risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Corporation operates in both Canada and the United States of America and is exposed to foreign exchange risks arising from changes in foreign exchange rates between the two countries. At the present time, the Corporation has a net exposure to the United States dollar, as the prices of most raw materials used in its businesses are denominated in U.S. dollars. Raw material supplies denominated in U.S. dollars are usually paid within thirty days or less of receiving actual deliveries, which is consistent with industry practices. Periodically, management may commit to entering into foreign exchange contracts to attempt to protect earnings against relatively short-term fluctuations in exchange rates. In such cases, management attempts to make informed judgements in entering such transactions but there is a possibility that markets may not respond in ways predicted. To the extent that the Corporation does not fully hedge its foreign currency exposure and exchange rate risk, or the Corporation’s subsidiaries are not able to or do not raise their selling prices accordingly when exchange rates are moving in an unfavourable direction, the profitability of the business could be adversely affected. The Corporation does not enter into currency driven derivative financial instruments for speculative purposes. The Corporation did not hold any foreign exchange contracts as at December 31, 2018. Historically, the Corporation has mainly financed its USA operations from internal resources with demand loans denominated in Canadian dollars on which the USA operations is exposed to currency risk. As the exchange rate between PFB Corporation Annual Report 2018 16 the Canadian and U.S. dollars fluctuated, unrealized gains and losses arising on the loans were recorded in the consolidated statement of income in accordance with IFRS. In 2013, PFB refinanced its USA subsidiary by making equity investments instead of purchasing debt instruments from it. Foreign exchange gain or losses on inter-segment settlements represent transactions between the Canadian and USA segment are settled on a monthly basis and involve foreign currency risk. Interest rate risk Interest rate risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of change in market interest rates. The Corporation’s interest rate risk is mitigated with a fixed rate of interest at 3.25% on its long-term debt until renewal in March 2022. Management believes that the potential adverse impact of interest rate fluctuations on the current level of borrowings exposed to interest rate risk will not be significant in relation to its expected future earnings. As at December 31, 2018, the Corporation’s Canadian subsidiary had access to a revolving credit facility with a Canadian bank. The revolving credit facility has a limit of $10,000 based on marginable trade receivables and inventories and the revolving credit facility was unused. The Corporation’s USA subsidiary had access to a revolving credit facility with a US bank. The revolving credit facility has a limit of $1,250, based on all inventory and equipment. The revolving credit facility was unused at December 31, 2018. Liquidity risk Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Corporation’s liquidity risk is that it is not able to settle liabilities when due or that it can do so only at an abnormally high cost. Accordingly, one of management’s primary goals is to maintain an optimum level of liquidity by actively managing assets, liabilities and cash flows generated by operations. The Corporation’s future strategies can be financed through a combination of cash flows generated by operations, borrowing under existing credit facilities, and the issuance of equity. Management prepares regular budgets and cash flow forecasts to help predict future changes in liquidity. 11. Off-balance sheet arrangements The Corporation does not believe it has any off balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on its financial condition, results of operations, or liquidity, other than those disclosed in the balance sheet as the available portion of credit facilities, outstanding letters of credit and operating leases. 12. Related party transactions All related party transactions are constituted in the ordinary course of business and they have been measured at the agreed exchange amounts which approximate fair value. All transactions with related parties have been approved by the Corporation’s Board of Directors. Balances and transactions between the Corporation and its subsidiaries, which are related parties of the Corporation, have been eliminated on consolidation. In the years ended December 2018 and 2017, the Corporation had the following transactions with related parties: Related party E. Carruthers Trucking Aeonian Capital Corporation Management services Nature of transactions Transportation services The following related party balances were outstanding at the end of the reporting years: Related party Nature of transactions E. Carruthers Trucking Transportation services 2018 $ 2,163 350 2017 $ 1,920 350 $ 2,513 $ 2,270 2018 2017 $ 81 $ 68 Aeonian Capital Corporation (“Aeonian”), and its affiliates, owned 2,991,168 (2017 - 2,967,668) common shares of the Corporation representing 44.5% (2017 – 44.2%) of the 6,716,003 issued and outstanding shares as at December 31, 2018. Aeonian is controlled by C. Alan Smith, President and Chairman of PFB. The Corporation is charged fees by Aeonian for 17 PFB Corporation Annual Report 2018 management services including those provided by Mr. Smith. The fees are reported under administrative expenses in the consolidated statement of income. E. Carruthers Trucking is owned by a sibling of a member of the Board of PFB. The transactions have occurred in the normal course of operations at arm’s length and are based on standard commercial terms. 13. Subsequent events Declaration of regular quarterly dividend On February 1, 2019, the Board of Directors declared a regular quarterly dividend of $0.08 per common share, which was paid on February 28, 2019, to shareholders of record at the close of business on February 14, 2019. Letters of credit Outstanding letters of credit for $1,301 remain outstanding as guarantee payments for inventory purchases. Operating credit facility As at January 18, 2019, the operating credit facility in Canada was increased to $17,000. 14. Outlook The Corporation continued to build on the positive momentum in the third quarter with strong sales and margin performance in the fourth quarter, driven by increased volumes, supported by warmer seasonal weather patterns and little to no impact from North American extreme weather events. As a result, the Corporation experienced record-high consolidated sales of $128,345 in 2018 while recording year-over- year sales growth in each quarter. During 2018, performance was driven by increased business activity in both the Canadian and USA segments across a broad range of product offerings and in accordance with several strategic initiatives intended to drive topline growth. Management is focused on sustaining strong performance into 2019 although future growth rates are dependent on macro and regional economic factors as well as seasonal weather patterns which can add an element of uncertainty into the first quarter of 2019. As expected, our principal raw material input cost softened during the fourth quarter due to higher global inventories and lower global demand tied to uncertainty created by ongoing US - China trade disputes. In addition, there were no major unplanned production disruptions in recent months. Going into the first quarter of 2019, raw material input costs appear relatively stable and at levels lower than those experienced in 2018, a departure from the previous two years. This should have positive effects on gross margins heading into the first quarter of 2019. However, uncertainty remains as a result of continued trade and tariff disputes between the United States and China, the potential for unplanned production disruptions and overall world oil price trends, all factors that could impact North American styrene pricing in 2019. The Corporation’s resin strategies intended to mitigate the impact of raw material input cost volatility proved effective in 2018 and will be implemented proactively in 2019, as required. Price increases implemented in the second quarter of 2018 became effective over the course of the year and have positioned the Corporation well for 2019. These factors and operational efficiencies realized through increased volumes and record sales resulted in 2018 gross margins of 22.4% compared to 20.2% in 2017. The Corporation will continue to monitor raw material input pricing and other cost drivers and adjust inventories accordingly. The influence of world crude oil prices on the economies of North America are the largest driver in the outlook for the Corporation. In general, the oil effect has been positive for the general economy that we operate in and in our continuing cost structure. During the course of the year, crude oil prices have been volatile, but generally rising. We continue to see economic recovery in the oil producing regions in which we operate. The longer-term devaluation of the Canadian dollar against the U.S. dollar limits the ability of competitors to import their products into Canada and increases the contribution made by USA segment revenues when expressed in Canadian dollars. The majority of our raw materials are priced and purchased in U.S. dollars and a weaker Canadian dollar results in overall increased cost of sales. Comparing the fourth quarter of 2018 to the fourth quarter of 2017, the Canadian dollar weakened providing tailwinds for reporting consolidated sales in Canadian dollars. The currency impact in 2018 remained neutral as headwinds in the first and second quarter of 2018 were offset by tailwinds in the third and fourth quarter of 2018. As a result, sales growth for the Corporation was not materially impacted by year-over-year currency fluctuations, but instead driven by increased volumes, increased business activity and improved pricing. Continued volatility of the Canadian dollar is possible based on geo-political environments and ongoing global trade and tariff disputes. PFB Corporation Annual Report 2018 18 The Corporation continues to experience strong demand for EPS product lines in both the Canadian and USA operating segments as we enter 2019. Infrastructure activity in Canada and the USA present good opportunities for continued growth. Generally speaking, the oil producing regions of Canada continue to recover as construction activity increases, pulling increased demand for our nationally branded insulation and building products. The United States expansion continues to be a strategic objective and we remain cautiously optimistic as interests by customers in our branded products that are manufactured in the US continue to gain traction. Growth in the US housing market as well as a strong US economy is having positive effects on our custom homes business as well as our structural insulated panel systems, but shortages of available contractors and increasing build costs persist which can adversely impact project timing. The custom homes group enters 2019 with a strong order book. The Corporation continues to search for suitable acquisitions to expand our US initiatives. 15. Disclosure controls and procedures (DC&P) DC&P are designed to provide reasonable assurance that all relevant information is gathered and reported to management, including, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) on a timely basis so that appropriate decisions can be made regarding public disclosures. An evaluation of our DC&P was conducted, as at December 31, 2018, by management under the supervision of the CEO and the CFO. Based on this evaluation, the CEO and the CFO have concluded that, as at December 31, 2018, our DC&P, as defined in National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), was effective. Notwithstanding the foregoing, no absolute assurances can be made that Corporation’s controls over disclosure will detect or prevent all failures of individuals within the organization to disclose material information otherwise required to be set forth in reports or news releases issued by the Corporation. 16. Internal controls over financial reporting Management is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reports for external reporting purposes in accordance with IFRS. All control systems contain inherent limitations, no matter how well designed and operated. As a result, management acknowledges that PFB’s internal controls over financial reporting will not prevent or detect all misstatements due to error or fraud. In addition, management’s evaluation of controls can provide only reasonable, not absolute, assurance that all control issues that may result in material misstatements, if any, have been detected. As at December 31, 2018, the CEO and CFO, assessed the effectiveness of the Corporation’s internal controls over financial reporting and concluded that it was effective and that no material weaknesses in the Corporation’s internal controls over financial reporting has been identified. 17. Risk management and assessment PFB is subject to risks and uncertainties inherent in the operation of its business. Management defines risk as the possibility that an event might happen in the future that could negatively affect the financial condition and/or results of operations of the Corporation. The following section describes specific and general risks that could affect PFB. The Audit Committee and the Board of Directors play an important role in developing risk management programs and reviewing and monitoring them on a quarterly basis. As it is difficult to predict whether any risk will happen or its related consequences, the actual effect of any risk on PFB’s business could be materially different from anticipated. The following descriptions of general and specific risks do not include all possible risks, as there may be other risks existing of which the Corporation is currently unaware. 17.1 Raw material price and supply The price of raw materials, specifically, styrene monomer, expandable polystyrene resin, polypropylene copolymers, oriented strand board, and raw timbers combined represent a significant portion of manufacturing costs in PFB’s businesses. Historically, there have been considerable cyclical and other causes of volatility in the price of these materials, which is outside the control of PFB. There are no futures markets for these materials available to PFB, which limits the ability to lock in prices for fixed periods of time. 19 PFB Corporation Annual Report 2018 PFB may, from time-to-time, build inventories of both raw materials and finished goods which can lead to the assumption of risk due to an inability to match carrying costs to selling prices under certain fixed price sales contracts. Conversely, from time to time, PFB may be short of inventory that has been contracted to be delivered under fixed price sales contracts that can lead to the assumption of risk also due to an inability to match costs to selling prices. Management continues to explore opportunities to minimize the impact that price swings in purchasing raw materials has on PFB’s earnings. The changing dynamics in the petrochemical industry, primarily driven by world oil prices and other global events, and changing dynamics affecting other industries, are difficult to predict. Such changes may create the potential for raw material supply disruptions or shortages which would be detrimental to PFB’s operations. 17.2 Economic and market conditions PFB’s business is affected by prevailing general and regional economic conditions, consumer confidence and spending, and both the demand for and prices of its EPS products and insulating building systems in those geographic areas in which it operates. Weaker economic conditions, the impact of changing mortgage rates and other interest rates potentially affecting the construction industry, and the possibility of slowdowns in residential and/or commercial construction activity, typically evidenced by the change in the number of building permits issued, may translate into lower demand for PFB’s products. Such effects may also adversely affect the financial condition and credit risk of PFB’s customers, including their ability to obtain credit to finance their businesses, which could create uncertainty over the collectability of trade receivables. 17.3 International Trade PFB exports some of its products to customers outside of Canada and imports some of its raw materials to Canada and certain of its inputs are affected by global commodity prices. PFB’s international operations are subject to inherent risks, including: change in the free flow of goods between countries; fluctuations in currency values; discriminatory fiscal policies; unexpected changes in local regulations and laws; and the uncertainty of enforcement of remedies in foreign jurisdictions. In addition, trade agreements between Canada and foreign jurisdictions could change and foreign jurisdictions could impose tariffs, quotas, trade barriers, and other similar restrictions on the PFB’s international sales. All of these risks could result in increased costs or decreased revenues, either of which could have a material adverse effect on the Company’s financial condition and results of operations. 17.4 Competition As a market leader in its industry, the Corporation faces intense and growing competition from other manufacturers of all sizes located in both Canada and the United States, new entrants into the markets we serve, along with manufacturers of substitute products which compete with EPS. Competition can affect the Corporation’s pricing strategies and lower its sales revenues and net income. Competition can also affect PFB’s ability to retain existing customers and attract new ones. A competitive business climate increases the resolve to provide exceptional customer service, quality products, and the need to be price competitive. Management continues to identify ways to grow revenues, manage expenses and increase productivity. This requires anticipating and responding quickly to the constant changes in its businesses and markets. 17.5 Currency The Corporation has a net exposure to the U.S. dollar which makes it vulnerable to fluctuations in the foreign exchange rate between the Canadian dollar and the U.S. dollar. The timing of foreign exchange rate fluctuations between the Canadian dollar and the U.S. dollar can have a significant effect on the Corporation’s operating results, the effect and magnitude of which depends on the product mix of sales and raw material purchases. From time-to-time, management may commit to utilizing derivative financial instruments in the normal course of business as a means of management of its foreign currency exposure. Management attempts to make informed judgements in such transactions but there is the possibility that markets may respond in ways not predicted. To the extent that PFB does not fully hedge its foreign currency exposure and exchange rate risk, or the Corporation’s subsidiaries are not able or do not raise their selling prices accordingly when exchange rates are moving in an unfavourable direction, the profitability of the business could be adversely affected. 17.6 Acquisitions The Corporation’s growth strategy includes making strategic acquisitions when possible. There is no assurance that it will find suitable companies to acquire or that it will have the financial resources needed to complete any acquisition. There could also be challenges integrating the operations of any acquired company with existing operations. PFB Corporation Annual Report 2018 20 17.7 Financing and liquidity In developing business operations to their full potential, significant capital and operating expenditures may be required on an ongoing basis. The Corporation has historically generated sufficient cash flow from its operations to fund its capital expenditure requirements, repay financing obligations, and maintain regular dividend payments. Future development of new products and the growth of the Corporation’s business through internal expansion or by acquisitions may depend on access to external financing. The Corporation’s cash position and existing credit facilities are considered adequate to meet its current and medium-term needs. There is no guarantee that financing for future expansion of the Corporation’s operations will be available on acceptable terms, if required. 17.8 Reputation Negative publicity regarding the Corporation’s business practices, regardless of whether true or false, could adversely affect the Corporation’s reputation which, in turn, could affect its operations, customers, and share value. PFB manages reputational risk by placing the utmost importance on corporate governance and full and fair disclosure. Good corporate governance practice emanates from an effective board of directors. Corporation’s board of directors and its board committees have been shaped to competently perform the role of overseeing the appropriate management of Corporation’s affairs with the objective of maximizing the long-term value of Corporation. A detailed summary outlining Corporation’s corporate governance practices can be found in the most recent Management Information Circular. 17.9 Trade credit The Corporation’s subsidiaries provide trade credit to their customers in the normal course of business. The Corporation’s credit policy is universally adopted across its businesses. The policy requires the credit history of each new customer to be closely examined before credit is granted, which may include performing solvency tests if a particular account is expected to become significant. Management diligently reviews past due trade receivables on a weekly basis, which helps minimize credit risk. The diversity of the Corporation’s activities and customer base also helps minimize the credit risk to which it may be exposed. 17.10 Environmental considerations Environmental issues are gaining in importance for the Corporation’s stakeholders. The Corporation is committed to responsibly managing the direct and indirect impact it has on the environment. The Corporation believes that it is in substantial compliance with applicable environmental laws in jurisdictions where it has operations. The Corporation takes custody of hazardous materials when the goods physically arrive at its facilities. All construction materials must adhere to fire safety requirements during their manufacture, transportation and storage. The Corporation will continue to work with Environment Canada and other industry partners in assessing environmental considerations. 17.11 Information technology The Corporation makes extensive use of information technology in conducting its businesses. This involves web- based connections, access to secure, centrally located servers and databases, and maintaining both existing and implementing new business software applications. The security and safeguarding of information technology assets and protocols will continue to be increasingly important to the Corporation. The Corporation minimizes its exposure to I.T. risks by continuously reviewing its access and application controls, performing disaster recovery testing, locating its backbone I.T. assets in an industry-leading secure location, and hiring and training specialist employees with respect to the protection and use of I.T. assets and related intellectual property. Failure in the completeness, accuracy, availability or security of the Corporation’s information systems or a breach of data security could adversely affect its operations and financial results. Correspondingly, computer viruses, cyber-attacks, security breaches, unforeseen natural disasters and related events or disruptions could result in information systems failures that may adversely affect the Corporation’s operations and financial results. 17.12 Cyber Security The Corporation relies on information technology and information systems in all areas of operations. These systems are subject to an increasing number of sophisticated cyber threats. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving. A successful cyber-attack may result in a breach of sensitive information or its systems to be disrupted, the Corporation’s financial position, brand and/or its ability to achieve strategic objectives may be negatively affected. 17.13 Seasonality and climatic factors affecting the construction industry Due to the seasonal nature of the construction industry, the Corporation’s actual reported sales exhibit variations when viewed on a quarter-by-quarter basis. Typically, sales are weakest in the first and fourth quarters of the year 21 PFB Corporation Annual Report 2018 and strongest in the second or third quarters. Sales in any quarter can be significantly influenced by weather events, particularly the timing of when winter begins and ends, and the severity thereof. 17.14 Plant and facilities The Corporation operates a number of manufacturing facilities across North America, most of which operate at or near capacity for significant portions of the year. Any disruption to operations at any plant and facility arising from natural or man-made causes such as fire, flood, labour disputes, interferences with access or egress, or other events, could have a material impact on the Corporation and its business operations. 17.15 Employee future benefits A defined benefit pension plan (the “Plan”) exists for certain Ontario-based employees who are members of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied industrial and Service Workers International union. The latest accounting valuation of the Plan calculated in accordance with IAS 19 was completed as at December 31, 2018, and it identified that the Plan had a defined benefit pension asset of $10 compared to a defined benefit asset of $91 at the end of the comparative year. Throughout 2018 and 2017, the Corporation made both normal service and special payment contributions to the Plan. The actual rate of return on plan assets and changes in interest rates and other variables could result in changes in the Corporation’s funding requirements for the Plan. The Plan assets are not immune to market fluctuations and, as a result, the Corporation may be required to make additional cash contributions in future. The Corporation operates group 401K plans for all qualifying employees located in Minnesota, Michigan, Ohio and Idaho, USA, in which qualifying employees may elect to defer current wages for retirement. The Corporation has the option to match employee contributions to the plans. The assets of the plan are held separately from those of the Corporation by a trust company, which is governed by a custodial agreement (ERISA). The Corporation also utilizes the services of registered investment brokers and third party administrators in the fulfillment of its actuarial and fiduciary responsibilities with respect to the plans. 17.16 Human resources The Corporation’s success depends on the abilities, experience, engagement, and succession of its management teams. The loss of key employees through either attrition or retirement could adversely impact the Company’s future business and financial results. The Corporation attempts to mitigate these risks by offering competitive compensation and benefits packages, training, succession planning, and providing a positive cultural environment. 17.17 Off-Balance Sheet Arrangements and Operating Leases The Corporation does not believe it has any off balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on its financial condition, results of operations, or liquidity, other than those disclosed in the balance sheet as the available portion of credit facilities, outstanding letters of credit and operating leases. 17.18 Internal and Disclosure Controls Ineffective internal controls over financial reporting or inadequate disclosure controls could result in an increased risk of a material misstatement in financial reporting and public disclosures. In accordance with guidelines adopted for publicly-traded companies in Canada, the Corporation assesses the effectiveness of its internal and disclosure controls using a top-down, risk-based approach in which both qualitative and quantitative measures are considered. An internal control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance to management and the Board of Directors regarding the achievement of results. The Corporation’s current systems of internal and disclosure controls places reliance on key personnel across the Company to perform a variety of control functions which include performing reviews, analysis, reconciliations and monitoring. The undetected failure of individuals performing such functions or implementing controls as designed could adversely impact the Corporation’s financial results. 17.19 Volatility of Market Share Price The market price of the Corporation’s common shares may be volatile and could be subject to fluctuations in response to quarterly variations in financial results or other events or factors. Consequently, broad market fluctuations or the failure of the Corporation’s financial results to meet expectations in a particular reporting period may adversely affect the market price of its common shares. PFB Corporation Annual Report 2018 22 18. Critical accounting judgements and estimates In the application of the Corporation’s accounting policies, as described in Note 2 to the consolidated financial statements for the years ended December 31, 2018 and 2017, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities. The estimates and associated assumptions are based on a combination of historical experience, available knowledge of current conditions, and other factors that are considered to be reasonable and relevant under the circumstances. Actual costs and outcomes may significantly differ from these estimates and assumptions. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years. The following are the key assumptions concerning the future and other key sources of estimating uncertainty at the end of the reporting year, that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year. 18.1 Revenue Recognition IFRS 15 requires management to make judgments and estimates. Judgement relates to the identification of performance obligations in each contract. Some contracts with customers include a bundled set of goods and services and judgement is required to determine the goods and services that are distinct performance obligations. Judgement is required to determine any level of integration and any interdependency between goods and services entered with customers. Allocation of the transaction price to different performance obligations may require estimates. In instances where information is incomplete or not available, determination of selling prices include market conditions and other observable inputs such as the scope of work and geographic region. Judgements and estimates are also required to determine an appropriate measure of progress and pattern of delivery when determining how control of promised goods or services transfers to a customer. Estimates of incentives or rebates are updated regularly as information becomes available and only to the extent that the variable consideration is constrained. 18.2 Remaining performance obligations Many factors may lead to a change during a contract performance period, which can result in a change to contract profitability from one financial reporting period to another. Some of the factors that can change the contract revenue include differing site conditions, the availability of skilled labour, the performance of subcontractors, unusual weather and the accuracy of original contracts. Judgements are required of factors that may impact remaining, unsatisfied performance obligations. Estimates are required to determine the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied, or partially unsatisfied, as at the end of each reporting period. Judgement is also required to determine the timing of when unsatisfied performance obligations will become realized as revenue in future periods. 18.3 Cash-generating unit (“CGU”) Determination of which assets constitutes a CGU is subject to management judgements. Also, the asset composition of a CGU can directly impact the recoverability of assets included therein. The recoverable amount of a CGU is assessed at the CGU level and is the higher of the CGU’s fair value less costs of disposal and its value in use. A CGU may be impaired when its carrying amount exceeds its recoverable amount. Key assumptions used for the value in use calculations are set out in note 16 of the audited consolidated financial statements for the year ended December 31, 2018. 18.4 Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating unit(s) to which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-generating unit and determining a suitable discount rate in order to calculate present value. In the years ended December 31, 2018 and 2017, no impairment of goodwill was recognized. Notwithstanding, reasonable changes in one or more of the variable assumptions or the discount rate used to estimate the present value of future cash flows could have a bearing on the valuation outcomes and conclusions. 23 PFB Corporation Annual Report 2018 18.5 Impairment of tangible and intangible assets Determining whether tangible and intangible assets are impaired requires an estimation of the value-in-use of the CGUs to which they have been allocated. The value-in-use calculation requires management to estimate the future cash flows expected to arise from the CGU and a suitable discount rate to be determined in order to calculate present value. In the years ended December 31, 2018 and 2017, no impairment of tangible and intangible assets was recognized. Notwithstanding, reasonable changes in one or more of the variable assumptions or the discount rate used to estimate the present value of future cash flows could have a bearing on the valuation outcomes and conclusions. 18.6 Valuation of inventories Management reviews the carrying amount of finished goods inventories at the end of each reporting year and the recorded amount is adjusted to the lower of cost or net realizable value. As part of the review, management is required to make certain assumptions when determining expected realizable amounts. An inventory reserve is maintained for slow-moving raw materials and work-in-progress inventories. The value of slow-moving inventories is based on management’s assessment of market conditions for its products as determined by historical usage and estimated future demand. Any write-downs in value may be reversed if the circumstances which caused them no longer exist. 18.7 Allowance for doubtful accounts Amounts included in allowance for doubtful accounts reflect the lifetime expected credit losses for trade receivables. Management determines allowances based on best estimates of future expected credit losses, considering historical credit loss experience, current economic conditions, and forecasts of future economic conditions. Significant or unanticipated changes in economic conditions could impact the magnitude of future expected credit losses. The value of the allowance for doubtful accounts reserve typically tracks the seasonality trend of trade receivables. Specific reserves may be created for individual customers in exceptional circumstances. Bad debts are written off against the reserve. 18.8 Income taxes The Corporation is subject to income taxes in both Canada and the USA. When preparing current and future tax expense at the end of each reporting year, management is required to make certain estimates and assumptions regarding the timing of when temporary differences will reverse and tax rates that will be in force at that time. Unknown future events and circumstances, such as changes in tax rates and laws, may materially affect the assumptions and estimates made from one year to the next and thereby affect the consolidated financial statements. 18.9 Measurement of retirement benefits Post-employment benefits are accounted for on an actuarial basis. The Corporation engages the services of an independent actuary to perform valuations of the Corporation’s defined benefits plan and the actuary provides a certified opinion thereon. For inclusion in the valuation, management is required to make certain assumptions including an appropriate discount rate and the estimated return of plan assets. The estimates are reviewed for reasonableness by the actuary. Due to the nature of the assumptions made and used in the valuations, there is the potential for fluctuations of a material nature in the value of the defined benefits in future years. 18.10 Property, plant and equipment The Corporation estimates the useful life of property plant and equipment that it owns or is held under a finance lease. The actual useful life of assets and components of assets could vary significantly from the estimated useful lives used in determining periodic depreciation expense. Additionally the amortization of financial lease obligations associated with leasing these assets can be based on parameters that are notional and not precisely measured. The effect of employing these estimates does not necessarily match cash flows from operations with costs recorded as expense. Management reviews the useful lives of the assets at least annually to ensure that expected and actual lives are as closely aligned as is practical. 18.11 Valuations performed during a business combination The Corporation makes judgments, estimates and assumptions that affect the quantitative and qualitative valuation of business combinations. These may include: estimates of future cash flows and working capital requirements; potential acquisition synergies; costs to complete the transaction; the value of contingent consideration; strategic direction; management effectiveness, and operating efficiencies. Fair value of assets acquired and liabilities assumed in a business combination is estimated based on information available at the date of acquisition and involves PFB Corporation Annual Report 2018 24 considerable judgment in determining the fair values assigned to acquired intangible assets, land, property, plant and equipment, and other assets, and the liabilities assumed on acquisition. Unknown future events and changes in assumptions and estimates may impact future cash flows and materially impact the valuation of each business combination. 18.12 Finance leases Management uses judgment in determining whether a lease should be accounted for as a finance lease. In doing so, management considers the lease terms and, in some cases, those terms may not always conclusively support the classification as a finance lease. 18.13 Share-based payment arrangements The compensation costs relating to share-based payment arrangements are based on estimates of how many common shares will actually vest and be exercised. 19. Application of new and revised International Financial Reporting Standards (IFRSs) Effective January 1, 2018 the Corporation adopted new IFRS standards – IFRS 15, Revenue from Contracts with Customers, IFRS 9, Financial Instruments and IFRS 2, Share-based payment. The effect of adoption of these new standards is outlined in more detail in Note 4 of the consolidated financial statements as at December 31, 2018, which also discloses the restated comparative financial statements for the impacts of adopting new accounting standards for the periods ended January 1, 2017 and December 31, 2017. In January 2016, the IASB issued IFRS 16 - Leases, which supersedes IAS 17 - Leases. IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases. The standard establishes a single model for lessees to bring leases on-balance sheet while lessor accounting remains largely unchanged and retains the finance and operating lease distinctions. The standard requires the lessees to recognize a lease liability reflecting discounted future lease payments and a “right-of-use asset” for all lease contracts, and record it on the balance sheet, except with respect to lease contracts that meet limited exception criteria. IFRS 16 is effective for annual periods beginning on or after January 1, 2019 with earlier adoption permitted. The Corporation will apply IFRS 16 retrospectively and recognize the cumulative effect of initial application on January 1, 2019, subject to permitted and elected practical expedients. The Corporation will not apply this standard to short-term leases and leases for which the underlying asset is of low value. The Corporation has elected not to separate non-lease components from lease components for all underlying asset classes except Property, which the Corporation has elected to separate and exclude non-lease components from lease components. The Corporation continues to assess and quantify the effect of this standard on the consolidated financial statements, information systems and internal controls. During the fourth quarter, the Corporation has further reviewed existing contracts for lease recognition, completed an analysis of discount rates and the tax-effects of leases upon retrospective adoption. The measurement of the total lease expense over the term of a lease will be unaffected by the new standard, however, management expects to recognize additional right-of-use assets and lease obligations on the consolidated balance sheet. Management also expects changes to cost of sales as operating expenses will be presented as depreciation and finance costs. Material changes are expected to the consolidated balance sheet and immaterial changes to the consolidated statement of income. Although total cash movement will be unchanged, the presentation in the statement of cash flows will differ under the new Standard. The full quantification of the new standard will be disclosed in the condensed interim consolidated financial statements for the first quarter of 2019. 25 PFB Corporation Annual Report 2018 20. Non-IFRS Financial Measures The Corporation uses measurements primarily based on IFRS as issued by the IASB and also certain secondary non-IFRS measurements. The non-IFRS measures used by the Corporation are considered to be useful as complimentary measures in assessing the Corporation’s financial performance. Non-IFRS measurements do not have a standardized meaning prescribed by IFRS and, as such, are unlikely to be comparable in definition to similar measures presented by other companies. The definitions of non-IFRS measurements used in this MD&A can be found in the section below: Measure Definition Adjusted EBITDA Represents earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is an absolute measure of our operating performance and provides an indication of the results generated by our business activities prior to how the activities are financed, how assets are depreciated and amortized, or how results are taxed. Adjusted EBITDA per share Adjusted EBITDA divided by the basic weighted average number of shares outstanding in the period. Non-cash working capital A financial measure to monitor how much capital we have committed to the day-to-day operations of our business. Non-cash working capital represents current assets (excluding cash or cash equivalents, restricted cash and income taxes recoverable) less current liabilities (excluding income taxes payable, current portions of finance lease obligations and current portion of long-term debt). Book value Shareholders’ equity divided by the actual number of common shares outstanding as at December 31 each year. Gross profit margin Gross profit divided by sales, expressed as a percentage. Operating margin Gross profit less selling expenses, administrative expenses and other gains (losses) divided by sales. Net income margin Net income divided by sales. Current ratio Return on equity Current assets divided by current liabilities. A financial measure used to assist in analyzing shareholder value. Net income for the year divided by opening shareholders’ equity. The following table shows the reconciliation of net income to adjusted EBITDA and related per share amounts for the years ended December 31: Net income Add back (deduct): Income taxes Finance costs Investment income Depreciation Amortization Adjusted EBITDA Adjusted EBITDA per share 2018 2017 2016 $ 6,189 $ 2,281 $ 4,688 2,324 766 (67) 3,634 132 794 832 (114) 3,768 132 2,392 1,421 (234) 3,748 90 $ 12,978 $ 7,693 $ 12,105 $ 1.93 $ 1.14 $ 1.80 PFB Corporation Annual Report 2018 26 The following table shows the reconciliation of quarterly net income to quarterly adjusted EBITDA and related per share amounts for each of the quarters in 2018 and 2017: Net income (loss) (As per financial statements) Add back (deduct): Income taxes (recovery) Finance costs Investment income Depreciation Amortization Adjusted EBITDA Adjusted EBITDA per share 2018 Q4 2018 Q3 2018 Q2 2018 Q1 2017 Q4 2017 Q3 2017 Q2 2017 Q1 $ 2,080 $ 3,265 $ 1,545 $ (701) $ 1,240 $ 1,519 $ 412 $ (890) 755 171 (18) 913 30 3,931 1,215 192 (4) 908 31 5,607 605 224 (13) 913 35 3,309 (251) 179 (32) 900 36 131 323 173 (24) 912 35 592 183 (21) 934 33 156 196 (19) 981 36 2,659 3,240 1,762 $ 0.59 $ 0.83 $ 0.49 $ 0.02 $ 0.40 $ 0.48 $ 0.26 (277) 280 (50) 941 28 32 $ - Adjusted EBITDA was $3,931 in the three month period ended December 31, 2018, an increase of $1,272 from $2,659 in the comparative three-month period of 2017. The increased adjusted EBITDA is primarily a result of higher sales. For the year ended December 31, 2018, adjusted EBITDA was $12,978, an increase of $5,285 from $7,693 in 2017. The increased adjusted EBITDA is reflective of higher net income from record sales during 2018 from higher volumes, selling prices, raw material supply strategies and manufacturing efficiencies. Robert Graham Mirko Papuga Chief Executive Officer Chief Financial Officer March 8, 2019 March 8, 2019 27 PFB Corporation Annual Report 2018 Management's Report The accompanying consolidated financial statements of PFB Corporation and all information included therein is the responsibility of the management of the Corporation and has been reviewed and approved by the Board of Directors upon recommendation by the Audit Committee. Management has prepared the consolidated financial statements based on the information available and in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements and other financial information have been prepared using the accounting policies described in Note 2 to the consolidated financial statements and reflect management’s best estimates and judgments based on available information. Financial information presented throughout this report is consistent with data presented in the consolidated financial statements. PFB Corporation maintains systems of internal controls in order to provide reasonable assurance that the consolidated financial statements are accurate and complete in all material respects. These systems include established policies and procedures, the selection and training of qualified personnel, and an organization structure providing for appropriate delegation of authority and segregation of responsibilities. The Board of Directors discharges its duties related to the consolidated financial statements by reviewing and approving financial information prepared by management and through the activities of its Audit Committee. The Audit Committee, made up of four unrelated and independent directors, meets with management and its responsibilities include reviewing the consolidated financial statements. The Audit Committee also meets with the Corporation’s independent auditors to discuss the audit approach, and the results of their audit examination prior to recommending approval of the consolidated financial statements to the Board of Directors. The shareholders’ auditor, Deloitte LLP, Chartered Professional Accountants, have audited the consolidated financial statements as at and for the years ended December 31, 2018 and 2017, in accordance with Canadian Generally Accepted Auditing Standards. Their independent report outlines the scope of their examination and opinion on the consolidated financial statements and is presented herein. Robert Graham Mirko Papuga Chief Executive Officer Chief Financial Officer March 8, 2019 March 8, 2019 Calgary, Alberta Calgary, Alberta PFB Corporation Annual Report 2018 28 Independent Auditor’s Report To the Shareholders and Board of Directors of PFB Corporation Opinion We have audited the consolidated financial statements of PFB Corporation (the “Company”), which comprise the consolidated balance sheets as at December 31, 2018 and 2017, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”). In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information Management is responsible for the other information. The other information comprises: ● Management’s Discussion and Analysis ● The information, other than the financial statements and our auditor’s report thereon, in the Annual Report. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of the auditor’s report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. 29 PFB Corporation Annual Report 2018 Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: ● Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ● Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. ● Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. ● Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. ● Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. ● Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Shawn Lai. Chartered Professional Accountants March 8, 2019 Calgary, Alberta PFB Corporation Annual Report 2018 30 Consolidated Balance Sheets As at December 31, 2018 and 2017 Thousands of Canadian dollars ASSETS Current assets Cash and cash equivalents Cash – restricted Trade receivables Inventories Income taxes recoverable Prepaid expenses Contract costs Total current assets Non-current assets Marketable securities - restricted Property, plant and equipment Intangible assets Goodwill Accrued defined benefit pension plan Deferred income tax assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Contract liabilities Income taxes payable Long-term debt Finance lease obligations Total current liabilities Non-current liabilities Long-term debt Finance lease obligations Deferred operating lease obligations Deferred income tax liabilities Total non-current liabilities Total liabilities SHAREHOLDERS’ EQUITY Common shares Equity-settled employee benefits reserve Accumulated other comprehensive income Retained earnings Shareholders’ equity Total liabilities and shareholders’ equity Note December 31, 2018 December 31, 2017 9 9 10 11 7 12 21, 25 14 15 16 17 7 18 7 19 21 21 20 7 24 $ 16,944 1,347 13,082 11,638 193 374 475 44,053 1,483 39,209 1,447 2,360 10 270 44,779 $ 88,832 $ 10,894 6,464 681 350 255 18,644 8,218 2,984 719 1,631 13,552 32,196 20,947 44 4,176 31,469 56,636 $ 88,832 $ 12,180 88 9,809 9,998 287 474 527 33,363 1,239 40,099 1,405 2,217 91 357 45,408 $ 78,771 $ 8,737 5,158 39 339 249 14,522 8,567 2,983 506 1,368 13,424 27,946 20,947 - 2,448 27,430 50,825 $ 78,771 Commitments and contingencies (Note 28), and operating leases (Note 27). The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors C. Alan Smith Gordon G. Tallman Executive Chairman & Director Director 31 PFB Corporation Annual Report 2018 Consolidated Statements of Income For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars, except per share amounts Sales Cost of sales Gross profit Selling expenses Administrative expenses Other (losses) gains Operating income Gain on sale of marketable securities Investment income Finance costs Income before taxes Income tax expense Net income for the year Earnings per share - $ per share Basic Diluted Weighted average number of common shares outstanding Basic Diluted Note 11 6 7 8 8 The accompanying notes are an integral part of these consolidated financial statements. 2018 2017 $ 128,345 (99,544) $ 105,557 (84,229) 28,801 (11,985) (7,452) (152) 9,212 - 67 (766) 8,513 (2,324) 21,328 (11,424) (6,399) 13 3,518 275 114 (832) 3,075 (794) $ 6,189 $ 2,281 $ 0.92 $ 0.92 $ 0.34 $ 0.34 6,716,003 6,732,470 6,716,003 6,716,003 PFB Corporation Annual Report 2018 32 Consolidated Statements of Comprehensive Income For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars Net income for the year $ 6,189 $ 2,281 Note 2018 2017 Other comprehensive income (loss): Items that may subsequently be reclassified to income: Foreign currency translation adjustments Exchange differences on translating foreign operations, net of tax Restricted financial assets Unrealized gain on restricted financial assets, net of tax 21, 25 Items that will not be subsequently reclassified to income: Defined benefit pension plan valuation change Unrealized (loss) gain on valuation change, net of tax 1,689 (1,209) 177 39 1,866 (1,170) (138) (138) 16 16 Other comprehensive income (loss) for the year Comprehensive income for the year 1,728 (1,154) $ 7,917 $ 1,127 All comprehensive income in each year is attributable to the shareholders of the Corporation. The accompanying notes are an integral part of these consolidated financial statements. 33 PFB Corporation Annual Report 2018 Consolidated Statements of Changes in Equity As at December 31, 2018 and 2017 Thousands of Canadian dollars, except number of shares Balance at January 1, 2017 Net income for the year Other comprehensive (loss) income for the year, net of tax Total comprehensive (loss) income for the year Payment of dividends Balance at December 31, 2017 Net income for the year Other comprehensive income (loss) for the year, net of tax Total comprehensive income (loss) for the year Payment of dividends Share-based payment Common shares Number of shares Share capital Note Equity- settled employee benefits reserve Accumulated other comprehensive income Defined benefit Unrealized pension plan gain on valuation financial change, assets, net of taxes net of taxes Foreign currency translation adjustments Retained earnings Total 6,716,003 $ 20,947 $ - $ 3,360 $ 190 $ 52 $ 27,097 $ 51,646 - - - - - - - - 6,716,003 20,947 - - - - - - - - - - 24 24 - - - - - - - - - 44 - (1,209) (1,209) - - 39 39 - - 16 16 - 2,281 2,281 - (1,154) 2,281 1,127 (1,948) (1,948) 2,151 229 68 27,430 50,825 - 1,689 1,689 - - - 177 177 - - - 6,189 - 6,189 6,189 1,728 7,917 (2,150) (2,150) - 44 (138) (138) - - Balance at December 31, 2018 6,716,003 $ 20,947 $ 44 $ 3,840 $ 406 $ (70) $ 31,469 $ 56,636 The accompanying notes are an integral part of these consolidated financial statements. PFB Corporation Annual Report 2018 34 Consolidated Statements of Cash Flows For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars CASH FLOWS FROM OPERATING ACTIVITIES Net income for the year Adjustments for: Depreciation expense Amortization expense Gain on disposal of property, plant and equipment Gain on sale of marketable securities Defined benefit pension plan Finance costs Investment income Income tax expense Share-based payment expense Unrealized foreign exchange (gains) losses Changes in non-cash working capital Unrealized foreign exchange relating to non-cash working capital Changes in deferred operating lease obligations Cash from operating activities, before income taxes Income taxes paid, net Net cash from operating activities CASH FLOWS USED IN INVESTING ACTIVITIES Increase in restricted cash balance Purchase of leased assets Reclassification of lease obligations related to purchase of leased assets Non-cash deferred operating lease obligation related to purchase of leased assets Purchase of property, plant and equipment Purchase of intangible assets Proceeds from disposal of property, plant and equipment Interest received Distributions received from marketable securities Net cash used in investing activities CASH FLOWS USED IN FINANCING ACTIVITIES Repayment of finance lease obligations Settlement of finance lease obligation related to purchase of leased assets Changes in long-term debt Proceeds from disposal of marketable securities Finance costs paid Dividends paid to shareholders Net cash used in financing activities Effects of exchange rate changes on the balance of cash held in foreign currencies Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Note 2018 2017 $ 6,189 $ 2,281 14 15 6, 14 7 6 29 20 22 22, 23 22 14 15 23 22 19, 23 24 9 3,634 132 (58) - (79) 766 (67) 2,324 44 (69) (1,298) 17 214 11,749 (1,312) 10,437 (1,259) - - - (1,769) (64) 82 48 19 (2,943) (279) - (338) - (766) (2,150) (3,533) 3,768 132 (51) (275) (40) 832 (114) 794 - 25 647 (64) 8 7,943 (144) 7,799 (51) (18,800) 10,982 143 (1,482) (129) 58 40 74 (9,165) (246) (10,982) 8,906 1,883 (832) (1,948) (3,219) 803 4,764 12,180 $ 16,944 (369) (4,954) 17,134 $ 12,180 The accompanying notes are an integral part of these consolidated financial statements. 35 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 1. General information PFB Corporation (“PFB” or the “Corporation”) is a Canadian public company incorporated under the Alberta Business Corporations Act and has its head office in Calgary, Alberta, Canada. The Corporation’s corporate office is located at 300, 2891 Sunridge Way NE, Calgary, Alberta, Canada T1Y 7K7. The Corporation’s shares are publicly traded on the Toronto Stock Exchange (“TSX”) under the symbol PFB. The principal business activity of the Corporation is manufacturing insulating building products made from expanded polystyrene materials and marketing these products in North America. The Corporation’s wholly-owned subsidiaries operate manufacturing facilities and sales operations in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba and Ontario in Canada, and in the States of Minnesota, Michigan, Idaho and Ohio, USA. 2. Significant accounting policies 2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). 2.2 Basis of preparation The consolidated financial statements were prepared on a historical cost basis except for certain financial instruments and contingencies which are valued at fair value through profit or loss. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The accounting policies set out below have been applied consistently in the preparation of the consolidated financial statements for all years presented. Certain comparative figures have been reclassified to conform to the presentation adopted in the current year. Sales of the Corporation’s products are driven by consumer and industrial demand for insulation and building products. The timing of customers’ construction projects can be influenced by a number of factors including the prevailing economic climate and weather. Seasonality of construction results in demand for the Corporation’s products to be typically stronger in the second and third quarters and less strong in the first and fourth quarters of its fiscal cycle. 2.3 Basis of consolidation Subsidiaries are all entities over which the Corporation has control. The Corporation controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The consolidated financial statements incorporate the accounts of the Corporation and its subsidiaries (entities controlled by the Corporation). All subsidiaries are wholly-owned by the Corporation (Note 31). All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. 2.4 Revenue Recognition The Corporation enters into contracts to supply various goods, services or combinations of goods and services, which are capable of being distinct and accounted for as separate performance obligations. Revenue is recognized when performance obligations under the terms of a contract with customer are satisfied; generally this occurs with the transfer of control of products or services. Control transfers to customers upon shipment or delivery of goods to the destination and upon completion of services. Revenue is measured as the amount of consideration the Corporation expects to receive in exchange for transferring goods or providing services. Revenue is reduced for variable consideration attributable to customer returns, customer rebates and similar allowances. Sales, excise, and other taxes are excluded from revenue. 2.4.1 Manufactured goods Revenue from contracts to provide manufactured goods is recognized at the transfer of control, which occurs upon shipment or delivery, in accordance with the terms of the contract. When contracts contain multiple performance obligations, the Corporation allocates the transaction price to each performance obligation identified in the contract. Revenue is recognized when each performance obligation is achieved. PFB Corporation Annual Report 2018 36 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 2.4.2 Rendering of services Revenue from the rendering of services includes design, advisory and installation services. Revenue from contracts to provide services is recognized when or as the services are provided in accordance with the performance obligations of the contract. The method to measure progress towards complete satisfaction of performance obligations over time is determined using the output method. When contracts include a combination of services, the Corporation allocates the transaction price to each service performance obligation and revenue is recognized as each distinct performance obligation is delivered. 2.4.3 Freight Freight services beyond normal freight terms incur charges that are recognized as freight revenues. 2.4.4 Construction contracts Construction contracts include performance obligations for the construction of an asset or to supply a bundled combination of products and services, such as full design build services and the Total Home Solution®. As performance obligations are achieved, revenue is recognized over time or at a point in time, depending on the nature of the performance obligation. The method to measure progress towards complete satisfaction of performance obligations over time is determined using the output method. Performance obligations are satisfied at a point in time upon shipment or delivery of goods. When acting as principal for design, advisory, installation, engineering or other work, the Corporation recognizes revenue on a gross basis. When total costs to be incurred on a contract exceed the total estimated revenue to be earned, a provision for the entire loss on the contract is recognized in the period the loss is determined. Contract modifications that occur are accounted for as if they were part of the existing contract and are recognized as a cumulative adjustment to revenue. 2.4.5 Other revenue types Revenue from the sale of other goods or services not listed above is generally ancillary and is recognized when control is transferred, typically on the delivery of the product or service to the customer. These revenues include the sale of scrap material, digital media subscriptions and other revenue types. 2.4.6 Contract costs Costs the Corporation would not have incurred if a contract had not been obtained and expected to be recovered, are included in other current assets on the consolidated balance sheet as contract costs. Contract costs are reduced over the life of a contract in proportion to the completion of those performance obligations. 2.4.7 Contract liabilities Contract liabilities include cash consideration received as a deposit at the beginning of certain contracts. Contract liabilities are reduced as performance obligations are achieved. The Corporation has determined there are no significant financing components with customers. Contract liabilities also include variable consideration for customer volume rebates and are accounted for using the ‘most likely amount’ method. Retrospective price reductions are applied when a customer purchases specified quantities of manufactured goods. The operating cycle, or duration, of some construction contracts may exceed an annual year. All contract liabilities are classified as current as they are expected to be realized or satisfied within the normal operating cycle of the contract. Refer to Note 12 – Contract costs, Note 18 – Contract liabilities and Note 13 – Remaining performance obligations, for further information. 2.4.8 Investment income Dividend income from investments is recognized when the Corporation’s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Corporation and the amount of income can be measured reliably). 37 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars Interest income from a financial asset is recognized when it is probable that the economic benefits will flow to the Corporation and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition. 2.5 Cash and cash equivalents, and restricted cash Cash and cash equivalents consist of cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of 90 days or less. Restricted cash comprises cash collected from certain customers of the USA segment which is contractually segregated from other cash as it is held solely for disbursements to suppliers and service providers specific to those customer’s contracts. 2.6 Inventories Inventories, which comprise raw materials and supplies, work-in-progress and finished products, are stated at the lower of cost and net realizable value. Costs of inventories are predominantly determined using the weighted average cost method and includes the cost of purchase, the cost of conversion (labour and overhead) and other costs required to bring the inventories to their present location and condition. Some customized work-in-progress and finished product inventories are held at actual cost using the First-in, First-out (“FIFO”) method and are segregated by customer job number. Inventories which have costs determined using the FIFO method represent a small portion of the Corporation’s inventories on hand at any point in time and such inventories turn frequently. Net realizable value represents the estimated selling price for inventories, less all estimated costs of completion and costs necessary to make the sale. The cost of work-in-process and finished product inventories includes the cost of materials, the cost of direct labour, and a systematic allocation of manufacturing overheads based on a normal range of capacity for each production facility. Inventories are written down to net realizable value when the cost of inventories is estimated to be unrecoverable due to obsolescence, damage or declining selling prices. When circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in selling prices, the amount of write-down previously recorded is reversed. 2.7 Property, plant and equipment (“PP&E”) PP&E are carried at cost less accumulated depreciation and any impairment losses. The cost includes expenditures directly attributable to the acquisition of the property, plant and equipment. Assets acquired under finance leases are recognized at an amount equal to fair value or, if lower, the present value of the minimum lease payments, less accumulated depreciation and any impairment losses. Gains and losses, determined as the difference between net sales proceeds and the carrying amount of the asset, arising on the disposal of individual assets are recognized in earnings in the year of disposal. PP&E in the course of construction for production are carried at cost, less any recognized impairment loss. Such properties are classified to the appropriate categories of PP&E when completed and ready for intended use. Depreciation commences when the assets are available for use and is recognized on a straight-line basis to depreciate the capitalized cost of assets to their estimated residual values over their estimated useful lives. When significant parts of an asset have different expected useful lives, they are accounted for as separate components of the asset and depreciated over their estimated useful lives and depreciation method when practical. Freehold land is not depreciated. Assets held under finance leases are depreciated over the shorter of the lease term and their expected useful lives. Asset class: Freehold land Buildings Plant and equipment Assets under finance lease Assets under construction Useful life: Unlimited useful life, not depreciated 15 to 40 years 3 to 20 years Lesser of the expected useful life and the term of the lease Depreciation commences when the asset is constructed and placed in use PFB Corporation Annual Report 2018 38 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars An item of PP&E is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognizing an item of PP&E is measured as the difference between the net sales proceeds and the carrying amount of the asset and is recognized in profit or loss. PP&E is reviewed quarterly to determine whether there is any indication of impairment. Depreciation methods, useful lives, and residual values are reviewed at least annually and adjusted as appropriate. 2.8 Leasing Leases are classified as finance leases whenever the terms of the leases transfer substantially all of the risks and rewards of ownership to the Corporation. All other leases are recorded as operating leases. Assets held under a finance lease are initially recognized as assets of the Corporation at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated balance sheets as current and long-term finance lease obligations. Lease payments are apportioned between finance expenses and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognized immediately in profit and loss. Operating lease payments are recognized in the consolidated statement of income as an expense on a straight-line basis over the lease term. Lease incentives received and predetermined fixed escalations of the minimum rent are recognized as an integral part of the total lease expense, over the term of the lease. The Corporation leases properties with rental incentives and predetermined fixed escalations of the minimum rent (Note 20). 2.9 Intangible assets Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and any accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting year and the effect of any changes in estimates is accounted for on a prospective basis. A summary of estimated useful life by asset class is as follows: Class: Useful life: Patents Product development costs Software Registered trade names Order backlog Non-compete agreements 17 years 3 years 3 to 5 years Indefinite life – not amortized Lives of individual contracts (max. 3 years) 1 to 1.5 years Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses and the carrying amounts are tested for impairment at least annually or whenever there is an indication that an asset may be impaired. In the case of impairment, the recoverable amount of an asset is estimated in order to determine the extent of the impairment loss, if any (Note 2.11). Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date, which is considered to be the asset’s deemed cost. Subsequent to their initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortization and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. An intangible asset is derecognized on disposal or when no future economic benefits are expected from use. Any gain or loss arising from de-recognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in profit or loss when the asset is derecognized. 2.10 Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. Goodwill is not amortized. For the purposes of impairment testing, goodwill is allocated to each of the Corporation’s cash-generating units (“CGU”) that are expected to benefit from the synergies of the combination. 39 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars A CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit, pro-rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognized directly in the consolidated statement of income. An impairment loss recognized for goodwill is not reversed in subsequent years. 2.11 Impairment of tangible and intangible assets other than goodwill At the end of each reporting year, the Corporation reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Corporation estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. The recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. The process of determining cash flows requires management to make estimates and assumptions which include forecasted future sales, earnings, capital investment, and discount rates. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or cash- generating unit in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. 2.12 Foreign currency translation The Corporation’s primary economic environment in which it operates its businesses is Canada. The consolidated financial statements are presented in Canadian dollars, which is the Corporation’s functional and presentation currency. At the end of each reporting year, monetary items denominated in foreign currencies are retranslated at exchange rates prevailing at that date. Gains and losses arising from this retranslation are included in profit or loss in the year in which they arise. Non-monetary assets and liabilities that are measured at their historical cost in a foreign currency are not retranslated. The Corporation’s subsidiaries located in the United States have a functional currency of U.S. dollars. The assets and liabilities of the Corporation’s foreign operations are translated into Canadian dollars using exchange rates prevailing at the end of each reporting year. Income and expense items are translated at the average exchange rates applicable to the years when recorded. Equity balance sheet amounts denominated in U.S. dollars are translated using historical exchange rates. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity. Goodwill and fair value adjustments on identifiable assets and liabilities assumed through acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting year. Exchange differences arising are recognized in other comprehensive income. 2.13 Provisions Provisions are recognized when the Corporation has a present legal or constructive obligation as a result of a past event, it is probable that the Corporation will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. PFB Corporation Annual Report 2018 40 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting year, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (where the effect of the time value of money is material). The Corporation’s provisions are not significant and are included in trade and other payables. 2.14 Financial instruments Financial assets and financial liabilities are recognized initially at fair value when the Corporation or a subsidiary of the Corporation becomes a party to the contractual provisions of the instrument (Note 25). Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial asset or financial liabilities, as appropriate, on initial recognition. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. 2.15 Financial assets Financial assets are classified and measured based on three categories: (i) assets at amortized cost; (ii) fair value through profit or loss (“FVTPL”); or (iii) fair value through other comprehensive income (“FVOCI”). The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets are initially measured at fair value. Upon initial recognition, the Corporation classifies its financial assets as subsequently measured at either amortized cost or fair value, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Financial assets are not reclassified subsequent to their initial recognition, except if in the period the Corporation changes its business model for managing financial assets. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as FVTPL: (i) The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and (ii) The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. 2.15.1 Impairment of financial assets The Corporation uses the “expected credit loss” model for calculating impairment and recognizes expected credit losses as a loss allowance for assets measured at amortized cost. The Corporation’s trade and other receivables are typically short-term with payments received within a twelve month period and do not have a significant financing component, therefore the Corporation recognizes an amount equal to the lifetime expected credit losses based on the Corporation’s historical experience. The carrying amount of these assets is net of any loss allowance. 2.16 Financial liabilities Financial liabilities are recognized initially at fair value and subsequently measured at either fair value or amortized cost. The Corporation’s financial liabilities are classified as ‘financial liabilities at amortized cost’ and include any borrowings and trade and other payables and are subsequently measured at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant year. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability. The Corporation does not hold any financial liabilities designated at fair value through profit or loss. 2.17 Taxation Income tax expense represents the sum of the tax currently payable, deferred tax and prior year adjustments. 41 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 2.17.1 Current tax The tax currently payable is based on taxable income for the year. Taxable income differs from ‘income before tax’ as reported in the consolidated statements of income because of items of income and expense that are taxable or deductible in other years and items that are never taxable or deductible. The Corporation’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting year. 2.17.2 Deferred tax Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable income. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable income nor the accounting income. In addition, deferred tax liabilities are not recognized if the temporary difference arises from the initial recognition of goodwill. The carrying amount of deferred tax assets is reviewed at the end of each reporting year and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax assets to be recovered. Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the year in which the liability is settled or the asset is realized, based on tax rates that have been enacted or substantively enacted by the end of the reporting year. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Corporation expects, at the end of the reporting year, to recover or settle the carrying amount of its assets and liabilities. Deferred income tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Corporation has a legally enforceable right to offset and intends to settle its current tax assets and liabilities on a net basis. 2.17.3 Current and deferred tax for the year Current, deferred and prior period tax adjustments are recognized in profit or loss, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current, deferred and prior year tax adjustments are also recognized in other comprehensive income or directly in equity, respectively. 2.18 Employee retirement benefit plan The Corporation has a defined benefit plan (the “Plan”) providing pension benefits to certain eligible employees who are members of a union which is their certified bargaining agent. The Plan is registered with the Financial Services Commission of Ontario and with the Canada Revenue Agency and is funded in accordance with applicable legislation. Commencing April 1, 2012, the defined benefit plan was closed to all new hires. The cost of providing benefits under the Plan is determined using the projected unit credit method prorated based on service, with actuarial valuations being carried out at the end of each annual reporting period. Re-measurement, comprising actuarial gains and losses, the effect of the changes to the asset ceiling, and the return on plan assets (excluding interest), is reflected immediately in the consolidated balance sheet with a charge or credit recognized in other comprehensive income in the year in which they occur. Re-measurement recognized in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss. Past service cost is recognized in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset. Defined benefit costs are categorized as follows: Service cost (including current and past service cost, as well as gains and losses on curtailments and settlements); Net interest expense or income; and Re-measurement. PFB Corporation Annual Report 2018 42 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars The Corporation presents service costs in the consolidated statements of income in the line item cost of sales. The retirement benefit obligation recognized in the consolidated balance sheets represents the actual deficit or surplus in the Corporation’s defined benefit plan. 2.19 Earnings per share Basic earnings per share is determined by dividing profit attributable to common shareholders of the Corporation by the weighted average number of common shares outstanding during the year. The Corporation uses the treasury stock method of calculating diluted earnings per common share. The treasury stock method is used to compute the dilutive effect of stock options, warrants and similar instruments. Under this method, the exercise of stock options is assumed to have occurred at the beginning of the year and the related common shares are assumed issued at that time. The proceeds from exercise are assumed to have purchased common shares of the Corporation for cancellation at the average market value price during the year. The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased) are included in the denominator of the diluted earnings per common share calculation. Diluted earnings per common share exclude all potential dilutive common shares where the effect is anti-dilutive. 2.20 Share-based payment arrangements Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Corporation’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting year, the Corporation revises its estimate of the number of equity instruments expected to vest. The impact of any revision to the original estimates, if any, is recognized in profit or loss such that the cumulative expense reflects the revised estimate with a corresponding adjustment to the equity-settled employee benefits reserve. 3. Critical accounting judgments and estimates In the application of the Corporation’s accounting policies, as described in Note 2, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities. The estimates and associated assumptions are based on a combination of historical experience, available knowledge of current conditions, and other factors that are considered to be reasonable and relevant under the circumstances. Actual costs and outcomes may significantly differ from these estimates and assumptions. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years. The following are the key assumptions concerning the future and other key sources of estimating uncertainty at the end of the reporting year, that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year. 3.1 Revenue recognition IFRS 15 requires management to make judgments and estimates. Judgement relates to the identification of performance obligations in each contract. Some contracts with customers include a bundled set of goods and services and judgement is required to determine the goods and services that are distinct performance obligations. Judgement is required to determine any level of integration and any interdependency between goods and services entered with customers. Allocation of the transaction price to different performance obligations may require estimates. In instances where information is incomplete or not available, determination of selling prices include market conditions and other observable inputs such as the scope of work and geographic region. Judgements and estimates are also required to determine an appropriate measure of progress and pattern of delivery when determining how control of promised goods or services transfers to a customer. Estimates of incentives or rebates are updated regularly as information becomes available and only to the extent that the variable consideration is constrained. 43 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 3.2 Remaining performance obligations Many factors may lead to a change during a contract performance period, which can result in a change to contract profitability from one financial reporting period to another. Some of the factors that can change the contract revenue include differing site conditions, the availability of skilled labour, the performance of subcontractors, unusual weather and the accuracy of original contracts. Judgements are required of factors that may impact remaining, unsatisfied performance obligations. Estimates are required to determine the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied, or partially unsatisfied, as at the end of each reporting period. Judgement is also required to determine the timing of when unsatisfied performance obligations will become realized as revenue in future periods. 3.3 Cash-generating unit (“CGU”) Determination of which assets constitute a CGU is subject to management judgments. Also, the asset composition of a CGU can directly impact the recoverability of assets included therein. The recoverable amount of a CGU is assessed at the CGU level and is the higher of the CGU’s fair value less costs of disposal and its value in use. A CGU may be impaired when its carrying amount exceeds its recoverable amount. Key assumptions used for the value in use calculations are set out in Note 16. 3.4 Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the CGUs to which goodwill has been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the CGU and determine a suitable discount rate in order to calculate present value. 3.5 Impairment of tangible and intangible assets Determining whether tangible and intangible assets are impaired requires an estimation of the value-in-use of the CGUs to which they have been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the CGU and a suitable discount rate to be determined in order to calculate present value. 3.6 Valuation of inventories Management reviews the carrying amount of finished goods inventories at the end of each reporting year and the recorded amount is adjusted to the lower of cost or net realizable value. As part of the review, management is required to make certain assumptions when determining expected realizable amounts. An inventory reserve is maintained for slow-moving raw materials and work-in-progress inventories. The value of slow-moving inventories is based on management’s assessment of market conditions for its products as determined by historical usage and estimated future demand. Any write downs in value may be reversed if the circumstances which caused them no longer exist. 3.7 Allowance for doubtful accounts Amounts included in allowance for doubtful accounts reflect the lifetime expected credit losses for trade receivables. Management determines allowances based on best estimates of future expected credit losses, considering historical credit loss experience, current economic conditions, and forecasts of future economic conditions. Significant or unanticipated changes in economic conditions could impact the magnitude of future expected credit losses. The value of the allowance for doubtful accounts reserve typically tracks the seasonality trend of trade receivables. Specific reserves may be created for individual customers in exceptional circumstances. Bad debts are written off against the reserve. 3.8 Income taxes The Corporation is subject to income taxes in both Canada and the USA. When preparing current and deferred tax expense at the end of each reporting year, management is required to make certain estimates and assumptions regarding the timing of when temporary differences will reverse and tax rates that will be in force at that time. Unknown future events and circumstances, such as changes in tax rates and laws, may materially affect the assumptions and estimates made from one year to the next and thereby affect the consolidated financial statements. 3.9 Measurement of retirement benefits Post-employment benefits are accounted for on an actuarial basis. The Corporation engages the services of an independent actuary to perform valuations of the Corporation’s defined benefits plan and the actuary provides a certified opinion thereon. For inclusion in the valuation, management is required to make certain assumptions PFB Corporation Annual Report 2018 44 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars including an appropriate discount rate and the estimated return of plan assets. The estimates are reviewed for reasonableness by the actuary. Due to the nature of the assumptions made and used in the valuations, there is the potential for fluctuations of a material nature in the value of the defined benefits in future years. 3.10 Property plant and equipment The Corporation estimates the useful life of property, plant and equipment that it owns or is held under a finance lease. The actual useful life of assets and components of assets could vary significantly from the estimated useful lives used in determining periodic depreciation expense. Management reviews the useful lives of the assets at least annually to ensure that expected and actual lives are closely aligned. 3.11 Valuations performed during a business combination The Corporation makes judgments, estimates and assumptions that affect the quantitative and qualitative valuation of business combinations. These may include: estimates of future cash flows and working capital requirements; potential acquisition synergies; costs to complete the transaction; the value of contingent consideration; strategic direction; management effectiveness, and operating efficiencies. Fair value of assets acquired and liabilities assumed in a business combination is estimated based on information available at the date of acquisition and involves considerable judgment in determining the fair values assigned to acquired intangible assets, land, property, plant and equipment, and other assets, and the liabilities assumed on acquisition. Unknown future events and changes in assumptions and estimates may impact future cash flows and materially impact the valuation of each business combination. 3.12 Finance leases Management uses judgment in determining whether a lease should be accounted for as a finance lease. In doing so, management considers the lease terms and, in some cases, those terms may not always conclusively support the classification as a finance lease. 3.13 Share-based payment arrangements The compensation costs relating to share-based payment arrangements are based on estimates of how many common shares will actually vest and be exercised. 4. Application of new and revised International Financial Reporting Standards (“IFRSs”) The Corporation has adopted the following accounting standards effective for annual periods beginning on or after January 1, 2018: IFRS 15 - Revenue From Contracts With Customers The core principle of IFRS 15 is to recognize revenue in accordance with the transfer of control of contracted goods or services to customers in an amount that reflects the consideration to which the entity is, or expects to be, entitled on the basis of principles pertaining to the nature, timing and uncertainty of revenue and cash flows arising from the contracts. The Corporation elected to apply the standard on a retrospective method whereby all prior year statements are restated. Impacts to previously reported results The Corporation identified no impacts to consolidated statement of income or loss, consolidated statement of changes in equity, and the consolidated statements of cash flows upon the adoption of IFRS 15. The following tables present the impact of the adoption of IFRS 15 on the Corporation’s consolidated balance sheets as of January 1, 2017 and December 31, 2017: 45 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars Prepaid expenses Contract costs Trade and other payables Deferred revenue Contract liabilities Prepaid expenses Contract costs Trade and other payables Deferred revenue Contract liabilities As reported $ 1,111 - $ 1,111 $ 8,383 2,821 January 1, 2017 Adjustments under IFRS 15 $ (397) 397 $ - $ (1,024) (2,821) - 3,845 $ 11,204 $ - As reported $ 1,001 - $ 1,001 $ 10,217 3,678 December 31, 2017 Adjustments under IFRS 15 $ (527) 527 $ - $ (1,480) (3,678) - 5,158 $ 13,895 $ - Adjusted $ 714 397 $ 1,111 $ 7,359 - 3,845 $ 11,204 Adjusted $ 474 527 $ 1,001 $ 8,737 - 5,158 $ 13,895 IFRS 9 - Financial Instruments The core principle of IFRS 9 is to introduce new requirements for the classification and measurement of financial assets, amend hedge accounting and introduce a forward-looking expected loss impairment model. The Corporation elected to apply the standard on a retrospective method whereby all prior year statements are restated. Impacts of previously reported results The Corporation identified no impacts to the consolidated financial statements upon the adoption of IFRS 9. Upon adoption, the Corporation made an irrevocable election to account for changes in the fair value of the marketable securities, through other comprehensive income, until derecognition. This is consistent with the accounting treatment prior to adoption. There are several financial instrument classification and measurement changes as a result of this change in accounting policy. The following table summarizes the classification and measurement changes for each class of the Corporation’s financial assets and financial liabilities upon adoption at January 1, 2018: PFB Corporation Annual Report 2018 46 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars Financial instrument Category Measurement Category Measurement IAS 39 IFRS 9 Cash and cash equivalents FVTPL Restricted cash FVTPL Fair value Fair value Restricted marketable securities Trade receivables Available for sale Fair value Assets at amortized cost Assets at amortized cost FVOCI Amortized cost Amortized cost Fair value Loans and receivables Amortized cost Assets at amortized Amortized cost cost Bank indebtedness Other financial liabilities Amortized cost Financial liabilities Amortized cost at amortized cost Trade and other payables Other financial liabilities Amortized cost Financial liabilities Amortized cost at amortized cost Long-term debt Other financial liabilities Amortized cost Financial liabilities Amortized cost at amortized cost As a result of adopting IFRS 9, the changes in classification categories did not result in any adjustment to the carrying amount of the related financial assets and financial liabilities. IFRS 2 – Share-based payment The Corporation has adopted amendments to IFRS 2 – Share-based payment, effective January 1, 2018 on a prospective basis. The amendments provide guidance on the effects of vesting and non-vesting conditions, a net settlement feature for withholding tax obligations and changes to the classification of the transaction from cash- settled to equity-settled. The adoption of the amendment to IFRS 2 – Share-based payment, did not have any effect on the consolidated financial statements. 4.1 New and revised accounting standards and interpretations, but not yet effective: The International Accounting Standards Board (“IASB”) and International Financial Reporting Interpretations Committee (“IFRIC”) have issued a number of new standards, amendments and interpretations that have not been applied in preparing these consolidated financial statements as their effective dates fall within annual periods beginning subsequent to the current reporting period. The new standard and amendments applicable to the Corporation are as follows: IFRS 16 – Leases In January 2016, the IASB issued IFRS 16 - Leases, which supersedes IAS 17 - Leases. IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases. The standard establishes a single model for lessees to bring leases on-balance sheet while lessor accounting remains largely unchanged and retains the finance and operating lease distinctions. The standard requires the lessees to recognize a lease liability reflecting discounted future lease payments and a “right-of-use asset” for all lease contracts, and record it on the balance sheet, except with respect to lease contracts that meet limited exception criteria. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted. The Corporation will apply IFRS 16 retrospectively and recognize the cumulative effect of initial application on January 1, 2019, subject to permitted and elected practical expedients. The Corporation will not apply this standard to short-term leases and leases for which the underlying asset is of low value. The Corporation has elected not to separate non-lease components from lease components for all underlying asset classes except Property, which the Corporation has elected to separate and exclude non-lease components from lease components. The Corporation continues to assess and quantify the effect of this standard on the consolidated financial statements, information systems and internal controls. During the fourth quarter, the Corporation has further reviewed existing contracts for lease recognition, completed an analysis of discount rates and the tax-effects of leases upon retrospective adoption. 47 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars The measurement of the total lease expense over the term of a lease will be unaffected by the new standard, however, management expects to recognize additional right-of-use assets and lease obligations on the consolidated balance sheet. Management also expects changes to cost of sales as operating expenses will be presented as depreciation and finance costs. Material changes are expected to the consolidated balance sheet and immaterial changes to the consolidated statement of income. Although total cash movement will be unchanged, the presentation in the statement of cash flows will differ under the new standard. The full quantification of the new standard will be disclosed in the condensed interim consolidated financial statements for the first quarter of 2019. 5. Segment information The Corporation operates individual legal entities in Canada and the USA which are reported as operating segments and revenue is reported in accordance with that segmentation. The Corporation has two reportable operating segments, Canada and the USA, and each segment applies the same accounting policies (Note 2), internal controls and reporting systems. Segments are based on the way management organizes the operations. Segments are identified and managed by the geographic and regulatory environment they operate within because they require compliance with different regulations. Segment performance predominantly focuses on operating results and the manner in which resources are allocated based on Canadian and USA operations, respectively. The chief operating decision maker evaluates performance on the basis of operating income or loss, as reported on a periodic basis. This performance measure is considered to be the most relevant in evaluating the results of each operating segment. 5.1 Segment sales and operating income Segment sales represent sales revenues directly attributable to each segment. Inter-segment sales have been eliminated. There are varying levels of integration between each segment. The Corporation operates individual legal entities in Canada and the USA which are reported as operating segments and revenue is reported in accordance with that segmentation. The Canadian segment primarily derives its revenues from the sale of expanded polystyrene (“EPS”) foam products, which it manufactures at its facilities in Canada. The USA segment primarily derives its revenues from the sale of EPS foam products, customized log and timber structures made at its facilities in the United States which typically include design and installation services that together provide the basis for a bundled sale of its manufactured products. Segment operating income represents the income as reported by each segment excluding any allocations for corporate income or expenses and foreign exchange gains or losses arising on inter-segment settlements. Information regarding each reportable operating segment for years ended December 31, 2018 and 2017 are set out below: Canada USA Total for segments Corporate – income Sales revenues 2018 2017 Operating income 2018 2017 $ 78,346 $ 68,970 $ 4,602 $ 1,746 49,999 36,587 $ 128,345 $ 105,557 4,026 8,628 586 (2) 1,319 3,065 452 1 Foreign exchange (loss) gain on inter-segment settlements Consolidated operating income $ 9,212 $ 3,518 PFB Corporation Annual Report 2018 48 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 5.2 Segment assets and liabilities Management measures capital employed using net segmented assets. The location of the capital assets and liabilities determines the geographic areas. The reconciliation of segmented assets and segmented liabilities in relation to total consolidated assets and liabilities is set out in the table below: Assets Segment assets Assets not allocated to segments: Cash and cash equivalents Freehold land and buildings Restricted marketable securities Corporate taxes1 Total assets Liabilities Segment liabilities Liabilities not allocated to segments: Finance lease obligations Long term debt Corporate taxes1 Total liabilities Net segment assets Canada USA 1 Current and deferred taxes. 5.3 Other segment information Additions to non-current assets: Canada USA Corporate Total Depreciation and amortization: Canada USA Corporate Total Inter-segment sales 49 PFB Corporation Annual Report 2018 2018 2017 $ 47,366 $ 41,658 16,944 22,750 1,483 289 12,180 23,386 1,239 308 $ 88,832 $ 78,771 $ 20,389 $ 15,788 3,239 8,568 - 3,232 8,906 20 $ 32,196 $ 27,946 $ 19,970 $ 19,802 7,007 6,068 2018 2017 $ 795 1,007 31 $ 914 648 7,724 $ 1,833 $ 9,286 $ 2,066 $ 2,177 627 1,073 675 1,048 $ 3,766 $ 3,900 $ 7,052 $ 5,657 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 6. Other (losses) gains Unrealized foreign exchange gains (losses) Realized foreign exchange losses Gain on disposals of property, plant and equipment Share-based payment expense 7. Income taxes 7.1 Income taxes recognized in the year Current tax expense Deferred tax expense Income tax expense 2018 $ 69 (235) 58 (44) 2017 $ (25) (13) 51 - $ (152) $ 13 2018 $ 2,027 297 $ 2,324 2017 $ 401 393 $ 794 In the year ended December 31, 2018, deferred income tax expense of $44 (2017 - $28) was recognized directly in other comprehensive income. The income tax expense can be reconciled to the accounting income as follows: Income before taxes 2018 $ 8,513 2017 $ 3,075 Income tax expense calculated at 27.4% (2017 – 27.4%) $ 2,333 $ 842 Effect of different tax rates of subsidiaries operating in other jurisdictions Enacted rate changes Non-taxable portion of capital gain Expenses not deductible in determining taxable income Prior period adjustments and reassessments Other Income tax expense (90) - - 57 19 5 216 1 (68) 42 (210) (29) $ 2,324 $ 794 The statutory tax rate in the table above is the combined Canadian federal and blended provincial income tax rate of approximately 27.4% (2017 – 27.4%). The Corporation’s USA segment were subject to federal and state statutory tax rates of approximately 25% for 2018 (2017 – 38%). As a result of US Tax Reform Legislation, effective January 1, 2018, the USA segment will be subject to a combined rate of approximately 25% and deferred tax balances at December 31, 2018 of the USA segment are measured at this enacted rate. 7.2 Current tax assets Current tax assets Income taxes recoverable Current tax liabilities Income taxes payable As at Dec 31, 2018 As at Dec 31, 2017 $ 193 $ 287 681 39 PFB Corporation Annual Report 2018 50 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 7.3 Deferred tax balances The Corporation is subject to tax in multiple jurisdictions and deferred tax assets and liabilities arising in different jurisdictions cannot be netted against each other. The analysis of deferred tax assets and liabilities presented in the consolidated balance sheets is as follows: As at Dec 31, 2018 As at Dec 31, 2017 $ 570 $ 133 - - (112) (188) - 209 95 (112) 115 (83) $ 270 $ 357 $ (2,099) $ (1,673) (141) 8 29 183 192 197 (40) - (16) 61 161 139 $ (1,631) $ (1,368) 2018 2017 $ 6,189 $ 2,281 6,716,003 6,716,003 16,467 N/A 6,732,470 6,716,003 $ 0.92 $ 0.92 $ 0.34 $ 0.34 Deferred tax assets Property, plant and equipment Non-capital tax losses carried forward Reserve Land Other Intangible assets Deferred tax liabilities Property, plant and equipment Intangible assets Non-capital tax losses carried forward Other Reserves Lease items Deferred operating lease obligation Non-capital tax losses carried forward expire on 2029. 8. Earnings per share The following table sets forth the reconciliation of basic and diluted earnings per share: Net income for the period Weighted average number of common shares outstanding – basic Effect of: Dilutive stock options Weighted average number of common shares outstanding - diluted Earnings per share: Basic Diluted 51 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 9. Cash and cash equivalents Cash held with banks Short-term investments As at Dec 31, 2018 As at Dec 31, 2017 $ 13,744 $ 12,180 3,200 - $ 16,944 $ 12,180 Interest income earned on bank balances and short-term investments is reported as investment income in the consolidated statements of income. Cash - restricted As at Dec 31, 2018 As at Dec 31, 2017 $ 1,347 $ 88 Restricted cash comprises cash collected from certain customers of the USA segment which is contractually segregated from other cash as it is held exclusively for disbursements to suppliers and service providers specific to those individual customer contracts. 10. Trade receivables Eligible trade receivables held by the Corporation’s subsidiaries in Canada have been pledged as security with a bank in support of a revolving credit facility. The revolving credit facility was unused as at December 31, 2018. 10.1 Current trade receivables Aging profile Current and past due for less than 30 days Past due for between 31 and 90 days Past due for 91 days or longer Total gross current trade receivables Allowance for doubtful accounts Current trade receivables, net As at Dec 31, 2018 As at Dec 31, 2017 $ 11,800 $ 8,764 1,343 487 13,630 (548) 572 886 10,222 (413) $ 13,082 $ 9,809 The average trade credit allowed on the sale of goods is between 30 and 60 days from the date of shipment. For sales of customized products and services, deposits and/or payment installments are typically incorporated into contract terms to mitigate the potential for default. Deposits and installments received on individual accounts which exceed the value of goods and/or services invoiced are recorded as contract liabilities on the consolidated balance sheets. The Corporation has recognized an allowance for doubtful trade receivables on accounts that are past due by more than 31 days based on best estimates of future expected credit losses and estimated irrecoverable amounts determined by reference to past experiences. As at December 31, 2018 and 2017, the allowance for doubtful accounts reserve includes amounts to cover new accounts in the Canadian segment and continuing exposure with several long-standing customers in the USA segment, both of which have trade receivables included in the past due for 91 days or longer category. In determining the recoverability of a trade receivable, the Corporation considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the end of the reporting year. The concentration of credit risk is limited due to the fact that the customer base is large and diversified. PFB Corporation Annual Report 2018 52 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 10.2 Change in allowance for doubtful accounts A reconciliation of the beginning and ending carrying amounts of the Corporation’s allowance for doubtful accounts is as follows: Balance at beginning of year Additional amounts provided for during the year Trade receivables written off during the year Balance at end of year 11. Inventories Raw materials Work in progress Finished goods 2018 $ (413) (148) 13 2017 $ (254) (211) 52 $ (548) $ (413) As at Dec 31, 2018 As at Dec 31, 2017 $ 5,907 $ 5,186 2,404 3,327 1,979 2,833 $ 11,638 $ 9,998 Eligible inventories held by each of the Corporation’s Canadian and USA subsidiaries have been pledged as security with a bank in support of revolving credit facilities. The revolving credit facilities were unused as at December 31, 2018. The cost of inventories recognized as an expense in cost of sales in the year ended December 31, 2018, was $80,184 (2017 - $68,263). Included in the cost of inventories recognized as an expense were write-downs from full cost to net realizable value in the amount of $799 (2017 - $331). There were no reversals of any write-downs in either 2018 or 2017. 12. Contract costs Contract costs represent the incremental costs of obtaining a contract with a customer on the expectation these costs will be recovered. Contract costs are comprised of sales commissions paid or payable to obtain certain contracts. These costs are amortized on a proportionate basis as a selling expense over the life of the contract, as this reflects the period over which goods or services are transferred to the customer. Amortization recognized in selling expenses during the year was $377 (2017- $315). Amortization of contract costs follows the seasonality of operations and is typically higher in the second and third quarter upon completion of performance obligations. Contract costs remaining to be amortized as selling expenses are $475 (2017 - $527). 13. Remaining performance obligations Performance obligations for certain goods manufactured, construction and design contracts generally include deposits which are initially recorded as contract liabilities and represent obligations of work that has not yet been completed. Revenue from unsatisfied performance obligations is recognized when services are rendered and control of the goods is transferred to the customers. For contracts that include deposits, the total remaining performance obligations as at year end were $17,077 (2017 - $17,256). The Corporation estimates it will recognize approximately $13,937 of revenue from the unsatisfied performance obligations upon completion of those performance obligations over the next twelve months and $3,140 after twelve months. 14. Property, plant and equipment In the tables below, assets under finance leases include buildings, automobiles and materials handling equipment. As at December 31, 2018, automobiles and materials handling equipment had a carrying amount of $473 (2017 - $486) and buildings had a carrying value of $2,042 (2017 - $2,186) for a total amount of assets under finance lease of $2,515 (2017 - 53 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars $2,672). Automobile leases include provisions whereby the automobiles can be purchased for their residual value whereas the individual building leases have no such rights to purchase at any residual value. Assets under construction as at December 31, 2018 are expected to be available for use in 2019. Cost Freehold land Buildings Plant and equipment Assets under finance leases Assets under construction Total Balance at January 1, 2017 $ 3,149 $ 12,100 $ 40,266 $ 15,770 $ 2,081 $ 73,366 Additions Purchase of leased assets Transfer of leased assets Disposal of PP&E assets Transfers between asset classes - 5,432 - - - 52 2,243 11,745 (77) 96 Effect of foreign currency changes (124) (457) 43 - - (291) 2,648 (469) 244 - (11,745) (160) 1,387 - - - - (2,744) 1,726 7,675 - (528) - (32) (26) (1,108) Balance at December 31, 2017 8,457 25,702 42,197 4,077 698 81,131 Additions Disposal of PP&E assets Transfer of leased assets Transfers between asset classes - - - - Effect of foreign currency changes 155 - - - 213 576 8 (350) 217 1,819 656 289 (247) (217) - 41 1,761 - - (2,032) 2,058 (597) - - 21 1,449 Balance at December 31, 2018 $ 8,612 $ 26,491 $ 44,547 $ 3,943 $ 448 $ 84,041 Accumulated Depreciation Balance at January 1, 2017 Depreciation expense Disposal of PP&E assets Transfers between asset classes Effect of foreign currency changes $ - $ 6,636 $ 28,268 $ 3,421 $ - $ 38,325 - - - - 1,186 2,318 (77) (226) 2,104 478 - (2,318) (287) (295) (157) (19) - - - - 3,768 - (521) (540) Balance at December 31, 2017 - 9,837 29,790 1,405 - 41,032 Depreciation expense Disposal of PP&E assets Transfer of leased assets Effect of foreign currency changes - - - - 1,201 - - 313 2,006 (350) 201 406 427 (223) (201) 20 - - - - 3,634 (573) - 739 Balance at December 31, 2018 $ - $ 11,351 $ 32,053 $ 1,428 $ - $ 44,832 Net book values 2017 2018 $ 8,457 $ 15,865 $ 12,407 $ 2,672 $ 698 $ 40,099 8,612 15,140 12,494 2,515 448 39,209 Depreciation commences when assets are available for use. Depreciation expense for the year ended December 31, 2018 in the amount of $3,112 (2017 - $3,265) is included in cost of sales, with an amount of $377 (2017 - $345) included in selling expenses, and an amount of $145 (2017 - $158) included in administrative expenses. PFB Corporation Annual Report 2018 54 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 15. Intangible assets Cost Balance at January 1, 2017 Additions Effect of foreign currency changes Patents $ 70 - - Product development costs Registered trade names Order backlog Non- compete agreement Software Total $ 971 $ 2,616 $ 1,346 $ 199 $ 38 $ 5,240 - (20) 129 (31) - (88) - (13) - (2) 129 (154) Balance at December 31, 2017 70 951 2,714 1,258 186 36 5,215 Additions Effect of foreign currency changes - - - 25 64 39 - 110 - 16 - 3 64 193 Balance at December 31, 2018 $ 70 $ 976 $ 2,817 $ 1,368 $ 202 $ 39 $ 5,472 Accumulated Amortization Balance at January 1, 2017 $ 53 $ 971 $ 2,483 $ - $ 199 $ 38 $ 3,744 Amortization expense Effect of foreign currency changes 5 - - (20) 127 (31) Balance at December 31, 2017 58 951 2,579 Amortization expense Effect of foreign currency changes 5 - - 25 127 39 - - - - - - (13) - (2) 132 (66) 186 36 3,810 - 16 - 3 132 83 Balance at December 31, 2018 $ 63 $ 976 $ 2,745 $ - $ 202 $ 39 $ 4,025 Net book values 2017 2018 $ 12 7 $ - - $ 135 $ 1,258 72 1,368 $ - - $ - - $ 1,405 1,447 Amortization expense for the year ended December 31, 2018 in the amount of $10 (2017 - $10) is included in cost of goods sold, an amount of $10 (2017 - $13) is included in selling expenses, and an amount of $112 (2017 - $109) is included in administrative expenses. 16. Goodwill 16.1 Cost Balance at beginning of year Effect of foreign currency exchange differences Balance at end of year 2018 2017 $ 2,217 $ 2,332 143 (115) $ 2,360 $ 2,217 For the purpose of impairment testing, goodwill is allocated to CGUs (Note 16.2). As at the testing date selected, the Corporation determined that the value in use of each cash-generating unit exceeded their carrying amounts and therefore no provision for impairment was provided. In order to determine whether impairment is incurred, the Corporation estimates the recoverable amount of each CGU. Recoverable amounts are determined on the basis of value in use calculations. Classification of CGUs and value in use in 2018 was determined the same way as in 2017. 55 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 16.2 Allocation of goodwill to cash-generating units The carrying amount of goodwill has been allocated for impairment testing purposes to the following cash- generating units: Canada USA As at Dec 31, 2018 As at Dec 31, 2017 $ 580 1,780 $ 580 1,637 $ 2,360 $ 2,217 The recoverable amounts of the cash-generating units are determined by performing value in use calculations which use cash flow projections based on a one-year financial budget approved by the directors plus future financial projections covering an additional four-year period. The cash flow projections for the four year period following the budget year are prepared in a manner consistent with past experience and reflect management’s expectation of the medium term operating performance of the CGUs and the markets in which they operate. The valuation model also takes into account working capital requirements and capital investments required to support the sales revenue projections, and terminal values. The Corporation used a discount rate of 12.0% (12.0% in 2017). The discount rate was determined based on an estimate of the Corporation’s weighted average cost of capital. The discount rate is pre-tax. The key assumptions used for value in use calculations in 2018 and 2017 were as follows: Year 2018 2017 Cash generating unit Compound annual growth rate (5 Years) Long-term growth rate Discount rate Canada USA Canada USA 2.9 % 6.9 % 4.8 % 11.0 % 2.0 % 2.0 % 2.0 % 2.0 % 12.0 % 12.0 % 12.0 % 12.0 % 17. Retirement benefits plans 17.1 Group registered retirement savings plan The Corporation operates a group registered retirement savings plan for all qualifying employees in Canada. The assets of each individual in the plan are held separately from those of the Corporation in investment instruments under the control of a large Canadian insurer. An individual employee’s assets held in the plan are self-administered by the employee. The Corporation’s obligation with respect to the group registered retirement savings plans is to administer employee contributions via the payroll and to part-match contributions made by employees based on an established policy. 17.2 Group 401K plan The Corporation operates group 401K plans for all qualifying employees located in Michigan, Minnesota, Ohio and Idaho, USA, in which qualifying employees may elect to defer current wages for retirement. The Corporation has the option to match employee contributions to the plans. The assets of the plans are held separately from those of the Corporation by a trust company and governed by a custodial agreement under the Employee Retirement Income Security Act (“ERISA”). The Corporation also utilizes the services of registered investment brokers and third party administrators in the fulfillment of its actuarial and fiduciary responsibilities with respect to the plans. 17.3 Defined benefit pension plan The Corporation operates a funded defined benefit pension plan for qualifying Ontario-based employees who are members of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service PFB Corporation Annual Report 2018 56 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars Workers International Union. Under the plan, retiring employees receive on a monthly basis a fixed benefit amount multiplied by the number of years of eligible service. No other post-retirement benefits are provided to these employees except for a minimal amount of life insurance coverage. The most recent actuarial valuation of plan assets and the present value of defined benefit obligation were determined as at December 31, 2016 and the accounting valuations were subsequently updated to December 31, 2018, by the independent actuary. The next valuation report is required as at December 31, 2019. The table below outlines the amounts included in the consolidated balance sheets arising from the Corporation’s obligation in respect of its defined benefit plan: Present value of the funded defined benefit obligation Fair value of plan assets Net asset arising from defined benefit obligation As at Dec 31, 2018 $ (1,898) 1,908 As at Dec 31, 2017 $ (1,837) 1,928 $ 10 $ 91 The principal assumptions used for the purpose of the actuarial accounting valuations were as follows: Discount rate (end of fiscal year) Expected return on plan assets 2018 3.75 % 3.75 % 2017 3.75 % 3.75 % Amounts recognized as an expense in respect of the defined benefit plan were as follows: Current service costs Administration costs Interest costs Interest income 2018 2017 $ 46 $ 42 10 69 (74) 51 69 (69) $ 51 $ 93 The expense for the years is included in cost of sales in the consolidated statements of income. Movements in the present value of the defined benefit obligation were as follows: Opening defined benefit obligation Current service costs Interest cost on obligation Benefit payments Actuarial gain Closing defined benefit obligation Movements in the present value of the plan assets were as follows: Opening fair value of plan assets Actual (loss) return on plan assets Employer contributions Administration costs Benefit payments 2018 2017 $ 1,837 46 69 (54) $ 1,833 42 69 (67) - (40) $ 1,898 $ 1,837 2018 2017 $ 1,928 $ 1,843 (87) 131 (10) (54) 70 133 (51) (67) Closing fair value of plan assets $ 1,908 $ 1,928 57 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars The major categories of plan assets are as follows: Equity instruments Fixed income securities Total Distribution of plan assets As at Dec 31, 2017 As at Dec 31, 2018 71 % 29 % 100 % 71 % 29 % 100 % To the best of management’s knowledge, none of the plan assets are invested in the Corporation’s shares. The Corporation expects to make contributions of $109 to the defined benefit plan in the 2019 financial year. 18. Contract liabilities The Corporation enters into contracts to sell its products and services in the normal course of its operations. When the customer’s payment precedes performance, the Corporation recognizes a contract liability. A contract liability is also recognized for the estimated rebates payable to customers associated with recognized sales at the end of the period. Contract liabilities are reduced as performance obligations are achieved and rebates paid. The changes in contract liabilities are set out below: Contract liabilities Balance, beginning of period 1 Current period 2 $ 5,158 5,902 7,894 8,028 $ 4,070 6,402 8,486 8,830 Revenue related to Current period deposits 3 Beginning of period deposits 4 $ (736) (1,607) (4,107) (5,581) $ (1,857) (3,357) (4,699) (5,041) Rebates, net 5 Foreign exchange $ (772) 452 598 (34) $ 39 102 (144) 262 Balance, end of period $ 5,902 7,894 8,028 6,464 $ 3,845 4,873 5,528 6,104 $ 4,480 5,218 4,158 5,729 $ (1,263) (2,318) (1,409) (3,454) $ (1,585) (2,527) (2,349) (3,667) $ (601) 437 345 285 $ (3) (155) (169) 161 $ 4,873 5,528 6,104 5,158 2018 Jan 1- Mar 31 Apr 1- Jun 30 Jul 1- Sep 30 Oct 1- Dec 31 2017 Jan 1- Mar 31 Apr 1- Jun 30 Jul 1- Sep 30 Oct 1- Dec 31 1 Contract liabilities for customer deposits the Corporation has received for outstanding performance obligations and unpaid customer rebates earned and payable by the Corporation. 2 Customer deposits that the Corporation has received during the period from new contracts with customers or additional customer deposits on existing contracts with customers, in advance of the Corporation’s performance. 3 Revenue recognized through the completion of performance obligations related only to the extent new customer deposits are received in the same period, excluding any amounts recognized as revenue from beginning balances. The decrease in contract liabilities is constrained to revenue recognized from customer deposits applied to performance obligations achieved in the current period. 4 Revenue recognized through the completion of performance obligations related to either new or existing contracts, for customer deposits on hand from prior periods, that was included in the beginning balance and excludes amounts recognized during the period in the note above. 5 Customer rebates payable by the Corporation or amounts paid to customers. 19. Borrowings 19.1 Operating credit facilities Canada The Canadian segment has a revolving facility that is secured by a first ranking security interest in trade receivables and inventories of the Canadian subsidiary, with a parent guarantee. PFB Corporation Annual Report 2018 58 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars The Corporation continues to provide a guarantee and postponement of claim to the bank in the amount of $10,000. The interest rate applicable on draws made against the facility is the Canadian bank’s prime rate plus 0.5% and the facility carries a monthly standby fee when not being utilized. The credit facility was not used as at December 31, 2018. USA The USA segment has a credit facility arrangement with a US bank for a variable rate revolving facility in the amount of $1,250. The revolving facility is secured by all inventory and equipment of the USA subsidiary. The interest rate applicable on draws made against the facility is a variable rate based on an index plus 0.25%. Under the facility, the USA subsidiary is subject to certain covenants, one of which is a financial covenant to maintain an Operating Cash Flow to Fixed Charge Coverage ratio of not less than 1.20:1. The second covenant is to maintain a Total Debt to Tangible Net Worth Ratio of less than 3.00 to 1.00. The credit facility was not used as at December 31, 2018. 19.2 Long-term debt The Corporation’s long-term debt position is stated in the following table: Balance at beginning of period Borrowings Repayments Balance at end of period Dec 31, 2018 $ 8,906 - (338) $ 8,568 As at February 28, 2017, the Corporation obtained long-term debt from a Canadian bank to fund the purchase of a real estate transaction completed at a fixed interest rate of 3.25%. The long-term debt is being amortized over a 20 year amortization period and subject to renewal within 5 years. The long-term debt is eligible for prepayment privilege, subject to certain prepayment penalties and is supported by the Corporation’s property. Borrowing and closing costs were expensed as incurred, as amounts are not material. The Corporation is subject to certain covenants on its long-term debt, one of which is a financial covenant to maintain a Debt Service Coverage Ratio of not less than 1.25:1. The financial covenant ratio is tested on an annual, year-end basis. The financial covenant ratio was tested and the Corporation was compliant with the ratio as at December 31, 2018. Estimated principal repayments on long-term debt through to maturity are set out in the table below: Current within 12 months Due within 12 to 24 months Due within 25 to 36 months Due within 37 to 48 months Due within 49 to 60 months Due after 60 months Total Dec 31, 2018 $ 350 361 373 385 398 6,701 $ 8,568 20. Deferred operating lease obligations The Corporation’s Canadian subsidiary is a party to certain real estate operating lease agreements, which are used by its operations. Rent expenses under those agreements are recognized in the consolidated statements of income on a straight- line basis over the term of each lease. The straight-line method creates timing differences between actual rent amounts paid to the owners of the properties and the amounts recorded as an expense. These differences arise as a result of rent-free periods and future contractual rent escalations being recognized sooner than they are required to be paid. 59 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars As at December 31, 2018, deferred operating lease obligations were recorded in the amount of $719 as a long-term liability on the consolidated balance sheet (2017 - $506). 21. Finance lease obligations Finance leases exist for automobiles, equipment and buildings. Lease obligations for automobiles and equipment are secured by the lessors’ title to the automobiles and equipment. In March 2013, the Corporation entered into carefree triple net lease agreements as part of a sale leaseback arrangement with a Canadian REIT for four Canadian properties, each having a lease term of twenty years. Monthly rent expenses are fixed over the first five years of each term with predetermined rent increases after years five, ten and fifteen of the twenty- year terms. A renewal option exists for a second term of ten years with market rates for rent to be determined at the time of renewal. Under the terms of the lease agreements, the Corporation is responsible for the operating costs of the leased premises including all major repairs necessary to maintain the properties in a state of good order and condition. As part of the sale leaseback transaction, a proportion of the consideration received was in units of the Canadian REIT which were pledged as security for the minimum rent obligations for the building leases over the first ten years of the lease term. The Canadian REIT units are held in an escrow account until the earlier of ten years from the initial lease date or the plan of arrangement is completed. The units had a fair value of $1,483 (2017 - $1,239) (Note 25). The Canadian REIT paid a final monthly distribution on the units on May 15, 2018. The distributions have been included in investment income in the consolidated statements of income. On February 28, 2017, the Corporation repurchased one of the four properties from the Canadian REIT (Note 22). The Corporation’s finance lease obligations as at December 31, 2018 and 2017 are stated in the following table: Not later than one year Later than one year and not later than five years Later than five years Total minimum lease payments Less: amounts representing finance costs Present value of minimum lease payments Finance lease obligations are included in the consolidated balance sheets as follows: Current Long-term Total 22. Purchase of leased property Minimum lease payments Dec 31, 2018 Dec 31, 2017 $ 649 $ 648 1,976 4,405 7,030 3,791 1,899 4,851 7,398 4,166 $ 3,239 $ 3,232 Dec 31, 2018 Dec 31, 2017 $ 255 2,984 $ 249 2,983 $ 3,239 $ 3,232 On February 28, 2017, the Corporation purchased, under a Right of First Offer (“ROFO”) a property which was previously leased from a Canadian REIT. The lease interest in the property was recorded as an operating lease of land and a finance lease of the buildings. The gross purchase price for the property was $18,822, of which $9,670 was paid in cash and $9,152 was funded through a mortgage on the property obtained from a Canadian financial institution (Note 19). The Corporation expensed $22 direct costs related to the transaction as incurred. The transaction resulted in the elimination of all leasing obligations related to the purchased property. In determining the transaction price allocated to land, the Corporation engaged assistance of third party specialists, to determine the fair value related as $5,432. For accounting purposes, the deferred operating lease obligations on the balance sheet, were eliminated in the amount of $143. PFB Corporation Annual Report 2018 60 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars The cost and accumulated depreciation of amounts previously classified as leasehold improvements, for property enhancements installed from March 2013 to February 2017 were reclassified from leasehold improvements to buildings in the amounts of $398 and $343, respectively. At March 15, 2013, the present value of minimum lease payments relating to the finance lease asset was recorded as the finance lease obligation in the amount of $14,220. This balance, through lease payments, decreased to $10,982 on February 28, 2017 and was extinguished on the transaction date. The land and building assets, along with the mortgage for buildings, have been allocated to the Corporate reportable segment. 23. Reconciliation of liabilities arising from financing activities The following table provides a reconciliation between the opening and closing balances for financing activities, including cash and non-cash flows changes: Cash changes Non-cash changes Bank indebtedness $ - $ 4,616 $ (4,616) Dec 31, 2017 Borrowings Repayments Additions Disposal $ - $ - (338) - - Foreign exchange Dec 31, 2018 $ - - $ - 8,568 8,906 3,232 - - $ 12,138 $ 4,616 $ (5,233) $ 289 $ (24) $ 21 $ 11,807 (279) 289 (24) 21 3,239 Long-term debt Finance lease obligations Total 24. Issued capital 24.1 Authorized The Corporation’s authorized share capital represents: (a) An unlimited number of voting common shares without nominal or par value which carry one vote per share and carry a right to dividends. (b) An unlimited number of preferred shares without nominal or par value, issuable in series at the discretion of the directors of the Corporation of which none are outstanding. 24.2 Share-based payments The Corporation has a stock option plan under which the maximum number of shares issuable is equal to 10% of the number of issued and outstanding common shares. A stock option allows the grantee of the option to acquire common shares of the Corporation, at the strike price established at the time of grant. Options may be exercised at any time from the vesting date to the date of expiry. The strike price of each stock option is determined with reference to the market price of the Corporation’s common shares. Each share option converts into one ordinary common share of the Corporation upon exercising. No amounts are paid or payable by the recipient on initial receipt of the option. The options carry neither rights to dividends nor voting rights. Under PFB’s stock option plan, 400,000 stock options were granted to certain directors and senior management with an exercise price ranging from $8.05 to $8.50 per share. Options granted on May 10, 2018 to a director vest immediately and expire on May 10, 2023. Options granted to senior management on March 8, 2018, commence to vest after the second anniversary of the grant date, continue to vest on a graduated schedule and expire on March 8, 2028. The exercise price of the options was determined with reference to the price of PFB’s stock on the Toronto Stock Exchange on the respective grant date. The following table sets forth information concerning the inputs used in this model, share options granted and vested under the stock option plan as at December 31, 2018: 61 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars Grant date Number of options outstanding Number of options exercisable 375,000 25,000 - 25,000 Weighted average exercise price $ 8.50 $ 8.05 Weighted average remaining life 9.25 4.40 Weighted average risk-free interest rate (%) 2.11 2.11 Weighted average expected life (years) 9.69 4.92 Estimated volatility (%) Expected annual dividend yield (%) 18.04 18.04 3.98 3.98 Calculated weighted average fair value per option $ 0.76 $ 0.81 400,000 25,000 $ 8.47 At the grant date, each option is measured at the fair value determined using the Black-Scholes option pricing model. The risk-free interest rate is based on Government of Canada bonds with similar duration, at the grant date. The weighted average expected life is based from the grant date to the date on which the option is expected to be exercised. Expected volatility is estimated by considering historic share price volatility over the most recently completed annual reporting period. The fair value of options granted with immediate vesting have an aggregate fair value of $20 or $0.81 per option, and are reported as a compensation expense on the grant date, with a corresponding increase in contributed surplus on the balance sheet. Options with vesting requirements have an aggregate fair value of $286 or $0.76 per option and are amortized on a straight-line basis over the ten year vesting period with the quarterly amortization amounts reported as compensation expense included as an administrative expense on the income statement with the off-set to contributed surplus on the balance sheet. During the period ended December 31, 2018, no options were exercised or expired. There are 400,000 options outstanding as at December 31, 2018. 24.3 Normal Course Issuer Bid In January 2018, the Corporation obtained approval from the Toronto Stock Exchange to renew its Normal Course Issuer Bid (the “Bid”) program for a 12-month period, which commenced on January 10, 2018 and ends no later than January 11, 2019. During the year ended December 31, 2018 and 2017, the Corporation did not purchase any of its common shares for cancellation under the Normal Course Issuer Bid. The Normal Course Issuer Bid lapsed on January 11, 2019 without renewal. 24.4 Dividends In the first quarter of 2018, the Corporation’s board of directors declared a regular quarterly dividend of $0.08 (2017 - $0.07) per common share which was paid in February of each year, respectively. The dividend payment in February 2018 amounted to $538 (2017 - $470). In the second quarter of 2018, the Corporation’s board of directors declared a regular quarterly dividend of $0.08 (2017 - $0.07) per common share which was paid in May of each year, respectively. The dividend payment in May 2018 amounted to $537 (2017 - $470). In the third quarter of 2018, the Corporation’s board of directors declared a regular quarterly dividend of $0.08 (2017 - $0.07) per common share which was paid in August of each year, respectively. The dividend payment in August 2018 amounted to $538 (2017 - $470). In the fourth quarter of 2018, the Corporation’s board of directors declared a regular quarterly dividend of $0.08 (2017 - $0.08) per common share which was paid in November of each year, respectively. The dividend payment in November 2018 amounted to $537 (2017 - $538). Aggregate dividends paid in the year ended December 31, 2018, amounted to $2,150 (2017 - $1,948). 25. Financial instruments 25.1 Capital management The Corporation manages its capital structure to ensure that the Corporation and its subsidiaries will be able to continue as going concerns, maximizing the return to shareholders through the optimization of the debt and equity, and to safeguard corporate assets. PFB Corporation Annual Report 2018 62 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars The capital structure of the Corporation consists of net debt (long-term debt as detailed in Note 19 offset by cash and cash equivalents) and equity of the Corporation (comprising issued share capital, reserves, and retained earnings as detailed in the consolidated statement of changes in equity). The Corporation’s capital structure, net of cash and cash equivalents, as at December 31, 2018 and 2017, is as outlined in the following table: Borrowings Less: cash and cash equivalents Surplus cash Shareholders’ equity As at December 31, 2018 As at December 31, 2017 $ 8,568 16,944 $ (8,376) $ 8,906 12,180 $ (3,274) $ 56,636 $ 50,825 Net borrowings to equity ratio N/A N/A The Corporation considers the amount of capital it requires in proportion to the associated risks. Adjustments may be made to the Corporation’s capital structure in light of changes in economic conditions and the risk characteristics of the underlying assets. The capital structure can be maintained or adjusted in a variety of ways as circumstances may change, including: adjusting the amount of dividends paid to shareholders; purchasing shares for cancellation (under Normal Course Issuer Bids); issuing new shares; and increasing or repaying any debt financing. The Corporation pursues its capital management objectives by prudently managing the capital generated through internal growth of its operations, optimizing the use of lower cost capital when required, and raising share capital when deemed appropriate, to fund significant strategic growth initiatives. 25.2 Categories of financial instruments The Corporation, through its financial assets and liabilities, is exposed to a variety of risks that may affect the fair value of its financial instruments with each carrying varying degrees of significance which could affect the Corporation’s ability to achieve its strategic objectives of growing its operations and increasing shareholder returns. The following fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value of financial instruments classified as FVTPL. The three levels of the fair value hierarchy are described below: Level 1: Fair value based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. Level 2: Fair value based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3: Fair value based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. The estimated fair value of each class of financial instruments, the methods and assumptions that were used to determine it are as follows: The carrying amount of cash and cash equivalents, restricted cash, trade receivables bank indebtedness, and trade and other payables approximate fair value due to the short-term maturity of those instruments. Marketable securities – restricted, consist of units of a Canadian REIT which are priced at $8.10 per unit based on a plan of arrangement and remain in escrow. Long-term debt is carried at amortized cost. The estimated fair value of long-term borrowings has been estimated to approximate the amortized cost. A summary of the categories, measurement basis, hierarchy, carrying values and fair values of financial instruments held by the Corporation are stated in the following table (see Note 4): 63 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars Category Financial instrument Cash and cash equivalents Cash - restricted Assets at Assets at amortized cost Measurement Hierarchy December 31, 2018 Carrying Amount Fair Value December 31, 2017 Fair Value Carrying Amount Amortized cost Level 1 $ 16,944 $ 16,944 $ 12,180 $ 12,180 Restricted marketable securities Trade receivables Trade and other payables Long-term debt amortized cost Amortized cost Level 1 1,347 1,347 88 88 Fair value Amortized cost FVOCI Assets at amortized cost Financial liabilities at amortized cost Financial liabilities at amortized cost Amortized cost Amortized cost Level 2 1,483 1,483 1,239 1,239 N/A 13,082 13,082 9,809 9,809 N/A (10,894) (10,894) (8,737) (8,737) Level 2 (8,568) (8,568) (8,906) (8,906) During the year ending December 31, 2018, restricted marketable securities were transferred from Level 1 to Level 2 fair value measurements. 25.3 Credit risk Credit risk is defined as the risk that the Corporation’s counterparty in a transaction fails to meet or discharge their obligation to the Corporation. The Corporation’s exposure to credit risk is associated with trade receivables and the potential risk that any customer is unable to pay amounts due. Allowances for doubtful accounts and bad debts are estimated as at the balance sheet date. The amounts reported for trade receivables on the balance sheet are net of allowances for doubtful accounts and the net carrying value represents the Corporation’s maximum exposure to credit risk. The Corporation’s subsidiaries provide trade credit to their customers in the normal course of business and the Corporation’s credit policy is universally adopted across all businesses. The policy requires the credit history of each new customer to be closely examined before credit is granted, which may involve performing solvency tests if a particular account is expected to become significant. It is not normal practice to require customers to provide collateral or security as a condition of approving trade credit. The diversity of the Corporation’s customer base and product offering combine to minimize overall exposures to credit risks. Customers ordering highly-customized manufactured products are required to make advance payments at various predefined stages of a sales contract. All payments received in advance of invoicing are reported as contract liabilities in the current liability section of the balance sheet. Final contract balances are typically required to be paid in full before products are shipped. Management diligently reviews past due trade receivables balances on a weekly basis to monitor potential credit risks. Accounts are considered for impairment on a case-by-case basis when they are past due or when objective evidence is received that a customer may default. A number of factors are considered in determining the likelihood of impairment. All bad debt write-offs and changes in the doubtful trade receivables reserve are expensed or credited, as applicable, to selling expenses in the consolidated statement of income. PFB believes that credit risk associated with its trade receivables is limited for the following reasons: Trade receivables balances are spread amongst a broad customer base which is dispersed across a wide geographic range; The aging profile of trade receivables balances is systematically monitored by management; Larger customers are offered a discount off invoice for prompt payment which is strictly enforced; and Payments for highly-customized orders are received in advance of products being shipped. PFB Corporation Annual Report 2018 64 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars Potential credit risk associated with contractual holdback amounts pertaining to certain large projects is considered to be low as the customers involved are required to provide bonding to the owners of the projects. The credit risk on cash balances is limited because the counterparties are large commercial banks in Canada and the United States. Payment of interest by customers arising on past due trade receivables balances is included in investment income in the consolidated statements of income. 25.4 Foreign currency risk Currency risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Corporation operates in both Canada and the United States of America and is exposed to foreign exchange risks arising from changes in foreign exchange rates between the two countries. At the present time, the Corporation has a net exposure to the U.S. dollar, as the prices for most raw materials used in its operations are denominated in that currency. Raw material supplies denominated in U.S. dollars are usually required to be paid within thirty days or less of receiving actual deliveries, which is consistent with industry practices. Periodically, management may commit to entering into foreign exchange contracts to attempt to protect earnings against relatively short-term fluctuations in exchange rates. In such cases, management attempts to make informed judgments in entering such transactions but there is a possibility that markets may not respond in ways predicted. To the extent that the Corporation does not fully hedge its foreign currency exposure and exchange rate risk, or the Corporation’s subsidiaries are not able to or do not raise their selling prices accordingly when exchange rates are moving in an unfavourable direction, the profitability of the business could be adversely affected. The Corporation did not hold any foreign exchange contracts as at December 31, 2018. The following tables detail the Corporation’s exposure to foreign currency risk as at December 31, 2018 and 2017, including a sensitivity analysis to changes in foreign exchange rates: December 31, 2018 December 31, 2017 USD Change in currency Net monetary assets Net monetary liabilities $ 12,567 (3,981) 5.0% 5.0% Effect on after tax income (loss) $ 478 $ (152) Change in currency USD Effect on after tax income (loss) $ 8,062 5.0% $ 307 (3,126) 5.0% $ (119) 25.5 Interest rate risk Interest rate risk is defined as the risk that the fair value or future cash flows of a financial instrument will fluctuate because of change in market interest rates. The Corporation’s Canadian subsidiary had access to a revolving credit facility with a Canadian bank. The revolving credit facility had a limit of $10,000, based on marginable trade receivables and inventories. The revolving credit facility was repaid and unused at December 31, 2018 (December 31, 2017 - $10,000 unused). The Corporation’s USA subsidiary had access to a revolving credit facility with a US bank. The revolving credit facility had a limit of $1,250, based on all inventory and equipment. The revolving credit facility was unused as at December 31, 2018 (December 31, 2017 - $1,250, unused). 25.6 Liquidity risk Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. Financial liabilities include principal and interest payments. The Corporation’s liquidity risk is that it is not able to settle liabilities when due or that it can do so only at an abnormally high cost. Accordingly, one of management’s primary goals is to maintain an optimum level of liquidity by actively managing assets, liabilities and cash flows generated by operations. The Corporation’s future strategies can be financed through a combination of cash flows generated by operations, borrowing under existing credit facilities, and the issuance of equity. Management prepares regular budgets and cash flow forecasts to help predict future changes in liquidity. 65 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars The Corporation has financial liabilities with the following maturities: As at December 31, 2018 Trade and other payables Long-term debt Finance lease obligations Total As at December 31, 2017 Trade and other payables Long-term debt Finance lease obligations Total Current less than 12 months $ 10, 894 $ 10,894 Total Due within 12 to 24 months $ - Due within 25 to 36 months $ - Due within 37 to 48 months $ - Due after 48 months $ - 11,369 7,030 623 649 623 575 623 479 623 453 8,877 4,874 $ 29,293 $ 12,166 $ 1,198 $ 1,102 $ 1,076 $ 13,751 $ 8,737 $ 8,737 11,992 7,398 623 648 $ 28,127 $ 10,008 $ - 623 $ - 623 559 $ 1,182 486 $ 1,109 $ - 623 429 $ - 9,500 5,276 $ 1,052 $ 14,776 26. Related party transactions All related party transactions are constituted in the ordinary course of business and they have been measured at the agreed to exchange amounts which approximate fair value. All transactions with related parties have been approved by the Board of Directors. Balances and transactions between the Corporation and its subsidiaries, which are related parties of the Corporation, have been eliminated on consolidation and are not disclosed in this note (Note 5.3). Details of transactions between the Corporation and other related parties are disclosed below. 26.1 Trading transactions Related party transactions are constituted in the ordinary business and they have been measured at the agreed to exchange amounts which closely approximate fair value. In the years ended December 31, 2018 and 2017, the Corporation had the following trading transactions with related parties: Related party Nature of transactions E. Carruthers Trucking Transportation services Aeonian Capital Corporation Management services The following related party balances were outstanding at the end of the reporting years: Related party Nature of transactions E. Carruthers Trucking Transportation services 2018 2017 $ 2,163 $ 1,920 350 350 $ 2,513 $ 2,270 2018 2017 $ 81 $ 68 Aeonian Capital Corporation (“Aeonian”), and its affiliates, owned 2,991,168 (2017 - 2,967,668) common shares of the Corporation representing 44.5% (2017 – 44.2%) of the 6,716,003 issued and outstanding shares as at December 31, 2018. Aeonian is controlled by C. Alan Smith, Executive Chairman of PFB. The Corporation is charged fees by Aeonian for management services including those provided by Mr. Smith. The fees are reported under administrative expenses in the consolidated statement of income. E. Carruthers Trucking is owned by a sibling of a member of the Board of PFB. The transactions have occurred in the normal course of operations at arm’s length and are based on standard commercial terms. PFB Corporation Annual Report 2018 66 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 26.2 Compensation of key management personnel The remuneration of directors and other members of key management personnel for the year ended were as follows: Short-term benefits 1 Post-employments benefits Other long-term benefits Share-based payments Termination benefits 2018 2017 $ 1,477 - - 44 - $ 1,198 - - - - $ 1,521 $ 1,198 1 Short-term benefits includes the following: salaries and associated employer-related costs for payroll and health benefits; bonuses; management and directors fees (as applicable). The remuneration of directors and the key executives is recommended to the Board of Directors by the Human Resources and Compensation Committee and having regard to the performance of individuals and market trends. 27. Operating lease arrangements Operating leases generally have varying terms of between 12 months and 15 years, with options to renew in some cases. Several leases either have rent incentives or rent escalation clauses. There are no contingent rents or sublease payments applicable to any operating lease. The Corporation’s future minimum payments under non-cancellable, operating lease arrangements for lands, buildings and equipment, as at December 31, 2018 and December 31, 2017 are as stated in the table below: Not later than one year Later than one year and not later than five years Later than five years 28. Commitments and contingencies 28.1 Performance bonds 2018 2017 $ 1,404 $ 1,217 5,011 4,966 3,815 5,823 $ 11,381 $ 10,855 From time to time, under the terms of certain sales contracts, the Corporation’s subsidiaries may be required to provide a performance bond as security. Performance bonds are considered normal practice for suppliers and contractors participating in larger construction projects, usually of a public nature. In the USA, government agencies in certain states have requirements for bonds to be posted when certain types of licensing applications are made in any of those states. As at December 31, 2018, the Canadian segment did not have any performance bonds outstanding (December 31, 2017 - $nil). In the USA, performance bonds in the amount of $651 (December 31, 2017 - $598) were pledged to various government agencies as at December 31, 2018. 28.2 Expenditures for property, plant and equipment and intangible assets Under the terms of the carefree triple net property leases with a Canadian REIT, the Corporation’s subsidiary, Plasti- Fab Ltd., is responsible for all major repairs necessary to maintain the leased properties in a state of good order and condition over the duration of the leases (Note 21). As at December 31, 2018, no definitive schedule of major repairs has been determined. 67 PFB Corporation Annual Report 2018 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars The Corporation had the following commitments for property, plant and equipment and intangible assets as at December 31, 2018 and 2017: Property, plant and equipment Intangible assets 28.3 Contingent liabilities As at Dec 31, 2018 As at Dec 31, 2017 $ 494 $ 273 58 - $ 552 $ 273 In the normal course of its operations, the Corporation and/or its subsidiaries may occasionally become involved in various claims. While the final outcome with respect to any claims pending cannot be predicted with certainty, it is the opinion of management that their resolution will not have a material adverse effect on the consolidated financial position, consolidated results of operations or cash flows. 28.4 Environment The Corporation’s subsidiaries are subject to various laws, regulations, and government policies relating to health and safety, production operations, storage and transportation of goods, disposal and environmental emissions of various substances and materials, and to the protection of the environment in general. 29. Supplementary cash flow information 29.1 Changes in non-cash working capital Trade receivables Inventories Prepaid expenses Contract cost Trade and other payables Contract liabilities 29.2 Non-cash transactions excluded from the consolidated statement of cash flows Property, plant and equipment acquired with finance lease obligations 30. Subsequent events Declaration of regular quarterly dividend 2018 2017 $ (3,273) $ (2,166) (1,640) 100 52 2,157 1,306 12 240 (130) 1,378 1,313 $ (1,298) $ 647 2018 2017 $ 289 $ 244 On February 1, 2019, the Board of Directors declared a regular quarterly dividend of $0.08 per common share payable on February 28, 2019, to shareholders of record at the close of business on February 14, 2019. Letters of credit Outstanding letters of credit for $1,301 remain outstanding as guarantee payments for inventory purchases. Operating credit facility As at January 18, 2019, the operating credit facility in Canada was increased to $17,000. PFB Corporation Annual Report 2018 68 Notes to the Consolidated Financial Statements For the years ended December 31, 2018 and 2017 Thousands of Canadian dollars 31. Subsidiaries Subsidiary Principal activities Place of incorporation and operation Proportion of ownership interest and voting power held by the Corporation December 31, 2017 December 31, 2018 Canada Plasti-Fab Ltd. USA Manufacturing Alberta, Canada 100% 100% PFB America Corporation Holding company PFB Custom Homes Group, LLC Design and Delaware, USA Delaware, USA construction services PFB Manufacturing, LLC Manufacturing Delaware, USA PFB America Real Estate, LLC Real estate holdings Delaware, USA 100% 100% 100% 100% 100% 100% 100% 100% 32. Approval of financial statements The financial statements were approved by the Board of Directors and authorized for issue on March 8, 2019. 69 PFB Corporation Annual Report 2018 DIRECTORS Frank B. Baker Corporate Director Bruce M. Carruthers Corporate Director Donald J. Douglas Chairman Emeritus United Communities Inc. John K. Read President Picante Capital Corp. Leslie A. Lundquist Director Lundquist Investment Management Inc. C. Alan Smith President Aeonian Capital Corporation William H. Smith, Q.C. Principal, William H. Smith Professional Corp. Vanessa H. Rennie Corporate Director Gordon G. Tallman Corporate Director OFFICERS Robert Graham Chief Executive Officer Mirko Papuga Chief Financial Officer William H. Smith, Q.C. Corporate Secretary OPERATIONS Head Office Calgary, Alberta Plasti-Fab Ltd. EPS Moulding Operations: Delta, British Columbia Crossfield, Alberta Edmonton, Alberta Saskatoon, Saskatchewan Winnipeg, Manitoba Kitchener, Ontario Ajax, Ontario Insulspan SIPS Division: Delta, British Columbia PFB America Corporation PFB Custom Homes Group, LLC Meridian, Idaho Blissfield, Michigan PFB Manufacturing, LLC Lebanon, Ohio Blissfield, Michigan Lester Prairie, Minnesota PFB America Real Estate, LLC WEBSITES www.pfbcorp.com www.advantageicf.com www.plastifab.com www.insulspan.com www.riverbendtf.com www.pfbsustainability.com www.precisioncraft.com www.pfbamerica.com www.mtndesign.com www.timberscape.com www.pointzerohomes.com BANKERS Royal Bank of Canada TRANSFER AGENT AND REGISTRAR Alliance Trust Company AUDITORS Deloitte LLP STOCK EXCHANGE LISTING The Toronto Stock Exchange STOCK SYMBOL PFB PFB Corporation Annual Report 2018 70 300, 2891 Sunridge Way N.E. Calgary, AB T1Y 7K7 Canada Tel: 403.569.4300 Fax: 403.569.4075 Email: mailbox@pfbcorp.com www.pfbcorp.com
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