Western Forest Products Inc.
2018 Annual Report
Management’s Discussion & Analysis
The following Management’s Discussion and Analysis (“MD&A”) reports and comments on the financial condition and results
of operations of Western Forest Products Inc. (the “Company”, “Western”, “us”, “we”, or “our”), on a consolidated basis, for the
three months and year ended December 31, 2018 to help security holders and other readers understand our Company and the
key factors underlying our financial results. This discussion and analysis should be read in conjunction with our audited annual
consolidated financial statements and the notes thereto for the years ended December 31, 2018 and 2017, which can be found
on SEDAR at www.sedar.com.
The Company has prepared the consolidated financial statements for the years ended December 31, 2018 and 2017 in
accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards
Board. Amounts discussed herein are based on our audited annual consolidated financial statements and are presented in
millions of Canadian dollars unless otherwise noted. Certain prior period comparative figures have been reclassified to conform
to the current period’s presentation.
Reference is made in this MD&A to adjusted EBITDA1. Adjusted EBITDA is defined as operating income prior to operating
restructuring items and other income (expense), plus amortization of property, plant, and equipment and intangible assets,
impairment adjustments, and changes in fair value of biological assets. Adjusted EBITDA margin is adjusted EBITDA as a
proportion of revenue. Western uses adjusted EBITDA and adjusted EBITDA margin as benchmark measurements of our own
operating results and as benchmarks relative to our competitors. We consider adjusted EBITDA to be a meaningful supplement
to operating income as a performance measure primarily because amortization expense, impairment adjustments and changes
in the fair value of biological assets are non-cash costs, and vary widely from company to company in a manner that we consider
largely independent of the underlying cost efficiency of their operating facilities. Further, the inclusion of operating restructuring
items which are unpredictable in nature and timing may make comparisons of our operating results between periods more
difficult. We also believe adjusted EBITDA and adjusted EBITDA margin are commonly used by securities analysts, investors
and other interested parties to evaluate our financial performance.
Adjusted EBITDA does not represent cash generated from operations as defined by IFRS and it is not necessarily indicative of
cash available to fund cash needs. Furthermore, adjusted EBITDA does not reflect the impact of a number of items that affect
our net income. Adjusted EBITDA and adjusted EBITDA margin are not measures of financial performance under IFRS, and
should not be considered as alternatives to measures of performance under IFRS. Moreover, because all companies do not
calculate adjusted EBITDA in the same manner, adjusted EBITDA and adjusted EBITDA margin calculated by Western may
differ from similar measures calculated by other companies. A reconciliation between the Company’s net income as reported
in accordance with IFRS and adjusted EBITDA is included in Appendix A to this report.
Also in this MD&A, management uses key performance indicators such as net debt, net debt to capitalization and current assets
to current liabilities. Net debt is defined as long-term debt less cash and cash equivalents. Net debt to capitalization is a ratio
defined as net debt divided by capitalization, with capitalization being the sum of net debt and shareholders’ equity. Current
assets to current liabilities is defined as total current assets divided by total current liabilities. These key performance indicators
are non-GAAP financial measures that do not have a standardized meaning and may not be comparable to similar measures
used by other issuers. They are not recognized by IFRS; however, they are meaningful in that they indicate the Company’s
ability to meet its obligations on an ongoing basis, and indicate whether the Company is more or less leveraged than in prior
periods.
This MD&A contains statements that may constitute forward-looking statements under the applicable securities laws. Readers
are cautioned against placing undue reliance on forward-looking statements. All statements herein, other than statements of
historical fact, may be forward-looking statements and can be identified by the use of words such as “will”, “estimate”, “project”,
“expect”, “anticipate”, “plan”, “intend”, “believe”, “seek”, “should”, “may”, “likely”, “pursue” and similar references to future
periods. Forward-looking statements in this MD&A include, but are not limited to, statements relating to: our current intent,
belief or expectations with respect to: market and general economic conditions, accounting standards, future costs,
expenditures, available harvest levels and our future operating performance, objectives, capital expenditures and strategies.
Although such statements reflect management’s current reasonable beliefs, expectations and assumptions as to, amongst
other things, the future supply and demand of forest products, global and regional economic activity and the consistency of the
regulatory framework within which the Company currently operates, there can be no assurance that forward-looking statements
are accurate, and actual results and performance may materially vary. Many factors could cause our actual results or
performance to be materially different including: general economic conditions, international demand for lumber, competition
and selling prices, international trade disputes, changes in foreign currency exchange rates, labour disruptions, natural
disasters, relations with First Nations groups, changes in laws, the availability of allowable annual cut, changes in regulations
or public policy affecting the forest industry, changes in opportunities and other factors referenced under the “Risks and
Uncertainties” section herein. The foregoing list is not exhaustive, as other factors could adversely affect our actual results and
performance. Forward-looking statements are based only on information currently available to us and refer only as of the date
hereof. Except as required by law, we undertake no obligation to update forward-looking statements.
Unless otherwise noted, the information in this discussion and analysis is updated to February 12, 2019.
1 Earnings Before Interest, Tax, Depreciation and Amortization
1
Summary of Selected Annual Information (1)
(millions of dollars except per share amounts and where otherwise noted)
As at and for the years ended December 31,
2018
2017
2016
Operating income prior to restructuring items and other income (expense)
Net income
103.4
69.2
117.0
74.4
110.2
94.2
Revenue
Lumber
Logs
By-products
Total revenue
Adjusted EBITDA
Adjusted EBITDA margin
Basic and diluted earnings per share (in dollars)
Cash dividends declared per share (in dollars)
Total Assets
Net Debt (Cash) (2)
$
$
$
$
$
$
952.9
160.0
83.8
1,196.7
143.5
12.0%
0.18
0.0875
858.2
214.8
70.4
1,143.4
152.6
13.3%
0.19
0.08
$
$
$
$
$
$
$
855.8
$
799.6
$
777.2
(2.4)
(35.3)
15.4
883.5
235.6
68.2
1,187.3
148.2
12.5%
0.24
0.08
Included in Appendix A is a table of selected results for the last eight quarters.
(1)
(2) Net debt is defined as the sum of long-term debt, revolving credit facility, less cash and cash equivalents.
Overview
We delivered record revenue and strong adjusted EBITDA in 2018, despite the negative impacts of softwood
lumber duties, significant increases in provincial stumpage rates and the effects of the worst coastal fire
season on record. Our earnings were positively impacted by the benefits of our refined marketing strategy
that supported higher price realizations despite commodity lumber price volatility. We accelerated strategic
capital investments in our operations to increase the production of high-value, finished lumber and to
improve our cost competitiveness.
Adjusted EBITDA of $143.5 million in 2018 included export tax expense of $43.0 million and stumpage
expense of $52.7 million. Export tax expense increased by $27.2 million due to the application of softwood
lumber duties for the full year of 2018. Higher coastal stumpage resulted in an incremental stumpage
expense of $30.6 million.
We achieved record revenue of $1,196.7 million in 2018, an increase of 5% from 2017, despite a weaker
specialty product sales mix and the temporary suspension of export log sales. We took advantage of robust
commodity markets in the first half of 2018 by directing export logs to our mills to increase commodity lumber
production.
Log production increased by 8% as we overcame the worst coastal fire season on record. Coastal fire
conditions led to the full curtailment of our timberlands operations for August and early September, during
which we directed resources to aid in firefighting efforts. Excluding stumpage expense, our timberlands costs
were relatively flat year over year as the benefit of margin improvement initiatives offset increased contractor
costs.
We increased lumber production by 9% as we leveraged a stronger opening log inventory to increase sawmill
operating hours over 2017. Excluded from our 2018 production results was 14 million board feet of third-
party custom cut production at our Ladysmith mill, to avoid temporary curtailment. Log supply at Ladysmith
continues to be challenged by high coastal log exports and competition from pulp producers.
Our net income in 2018 was $69.2 million, as compared to $74.4 million in 2017. The benefits of margin
improvement initiatives and leveraging our mill capital investments were offset by significant incremental
export duty and stumpage expenses in 2018.
Strong operating cash flows were used to fund $95.1 million of capital expenditures, including $24.6 million
invested in the acquisition and upgrade to our Arlington, Washington distribution and processing center. We
returned $34.3 million to shareholders through regular, quarterly dividends and we repurchased $25.2 million
of our outstanding common shares for cancellation. Liquidity was $250.4 million at December 31, 2018.
2
We continue to reposition our coastal assets and pursue external opportunities to grow our margin-focused
business. We achieved another milestone in our collaborative work with coastal First Nations in December
2018, when we reached an agreement to sell a 7% ownership interest in our Port Alberni Forest Operation
to the Huu-ay-aht First Nations for $7.2 million. The sale and partnership agreements are subject to
customary closing conditions and are scheduled to be completed late in the first quarter of 2019.
On February 1, 2019, we completed the asset acquisition of Columbia Vista Corporation’s (“Columbia Vista”)
operations in Vancouver, Washington. This acquisition is consistent with our strategy of pursuing margin-
focused business opportunities that complement our position in selected markets. Bringing Western and
Columbia Vista together provides us the opportunity to expand our Douglas fir specialty product offerings,
particularly in Japan, which will support our BC-based hemlock programs. The combination of Columbia
Vista and Western makes us more meaningful to our selected customers and creates a stronger company
for all our employees.
Change to Board of Directors
Ms. Suzanne Blanchet tendered her resignation from the Board of Directors effective November 9, 2018, for
personal reasons. The Company intends to fill the director vacancy through its ongoing candidate search.
Today, the Company announced the planned transition of its Board of Directors and certain Board
Committees including the immediate appointment of director Michael Waites to Chair of the Board.
3
Summary of Selected Quarterly and Annual Results (1)
(millions of dollars except per share amounts and where otherwise noted)
Q4
2018
Q4
2017
Q3
2018
YTD
2018
YTD
2017
Summary Information
Revenue
Lumber
Logs
By-products
Total revenue
Export tax
Stumpage
Adjusted EBITDA
Adjusted EBITDA margin
Operating income prior to restructuring items and other income (expense)
Net income for the period
Basic and diluted earnings per share (in dollars)
Operating Information
Lumber
Lumber Shipments – millions of board feet(2)
Western Red Cedar
Japan Specialty
Niche
Commodity
Total
Lumber Production – millions of board feet
Lumber Price – per thousand board feet
Logs
Log Shipments – thousands of cubic metres
Export
Domestic
Pulp
Total
Net production – thousands of cubic metres(3)
Saw log purchases – thousands of cubic metres
$
$
$
230.9
36.2
17.7
284.8
207.3
56.6
19.2
283.1
238.2
33.6
20.7
292.5
$
952.9
160.0
83.8
1,196.7
$
$
$
858.2
214.8
70.4
1,143.4
$
$
$
$
$
10.1
13.8
$
0.1
7.9
$
11.5
10.9
$
43.0
52.7
$
15.8
22.1
$
18.0
6.3%
$
38.9
13.7%
$
32.3
11.0%
$
143.5
12.0%
$
152.6
13.3%
$
$
$
$
$
7.7
5.3
0.02
30.3
19.0
0.05
23.4
15.1
0.04
103.4
69.2
0.18
117.0
74.4
0.19
$
$
$
$
$
47
37
24
110
218
53
37
19
91
200
51
31
24
106
212
205
138
96
441
880
232
150
84
374
840
200
1,059
$
184
1,037
$
221
1,124
$
864
1,083
$
792
1,022
$
1
222
146
369
1,135
212
84
262
147
493
1,099
343
10
189
109
308
815
197
65
1,037
407
1,509
4,328
979
459
839
365
1,663
4,008
1,150
Log Price – per cubic metre(4)
$
98
$
115
$
109
$
106
$
120
Illustrative Lumber Average Price Data(5)
Price Basis
Grn WRC #2 Clear & Btr 4x6W RL ($C)
Grn WRC Deck Knotty 2x6 RL S4S
Grn WRC #2 & Btr AG 6x6 RL
Coast Grn WRC Std&Btr NH 3/4x4 RL S1S2E
Grn Hem Baby Squares Merch 4-1/8x4-1/8 13' S4S
Grn Dfir Baby Squares Merch 4-1/8x4-1/8 RL S4S
KD White Fir Shop Moulding&Btr C&Btr 5/4 S2S
Grn Dfir (Portland) #1&Btr 100% FOHC 6x6 Rough
Hemlock Lumber 2x4 (40x90) Metric RG Utility
c.i.f. dest. N Euro
Net f.o.b. Mill
Net f.o.b. Mill
Net f.o.b. Mill
c.&f. dest. Japan
c.&f. dest. Japan
Net f.o.b. Mill
Net f.o.b. Mill
c.i.f. dest. Shanghai
$
$
$
$
$
$
$
$
$
5,133
1,418
2,245
1,146
1,000
1,200
1,080
1,358
440
$
$
$
$
$
$
$
$
$
4,950
1,528
1,878
1,184
800
1,055
1,060
1,165
466
$
$
$
$
$
$
$
$
$
5,150
1,503
2,215
1,180
1,000
1,235
1,080
1,398
527
$
$
$
$
$
$
$
$
$
5,100
1,493
2,134
1,171
949
1,189
1,075
1,369
486
$
$
$
$
$
$
$
$
$
4,641
1,484
1,780
1,138
766
1,026
1,060
1,024
444
Average Exchange Rate – CAD to USD
Average Exchange Rate – CAD to JPY
0.756
85.32
0.787
88.84
0.765
85.32
0.771
85.19
0.770
86.39
(1)
Included in Appendix A is a table of selected results from the last eight quarters.
(2) Comparative figures have been reclassified to conform to the current period’s presentation, which reflects the reclassification of
certain Niche products (Hemlock timbers and US-destined Yellow Cedar) from Commodity and Japan Specialty shipment totals.
(3) Net production is sorted log production, net of residuals and waste.
(4) The log revenue used to determine average price per cubic metre has been reduced by the associated shipping costs arranged
in the respective periods to enable comparability of unit prices.
(5) Sourced from Random Lengths in USD/Mfbm, except Hemlock Lumber Metric RG Utility that is sourced from China Bulletin.
4
Summary of Fourth Quarter 2018 Results
Adjusted EBITDA for the fourth quarter of 2018 was $18.0 million, as compared to $38.9 million from the
same period last year. An incremental $10.0 million of export tax expense, an added $5.9 million of stumpage
expense and a commodity-heavy sales mix more than offset improvements in specialty product price
realizations. In addition, lower commodity lumber pricing drove a negative lumber and log inventory
revaluation of $1.9 million, as compared to a positive adjustment of $2.5 million in the same period last year.
Operating income prior to restructuring items and other income decreased to $7.7 million from $30.3 million
in the same period last year. Last year, we proactively increased Western Red Cedar (“WRC”) pricing and
shipments in advance of the application of lumber duties, and US countervailing lumber duty application was
limited to three days in the quarter. In contrast, the fourth quarter of 2018 saw a return to a more normal
seasonal WRC sales cycle and the full application of lumber duties.
Canadian to United States dollar (“USD”) exchange rate volatility leading into year-end resulted in an
unrealized mark-to-market expense of $2.2 million from outstanding foreign currency forward contracts, as
compared to a $0.7 million unrealized gain in the fourth quarter of 2017.
Sales
Lumber revenue was $230.9 million, an increase of 11% from same period last year. We grew shipments
by 9% and increased realized lumber pricing, despite a weaker sales mix and a steep decline in commodity
lumber prices. Specialty lumber sales pricing was supported by a 26% increase in high-value WRC timbers.
To mitigate declining commodity lumber prices, we significantly increased direct lumber sales into China.
As noted above, we returned to a more normal seasonal WRC sales cycle, which contributed to an 11%
decrease in WRC shipments. Specialty lumber represented 49% of total fourth quarter shipments, as
compared to 55% in the same period last year.
Fourth quarter log revenue was $36.2 million, a 36% decrease from the same period last year. Improved log
pricing was more than offset by a weaker log sales mix. Log shipments decreased by 25% as compared to
the fourth quarter of 2017, as we temporarily suspended our export log sales program to direct additional
logs to our mills. The only export log shipment in the period originated from a short-term First Nation timber
purchase agreement managed by Western.
By-products revenue was $17.7 million in the fourth quarter of 2018, as compared to $19.2 million in the
same period in 2017. Pricing remained comparatively flat, on lower shipments due to reduced chip volumes
purchased for resale.
Operations
Lumber production was 200 million board feet, a 9% increase over the fourth quarter of 2017, despite storm-
related power outages and capital projects which interrupted production in late December. We grew lumber
production by leveraging the benefit of our mill capital investments, well-positioned opening log inventory,
and the redirection of export logs. We significantly increased year-over-year production at our Duke Point
facility through improved operating efficiencies and higher operating hours. In addition, we grew finished
lumber production from the upgraded planer. Recent investments in our Chemainus timber deck drove a
14% increase in high-value WRC timber production over the same period last year.
Fourth quarter manufacturing costs were 3% higher than the same period last year due to increased
secondary processing and storm and capital related downtime. Our natural gas pricing was higher due to a
temporary supply disruption.
Log production was 1,135,000 cubic metres, an increase of 3% from the fourth quarter of last year. We took
advantage of improved harvest conditions to make up ground from fire-related curtailments in the third
quarter, increasing closing log inventory by 6% compared to the end of 2017.
Excluding stumpage expense, our harvest costs were consistent with the fourth quarter of 2017. Stumpage
expense increased by 75% as a result of provincial rate equation updates, the ongoing influence of coastal
log exports and higher market log pricing, despite weaker lumber markets.
Saw log purchases were 212,000 cubic metres, a 38% decrease from the same quarter last year. Increased
demand from export markets and pulp manufacturers reduced log supply to domestic sawmills and drove
log prices higher.
5
Freight expense increased $1.4 million as compared to the fourth quarter of 2017. Higher freight expense
was attributable to increased in-market sales to China, consistent with our strategy. Increased freight costs
arising from a 9% increase in lumber shipments were largely offset by savings from lower log shipments.
Fourth quarter adjusted EBITDA and operating income included $10.1 million of countervailing duty (“CVD”)
and anti-dumping duty (“AD”), as compared to $0.1 million in the same quarter last year. CVD was not in
effect until December 28, 2017. Duty expense in the fourth quarter of 2017 was offset by a $3.5 million export
tax recovery due to differences in preliminary and revised duty rates.
Selling and Administration Expense
Fourth quarter selling and administration expense was $7.6 million in 2018, as compared to $7.4 million in
the same period last year. A decline in our common share price over the quarter resulted in a $0.7 million
mark-to-market recovery related to share-based compensation plans. We incurred comparatively greater
expense related to foundational system and process improvements in support of our growth strategy.
Net Income
Net income for the fourth quarter of 2018 was $5.3 million, as compared to $19.0 million for the same period
of 2017. Operating margins and net income were reduced by higher export duty and stumpage expenses.
Arlington Operations Update
In the fourth quarter of 2018, we invested $4.5 million in Arlington infrastructure and equipment upgrades.
Approximately 24% of all US-bound shipments were distributed through the facility in the fourth quarter of
2018. With infrastructure upgrades and equipment installation nearing completion, we expect to commission
secondary processing late in the first quarter of 2019, and continue to increase the portion of US-bound
shipments distributed through Arlington.
Sale of Ownership Interest in Port Alberni Forest Operations
On December 14, 2018, Western announced it had reached an agreement whereby the Huu-ay-aht First
Nations will acquire a 7% interest from Western in a newly formed Limited Partnership for $7.2 million,
subject to closing adjustments (the “Transaction”). The assets of the Limited Partnership will consist of Port
Alberni Forest Operation, including TFL 44 and certain other associated assets and liabilities. The Company
will continue to source fibre from the Limited Partnership assets to support its BC manufacturing facilities.
The completion of the Transaction is subject to customary closing conditions and is scheduled to close late
in the first quarter of 2019. As part of the agreement, Western may sell Huu-ay-aht First Nations an
incremental interest in the Limited Partnership subject to further negotiation.
Columbia Vista Asset Acquisition
On February 1, 2019, we completed the asset acquisition of Columbia Vista Corporation’s operations in
Vancouver, Washington. This acquisition is consistent with our strategy of pursuing margin-focused
business opportunities that complement our position in selected markets. Bringing Western and Columbia
Vista together provides us the opportunity to expand our Douglas fir specialty product offerings, particularly
in Japan, which will support our BC-based hemlock programs. The combination of Columbia Vista and
Western makes us more meaningful to our selected customers and creates a stronger company for all our
employees.
6
Summary of 2018 Annual Results
We delivered an annual adjusted EBITDA of $143.5 million in 2018 and adjusted EBITDA margin of 12.0%,
despite facing the significant headwinds of an incremental $27.2 million in export duty expense and
additional stumpage expense of $30.6 million; both of which more than doubled from last year. Operating
income prior to restructuring items and other income decreased by 12% from 2017 to $103.4 million.
Sales
Lumber revenue increased by 11% in 2018 to $952.9 million, as we grew sales volumes and improved price
realizations. Average lumber price realizations were 6% higher compared to 2017, despite proportionately
higher commodity sales. Commodity lumber increased to 50% of total lumber shipments in 2018, from 45%
in 2017. Conversely, WRC lumber shipments declined to 23%, from 28% in the prior year, due in part to a
more normal seasonal WRC sales cycle in the fourth quarter of 2018. We grew shipments to China to
capitalize on strong market demand and pricing, while at the same time partially mitigating the impact of US
duties.
Log revenue was $160.0 million in 2018, a decrease of $54.8 million from 2017 due to a 9% decrease in log
shipments. Lower log revenue was the result of the temporary suspension of our export log sales program
in 2018, to supply our coastal sawmills and capitalize on increased demand for commodity lumber.
By-product revenue increased to $83.8 million in 2018, from $70.4 million in 2017. Chip price realizations
increased 23%, more than offsetting a 7% reduction in sales volumes. Lower shipments were driven by
reduced chip volumes purchased for resale.
Operations
Lumber production was 864 million board feet, a 9% increase over 2017. In addition, we produced 14 million
board feet equivalent of custom cut production for a third party in the first quarter of 2018, which was not
reflected in our lumber production volume. Higher opening log inventory and increased mill operating hours
improved total production. In addition, we directed export logs into our manufacturing operations to leverage
our flexible operating platform and capitalize on strong commodity markets in the first half of 2018. Operating
costs were driven lower year-over-year through a heavier mix of commodity lumber and incremental benefits
realized from our strategic capital initiatives.
The recapitalization of our Duke Point sawmill and improved opening log inventory facilitated a 30% increase
in total operating hours as compared to 2017. The ramp-up of our rebuilt Duke Point planer operation has
supported the reduction of secondary remanufactured lumber processed via higher-cost, third-party
facilities, while growing our production of finished lumber products.
The cost benefits of these operating improvements were partly offset by a 25% increase in primary
production volumes at third party custom cut facilities year-over-year. We leveraged these facilities in order
to supply our customers’ needs, optimize sawmill cut schedules and grow overall production.
Log production for 2018 was 4,328,000 cubic metres, 8% higher than 2017 despite the impact of the worst
coastal fire season on record. Log costs were 7% higher, due to increased stumpage, a higher percentage
of grapple yarding and the mix of operations offset by our margin improvement initiatives and reduced
helicopter logging.
We supplemented our internal log supply with saw log purchases of 979,000 cubic metres, a 15% decrease
from 2017. The temporary suspension of our export log program limited our ability to successfully procure
logs from government-auctioned standing timber sales. Increased pricing for purchased logs was driven by
strong demand.
Freight expense decreased by $12.6 million in 2018 to $90.6 million. The temporary suspension of our export
log sales program more than offset the impact of a 5% increase in lumber shipments over 2017.
Selling and Administration Expense
Selling and administration expenses were $32.0 million, as compared to $32.8 million in 2017. Mark-to-
market recovery related to share-based compensation plans more than offset increased IT costs related to
foundational system and process improvements in support of our growth strategy.
7
Finance Costs
Finance costs were $2.7 million in 2018 compared to $2.5 million in 2017.
On August 8, 2018, we announced the execution of a new $250 million syndicated credit facility. The facility,
which matures on August 1, 2022, includes an accordion feature to access an additional $100 million of
debt. As part of this refinancing, we recognized the remaining deferred financing costs of the previous credit
facilities. The Company had drawings of $7.0 million on the credit facility as at December 31, 2018.
Net Income
Net income was $69.2 million, as compared to $74.4 million in 2017. Reduced operating margins were offset
by reduced operating restructuring items and lower income tax expense.
Operating Restructuring Items
We incurred $4.8 million of operating restructuring costs in 2018, including $2.2 million relating to the
indefinite curtailment of our Somass sawmill; $1.5 million in severance and related expenses attributable to
ongoing business optimization initiatives; and $0.6 million incurred to retrain employees affected by the
closure of the Englewood train operation. Operating restructuring costs were $14.4 million in 2017, due
primarily to the indefinite curtailment of our Somass sawmill and closure of the Englewood train.
Our Somass sawmill remains indefinitely curtailed as a result of a fibre supply deficit arising from years of
tenure takebacks and government land use decisions, and rising costs associated with the US Softwood
Lumber dispute. We are evaluating options to create a sustainable, long-term solution for the site, and we
are considering the input of government, First Nations and other stakeholders.
Income Taxes
We used the majority of our remaining non-capital loss carryforwards during the second quarter of 2018,
which will result in cash taxes payable for the tax year ending December 31, 2018. Accordingly, current
income tax expense of $14.3 million and deferred income tax expense of $11.3 million, respectively, were
recognized in net income in 2018. Total income tax expense decreased by $1.3 million from 2017 as a result
of lower operating earnings.
Deferred income tax recovery of $0.2 million was recognized through other comprehensive income as a
result of actuarial losses arising from our legacy defined benefit pension plans. In 2017, we recognized
deferred income tax recovery of $0.7 million through other comprehensive income as a result of actuarial
losses arising from these pension plans.
At December 31, 2018, the Company and its subsidiaries had unused non-capital loss carry forwards totaling
approximately $2.0 million in Canada, and $2.1 million in the US, which can be used to reduce taxable
income. In addition, the Company has unused capital losses carried forward of approximately $93.7 million
in Canada, which are available indefinitely.
In May 2018, the Company received correspondence from the Canada Revenue Agency (“CRA”) regarding
certain restructuring transactions, occurring in 2004 and 2007 to 2011, and the general anti-avoidance rule.
Management believes the CRA’s position is without merit. Management is prepared to defend its position if
a notice of reassessment is issued, and as such, the Company has not recognized any income tax provision
as at December 31, 2018 relating to this matter.
8
Financial Position and Liquidity
(millions of dollars except where otherwise noted)
Selected Cash Flow Items
Operating Activities
Net income
Amortization
Other
Subtotal
Change in non-cash working capital
Cash provided by (used in) operating activities
Investing Activities
Additions to property, plant and equipment
Additions to capital logging roads
Purchase of Arlington facility
Other
Cash provided by (used in) investing activities
Financing Activities
Repayment of debt
Dividends
Share repurchases
Other
Cash provided by (used in) financing activities
Increase (decrease) in cash
Summary of Financial Position
Cash and cash equivalents
Current assets
Current liabilities
Total debt, net of deferred financing costs
Net debt (cash) (1)
Shareholders' equity
Total liquidity (2)
Financial ratios:
Current assets to current liabilities
Net debt to capitalization (3)
Q4
2018
Q4
2017
Q3
2018
YTD
2018
YTD
2017
74.4
36.3
18.1
128.8
5.6
134.4
(41.7)
(13.5)
-
7.1
(48.1)
(35.0)
(31.7)
(2.7)
(0.6)
(70.0)
$
$
$
$
$
5.3
9.9
2.9
18.1
(12.5)
5.6
(27.4)
(3.6)
-
2.0
(29.0)
19.0
9.4
3.5
31.9
(28.4)
3.5
(19.3)
(3.2)
-
0.1
(22.4)
15.1
9.6
1.2
25.9
14.2
40.1
(17.7)
(3.0)
-
0.8
(19.9)
69.2
40.2
23.6
133.0
(14.8)
118.2
(70.6)
(12.9)
(11.6)
3.1
(92.0)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
-
$
(8.7)
(9.1)
6.8
(11.0)
$
-
$
(8.0)
(2.7)
(0.3)
(11.0)
$
-
$
(8.8)
(10.4)
(0.3)
(19.5)
$
-
$
(34.3)
(25.2)
6.4
(53.1)
$
$
$
$
(34.4)
$
(29.9)
$
0.7
$
(26.9)
$
16.3
$
8.4
297.9
142.7
6.0
(2.4)
572.9
250.4
2.09
-
$
35.3
292.5
107.8
$
42.8
324.6
146.0
-
(35.3)
562.7
269.3
2.71
-
-
(42.8)
586.6
291.8
2.22
-
(1) Net debt (cash) is defined as the sum of long-term debt, less cash and cash equivalents.
(2) Total liquidity comprises cash and cash equivalents, and available credit under the Company’s credit facility.
(3) Capitalization comprises net debt and shareholders’ equity.
Cash provided by operating activities in 2018 was $118.2 million as compared to $134.4 million in 2017. We
invested $95.1 million in capital including $24.6 million for the acquisition and upgrades to our Arlington,
Washington distribution and processing facility. We increased our dividend by 12.5%, returning $34.3 million
to shareholders through quarterly dividends, and repurchased $25.2 million of our common shares for
cancellation under our normal course issuer bid.
Cash used in investing activities was $92.0 million in 2018, as compared to $48.1 million invested in 2017.
We increased capital investments in 2018, including $36.0 million in strategic capital investments ranging
from the Arlington acquisition to numerous high-return, low cost capital projects. Our strategic capital
program is discussed in more detail under “Strategy and Outlook”.
Cash used in financing activities decreased to $53.1 million in 2018, as compared to $70.0 million in 2017,
which included repayment of the remaining $35.0 million of debt outstanding.
Total liquidity decreased to $250.4 million at December 31, 2018, from $269.3 million at the end of 2017.
Liquidity is comprised of cash and cash equivalents of $8.4 million and unused availability under the credit
facility of $242.0 million. Based on our current forecasts, we expect sufficient liquidity will be available to
meet our obligations in 2019.
9
Capital Allocation
Normal Course Issuer Bid
On August 3, 2018, the Company renewed its Normal Course Issuer Bid (“NCIB”) permitting the purchase
and cancellation up to 19,662,439 of the common shares or approximately 5% of the common shares issued
and outstanding as of August 3, 2018.
In 2018, the Company repurchased 11,695,573 common shares under the NCIB for $25.2 million at an
average price of $2.15 per common share.
As at February 12, 2019, 8,498,617 common shares remain available to be purchased under the current
NCIB. The NCIB expires on August 7, 2019.
Strategy and Outlook
Western’s long-term business objective is to create superior value for shareholders by building a margin-
focused log and lumber business of scale to compete successfully in global softwood markets. We believe
this will be achieved by maximizing the sustainable utilization of our forest tenures, operating safe, efficient,
low-cost manufacturing facilities and augmenting our sales of targeted high-value specialty products for
selected global customers with a lumber wholesale program. We seek to manage our business with a focus
on operating cash flow and maximizing value through the production and sales cycle. We routinely evaluate
our performance using the measure Return on Capital Employed.
Continuing to guide our actions are the strategic initiatives presented below, with recent accomplishments:
Strengthen the Foundation
We have developed a track record of consistently delivering positive operating income and a
balanced approach to capital allocation.
Through our focused capital investments we have positioned Western as the only company on the
coast of BC capable of consuming the complete profile of the coastal forest and competitively
manufacturing a diverse product mix.
The strategic capital investments completed and activated within the last two years have allowed us
to increase the production of targeted products and supported the consolidation of our coastal
operations. By advancing the recapitalization and consolidation of our coastal operating base, we
have improved the financial performance and stability of our business.
We continue to invest in people and systems to create a platform for growth in our existing
operations and to accelerate our pursuit of margin-focused growth opportunities.
We continue to pursue opportunities for long-term, mutually beneficial relationships with coastal First
Nations. We recently announced the sale of an ownership interest in our Port Alberni Forest
Operation to Huu-ay-aht First Nations, aligning our interests and introducing an opportunity to
potentially involve other First Nations in a shared vision for forestry.
Grow the Base
We have grown annual revenue to $1.2 billion, more than double the revenue reported in 2009.
We continue to optimize our operations and invest in our mills and timberlands to improve margins
and position ourselves for growth.
We have implemented a non-capital margin improvement program to improve our cost structure and
optimize our supply chain.
The success of our business relationships with First Nations continues to drive incremental log
volume and has enabled Western to grow specialty lumber production in recent years.
We are delivering on a strategy that drives the production and sale of targeted, high-margin products
of scale to selected customers that value our product offerings.
10
Explore Opportunities
Our ongoing reinvestment in and consolidation of our coastal operating base and steady operating
improvements have delivered improved financial performance and a strong balance sheet that will
support continued growth of our margin-focused business.
In 2018 we acquired a distribution and processing centre in Arlington, Washington, integrated the
distribution operations and are poised to start secondary processing in the first quarter of 2019.
In early 2019 we completed an acquisition of the assets of Columbia Vista Corporation in Vancouver,
Washington, that will enable us to offer a broader array of Douglas fir specialty products to our
selected customers in both the US and Japan.
To meet our selected customers’ needs we have launched a new wholesale business which will
provide complementary products to our industry leading specialty product offerings and enhance
our return on capital employed.
We continue to evaluate opportunities to grow shareholder value.
Sales & Marketing Strategy Update
We are progressing with the execution of our sales and marketing strategy that focuses on the production
and sale of targeted, high-margin products of scale to selected customers. We supplement our key product
offerings with purchased lumber to deliver the suite of products our customers require. To accelerate and
lead our sales and marketing initiatives, we made the following executive management additions in the fourth
quarter of 2018:
Bruce Alexander joined Western as the Senior Vice President, Sales, Marketing and Manufacturing. Mr.
Alexander is an experienced executive and brings over 30 years of sales, manufacturing and management
experience in the forest products and manufacturing industries, including on the coast of BC. Mr. Alexander
will be responsible for positioning Western as the leading global supplier of specialty building materials.
Common leadership of sales, marketing and manufacturing business units will drive alignment between
these functions, and is expected to optimize the production of targeted products of scale and grow our
selected customer base worldwide.
Don McGregor joined Western as Vice President, Wholesale Lumber. Mr. McGregor brings almost 30 years
of lumber marketing experience, including more than 20 years as President of Vanport Canada, a leading
wholesale lumber company. Mr. McGregor is responsible for leading wholesale lumber operations and, in
building relationships with global suppliers, broadening the scope of our specialty product offerings. Through
the existing industry-leading product portfolio and complementary supply from new supply relationships, Mr.
McGregor will expand product offerings to deliver greater value to our selected customers.
Market Outlook
Despite the recent volatility in commodity lumber pricing, our long-term view of market fundamentals remains
unchanged. In North America, rising lumber consumption will continue to be driven by increased new home
construction and a robust repair and renovation sector. We expect lumber demand in China to continue to
grow due to a government commitment to housing, while in Japan, lumber consumption is expected to
remain relatively stable over the next few years.
The supply of commodity lumber exceeded demand in North America in the second half of 2018 as new
home construction stalled. Benchmark KD SPF 2x4 pricing fell more than 49% from the peak in May 2018
which led to numerous mill production curtailments. Demand in China for commodity lumber has remained
relatively strong despite declining prices. We successfully grew China lumber shipments by 12% in 2018.
Lumber shipments to Japan declined by 19% in 2018 mainly due to limited Douglas fir log availability.
Looking ahead, we anticipate North American demand and pricing for commodity lumber to improve as we
enter the spring building season. However, we do not expect pricing to repeat last year’s record performance
as idled commodity lumber capacity is likely to respond to improved demand, moderating any pricing
response. Lumber pricing in China has reset and is expected to remain flat through the first quarter of 2019,
as that market enters the seasonal holiday slowdown. We will continue to monitor these prices and make
adjustments in our operating plans accordingly.
11
In the first half of 2019, we expect WRC pricing trends to be product specific. We anticipate prices to remain
stable for WRC timbers and wide width WRC products. In contrast, we expect the narrow width WRC lumber
market to remain weak due to substitution from low priced imported lumber and an abundant supply of
narrow-width US cedar lumber production. We anticipate pricing in high-value WRC export markets to
weaken. To mitigate the impact of lower WRC pricing we will endeavor to manage our product mix.
Our Japan product mix is expected to improve with the inclusion of Douglas fir sales from our Columbia
Vista division. We expect demand in Japan to be relatively stable for the first half of 2019, as builders look
to complete projects ahead of an expected increase in the Japanese consumption tax. The recent closure
of a Japanese fir sawmill is expected to support fir pricing. Demand for hemlock products is expected to
remain pressured due to domestic product substitution.
We expect further decreases in domestic saw log prices in response to declining lumber markets through
the first quarter of 2019.
Strategic Capital Program Update
We continue to implement a strategic capital program that is designed to position Western as the only
company capable of sustainably consuming the complete profile of the coastal forest and competitively
manufacturing a diverse product mix for global markets.
Our strategic capital program is focused on the installation of technology that will deliver top quartile
performance and improve our ability to manufacture targeted products that yield the best margin. In addition
to investments in our manufacturing assets, we also allocate capital to strategic, high-return projects
involving our information systems, timberlands assets, and forest inventories.
In the fourth quarter of 2018, we continued to make advancements with the latest phase of the Duke Point
planer rebuild and progressed on a number of small, high-return capital projects focused on debottlenecking
our manufacturing operations.
We completed our acquisition of Columbia Vista Corporation in Vancouver, Washington on February 1, 2019
for US$30.5 million, subject to post closing working capital adjustments. The assets acquired include a
sawmill operation and separate remanufacturing site with 18 dry kilns and planer facilities.
Scheduled for the first half of 2019 are the completion of a series of high-return, low-cost strategic capital
projects at our Duke Point, Saltair and Cowichan Bay operations, along with the modernization of our forklift
fleet as we implement a centralized fleet management program. We will continue to upgrade our processing
equipment at Arlington and expect the facility to begin commissioning in the first quarter of 2019.
Softwood Lumber Dispute and US Market Update
Western’s results for 2018 include $43.0 million of export duty expense, comprised of CVD and AD expense.
At February 1, 2019, Western had $64.9 million of cash on deposit with the US Department of Treasury in
respect of these softwood lumber duties.
The US application of duties continues a long-standing pattern of US protectionist action against Canadian
lumber producers. We disagree with the US trade determination and the inclusion of specialty lumber
products, particularly Western Red Cedar and Yellow Cedar products in this commodity lumber focused
dispute. As duties paid are determined on the value of lumber exported, and as our shipments to the US
market are predominantly high-value, appearance grade lumber, we are disproportionately impacted by
these duties. We have filed a Chapter 19 North American Free Trade Agreement (“NAFTA”) separate-like-
product challenge, on which a ruling is not expected until late 2019.
US market sales represent less than 25% of Western’s total revenue in 2018. Continued strong demand and
a lack of supply has supported improvements in our specialty lumber product pricing, partly offsetting the
impact of duties.
Our acquisition of a distribution and processing centre in Arlington, Washington and the assets of Columbia
Vista Corporation in Vancouver, Washington are expected to partially mitigate the damaging effects of duties
on our products destined for the US market while increasing US market sales. We intend to leverage our
flexible operating platform to continue to overcome any challenges that arise from this trade dispute. Refer
to “Risks and Uncertainties - Softwood Lumber Dispute” below for a more detailed softwood lumber dispute
timeline.
12
Summary of Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2018 and our payments due
for each of the next five years and thereafter, including estimated interest payments:
(millions of Canadian dollars)
Accounts payable and
accrued liabilities
Long-term debt
Operating leases
Reforestation obligation
Defined benefit pension
plan funding obligation
Columbia Vista acquisition
Non-GAAP Measures
Total
2019
2020
2021
2022
2023
Thereafter
$
132.7
11.5
21.8
26.7
$
132.7
1.2
4.0
10.1
-
$
1.2
3.5
4.4
-
$
1.2
3.1
2.8
-
$
7.9
2.5
1.8
-
$
-
2.1
1.4
-
$
-
6.6
6.2
25.7
41.6
260.0
$
3.1
41.6
192.7
$
3.1
-
12.2
$
3.1
-
10.2
$
3.1
-
15.3
$
3.0
-
6.5
$
10.3
-
23.1
$
Reference is made in this MD&A to the following non-GAAP measures: Adjusted EBITDA, Adjusted EBITDA
margin, and Net debt to capitalization are used as benchmark measurements of our operating results and
as benchmarks relative to our competitors. These non-GAAP measures are commonly used by securities
analysts, investors and other interested parties to evaluate our financial performance. These non-GAAP
measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar
measures presented by other issuers. The following table provides a reconciliation of these non-GAAP
measures to figures as reported in our audited annual consolidated financial statements:
(millions of dollars except where otherwise noted)
Q4
2018
Q4
2017
Q3
2018
YTD
2018
YTD
2017
Adjusted EBITDA
Net income
Add:
Amortization
Changes in fair value of biological assets, net
Operating restructuring items
Other (income) expense (1)
Finance costs
Current income tax (recovery) expense
Deferred income tax expense
Adjusted EBITDA
Adjusted EBITDA margin
Total revenue
Adjusted EBITDA
Adjusted EBITDA margin
Net debt to capitalization
Net debt
Total debt, net of deferred financing costs
Cash and cash equivalents
Net debt (cash)
Capitalization
Net debt (cash)
Add: Shareholders' equity
Capitalization
Net debt to capitalization
$
5.3
$
19.0
$
15.1
$
69.2
$
74.4
9.9
0.4
(0.4)
0.9
0.7
-
1.2
18.0
$
9.4
(0.7)
3.1
(0.5)
0.5
-
8.2
38.9
$
9.6
(0.8)
1.7
-
0.9
6.2
(0.5)
32.3
$
40.2
(0.1)
4.8
1.1
2.7
14.3
11.3
143.5
$
36.3
(0.6)
14.4
(1.2)
2.5
0.2
26.7
152.6
$
$
284.8
18.0
6.3%
$
283.1
38.9
13.7%
$
292.5
32.3
11.0%
$
1,196.7
143.5
12.0%
$
1,143.4
152.6
13.3%
$
$
6.0
(8.4)
(2.4)
-
$
(35.3)
(35.3)
$
-
$
(42.8)
(42.8)
$
$
$
(2.4)
572.9
570.5
$
$
(35.3)
562.7
527.4
$
$
(42.8)
586.6
543.8
-
-
-
Figures in the table above may not equal or sum to figures presented elsewhere due to rounding.
(1) Other (income) expense, net of changes in fair market value less cost to sell of biological assets.
Included in the net income to adjusted EBITDA reconciliation for 2017 was $8.7 million related to the
indefinite curtailment of our Somass sawmill; $2.4 million related to the closure of the Englewood train; $3.4
million in property sales gains; and a $3.1 million reduction to cost of goods sold for WorkSafeBC
Certification of Recognition insurance premium rebates received for the 2014 and 2016 fiscal years.
13
Critical Accounting Estimates
Reforestation Obligation
Under BC law, we are responsible for reforesting areas that we harvest. These obligations are referred to
as reforestation obligations. We accrue our reforestation obligations based on estimates of future costs at
the time the timber is harvested. The estimate of future reforestation costs is based on a detailed analysis
for all areas that have been logged and includes estimates for the extent of reforestation versus natural
regeneration, the cost of planting including the cost of seedlings, the extent and cost of site preparation,
brushing, weeding, thinning and replanting and the cost of conducting surveys. Our registered professional
foresters conduct the analysis that is used to estimate these costs. However, these costs are difficult to
estimate and can be affected by weather patterns, forest fires and wildlife issues that could impact the actual
future costs incurred and thus result in material adjustments.
Valuation of Inventory
We value our log and lumber inventories at the lower of cost and net realizable value. We estimate net
realizable value by reviewing current market prices for the specific inventory items based on recent sales
prices and current sales orders. If the net realizable value is less than the cost amount, we will record a
write-down. The determination of net realizable value at a point in time is generally both objective and
verifiable. However, changes in product prices can occur suddenly, which could result in a material write-
down in inventories in future periods.
Valuation of Accounts Receivable
We record an allowance for the collection of doubtful accounts receivable based on our best estimate of
potentially uncollectible amounts. The best estimate considers past experience with our customer base and
a review of current economic conditions and specific customer issues. The Company’s general practice is
to insure substantially all North American lumber receivables for 90% of value with the Export Development
Corporation, while all export sales are sold on either a cash basis or with secured instruments, which reduces
the Company’s exposure to bad debts.
Pension and Other Post Retirement Benefits
Western has various defined benefit and defined contribution plans, and a group RRSP that provide
retirement benefits to most of its salaried employees. A group RRSP is provided to certain hourly employees
not covered by forest industry union plans. The Company also provides other post-retirement benefits and
pension bridging benefits to eligible retired employees. Our defined benefit plans were closed to new
entrants effective June 30, 2006. No further benefits accrue under these plans for years of service after
December 31, 2010, and no further benefits accrue under these plans for compensation increases effective
December 31, 2016. We retain independent actuarial consultants to perform actuarial valuations of plan
obligations and asset values, and advise on the amounts to be recorded in the financial statements. Actuarial
valuations include certain assumptions that directly affect the fair value of the assets and obligations and
expenses recorded in the financial statements. These assumptions include the discount rate used to
determine the net present value of obligations, the return on plan assets used to estimate the increase in
the plan assets available to fund obligations, and medical and health care costs used to estimate obligations.
Actual experience can vary materially from the estimates and impact the cost of our pension and post-
retirement medical and health plans and future cash flow requirements.
Environmental Provisions
We disclose environmental obligations when known and accrue costs associated with the obligations when
they are known and can be reasonably estimated. The Company owns a number of manufacturing sites that
have been in existence for significant periods of time and, as a result, we may have unknown environmental
obligations. However, until the sites are decommissioned and the plant and equipment are removed, a
complete environmental review cannot be undertaken.
14
Contingencies
Provisions for liabilities relating to legal actions and claims require judgements using management’s best
estimates regarding projected outcomes and the range of loss, based on such factors as historical
experience and recommendations of legal counsel. Actual results may vary from estimates and the
differences are recorded when known.
Valuation of Biological Assets
The Company values its biological assets at fair value less costs to sell. Valuation analysis includes recent
comparatives of standing timber sales, direct and indirect costs of sustainable forest management, net
present value of future cash flows for standing timber and log pricing assumptions. Significant assumptions
are used in the preparation of the valuation and actual results may vary materially from estimates.
Impairments
Assets that are subject to amortization are tested for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Impairment losses are recognized
in net income for the period for the amount by which the asset’s carrying amount exceeds its recoverable
amount. An impairment analysis requires the use of significant assumptions, including management and
independent third party input.
Income Tax Assets and Liabilities
Estimations in the recognition of tax assets or liabilities require assessments to be made based on the
potential tax treatment of certain items that will only be resolved once finally agreed with the relevant tax
authorities. Significant judgment is required as income tax laws and regulations can be complex and are
potentially subject to different interpretation between the Company and the respective tax authority. Net
income in subsequent periods may be impacted by the amount that estimates differ from the final tax return.
Deferred Income Taxes
Deferred tax assets and liabilities comprise the tax effect of temporary differences between the carrying
amount and tax basis of assets and liabilities, as well as the tax effect of unused tax losses. Assumptions
underlying the composition of deferred tax assets and liabilities include estimates of future results of
operations and the timing of reversal of temporary differences as well as the substantively enacted tax rates
and laws at the time of the expected reversal. The composition of deferred tax assets and liabilities is
reasonably likely to change from period to period due to the number of variables associated with the differing
tax laws and regulations across the jurisdictions in which the Company operates. As a result, the precision
and reliability of the resulting estimates are subject to uncertainties and may change as additional
information becomes known. Uncertainties surrounding these assumptions and changes in tax rates or tax
policy could have a material effect on expected results.
Accounting Policies and Standards
Please refer to Note 2(g), 19 and 23 of our audited annual consolidated financial statements for the year
ended December 31, 2018 for further information on the accounting standards referenced below.
New Accounting Standards
The Company has adopted the following standards with a date of initial application of January 1, 2018, which
had no significant impact on the Company’s interim financial statements:
•
•
IFRS 15, Revenue from Contracts with Customers
IFRS 9, Financial Instruments
Accounting Standards and Interpretations not yet Adopted
A number of new and amended IFRS standards are not yet effective for the year ended December 31, 2018
and have not been applied in preparing these interim financial statements. IFRS 16, Leases (“IFRS 16”) is
considered by the Company to be the most significant of several pronouncements that may affect future
15
financial statements. The Company intends to adopt IFRS 16 in its consolidated financial statements for the
year commencing January 1, 2019.
The Company plans to apply a modified retrospective approach upon adoption of IFRS 16. Under the
modified retrospective approach, the Company will calculate the right of use assets and lease liabilities as
at January 1, 2019 and will not restate comparative information. Rather, the Company will recognize the
cumulative effect of initially applying the standard as an adjustment to equity at the date of application. The
Company continues to evaluate the impact of adopting the new standard which will be completed and
disclosed in the consolidated financial statements in the first quarter of 2019. The Company anticipates that
upon transition, the impact to its consolidated financial statements will be an increase in non-current assets
and liabilities of less than 3% of total assets. Following the adoption of this standard, the consolidated
statement of comprehensive income will recognize depreciation in cost of goods sold and finance costs for
operating lease payments previously expensed in cost of goods sold.
Financial Instruments and Other Instruments
Western has a program in place to reduce the impact of volatile foreign exchange rates on its net income.
The Company utilizes derivative financial instruments in the normal course of its operations as a means to
manage its foreign exchange risk. Therefore, Western may purchase foreign exchange forward contracts or
similar instruments to hedge anticipated USD and JPY sales. The Company does not utilize derivative
financial instruments for trading or speculative purposes. Western will consider whether to apply hedge
accounting on a case by case basis and if the instrument is not designated as a hedge, the instrument is
adjusted to fair value and marked to market each accounting period, with changes recorded in net income.
During 2018, the Company entered into foreign exchange forward contracts to sell USD and JPY in order to
partially mitigate its foreign currency risk. At December 31, 2018, the Company had forward contracts in
place to sell an aggregate USD $62.3 million and JPY 155.0 million (2017: USD 43.0 million; JPY 325.0
million). A net loss of $5.1 million was recognized on contracts which matured in the year (2017: net gain of
$0.7 million), which is included in sales in the consolidated statement of comprehensive income.
Other financial instruments, which for Western consist primarily of debt instruments, are discussed
elsewhere in this discussion and analysis.
Off-Balance Sheet Arrangements
Other than operating leases for vehicles, equipment and machinery, the Company does not have any off-
balance sheet arrangements as at December 31, 2018.
Related Party Transactions
Key personnel of the Company include the executive management team and members of the Board of
Directors. The compensation paid or payable to key personnel is shown below:
Years ended December 31,
2017
2018
Salaries, directors' fees and short-term benefits
Post-employment benefits
Share-based compensation, including mark-to-market adjustment
$
$
7.2
0.3
2.7
10.2
6.6
0.3
4.4
11.3
$
$
Risks and Uncertainties
The following risks and uncertainties may have a material adverse effect on our operations or our financial
condition:
Environmental Regulation
We are subject to extensive federal and provincial environmental laws and regulations. These laws and
regulations impose stringent standards on our operations and impose liability to remedy problems that we
are legally responsible regarding, among other things:
16
• air emissions, and land and water discharges;
• operations or activities affecting watercourses or the natural environment;
• operations or activities affecting species at risk and critical habitats;
• use and handling of hazardous materials;
• use, handling, and disposal of waste; and
•
remediation of environmental contamination.
We may incur substantial costs to comply with current or future requirements, to respond to orders or
directions made, to remedy or to compensate others for the cost to remedy problems for which we are legally
responsible or to comply with new environmental laws that may be adopted from time to time. In addition,
we may discover currently unknown environmental problems or conditions affecting our operations or
activities or for which we are otherwise legally responsible. Western has closed certain operations and
although we have engaged specialists to advise us of environmental problems and conditions, normal site
clean-up may identify additional problems or conditions. Any such event could have a material adverse effect
on our financial condition and results of operations.
Western is one of five founding members of the Coast Forest Conservation Initiative (the “CFCI”), a
collaborative effort amongst forest companies working in BC's Central and North Coast. Its purpose is to
define and support the development of an ecosystem-based management as part of 2003 Land and
Resource Management Plan recommendations. The CFCI Companies, along with major environmental
groups delivered a suite of recommendations for consideration by the Province and the First Nations who
live in the region. On January 28, 2016 the Province enacted, by Order in Council, the GBR Order. On May
19, 2016, the Great Bear Rainforest (“GBR”) (Forest Management) Act received Royal Assent in the BC
legislature and this Act was subsequently brought into force on December 20, 2016 with an Order in Council
(number 974). As a result of the GBR related legislation the Company’s Allowable Annual Cut (“AAC”) in the
GBR area was reduced from 522,774 m3 per year to 427,005 m3 per year, effective January 1, 2017. Further,
Forest Licence A19244 was subdivided by the Province into two forest licences to ensure timber harvest
attributed to the GBR area is wholly contained in licences that only include forest operations in the GBR
area. WFP’s Tree Farm Licenses within the GBR were also partitioned. TFL 39 has a GBR specific AAC of
41,300 m3 per year that can only be harvested from the TFL blocks within the GBR.
Safety
The Company’s safety policy reflects its values and commitment to providing a healthy and safe workplace
for its people, while at the same time ensuring compliance with our regulatory requirements under
WorkSafeBC and other applicable regulations. Workplace safety laws and regulations change over time and
may involve new methodologies and additional costs necessary to bring the Company into compliance.
Variable Operating Performance, Product Pricing and Demand Levels
A key factor affecting Western’s operating and financial performance is the price received for lumber, logs
and other products. Prices for these products are highly cyclical and have fluctuated significantly in the past
and may fluctuate significantly in the future. The markets for our products are also highly cyclical and are
characterized by periods of excess product supply due to many factors, including:
• Additions/curtailments to industry capacity and production;
• Periods of insufficient demand due to weak economic activity or other causes including weather;
• Customers experiencing reduced access to credit; and
•
Inventory de-stocking by customers.
Product demand is influenced to a significant degree by economic activity at the global level. Additionally,
although costs may increase, customers may not accept related price increases for those products. We are
not able to predict with certainty market conditions and prices for our products. Western’s results of
operations depend upon the prices we receive for lumber, logs and chips, and deterioration in prices of, or
demand for, these products could have a material adverse effect on our financial condition or results of
operations. We cannot provide any assurance or prediction as to the timing and extent of any price changes.
On an annualized basis and based on current operating metrics, we estimate that operating earnings would
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increase or decrease by approximately $9 million for each incremental price increase or decrease,
respectively, of $10 per thousand board feet of lumber.
Western’s financial performance is also dependent on the rate at which production capacity is utilized. In
times of challenging conditions in any of our major markets the Company maintains inventory control by
aligning log supply and lumber production with anticipated sales volumes. When capacity utilization is
reduced in response to weak demand for products, the cost per unit of production may increase and
profitability decrease.
From time to time and in accordance with market influences, the Company will reduce production with
temporary logging and/or sawmilling curtailments. In extreme cases, such curtailments may become
permanent closures. When Western undertakes significant market-related curtailments of sawmills, the
volume of chips produced is reduced and accordingly there is greater risk that the Company may not meet
minimum contractual obligations under long-term chip supply agreements without incurring additional cost.
International Business and Risks of Exchange Rate Fluctuations
Western’s products are sold in international markets. Economic conditions in those markets, the strength of
the housing markets in the US and Japan, the rate of development in China, fluctuations in foreign exchange
rates and international sensitivity to interest rates, can all have a significant effect on our financial condition
and results of operations. In general, our sales are subject to the risks of international business, including:
•
•
•
•
fluctuations in foreign currencies;
changes in the economic strength of the countries in which we conduct business;
trade disputes;
changes in regulatory requirements;
tariffs and other barriers;
•
• quotas, duties, taxes and other charges or restrictions upon exports or imports;
•
•
transportation costs and the availability of carriers of any kind including those by land or sea; and
strikes or labour disputes in the transportation industry or related dock or container service industries.
Depending on product mix, destination and exchange rates, between 45% and 55% of our total product
sales are denominated in USD and between 4% and 8% in JPY, while most operating costs and expenses
are incurred in CAD, with small portions in USD and JPY. The Company’s functional currency is the CAD
and financial results are reported in CAD. Significant variations in relative currency values, particularly
significant changes in the value of the CAD relative to the USD, have had, and in the future could have, a
material impact on our operating earnings and cash flows. We estimate that an increase or decrease of 1%
in the value of the CAD compared to the USD and JPY would decrease or increase annual operating
earnings by approximately $4.3 million, and $0.4 million, respectively.
Softwood Lumber Dispute
The softwood lumber agreement (“SLA”) between Canada and the United States, under which the
Company’s exports to the US could be assessed an export tax by the Canadian Government, expired on
October 12, 2015, eliminating export tax measures on Canadian softwood lumber shipments to the US.
The twelve-month standstill period of the SLA, which precluded the US from bringing trade action against
Canadian softwood lumber producers, expired October 12, 2016. On November 25, 2016, the US Lumber
Coalition petitioned the US Department of Commerce (“DoC”) and the US International Trade Commission
(“ITC”) seeking CVD and AD on Canadian softwood lumber shipments to the US.
On January 6, 2017, the ITC concluded that there was “reasonable indication” that softwood lumber products
from Canada materially injured US producers; and, as a result, the DoC continued its ongoing CVD and AD
investigations on these products.
On April 24, 2017, the DoC announced a preliminary countervailing duty of 19.88% for “all other” Canadian
lumber producers including Western, effective April 28, 2017, and on June 26, 2017, the DoC announced a
preliminary “all other” anti-dumping duty rate of 6.87% effective June 30, 2017. The DoC also made
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preliminary determinations on critical circumstances in April that resulted in 90-day retroactive application of
countervailing duty from January 28 to April 27, 2017, and anti-dumping duty from April 1 to June 29, 2017.
The preliminary countervailing duties were applicable through August 25, 2017, after which they were
suspended pending final determinations by the DoC and the ITC. On November 2, 2017, the DoC
announced final determinations in its countervailing duty and anti-dumping duty investigations, concluding
that critical circumstances did not exist for countervailing duty, but did exist for anti-dumping duty.
On December 7, 2017, the ITC announced a final injury determination, voting that exports of softwood lumber
from Canada injured US producers. Concurrently, the ITC lowered the final countervailing duty rate to
14.19% and lowered the final antidumping duty rate to 6.04%, for “all other” Canadian lumber producers
including Western, and concluded that critical circumstances did not exist for AD. The final rates are effective
December 28, 2017. Due to the difference in preliminary and final rates applied for CVD and AD deposits,
Western recorded an export tax recovery of $3.5 million in the fourth quarter of 2017.
On January 3, 2018, US Department of Commerce published amended final determinations, resulting in
reduced, final CVD and AD rates of 14.19% and 6.04% respectively for “all other” Canadian lumber
producers including Western.
In May 2018, we filed a NAFTA challenge to contest the ITC’s finding that goods manufactured from Cedar
(including WRC, Yellow Cedar and Redwood species) were not a separate product group from lumber
manufactured from other softwood species. Rebuttal briefs from the US Lumber Coalition and US
International Trade Commission were received in October 2018 and we filed our response in late 2018, on
which a ruling is not expected until late 2019.
Employees and Labour Relations
Hourly paid employees at our Canadian manufacturing facilities, timber harvesting operations and a small
group of clerical employees are unionized. The majority of the unionized employees are represented by the
United Steel Workers (“USW”), which holds two collective agreements with the Company. Approximately
1,500 Western employees represented by the USW are covered by a five-year collective agreement,
expiring June 15, 2019. An agreement with the USW covering 4 office clerical employees is in effect until
December 31, 2019. The Pulp, Paper & Woodworkers of Canada (“PPWC”) represents the remaining
unionized employees. The PPWC collective agreement for the Ladysmith Sawmill (82 employees), expires
on December 31, 2019. The PPWC also represents the unionized employees at our Value-Added
Remanufacturing Operation (86 employees) runs through until October 14, 2021.
Should the Company be unable to negotiate an acceptable contract after any of these collective agreements
expire with any of the unions, a strike or lockout could occur. A strike or lockout could involve significant
disruption of operations and/or an adverse material impact on our financial condition. Furthermore, a
negotiated settlement could result in unplanned increases in wages or benefits payable to unionized
employees. In addition, the Company relies on certain third parties, such as logging contractors, stevedores,
trucking companies and railways, whose workforces are unionized, to provide the Company with services
necessary to operate the business. If those workers/employers engage in a strike or lockout, our operations
could be disrupted.
Long-Term Competition
The markets for our products are highly competitive on a domestic and international level, with a large
number of major companies competing in each market, some of which have substantially greater financial
resources than Western. We also compete indirectly with firms that manufacture substitutes for solid wood
products, including non-wood and engineered wood products. While the principal basis for competition is
price, we also compete to a lesser extent on the basis of quality and customer service. In addition, market
acceptance of the environmental sustainability of our products as compared with substitutes could be a
challenge in the future. Changes in the level of competition, industry capacity and the global economy have
had, and are expected to continue to have, a significant impact on the selling prices of the Company’s
products and the overall profitability of the Company. Our competitive position will be influenced by factors
including the availability, quality and cost of fibre, energy and labour, and plant efficiencies and productivity
in relation to our competitors. Our competitive position could be affected by fluctuations in the value of the
CAD relative to the USD and/or the JPY, and by changes in the treatment of softwood lumber shipments to
the US subsequent to the expiry of the SLA.
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Forest Resource Risk, Natural Catastrophes and Climate Change
Our timber tenures are subject to the risks associated with all standing forests, in particular, forest fires, wind
storms, insect infestations and disease. Procedures and controls are in place to try and mitigate such risk
through prevention and early detection. Most of the timber that we harvest comes from Crown tenures and
insurance coverage is maintained only for loss of logs following harvesting due to fire and other occurrences.
This coverage does not extend to standing timber, and there is no assurance that this coverage would be
adequate to provide protection against all eventualities, including natural catastrophes. In 2016, Western
entered into a cost-sharing agreement with the Crown for our private timberlands to share individual incident
costs of mobilizing helicopters and aerial water tankers in the event of a fire on those lands.
In addition, our operations may be adversely affected by severe weather including wind, snow and rain that
may result in our operations being unable to harvest or transport logs to our manufacturing facilities for
extended periods of time. Although we anticipate and factor in a certain period of down-time due to weather,
extended periods of severe or unusual weather may adversely impact our financial results due to higher
costs and missed sales opportunities arising from fibre shortages or the deterioration of logs remaining on
the ground or in the water for extended periods of time.
Other than the sales offices in Japan and China, all of our business operations are located on the BC coast
and the US Pacific Northwest, which are geologically active and considered to be at risk from earthquakes.
Climate change over time is predicted to lead to changes in the frequency of storm events as well as their
severity. We may also see changes in the occurrence of wildfires and forest pest outbreaks. Long-term
climatic models are predicting that the optimum ranges of many species, including those of our major tree
species, may shift over time. While we are unable to predict the impact of all of these potential factors on
our tenures or on forest practices, we have incorporated considerations for climate change in our
reforestation practices as facilitated through Provincial policy and legislation.
While the Company maintains insurance coverage to the extent deemed prudent by us, we cannot guarantee
that all potential insurable risks have been foreseen or that adequate coverage is maintained against known
risks.
Impact of Mountain Pine Beetle and Spruce Beetle Infestation
The interior forests of BC and western parts of Alberta have been, and continue to be, seriously damaged
by North America’s largest recorded mountain pine beetle infestation. Over the past few years there has
also been a growing concern with spruce beetle that is now killing live trees. Western does not operate in
the affected areas and lodgepole pine, the species most at risk from the infestation, is not a key source of
timber in the coastal forests. While coastal forests do contain Sitka spruce, large scale spruce beetle
infestations killing live trees has only been recorded in Engelmann and white spruce tree species throughout
North America. Those tree species are concentrated in the interior of BC and are not a source of timber for
Western. The pine beetle infestation has caused widespread mortality of lodgepole pine and spruce beetle
infestations are growing in scale in the interior. There is growing evidence that, as the dead trees decay,
they become more difficult and costly to manufacture into lumber and that the quality of the residual wood
chips may diminish. There may also be access issues over time as developing second growth forests grow
to a size that precludes efficient entry into remote pine and spruce beetle damaged stands.
The mountain pine beetle has crossed into Alberta, and timber harvesting of lodgepole and jackpine in
Alberta may see an increase in Allowable Annual Cut AAC to promote salvage before decay, potentially
adding to downward price pressures as the lumber supply may increase. The Company is unable to predict
when or if the mountain pine beetle infestation will be halted or its impact on future lumber, chip and log
prices.
Pulp and Paper Market Variability
The selling price in CAD of our residual wood chips is tied by formula to published indices that reflect the
USD selling price of NBSK pulp. Fluctuations in pulp prices and foreign currencies will accordingly impact
the selling price of our residual wood chips. The price and demand for the pulp logs and other logs sold to
pulp and paper companies is also dependent on the market conditions for pulp and paper. If there is a
contraction in the coastal pulp and paper industry, we may need to find alternative customers for the pulp
logs and residual chips from our sawmills.
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Availability of Fibre and Dependency on Fibre Obtained from Government Timber Tenures
Currently, substantially all of the timberlands in BC in which we operate are owned by the Province and
administered by the Ministry of Forests, Lands and Natural Resource Operations and Rural Development
(the “MFLNRORD”). The Forest Act (British Columbia) (the “Forest Act”) empowers the MFLNRORD to grant
timber tenures, including Tree Farm Licences (“TFLs”), Forest Licences (“FLs”) and Timber Licences (“TLs”),
to producers, although no new TLs can be issued and the availability of extensions to expiring TLs is not
assured. The Provincial Chief Forester must conduct a review of the AAC for each Timber Supply Area and
each TFL in the Province on a periodic basis, at least once every ten years. This review is then used to
determine the AAC for licences issued by the Province under the Forest Act. Many factors affect the AAC
such as timber inventory, the amount of operable forest land, growth estimates of young forests, regulation
changes and environmental and social changes. Such assessments have in the past resulted and may in
the future result in reductions or increases to the AAC attributable to licences held by BC forest companies
(without compensation), including the licences that we hold. In addition, our AAC can be temporarily reduced
(without compensation for the first four years) in areas where logging has been suspended under Part 13 of
the Forest Act pending government decisions regarding the public interest in designated areas. Land use
planning, including critical habitat designations, stand age restrictions, as well as new harvesting regulations,
can constrain access to timber and new parks can permanently remove land from the timber harvesting land
base. There can be no assurance that the amounts of such future reductions on our licences, if any, will not
be material or the amounts of compensation, if any, for such reductions will be fair and adequate.
Our fibre supply requirements in the United States are currently met from a broad range of sources, including
Federal and State lands, from private landowners and open market purchases, which are subject to log
availability and based on market prices. Changes in the log markets in which we operate, including the price,
quality or availability of log supply, may increase the costs of log purchases which could adversely affect our
results. In addition, weather-related issues can restrict timely access to log supply.
First Nations Land Claims
First Nations groups have made claims of rights and title to substantial portions of land in British Columbia,
including areas where our timber tenures and operations are situated. These claims of rights and title have
created uncertainty as to the status of competing property rights and of legislation and Crown decisions that
may adversely affect such asserted rights and title. The Supreme Court of Canada has held that Aboriginal
groups may have a spectrum of constitutionally recognized and affirmed Aboriginal rights and title in lands
that have been traditionally used or occupied by their ancestors; however, such rights or title are not absolute
and may be infringed by government in furtherance of a valid legislative objective, including forestry, subject
to meeting a justification test. The effect on any particular lands will not be determinable until the nature of
historical use, occupancy and rights in any particular piece of property have been clarified. The Supreme
Court of Canada has also held that even before claims of rights and title are proven, the Crown has a legal
duty to consult with First Nations, which can become a duty to seek possible accommodations, when the
Crown has knowledge, real or constructive, of the potential existence of an Aboriginal right or title and
contemplates conduct that might adversely impact it. During the period before asserted claims are proven,
the Crown is required to consult in good faith with the intention of substantially addressing First Nation
concerns, but agreement by the First Nation is not required in these consultations.
First Nations are seeking compensation from governments (and in some instances from forest tenure
holders) with respect to these claims, and the effect of these claims on timber tenure rights, including our
timber tenures, cannot be estimated at this time. The Federal and Provincial Governments have been
seeking to negotiate treaty and/or other settlements with Aboriginal groups in British Columbia in order to
resolve these claims.
In June 2014, the Supreme Court of Canada (the “Court”) released its decision on the Aboriginal title claim
by the Tsilhqot’in Nation of British Columbia, regarding land outside their traditional reserve area. The Court
recognized Tsilhqot’in title to a portion of the area in dispute, including rights to decide how the land will be
used, occupancy and economic benefits of the land. The Court held that while the Provincial Government
had the constitutional authority to regulate forest activity on Aboriginal title lands, it had not adequately
consulted with the Tsilhqot’in. While the decision does not directly impact Western’s business as we do not
have tenure in this area, we do operate on Crown tenures elsewhere that are subject to claims of Aboriginal
title. The potential impact on Western’s tenure holdings is not ascertainable at this time.
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On April 1, 2011, the first modern treaty affecting the Company’s tenures was brought into force. The Maa-
nulth First Nations Treaty extinguished the Company’s tenure rights on Maa-nulth Treaty Settlement Lands
within TFL 44 and permanently reduced the tenure’s AAC by 95,200 cubic metres. A treaty provision which
created a new Protected Area inside of TFL 44 permanently reduced the AAC by another 8,800 cubic metres.
The Company concluded discussions with the Province on the magnitude of the treaty impacts on AAC, soft
cost investments and downstream business in 2016. On October 21, 2016, the Company announced that
the Province of BC had agreed to compensate Western in the amount of $14.0 million for the partial tenure
extinguishment.
Other treaty and government-to-government processes involving the ‘Namgis, Ditidaht, Snuneymuxw,
Heiltsuk, Hupacasath, K’ómoks, and Wuikinuxv First Nations are well advanced and may lead to agreements
impacting Western in 2018. In October 2018, the Province and shíshálh Nation signed the Foundation
Agreement which includes a shared-decision making process for forestry-related decisions. It is expected
that through these and other settlement processes the Provincial Government may seek to remove areas
from the Company’s various forest tenures.
In January 2017, the Nuchatlaht First Nation filed a Notice of Civil Claim against Canada, the Province of
British Columbia and the Company, seeking a declaration of Aboriginal title to a claim area that
encompasses the northern half of Nootka Island. The claim area encompasses WFP’s Forest Licence
A19231 and certain timber licences held by WFP. Each of the Province, Canada and the Company have
filed a response to the Notice of Civil Claim and a case management judge has been appointed to oversee
the proceedings. In December 2017, the Nuchatlaht First Nation filed an Amended Notice of Civil Claim that
included significant changes to their original claim, and each of Canada, the Province and the Company
then filed amended responses to Nuchatlaht’s Amended Notice of Civil Claim. Since that time, little progress
has been made toward advancing the case as the Province and Nuchatlaht have been engaged on a number
of substantive and procedural issues.
On May 30, 2018, Western and several other parties, including Canada, the Province, Interfor, Marine
Harvest and Cermaq, were served with a Notice of Civil Claim by the Dzawada’enuxw First Nation. The First
Nation, located at Kingcome Inlet on the mainland coast, is seeking a declaration of Aboriginal title over an
area that includes two Western Timber Licenses and TFL 39 block 3. The claim is unique in that the First
Nation seeks a declaration of title over a marine area as well as land, and appears to have been strategically
filed in advance of the Province making a decision on renewal of fish farm tenures in the Broughton
Archipelago area. Western has not yet filed a response in this claim as we continue to await clarification of
the claim area by Dzawada’enuxw’s legal counsel.
In July 2013, the Ehattesaht First Nation filed a petition with the BC Supreme Court against the Province of
British Columbia regarding a decision of the Crown on the amount of unharvested volume in TFL 19 from
the 2007 to 2011 cut control period. The Ehattesaht claimed the Crown did not adequately consult them
about the decision and that additional volume must be made available to them based upon their asserted
territory, rights, and economic interests. In 2014, the court ruled in favor of the Ehattesaht requiring further
consultation on unharvested volume. In 2016, the Province advised Western that it would be awarding the
unharvested volume, through separate forest licences, to the Ehattesaht and Mowachaht/Muchalaht First
Nations. In order to minimize the potential impact of these new licences on its ongoing operations in TFL 19,
Western continues to engage with the Ehattesaht and Mowachaht/Muchalaht First Nations to find mutually-
beneficial solutions.
In January 2008, the Ditidaht First Nation commenced litigation in the BC Supreme Court against the
Province of British Columbia, Canada, certain other First Nations and two forestry companies, including
Western, seeking amongst other things declarations of aboriginal title and rights in areas of Vancouver Island
that include areas covered by timber tenures held by the Company and declarations that provincial forestry
legislation and the Company's timber tenures are of no force or effect on the claimed aboriginal title lands.
In March 2013, Ditidaht and the BC Government entered an Incremental Treaty Agreement (the “ITA”) which
included Ditidaht agreement to not initiate or proceed with litigation against the Crown for land dispositions
and land use authorizations during the term of the ITA, subject to the Provincial Government complying with
consultation processes established under existing provincial policies and procedures. Consequently, unless
the ITA is terminated in accordance with its provisions, this litigation will not be further pursued by Ditidaht.
In April 2008, the Kwakiutl First Nation commenced litigation in the BC Supreme Court against the Province
of British Columbia, Western and Canada, seeking, amongst other things, orders to set aside the Province’s
decision to remove Western’s private lands from TFL 6 and the Province’s approval of the Company’s Forest
22
Stewardship Plan (“FSP”) on the Crown lands within their area of interest, based on alleged infringements
of their treaty rights and unextinguished aboriginal title and rights. This case was decided in June 2013, with
the court upholding the Private Land withdrawal from TFL 6 and also the decision to extend the term of our
FSP. The Crown was found to have an ongoing duty to consult the Kwakiutl in good faith and to seek
accommodations regarding their claim of unextinguished Aboriginal rights, title and interests in respect of
the Kwakiutl traditional territory. In 2015, the BC Court of Appeal ruled on the Crown’s appeal of the decision,
finding that the Province breached its duty to consult and owed Kwakiutl a meaningful consultation process
respecting its treaty rights and claims to Aboriginal rights and title.
The Company is currently unable to predict the outcome of these First Nation legal proceedings on Western’s
ongoing operations or on any sale of its non-core assets and private forestry lands.
Current Provincial Government policy requires that forest management and operating plans take into
account and not unreasonably infringe on Aboriginal rights and title, proven or unproven, and provide for
consultation with First Nations. This policy is reflected in the terms of our timber tenures, which provide that
the MFLNRORD may vary or refuse to issue cutting permits in respect of a timber tenure if it is determined
by a court that the forestry operation would unreasonably interfere with Aboriginal rights or title. First Nations
have, at times, sought to restrict the Provincial Government from granting or replacing forest tenures and
other operating authorizations or from approving forest management plans on Crown lands without full
consultation and accommodation or their consent if these decisions could affect lands claimed by them.
There can be no assurance that denial of required approvals for, or changes to the terms of our timber
tenures, other operating authorizations or forest management plans as a consequence of such consultation
or action will not have an adverse effect on our financial condition or results of operations.
The current Provincial and Federal Governments have each pledged to implement the United Nations
Declaration on the Rights of Indigenous Peoples (UNDRIP), the Calls to Action of the Truth and
Reconciliation Commission, and, in the case of the Provincial Government, the Tsilhqot’in decision.
Significant expectation has been raised among Aboriginal groups in British Columbia and across the country
as to the potential impact these commitments may have on efforts to achieve true reconciliation with
Aboriginal groups. To date, both the Provincial and Federal Governments have issued limited guidance as
to how these commitments will be implemented, with each issuing nearly-identical principles on their
respective relationship with Indigenous peoples. At this time, the Company is unable to predict the outcome
of the implementation of these commitments on Western’s ongoing operations or on any sale of its non-core
assets and private lands.
An unfavourable result in any of the First Nations consultation or litigation in which the Company is a party
or which involves assets of the Company could have a material adverse effect on our financial condition or
results of operations.
Stumpage Fees
Stumpage is the fee that the Province charges forest companies for timber harvested from Crown land in
British Columbia. Approximately 95% of the timber we harvest is from Crown land. Stumpage is set using
the Coast version of the Market Pricing System (“MPS”). MPS uses the winning bids and stand
characteristics of timber sold through British Columbia Timber Sales (“BCTS”) auctions to develop
regression equations that predict the market (i.e. auction) value of Crown timber harvested under long-term
tenures. The auction value is then adjusted to reflect costs that tenure holders incur and that BCTS expends
on behalf of bidders. These costs, like forest planning and administration and silviculture, are referred to as
‘Tenure Obligation Adjustments’. Coastal MPS are updated periodically to reflect recent sale data and costs.
The most recent update occurred on December 15, 2018. Stumpage rates are also adjusted quarterly to
reflect changes in log prices.
There can be no assurance that future changes to the stumpage system or the Province’s administrative
policy will not have a material impact on the stumpage fees payable by us and consequently affect our
financial condition and results of operations.
Long-term Fibre Supply Agreements
The Company has a number of long-term commitments to supply chip fibre, saw logs and pulp logs to third
parties. Certain of these fibre supply agreements have minimum volume requirements. A failure to supply
the minimum volumes may result in additional costs or deferred obligations.
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Regulatory Risks
Our forestry and sawmill operations are subject to extensive federal, provincial, state, municipal and other
local laws and regulations, including those governing forestry, exports, taxes, labour standards, occupational
health, safety, waste disposal, building structures/systems, environmental protection and remediation,
protection of endangered and protected species and land use and expropriation. Under certain laws and
regulations, we are also required to obtain permits, licences and other authorizations to conduct our
operations, which permits, licences and authorizations may impose additional conditions that must be
satisfied. Although we budget for expenditures to maintain compliance with such laws and permits, there
can be no assurance that these laws and regulations or government policy will not change in the future in a
manner that could have an adverse effect on our financial condition or results of operations or the manner
in which we operate. Nor can there be any assurance that administrative interpretation of existing laws and
regulation will not change or more stringent enforcement of existing laws will not occur, in response to
changes in the political or social environment in which we operate or otherwise, in a manner that could have
an adverse effect on our financial condition or results of operations or the manner in which we operate.
Log exports from our timber operations are subject to federal and provincial regulations. An export permit
must be obtained from the Canadian Federal Government to export any logs harvested in BC and generally
the logs must be surplus to the supply required for domestic manufacturers. Logs from private timberlands
that were granted by the Crown prior to March 12, 1906 are subject to the Federal surplus test and logs from
private land granted after that date are subject to the Provincial surplus test. Logs harvested from Crown
land in BC are subject to the Provincial surplus test. The regulations also restrict the species and grade
permitted for export.
Under both the federal and provincial surplus tests, the logs must be advertised for local consumption. Logs
are declared surplus and may be exported if there are no offers on the advertised logs by domestic
manufacturers. In practice, domestic offers on export volume can satisfied with replacement volume to
minimize operational impacts. However, a substantial increase in domestic demand may adversely impact
timber operations as export pricing is generally at a premium to domestic pricing.
There have been significant legislative reforms in the BC Forest Industry over the last 40 years. One of the
more significant examples of this was seen in 2003 when the Province took back approximately 20% of the
AAC from major license holders, including Western, and provided monetary compensation in return. There
can be no assurance that the Province will not implement further policy changes, or that such changes will
not have a material adverse effect on our operations or our financial position.
In 2018, the Provincial Government introduced a Coastal Revitalization Initiative. On January 17, 2019, the
Premier announced the Province’s commitment to make changes to BC’s export, Bill 13 and waste policies
with the intent to increase domestic and value added manufacturing in BC. Depending on how these policy
changes are implemented, they could have a material effect on our financial condition and results.
In addition, Western is subject to routine litigation incidental to our business, the outcome of which we do
not anticipate will have a materially adverse effect on our financial condition and results of operations.
Information Technology Security
Western relies on information technology systems to facilitate harvesting, log purchasing and reforestation
activities, operation of our manufacturing facilities, interactions with vendors, customers and employees and
reporting on our business. Interruption or failure of these systems could be due to a variety of causes, such
as cyber-based attacks, vandalism, power or service outages, corruption, fire or natural disaster, and could
result in operational disruption or the misappropriation of sensitive or proprietary data. Such events could
have a negative impact on Western’s reputation or subject the Company to potential liability, proceedings
by affected parties, civil or criminal penalties. Interruption or failure of these systems could result in material
adverse effect on Western’s business.
While the Company believes current security measures and disaster recovery plans to be adequate, we
continue to develop and enhance internal controls, policies and procedures designed to protect information
technology systems from attack, damage or unauthorized access.
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Reliance on Directors, Management and Other Key Personnel
Western relies upon the experience and expertise of our personnel. No assurance can be given that we will
be able to retain our current personnel and attract additional personnel as necessary for the development
and operation of our business. Loss of or failure to attract and retain key personnel could have a material
adverse effect on Western’s business.
Continuation of the Dividend Program
We declared and paid total quarterly cash dividends of $0.0875 per outstanding common share during the
four quarters ended December 31, 2018. Any decision to declare and pay dividends in the future will be
made at the discretion of our Board of Directors, after taking into account our operating results, financial
condition, cash requirements, financing agreement restrictions and other factors our Board may deem
relevant. We may be unable or may elect not to continue to declare and pay dividends, even if necessary
financial conditions are met and sufficient cash is available for distribution.
Evaluation of Disclosure Controls and Procedures
As required by National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings,
Western conducted an evaluation of the effectiveness of the disclosure controls and procedures and the
system of internal control over financial reporting based on the “Internal Control – Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management concluded that the Company’s system of internal control over financial reporting
was effective as at December 31, 2018. The evaluation was carried out under the supervision and with the
participation of the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”). Based on the
evaluation, Western’s CEO and CFO concluded that the Company’s disclosure controls and procedures are
effective in providing reasonable assurance that material information relating to Western and its consolidated
subsidiaries is made known to them by others within those entities, particularly during the period in which
the annual filings are being prepared. In addition, Western’s CEO and CFO concluded that the Company’s
internal controls over financial reporting are effective in providing reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for Western and its consolidated
subsidiaries for the period in which the annual filings are being prepared.
The CEO and CFO confirm that there were no changes in the controls which materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting during the year
ended December 31, 2018.
In the year ended December 31, 2018, Western completed the implementation of inventory and payroll
systems and completed the acquisition and integration of the Arlington distribution and processing centre.
The Company’s internal controls were maintained or supplemented by controls added during these system
implementations and related process improvements.
Outstanding Share Data
As of February 12, 2019, there were 382,084,965 common shares of the Company issued and outstanding.
We have reserved 30,000,000 of our Shares for issuance upon the exercise of options granted under our
incentive stock option plan. During the year ended December 31, 2018, 1,235,788 options were granted,
660,000 previously granted options were exercised and 328,914 options were forfeited. As of February 12,
2019, 11,965,357 options were outstanding under our incentive stock option plan.
Additional Information
Additional information relating to the Company and its operations, including the Company’s Annual
Information Form, can be found on SEDAR at www.sedar.com.
25
Management’s Discussion and Analysis – Appendix A
Summary of Selected Results for the Last Eight Quarters
(millions of dollars except per share
amounts and where noted)
2018
Q4
Q3
Q2
Q1
2017
Q4
Q3
Q2
Q1
Average Exchange Rate – USD to CAD
Average Exchange Rate – CAD to USD
1.296
0.771
1.322
0.756
1.307
0.765
1.291
0.775
1.265
0.791
1.298
0.770
1.271
0.787
1.253
0.798
1.345
0.744
1.323
0.756
Financial Perform ance
Revenue
Lumber
Logs
By-products
Total revenue
Adjusted EBITDA
Adjusted EBITDA margin
Earnings per share:
$
952.9
160.0
83.8
1,196.7
$
$
$
230.9
36.2
17.7
284.8
$
$
238.2
33.6
20.7
292.5
$
$
255.6
49.0
23.2
327.8
$
$
228.2
41.2
22.2
291.6
$
858.2
214.8
70.4
1,143.4
$
$
$
207.3
56.6
19.2
283.1
$
$
212.5
55.5
17.2
285.2
$
$
212.8
57.2
17.4
287.4
$
$
225.6
45.5
16.6
287.7
$
143.5
12.0%
$
$
18.0
43.0
6.3% 11.0% 15.3% 14.7%
50.2
32.3
$
$
$
$
34.0
32.6
152.6
13.3% 13.7% 11.4% 16.4% 11.8%
38.9
47.1
$
$
$
Net income, basic and diluted
$
0.18
$
0.02
$
0.04
$
0.07
$
0.05
$
0.19
$
0.05
$
0.04
$
0.06
$
0.04
Operating Statistics
Lum ber(1)
Production
Shipments
Price
Logs (2)
Net production
Saw log purchases
Log availability
Shipments
Price(3)
mmfbm
mmfbm
$/mfbm
000 m3
000 m3
000 m3
000 m3
$/m3
Share Repurchases and Dividends
864
880
1,083
$
200
218
1,059
$
221
212
1,124
$
234
235
1,088
$
209
215
1,061
$
793
840
1,022
$
184
201
1,031
$
196
220
966
$
204
194
1,097
$
209
225
1,003
$
4,328
979
5,307
1,509
106
$
1,135
212
1,347
369
98
$
815
197
1,012
308
109
$
1,348
305
1,653
471
104
$
1,029
265
1,294
361
114
$
4,008
1,150
5,158
1,663
120
$
1,099
343
1,442
494
107
$
910
327
1,237
369
134
$
1,091
249
1,340
436
122
$
908
231
1,139
364
116
$
Shares repurchased (millions)
Shares repurchased
Dividends paid
11.7
25.2
34.3
$
$
4.9
9.1
8.7
$
$
4.6
10.4
8.8
$
$
1.6
4.1
8.9
$
$
0.6
1.6
7.9
$
$
1.1
2.7
31.7
$
$
1.1
2.7
7.9
$
$
-
$
-
$
7.9
-
$
-
$
7.9
-
$
-
$
7.9
Figures in the table above may not equal or sum to figures presented elsewhere due to rounding.
"mmfbm" = millions of board feet; "mfbm" = thousands of board feet.
(1)
(2) Net production is sorted log production, net of residuals and waste. Log availability is net production plus saw log purchases.
(3) The log revenue used to determine average price per cubic metre has been reduced by the associated shipping costs arranged
in the respective periods to enable comparability of unit prices.
In a normal operating year there is seasonality to the Company’s operations with higher lumber sales in the
second and third quarters when construction activity, particularly in the US, has historically tended to be
higher. Logging activity may also vary depending on weather conditions such as rain, snow and ice in the
winter and the threat of forest fire in the summer.
26
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Management of Western Forest Products Inc. (“Western” or the “Company”) is responsible for the
accompanying Consolidated Financial Statements and all other information in the Management’s Discussion and
Analysis. The Consolidated Financial Statements have been prepared by Management in accordance with
International Financial Reporting Standards as issued by the International Accounting Standards Board and,
where necessary, reflect Management’s best estimates and judgements at this time. The financial information
presented throughout the Management’s Discussion and Analysis dated February 12, 2019 is consistent with
that contained in the Consolidated Financial Statements.
Western maintains systems of internal accounting controls, policies and procedures to provide reasonable
assurance as to the reliability of the financial records and the safeguarding of its assets. Management meets the
objectives of internal accounting control on a cost-effective basis through the prudent selection and training of
personnel, adoption and communication of appropriate policies, procedures and controls, and employment of an
internal audit program.
The Board of Directors reviews through oversight of Management’s responsibilities with respect to the
Consolidated Financial Statements primarily through the activities of its Audit Committee, which is composed
solely of independent directors of the Company. This Committee meets with Management and the Company’s
independent auditors, KPMG LLP, to review the Consolidated Financial Statements and recommend their
approval by the Board of Directors. The Audit Committee is also responsible for making recommendations with
respect to the appointment, remuneration and the terms of engagement of the Company’s auditors. The Audit
Committee also meets with the auditors, without the presence of Management, to discuss the results of the audit,
related findings and their suggestions.
The Consolidated Financial Statements have been audited by KPMG LLP, who were appointed by the
shareholders at the annual shareholders’ meeting. The auditors’ report follows.
“Don Demens”
“Stephen Williams”
Don Demens
President & Chief Executive Officer
Stephen Williams
Executive Vice President & Chief Financial Officer
February 12, 2019
27
KPMG LLP
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
Fax (604) 691-3031
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Western Forest Products Inc.
Opinion
We have audited the consolidated financial statements of Western Forest Products Inc. (the “Company”),
which comprise:
−
−
−
−
the consolidated statements of financial position as at end of December 31, 2018 and December 31,
2017
the consolidated statements of comprehensive income for the years then ended
the consolidated statements of changes in shareholders’ equity for the years then ended
the consolidated statements of cash flows for the years then ended
− and notes to the consolidated financial statements, including a summary of significant accounting
policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the
consolidated financial position of the Company as at end of December 31, 2018 and end of December
31, 2017, and its consolidated financial performance and its consolidated cash flows for the years then
ended in accordance with International Financial Reporting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the “Auditors’ Responsibilities for the
Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Company in accordance with the ethical requirements that are relevant to or
audit of the financial statements in Canada and we have fulfilled our other 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.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a
Swiss entity. KPMG Canada provides services to KPMG LLP.
28
Other Information
Management is responsible for the other information. Other information comprises:
− Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
−
Information, other than the financial statements and the auditors’ report thereon, included in a document
likely to be entitled “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 and the Annual Report filed with the relevant
Canadian Securities Commissions as at the date of this auditors’ 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 the auditors’ report.
We have nothing to report in this regard.
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 International Financial Reporting Standards, 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.
Auditors’ 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 auditors’ 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 generally accepted auditing standards 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 the
financial statements.
29
As part of an audit in accordance with Canadian generally accepted auditing standards, 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 auditors’ 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 auditors’
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.
− 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.
− Provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and communicate with them all relationships and other matters
that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
Chartered Professional Accountants
The engagement partner on the audit resulting in this auditors’ report is John Desjardins.
Vancouver, Canada
February 12, 2019
30
Western Forest Products Inc.
Consolidated Statements of Financial Position
(Expressed in millions of Canadian dollars)
Assets
Current assets:
Cash and cash equivalents
Trade and other receivables (Note 19)
Inventory (Note 4)
Prepaid expenses and other assets
Non-current assets:
Property, plant and equipment (Note 5)
Timber licenses (Note 6)
Biological assets (Note 7)
Other assets (Note 8)
Deferred income tax assets (Note 10)
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities
Reforestation obligation (Note 12)
Non-current liabilities:
Long-term debt (Note 9)
Reforestation obligation (Note 12)
Deferred income tax liabilities (Note 10)
Other liabilities (Note 11)
Deferred revenue (Note 17(d), 23)
Shareholders’ equity:
Share capital (Note 13)
Contributed surplus
Retained earnings
December 31,
December 31,
2018
2017
$
8.4
91.3
174.9
23.3
297.9
$
35.3
86.2
152.0
19.0
292.5
369.9
113.2
58.3
15.8
0.7
313.9
117.2
58.2
17.5
0.3
$
855.8
$
799.6
$
132.7
10.0
142.7
$
98.9
8.9
107.8
6.0
15.7
40.3
23.8
54.4
282.9
491.1
9.1
72.7
572.9
-
16.4
28.1
28.2
56.4
236.9
505.5
8.7
48.5
562.7
$
855.8
$
799.6
Commitments and Contingencies (Note 17)
Subsequent event (Note 26)
See accompanying notes to these consolidated financial statements.
Approved on behalf of the Board:
"Lee Doney"
Chairman
"James Arthurs"
Director
31
Western Forest Products Inc.
Consolidated Statements of Comprehensive Income
(Expressed in millions of Canadian dollars except for share and per share amounts)
Revenue (Note 23)
Costs and expenses:
Cost of goods sold
Freight
Export tax (Note 17)
Selling and administration
Operating income prior to restructuring items and other expense
Operating restructuring items (Note 21)
Other income (expense)
Operating income
Finance costs (Note 20)
Income before income taxes
Current income tax expense (Note 10)
Deferred income tax expense (Note 10)
Net income
Other comprehensive loss
Items that will not be reclassified to profit or loss:
Defined benefit plan actuarial loss (Note 18)
Income tax recovery on other comprehensive loss (Note 10)
Total items that will not be reclassified to profit or loss
Other comprehensive loss for the period
Years ended
December 31,
2018
2017
$
1,196.7
$
1,143.4
927.7
90.6
43.0
32.0
1,093.3
103.4
(4.8)
(1.1)
97.5
(2.7)
94.8
(14.3)
(11.3)
(25.6)
69.2
(0.7)
0.2
(0.5)
(0.5)
874.6
103.2
15.8
32.8
1,026.4
117.0
(14.4)
1.2
103.8
(2.5)
101.3
(0.2)
(26.7)
(26.9)
74.4
(1.5)
0.7
(0.8)
(0.8)
Total comprehensive income
$
68.7
$
73.6
Net income per share (in dollars)
Basic and diluted earnings per share (Note 15)
Weighted average number of common shares outstanding (thousands)
Basic
Diluted
See accompanying notes to these consolidated financial statements.
$
0.18
$
0.19
392,333
396,107
395,589
399,663
32
Western Forest Products Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in millions of Canadian dollars)
Balance at December 31, 2016
Net income
Other comprehensive loss:
Defined benefit plan actuarial loss recognized
Income tax recovery on other comprehensive loss
Total comprehensive income
Share-based payment transactions recognized in equity
Exercise of stock options
Repurchase of shares (Note 13)
Dividends
Total transactions with owners, recorded directly in equity
Share
Capital
Contributed
Surplus
Retained
Earnings
Total Equity
$
506.0
$
8.6
$
7.9
$
522.5
-
-
-
-
-
0.9
(1.4)
-
(0.5)
-
-
-
-
0.4
(0.3)
-
-
0.1
74.4
74.4
(1.5)
0.7
73.6
-
-
(1.3)
(31.7)
(33.0)
(1.5)
0.7
73.6
0.4
0.6
(2.7)
(31.7)
(33.4)
Balance at December 31, 2017
$
505.5
$
8.7
$
48.5
$
562.7
Balance at December 31, 2017
Net income
Other comprehensive loss:
Defined benefit plan actuarial loss recognized
Income tax recovery on other comprehensive loss
Total comprehensive income
Share-based payment transactions recognized in equity (Note 14(a))
Exercise of stock options
Repurchase of shares (Note 13)
Dividends (Note 13)
Total transactions with owners, recorded directly in equity
$
505.5
$
8.7
$
48.5
$
562.7
-
-
-
-
-
0.6
(15.0)
-
(14.4)
-
-
-
-
0.8
(0.4)
-
-
0.4
69.2
69.2
(0.7)
0.2
68.7
-
-
(10.2)
(34.3)
(44.5)
(0.7)
0.2
68.7
0.8
0.2
(25.2)
(34.3)
(58.5)
Balance at December 31, 2018
$
491.1
$
9.1
$
72.7
$
572.9
See accompanying notes to these consolidated financial statements.
33
Western Forest Products Inc.
Consolidated Statements of Cash Flows
(Expressed in millions of Canadian dollars)
Cash provided by (used in):
Operating activities:
Net income from continuing operations
Items not involving cash:
Amortization of property, plant and equipment (Note 5)
Amortization of timber licenses (Note 6)
Gain on disposal of assets
Impairment of assets
Change in fair value of biological assets (Note 7)
Change in reforestation obligation (Note 12)
Amortization of deferred revenue
Share-based compensation, including mark-to-market adjustment
Net finance costs
Income tax expense (Note 10)
Change in pension liability (Note 18)
Export tax receivable (Note 17)
Other
Changes in non-cash working capital items:
Trade and other receivables
Inventory
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Investing activities:
Additions to property, plant and equipment (Note 5)
Purchase of Arlington facility (Note 5)
Proceeds on disposal of assets
Deposits (Note 5)
Financing activities:
Interest paid
Draw on long-term debt (Note 9)
Repayment of long-term debt
Repurchase of shares (Note 13)
Dividends (Note 13)
Proceeds from exercise of stock options
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to these consolidated financial statements.
Years ended
December 31,
2018
2017
$
69.2
$
74.4
36.2
4.0
(0.5)
0.3
(0.1)
0.4
(2.0)
1.7
2.7
25.6
(3.1)
(0.3)
(1.1)
133.0
(5.2)
(22.9)
(4.3)
17.6
(14.8)
118.2
(83.5)
(11.6)
3.1
-
(92.0)
(1.0)
7.0
-
(25.2)
(34.3)
0.4
(53.1)
(26.9)
35.3
32.3
4.0
(3.8)
3.2
(0.6)
(3.6)
(2.0)
4.4
2.5
26.9
(3.2)
(3.5)
(2.2)
128.8
20.8
(2.7)
(4.8)
(7.7)
5.6
134.4
(55.2)
-
7.7
(0.6)
(48.1)
(1.2)
-
(35.0)
(2.7)
(31.7)
0.6
(70.0)
16.3
19.0
$
8.4
$
35.3
34
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
1. Reporting entity
Western Forest Products Inc. (“Western” or the “Company”) is an integrated forest products company,
incorporated and domiciled in Canada, operating primarily on the coast of British Columbia and Washington
State. The address of the Company’s head office is Suite 800 – 1055 West Georgia Street, Vancouver,
British Columbia, Canada. The consolidated financial statements as at and for the years ended December
31, 2018 and 2017 comprise the financial results of the Company and its subsidiaries. The Company’s
primary business is the sale of lumber and logs, which includes timber harvesting, sawmilling logs into
specialty lumber and value-added lumber remanufacturing. The Company is listed on the Toronto Stock
Exchange, under the symbol WEF.
2. Basis of preparation
(a) Statement of compliance
The consolidated financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards (“IFRS”), as issued by the International Accounting
Standards Board. Certain comparative figures in the statements of cash flows have been reclassified to
conform to the current year’s presentation.
The consolidated financial statements were authorized for issue by the Board of Directors on February
12, 2019.
(b) Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for the
following material items in the statements of financial position:
• Biological assets are measured at fair value less costs to sell;
• Liabilities for cash-settled share-based payment transactions are measured at fair value at each
reporting date;
• Equity-settled share-based payments are measured at fair value at grant date;
• Derivative financial instruments are measured at fair value through profit or loss at each reporting
date;
• The defined benefit pension liability is recognized as the net total of the fair value of the plan assets,
less the present value of the defined benefit obligation; and,
• Reforestation obligations are measured at the discounted value of expected future cash flows.
(c) Functional and presentation currency
These consolidated financial statements are presented in Canadian dollars which is the Company’s
functional currency. All amounts are presented in millions of Canadian dollars, unless otherwise
indicated.
(d) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by Western. Western controls an entity when it is exposed to, or
has rights to, variable returns from its investment with the entity and has the ability to affect those
returns through its power over the entity. The financial statements of subsidiaries are included in the
consolidated financial statements from the date on which control commences until the date on which
it ceases.
The principal wholly-owned operating subsidiaries of the Company at December 31, 2018 are
Western Lumber Sales Limited, which sells into the United States (“US”), Western Forest Products
Japan Ltd., which sells into Japan and WFP Partnerships Ltd, which holds assets of the US
operation through indirect US subsidiaries, including Western Forest Products US LLC.
(ii) Interests in equity-accounted investees
Western’s interests in equity-accounted investees comprise interests in joint ventures. A joint
venture is an arrangement in which Western has joint control, whereby it has the rights to the net
assets of the arrangement, rather than rights to all of its assets and obligations for all of its liabilities.
35
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
2. Basis of preparation (continued)
(d) Basis of consolidation (continued)
(ii) Interests in equity-accounted investees (continued)
Interests in the joint venture are accounted for using the equity method. They are recognized initially
at cost, including transaction costs. Subsequent to initial recognition, the consolidated financial
statements include Western’s share of the profit and loss and other comprehensive income of equity
accounted investees, until the date on which significant influence or joint control ceases.
(iii) Transactions eliminated on consolidation
Inter-company balances and transactions, and any unrealized income and expenses arising from
inter-company transactions, are eliminated. Unrealized gains arising from transactions with equity
accounted investees are eliminated against the investment to the extent of Western’s interest in the
investee. Unrealized losses are eliminated in the same way, except to the extent that there is
evidence of impairment.
(e) Foreign currency translation
Foreign currency transactions are translated into Canadian dollars using the exchange rates prevailing
at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the
reporting date are translated into Canadian dollars at the exchange rate on that date. Foreign currency
differences arising on translation are recognized in net income for the period. Non-monetary assets and
liabilities that are measured in terms of historical cost in a foreign currency are translated using the
exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign
currencies that are stated at fair value are translated into Canadian dollars at foreign exchange rates at
the date the fair value was determined.
(f) Use of estimates and judgements
The preparation of the consolidated financial statements in conformity with IFRS requires Management
to make judgements, estimates and assumptions that affect the application of accounting policies and
the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these
estimates. Estimates and assumptions are reviewed on an ongoing basis. Revisions to estimates are
recognized prospectively.
(i) Judgements
The determination of appropriate cash generating units as described in Note 3(b) is a judgement
made in applying accounting policy that has a significant effect on the amounts recognized in the
consolidated financial statements.
(ii) Assumptions and estimation uncertainties
Information about assumptions and estimation uncertainties that have a significant risk of resulting
in a material adjustment within the next financial year is included in the following notes:
Note 4
Note 7
Note 10
Note 12
Note 14
Note 17
Note 19
Measurement of net realizable value of inventories
Measurement of fair value less costs to sell of standing timber
Recognition of deferred income tax assets: availability of future taxable profit
against which carry forward tax losses can be used
Measurement of the present value of reforestation obligations: key
assumptions about the likelihood and magnitude of an outflow of resources
Measurement of share-based payment transactions
Recognition and measurement of provisions and contingencies: key
assumptions about the likelihood and magnitude of an outflow of resources
Measurement of defined benefit obligations, key actuarial assumptions,
recognition of termination benefits
Measurement of fair values – a number of Western’s accounting policies and disclosures require
the measurement of fair values for both financial and non-financial assets and liabilities. An
established framework is in place with respect to the measurement of fair values, including Level 3
36
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
2. Basis of preparation (continued)
(f) Use of estimates and judgements (continued)
(ii) Assumptions and estimation uncertainties (continued)
fair values, on which significant unobservable inputs and valuation adjustments are reviewed
regularly. third party information is used to measure fair values, Management assesses the evidence
obtained from the third parties to support the conclusion that such valuations meet the requirements
of IFRS, including the level in the fair value hierarchy in which such valuations would be classified.
Refer to Note 19 for more details.
When measuring the fair value of an asset or liability, Western uses market observable data as far
as is possible. Fair values are categorized into different levels in a fair value hierarchy based on the
inputs used in the valuation techniques as follows:
• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
• Level 2: inputs other than quoted prices included in Level 1 that are observable for the assets
or liability, either directly or indirectly
• Level 3: inputs for the asset or liability that are not based on observable market data
If the inputs to measure the fair value of the asset or liability might be categorized in different levels
of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same
level of the hierarchy as the lowest level input that is significant to the entire measurement. Transfers
between levels of the fair value hierarchy are recognized at the end of the period in which the change
occurred.
The Company does not include WorkSafeBC Certificate of Recognition (“COR”) rebates when
estimating its WorkSafeBC insurance premium expense, as the collectability of COR rebates cannot
be reasonably assured. During the year ended December 31, 2017, the Company recognized a
reduction to cost of goods sold of $3.1 million for the receipt of COR rebates arising from fiscal years
2014 and 2016.
(g) Accounting standards not yet adopted
The following amended IFRS standard is not yet effective for the year ended December 31, 2018 and
has not been applied in preparing these consolidated financial statements.
IFRS 16, Leases (“IFRS 16”)
IFRS 16 is effective for years commencing on or after January 1, 2019, and will replace IAS 17, Leases
(“IAS 17”). IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and
liabilities for all leases, unless the lease term is 12 months or less or the underlying asset has a low
value, while lessor accounting remains largely unchanged from IAS 17 and the distinction between
operating and finance leases is retained. The Company intends to adopt IFRS 16 in its consolidated
financial statements for the year commencing January 1, 2019.
The Company plans to apply a modified retrospective approach upon adoption of IFRS 16. Under the
modified retrospective approach, the Company will calculate the right of use assets and lease liabilities
as at January 1, 2019 and will not restate comparative information. The Company will recognize the
cumulative effect of initially applying the standard as an adjustment to equity at the date of application.
The Company continues to evaluate the impact of adopting the new standard which will be completed
and disclosed in the consolidated financial statements in the first quarter of 2019. The Company
anticipates that upon transition, the impact to its consolidated financial statements will be an increase in
non-current assets and liabilities of less than 3% of total assets. Following the adoption of this standard,
the consolidated statement of comprehensive income will recognize depreciation in cost of goods sold
and finance costs for operating lease payments previously expensed in cost of goods sold.
The Company’s future minimum lease payments at December 31, 2018 under operating leases are
disclosed in Note 17 (e).
37
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
3. Significant accounting policies
Significant accounting policies not described elsewhere in these consolidated financial statements include:
(a) Cash and cash equivalents
Cash and cash equivalents include cash in bank accounts and highly liquid money market instruments
with maturities of 90 days or less from the date of acquisition, and are carried at amortized cost.
(b) Impairment of non-financial assets
At each reporting date, the Company reviews the carrying amounts of its non-financial assets (other than
biological assets, inventories, and deferred income tax assets) to determine whether there is any
indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.
For impairment testing, assets are grouped together into the smallest group of assets that generates
cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash
generating units (“CGUs”). The recoverable amount of an asset or CGU is the greater of its value in use
and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted
to their present value using a pre-tax discount rate that reflects current market assessments of the time
value of money and the risks specific to the asset or CGU.
Impairment losses are recognized in net income. They are allocated first to reduce the carrying amount
of goodwill (if any) to the CGU, and then to reduce the carrying amounts of the other assets in the CGU
on a pro-rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an
impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation or amortization, if no impairment
loss had been recognized.
4.
Inventory
Accounting policy
Inventory, other than supplies which are valued at specific cost, are valued at the lower of cost and net
realizable value (“NRV”) as described below:
(i) Lumber by species (hemlock and balsam, Douglas fir, and yellow and western red cedar) and facility;
(ii) Logs by sort by end use (saw logs and pulp logs).
The cost of inventories includes expenditures incurred in acquiring the inventories, production or conversion
costs and other costs incurred in bringing them to their existing location and condition.
The costs of lumber produced carry an average cost of production based on the species and facility where
they were produced. The cost of logs produced carry an average cost of production based on the operation
where the logs are produced, determined by log production costs divided by production volumes.
NRV is the estimated selling price in the ordinary course of business, less the estimated costs of completion
and selling expenses. The NRV for logs designated for lumber production is determined on the basis of the
logs being converted to lumber, and for the remaining logs it is based on market log prices.
The cost of logs transferred from biological assets (standing timber) is its fair value less costs to sell at the
date of harvest.
Due to increased variability in logging stumpage costs, the Company changed its log inventory costing
methodology to allocate stumpage expense to sorted log production volume based on a relative sorted value,
by operation. The change was made prospectively as the impact on prior periods was not material.
38
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
4.
Inventory (continued)
Supporting information
Gross value of inventory
Logs
Lumber
Supplies and other
Provisions
Logs
Lumber
Supplies and other
Total value of inventory
December 31,
2018
December 31,
2017
$
$
$
$
$
$
125.7
51.7
13.1
190.5
(8.8)
(6.3)
(0.5)
(15.6)
109.5
36.8
14.1
160.4
(5.7)
(2.2)
(0.5)
(8.4)
$
$
$
174.9
$
152.0
The carrying amount of inventory recorded at net realizable value was $79.4 million at December 31, 2018
(2017: $51.3 million), with the remaining inventory recorded at cost.
During 2018, $927.7 million (2017: $874.6 million) of inventory was charged to cost of sales which includes
a $7.2 million increase (2017: $5.6 million decrease) to the provision relating to inventory value write-downs.
5. Property, plant and equipment
Accounting policy
All items of property, plant and equipment are measured at cost, less accumulated depreciation and any
accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition
of the asset. When parts of an item of property, plant and equipment have different useful lives, they are
accounted for as separate items (major components) of property, plant and equipment. Subsequent costs
are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it
is probable that future economic benefits associated with the item will flow to the Company and the cost of
the item can be measured reliably.
Depreciation is based on the depreciable amount of an item of property, plant and equipment, which is the
cost of an item, less its estimated residual value. Depreciation is calculated using the straight-line method
and is recognized in net income over the estimated useful life of each component of an item of property,
plant and equipment. Land is measured at cost and is not depreciated. The estimated useful lives for the
current and comparative periods are as follows:
• Buildings and equipment
• Long-term logging roads and bridges
5 - 20 years
9 - 20 years
Residual values, depreciation methods and useful lives are reviewed, and adjusted if appropriate, at each
reporting date.
Gains and losses on disposals are determined by comparing proceeds from disposal with the carrying
amount of the item of property, plant and equipment and are recognized in net income for the period in which
the disposal occurs.
Supporting information
On January 17, 2018, the Company completed the acquisition of the assets of a lumber distribution and
processing centre in Arlington, Washington for a total purchase price, including related transaction costs, of
$11.6 million. A purchase deposit of US $0.5 million was recorded to other assets at December 31, 2017.
39
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
5. Property, plant and equipment (continued)
Cost
Balance at January 1, 2017
Additions
Disposals
Balance at December 31, 2017
Additions
Arlington facility
Disposals
Balance at December 31, 2018
Accumulated amortization and impairments
Balance at January 1, 2017
Amortization
Disposals
Impairments
Balance at December 31, 2017
Amortization
Disposals
Impairments
Balance at December 31, 2018
Carrying amounts
At December 31, 2017
At December 31, 2018
6. Timber licences
Accounting policy
$
$
$
Buildings &
equipment
302.8
41.7
(2.6)
341.9
70.6
7.9
(6.7)
413.7
130.1
20.0
(2.0)
2.7
150.8
23.0
(6.4)
0.1
167.5
$
Logging
roads
178.4
13.5
-
191.9
12.9
-
-
$
204.8
$
144.5
12.3
-
-
156.8
13.2
-
-
$
170.0
Land
90.6
-
(2.8)
87.8
-
3.7
(2.3)
89.2
$
-
-
-
0.1
0.1
-
-
0.2
0.3
$
$
$
$
$
$
$
$
Total
571.8
55.2
(5.4)
621.6
83.5
11.6
(9.0)
707.7
274.6
32.3
(2.0)
2.8
307.7
36.2
(6.4)
0.3
337.8
$
191.1
$
35.1
$
87.7
$
313.9
$
246.2
$
34.8
$
88.9
$
369.9
Crown timber tenures are the contractual arrangements between the Company and the British Columbia
Provincial Government whereby the Company gains the right to harvest timber. All of the Company’s timber
licences are accounted for as acquired finite lived timber licences. Accordingly, these are valued at their
acquired cost less accumulated amortization and any accumulated impairment losses. Amortization is
recognized on a straight-line basis over 40 years, the estimated useful life of these crown timber tenures.
Amortization methods, useful lives and residual values are reviewed, and adjusted if appropriate, at each
reporting date.
Supporting information
Cost
Balance at December 31, 2017
Balance at December 31, 2018
Accumulated amortization
Balance at January 1, 2017
Amortization
Balance at December 31, 2017
Amortization
Balance at December 31, 2018
Carrying amounts
At December 31, 2017
At December 31, 2018
$
170.7
$
170.7
$
49.5
4.0
$
53.5
4.0
$
57.5
$
117.2
$
113.2
40
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
7. Biological assets
Accounting policy
Standing timber on privately held forest land that is managed for timber production is characterized as a
biological asset. Accordingly, at each reporting date, the biological asset is valued at its fair value less costs
to sell with any change therein, including the impact of growth and harvest, recognized in net income for the
period. Costs to sell include all costs that would be necessary to sell the assets. Land under the standing
timber is measured at cost and included in property, plant and equipment. Long-term roads and bridges on
the land underlying the standing timber are considered a component of property, plant and equipment and
are recorded at cost less accumulated amortization.
Supporting information
(a) Reconciliation of carrying amount
Carrying value, beginning of year
Change in fair value due to growth and pricing
Harvested timber transferred to inventory
Carrying value, end of year
Years ended December 31,
2018
2017
$
58.2
5.6
(5.5)
$
57.6
5.6
(5.0)
$
58.3
$
58.2
At December 31, 2018, private timberlands comprised an area of approximately 23,293 hectares
(December 31, 2017: 23,293 hectares) of land owned by the Company; standing timber on these
timberlands ranged from newly planted cut-blocks to mature forests available for harvest. During the
year ended December 31, 2018, the Company harvested and scaled approximately 141,609 cubic
metres (“m3”) of logs from its private timberlands, which had a fair value less costs to sell of $106 per m3
at the date of harvest (2017: 127,844 m3 and $112 per m3, respectively).
(b) Measurement of fair values
The table above reconciles the opening balances to the closing balances for Level 3 fair values. The
change in fair value resulting from price and growth is reflected in cost of goods sold. The fair value
measurements for the Company’s standing timber of $58.3 million has been categorized as Level 3 fair
value based on the inputs to the valuation technique used as discussed below.
Valuation technique
Significant unobservable inputs
Discounted cash flows: The valuation model
considers the present value of the net cash
flows expected to be generated by the
individual private timberlands utilizing a
harvest optimization approach. The cash
flow projections include specific estimates
for 25 years. The expected net cash flows
are discounted using a
risk-adjusted
discount rate.
•
•
•
•
Estimated future log prices per m3 ($74
- $152, weighted average $96).
Estimated harvest costs per m3 ($59 -
$81, weighted average $64).
Estimated harvest annual volume
- 108,000 m3, weighted
(11,000
average 88,000 m3).
Risk-adjusted discount rate (2017:
7.0% - 7.5%, weighted average 7.0%
Inter-relationship between key
unobservable inputs and fair value
measurement
The estimated fair value would increase
(decrease) if:
•
•
•
•
The estimated log prices per m3
were higher (lower);
The estimated harvest costs per m3
were lower (higher);
The estimated harvest volumes
were higher (lower); or
The risk-adjusted discount rates
were lower (higher).
(c) Risk management strategies related to biological assets
Western is exposed to the following risks relating to its private timberlands:
• The Company is exposed to risks arising from fluctuations in log prices and sales volumes. When
possible, Western aligns its harvest volumes to market supply and demand, and performs regular
industry trend analyses for projected harvest volumes and pricing in order to manage this risk.
• The standing timber is exposed to risk of damage as a result of severe weather conditions, forest
fires, insect infestation and disease. Western has processes and procedures in place to monitor and
mitigate these risks, including fire management strategies and regular inspection for pest infestation.
41
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
8. Other assets
Investments
Deferred transaction costs
Export tax receivables (Note 17(b))
9. Long-term debt
Accounting policy
December 31,
2018
December 31,
2017
$
$
11.1
0.9
3.8
15.8
13.3
0.7
3.5
17.5
$
$
Long-term debt is recognized initially at fair value, net of transaction costs incurred. Long-term debt is
subsequently carried at amortized cost; any difference between the proceeds and the redemption value is
recognized in net income over the term of the long-term debt using the effective interest method.
Transaction costs are deferred and amortized to finance costs over the term of the long-term debt using the
effective interest rate method.
Supporting information
On August 8, 2018, the Company entered into a new syndicated Credit Facility (the “Credit Facility”). The
Credit Facility provides for a maximum borrowing amount of $250 million, has a maturity date of August 1,
2022, and includes an accordion feature which allows the Company to increase the aggregate amount
available to $350 million, subject to lender approval.
The Credit Facility is available in Canadian dollars by way of Prime Rate Advances, Bankers’ Acceptances
or Letters of Credit and in US dollars by way of US Base Rate Advances, US Prime Rate Advances, LIBOR
Advances or Letters of Credit. Interest on the Credit Facility is indexed to benchmark rates and varies
depending on the nature of each draw and a total debt to EBITDA based pricing grid.
The Credit Facility is secured by a general security agreement, excluding specified properties and their
related assets, and is subject to certain financial covenants, including maximum debt to total capitalization
ratios (see Note 16).
At December 31, 2018, $7.0 million was outstanding under the Company’s Credit Facility. The interest rate
for the Credit Facility was 4.65% at December 31, 2018. The Company was in compliance with its financial
covenants at December 31, 2018.
December 31,
2018
December 31,
2017
Long-term debt
Less transaction costs
Available
Drawings
Outstanding letters of credit
Unused portion of Term Loan
$
$
$
7.0
(1.0)
6.0
250.0
(7.0)
(1.0)
242.0
$
$
-
-
$
-
$
110.0
-
-
$
110.0
42
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
10. Income taxes
Accounting policy
Income tax expense comprises current and deferred income tax. It is recognized in net income for the period
except to the extent that it relates to items recognized either in other comprehensive income or directly in
equity, in which case it is recognized in other comprehensive income or equity, respectively.
(a) Current tax
Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year
and any adjustment to tax payable or receivable in respect of the previous years. It is measured using
tax rates enacted or substantively enacted at the reporting date.
Current income tax assets and liabilities are offset only if certain criteria are met.
(b) Deferred income tax
Deferred income tax is recognized in respect of temporary differences arising between the tax bases of
assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred
income tax is not recognized if it arises from initial recognition of an asset or liability in a transaction,
other than a business combination, that at the time of the transaction affects neither accounting profit
nor taxable profit.
Deferred income tax assets are recognized for unused tax losses, unused tax credits and deductible
temporary differences to the extent that it is probable that future taxable profits will be available against
which they can be used. Deferred income tax assets are reviewed at each reporting date and are
recognized to the extent that it is probable that the related tax benefit will be realized. Unrecognized
deferred income tax assets are reassessed at each reporting date and recognized to the extent that it is
probable that future taxable profits will be available against which they can be used.
Deferred income tax is measured at the rates that are expected to be applied to temporary differences
when they reverse, using rates enacted or substantively enacted at the reporting date. Deferred income
tax assets and liabilities are offset only if certain criteria are met.
Supporting information
Current tax expense
Current period
Deferred income tax expense
Origination and reversal of temporary differences
Change in tax rates
Recognition of previously unrecognized tax losses
Change in unrecognized deductible temporary differences
Years ended December 31,
2018
2017
$
$
14.3
14.3
$
$
0.2
0.2
$
$
11.3
-
-
-
11.3
26.0
0.8
-
(0.1)
26.7
$
$
Total income tax expense
$
25.6
$
26.9
43
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
10. Income taxes (continued)
(b) Deferred income tax (continued)
Income tax expense (recovery) differs from the amount that would be computed by applying the Company’s
combined Federal and Provincial statutory rate as follows:
Years ended December 31,
Income tax expense at the statutory rate of 27.00% (2017 - 26.00%)
Difference in tax rates
Over (under) provided for in prior periods
Other permanent differences
Change in income tax rates
Use of investment tax credits
Change in unrecognized deductible temporary differences
Total income tax expense - 27.10% (2017 - 26.55%)
2018
$
2017
$
25.6
0.2
0.2
-
-
(0.4)
-
25.6
26.3
(0.3)
(0.3)
0.2
0.8
-
0.2
26.9
$
$
The statutory rate increased from 26% to 27% effective January 1, 2018.
The components of recognized deferred income tax assets and liabilities are as follows:
For the Year ended December 31, 2018
Deferred income tax assets
Tax loss carry-forwards
Employee future benefits obligation
Provisions and other
Deferred income tax liabilities
Intangible assets
Biological assets
Property, plant and equipment
For the Year ended December 31, 2017
Deferred income tax assets
Tax loss carry-forwards
Employee future benefits obligation
Provisions and other
Deferred income tax liabilities
Intangible assets
Biological assets
Property, plant and equipment
Opening
Balance
Recognized in Recognized in Recognized in
Taxes Payable
Profit or Loss
OCI
Ending
Balance
$
11.9
6.0
12.9
30.8
$
(10.9)
(0.8)
2.0
(9.7)
-
$
-
(0.7)
(0.7)
-
$
0.2
-
0.2
$
1.0
5.4
14.2
20.6
(31.6)
(8.5)
(18.5)
(58.6)
1.1
(0.1)
(2.6)
(1.6)
-
-
-
-
-
-
-
-
(30.5)
(8.6)
(21.1)
(60.2)
$
(27.8)
$
(11.3)
$
(0.7)
$
0.2
$
(39.6)
$
30.9
6.3
12.7
49.9
$
(19.0)
(1.0)
0.2
(19.8)
$
-
-
$
-
-
$
-
0.7
-
0.7
$
11.9
6.0
12.9
30.8
(31.5)
(7.9)
(12.3)
(51.7)
(0.1)
(0.6)
(6.2)
(6.9)
-
-
-
-
-
-
-
-
(31.6)
(8.5)
(18.5)
(58.6)
$
(1.8)
$
(26.7)
$
-
$
0.7
$
(27.8)
The Company has recognized deferred income tax assets in relation to unused tax losses that are available
to carry forward against future taxable income. At December 31, 2018, the Company and its subsidiaries
have unused non-capital tax losses carried forward totaling $2.1 million in the US (2017: nil) and $2.0 million
in Canada (2017: $43.9 million), which can be used to reduce taxable income. The Company has unused
capital losses carried forward of approximately $93.7 million (2017: $96.3 million) available to be utilized
against future capital gains indefinitely.
44
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
10. Income taxes (continued)
(b) Deferred income tax (continued)
Deferred income tax assets have not been recognized in respect of the following loss carry-forwards and
other deductible temporary differences:
Temporary deductible differences
Capital loss carry-forwards
11. Other liabilities
Employee future benefits obligation (Note 18)
Environmental accruals
Performance share unit plan liabilities, non-current (Note 14(c))
Other
12. Reforestation obligation
Accounting policy
December 31,
2018
$
19.0
December 31,
2017
$
16.8
93.7
96.3
$
112.7
$
113.1
December 31,
2018
December 31,
2017
$
$
19.0
1.5
1.8
1.5
23.8
21.4
3.1
2.5
1.2
28.2
$
$
The Company’s provision for reforestation relates to the obligation for reforestation on Crown land and arises
as timber is harvested. Reforestation on private timberlands is expensed as incurred. The Company
recognizes a provision for reforestation at fair value in the period in which the legal obligation is incurred,
with the fair value of the liability at the reporting date determined with reference to the present value of
estimated future cash flows. The pre-tax discount rate used to determine the present value reflects current
market assessments of the time value of money and the risks specific to the liability. The actual discount rate
used reflects the current risk-free rate given that risks are incorporated into the future cash flow estimates.
In periods subsequent to the initial measurement, changes in the liability resulting from revisions to estimated
future costs are recognized in cost of sales within net income for the period as they occur. Reforestation
expense incurred on current production is included in production costs and the unwinding of discount, or
accretion cost, is included in finance costs for the year.
Supporting information
Changes in the reforestation obligation are as follows:
Years ended December 31,
2018
2017
Reforestation obligation, beginning of period
Reforestation provision charged
Reforestation expenditures
Unwind of discount
Reforestation obligation, end of period
Less current portion
$
$
25.3
8.6
(8.5)
0.3
25.7
10.0
15.7
28.9
5.4
(9.3)
0.3
25.3
8.9
16.4
$
$
The reforestation expenditures are expected to occur over the next one to ten years and have been
discounted at risk-free rates of 1.86% to 1.97% (2017: 1.52% to 2.05%). The total undiscounted amount of
the estimated future expenditures required to settle the reforestation obligation at December 31, 2018 is
$26.7 million (December 31, 2017: $26.4 million).
45
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
13. Share capital
Accounting policy
The Company’s authorized capital consists of an unlimited number of common shares and an unlimited
number of preferred shares. Common shares and preferred shares are classified as equity. Incremental
costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the
proceeds, net of any tax effects.
Supporting information
The Company has no outstanding preferred shares. The common shares entitle the holders thereof to one
vote per share. Issued and outstanding common shares are as follows:
Balance at January 1, 2017
Exercise of stock options
Repurchase of shares
Balance at December 31, 2017
Exercise of stock options
Repurchase of shares
Balance at December 31, 2018*
*Based on trade date
Number of
Common Shares
Amount
395,447,663
$
506.0
407,429
(1,079,000)
0.9
(1.4)
394,776,092
$
505.5
660,000
(11,695,573)
383,740,519
0.6
(15.0)
491.1
$
During the year ended December 31, 2018, cash dividends of $0.02 per common share were paid for the
quarter ended March 31, 2018, and $0.0225 for each of the quarters ended June 30, 2018, September 30,
2018 and December 31, 2018. An aggregate of $34.3 million (2017: $31.7 million) in dividends was paid to
shareholders in 2018.
On August 3, 2018, the Company renewed a Normal Course Issuer Bid (“NCIB”) permitting the purchase
and cancellation up to 19,662,439 of the common shares or approximately 5% of the common shares issued
and outstanding as of August 3, 2018. The NCIB expires on August 7, 2019.
In 2018, the Company repurchased 11,695,573 common shares under the NCIB (2017: 1,079,000) for $25.2
million at an average price of $2.15 per common share (2017: $2.7 million and $2.50, respectively), of which
$15.0 million was charged to share capital and $10.2 million was charged to retained earnings (2017: $1.4
million and $1.3 million, respectively).
14. Share-based compensation plans
Accounting policy
Stock options
The Company has established an incentive stock option plan (the “Option Plan”) for eligible directors, officers
and employees and accounts for these plans using the fair value method. The grant-date fair value of options
is recognized as an employee expense, with a corresponding increase in contributed surplus, over the period
that the individual becomes unconditionally entitled to the awards. When stock options are exercised, the
cash consideration received from employees is credited to share capital, as is the previously calculated fair
value included in contributed surplus.
Determining the fair value of share-based compensation awards at the grant date requires judgement. The
fair value of the options is determined using either the Black-Scholes or the Hull-White option pricing models
which take into account, as of the grant date, the exercise price, the expected life of the options, the current
price of the underlying stock and its expected volatility, expected dividends on the shares, and the risk-free
interest rate over the expected life of the option. The Company bases its estimates of volatility on historical
share prices of the Company itself as well as those of comparable companies with longer trading histories.
The options are only exercisable when the share price exceeds a barrier price of $0.70 for 60 consecutive
days on a volume weighted average price basis. With this additional requirement for the share price to
exceed a minimum level before the options become exercisable, it is necessary to utilize the Hull-White
model as this model takes into account the barrier price factor.
46
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
14. Share-based compensation plans (continued)
Deferred share units and performance share units
The grant-date fair value of the amount payable to eligible directors, officers and employees in respect of
Deferred Share Units (“DSUs”), which are cash-settled, is recognized as an employee expense with a
corresponding increase in liabilities, over the period that the individuals become unconditionally entitled to
payment.
The grant-date fair value of the amount payable to eligible officers and employees in respect of Performance
Share Units (“PSUs”), which are cash-settled, is recognized as an employee expense with a corresponding
increase in liabilities, over a three year performance period.
The liabilities under the DSU and PSU Plans are re-measured at fair value at each reporting date and at
settlement date. For the PSU Plan, this includes re-measurement as the Company’s performance tracks
against the performance vesting targets. Any changes in the fair value of the liabilities are recognized in cost
of goods sold and selling and administration expense.
Supporting information
(a) Stock-option plan
The Option Plan permits the granting of options to eligible participants to purchase up to an aggregate
of 30,000,000 common shares. Each option is exercisable, subject to vesting terms of 20% per year and
immediately upon a change in control of the Company, into one Common Share, subject to adjustments,
at a price of not less than the closing price of the common shares on the TSX on the day immediately
preceding the grant date. Options granted under the Option Plan expire a maximum of ten years from
the date of the grant. All outstanding options are only exercisable when the share price has been equal
to or exceeds $0.70 for the 60 consecutive days preceding the date of exercise on a volume weighted
average price basis.
During the year ended December 31, 2018, the Company granted 1,235,788 options with a fair value of
$0.9 million. Weighted average assumptions applied in the option pricing model included exercise price
of $2.74, risk-free interest rate of 2.28%, a volatility rate of 33.81%, and an expected life of seven years.
The following table summarizes the change in options outstanding during the years ended December
31, 2018 and 2017:
Outstanding, beginning of period
Granted
Exercised
Forfeited
Outstanding, end of period
Years ended December 31, 2018
Years ended December 31, 2017
Number of Options
11,718,483
1,235,788
(660,000)
(328,914)
11,965,357
Weighted average
exercise price
$
$
$
$
$
1.56
2.74
0.59
2.13
1.72
Number of Options
11,235,585
1,657,877
(426,226)
(748,753)
11,718,483
Weighted average
exercise price
$
$
$
$
$
1.50
2.09
1.40
1.99
1.56
Details of options outstanding under the Option Plan at December 31, 2018 are as follows:
Exercise price
$0.22 - $0.96
$1.27 - $1.97
$2.09 - $2.75
Number outstanding
December 31, 2018
3,850,000
2,537,654
5,577,703
11,965,357
Weighted average
remaining option life
(years)
2.9
5.5
7.1
5.4
Weighted average
exercise price
$
$
$
$
0.82
1.58
2.39
1.72
Number exercisable
December 31, 2017
3,850,000
1,855,062
2,361,821
8,066,883
Weighted average
exercise price
$
$
$
$
0.82
1.44
2.38
1.42
In 2018, the Company recorded equity-based compensation expense for these options of $0.8 million
(2017: expense of $0.4 million), with a corresponding increase to contributed surplus.
47
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
14. Share-based compensation plans (continued)
(b) Deferred share unit plan
The Company has a DSU Plan for directors and designated executive officers. Directors may elect to
take a portion of their fees in the form of DSUs and prior to January 1, 2015 executive officers could
elect to take a portion of their annual incentive bonus in the form of DSUs. For directors, the number of
DSUs allotted is determined by dividing the dollar portion of the quarterly fees a director elects to take
in DSUs by the share price value on the fifth day following each quarter end. All DSU holders are entitled
to DSU dividends, equivalent to the dividend they would have received if they held their DSUs as
common shares. For dividends, the number of DSUs allotted is determined by dividing the total dollar
value of the dividend each DSU holder would have received, by the closing share price on the dividend
payment date.
Effective January 1, 2015, DSUs are only granted to non-executive directors per the amended DSU
Plan.
Outstanding, beginning of period
Granted
Outstanding, end of period
Years ended December 31, 2018
Years ended December 31, 2017
Number of DSU
1,282,219
186,535
1,468,754
Weighted average
unit value
$
$
$
1.18
2.32
1.32
Number of DSU
1,100,073
182,146
1,282,219
Weighted average
unit value
$
$
$
0.98
2.39
1.18
In 2018, the Company recorded equity-based compensation recovery for these DSUs of $0.6 million
(2017: expense of $1.1 million), with a corresponding decrease to accounts payable and accrued
liabilities.
(c) Performance share unit plan
The Company has established a PSU Plan for designated officers and employees of the Company.
Under the terms of the PSU Plan, participants are granted a number of PSUs based on a target award
divided by the value of the Company’s common shares at the effective date of grant. All PSU holders
are entitled to PSU dividends, equivalent to the dividend they would have received if they held their
PSUs as common shares.
Performance targets are set by the Management Resource & Compensation Committee of the
Company’s Board of Directors. The number of PSUs which will ultimately vest will be the original number
of PSUs granted plus PSUs equal to the value of accrued notional dividends over the performance
period. For dividends, the number of PSUs allotted is determined by dividing the total dollar value of the
dividend each PSU holder would have received, by the closing share price on the trading day
immediately after the dividend date of record. The redemption value of vested PSUs will be in a range
from 0% to 200% based on return on capital employed over a three year performance period.
Outstanding, beginning of period
Granted
Redeemed
Outstanding, end of period
Years ended December 31,
2018
1,582,285
562,049
(429,002)
1,715,332
2017
952,236
630,049
-
1,582,285
In 2018, the Company recorded equity-based compensation expense for these PSUs of $1.3 million
(2017: expense of $3.0 million), with a corresponding increase to accounts payable and accrued
liabilities and other liabilities.
15. Earnings per share
The Company presents basic and diluted earnings per share (“EPS”) data for its common shares. Basic EPS
is calculated by dividing the net income attributable to Common shareholders of the Company by the
weighted average number of shares outstanding during the period. Diluted EPS is determined by adjusting
the net income attributable to the shareholders and the weighted average number of shares outstanding, for
the effects of all dilutive potential shares, which comprise share options granted to employees and directors.
48
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
16. Capital requirements
The Company’s strategy for managing capital is to maintain a capital position that provides financial flexibility
and achieves growth with the objective of maximizing long-term shareholder value. Western’s capital
requirements typically include major new investments designed to increase net income and disbursements
for other new equipment and ongoing enhancements, efficiency improvements, safety, and protection or
extension of the life of equipment. Significant expenditures are also required to fund new capital roads
allowing access to timber stands for harvesting purposes.
As at December 31, 2018, the Company had $7.0 million drawn in its debt facilities and a nil net debt to
capitalization ratio (2017: nil). Net debt is defined as long-term debt, less cash and cash equivalents.
Capitalization comprises net debt and shareholders’ equity.
Changes to the capital structure may be made as strategic opportunities arise. In order to maintain or adjust
the capital structure, the Company may buy back shares, issue new shares, source new debt, or sell assets.
The Company has internal controls to ensure changes to the capital structure are properly reviewed and
approved.
Beginning in 2013, the Company initiated a quarterly dividend program which is being paid from operating
cash flows, and is at the discretion of the Company’s Board of Directors.
In the current year, the Company renewed a Normal Course Issuer Bid permitting the purchase and
cancellation up to 19,662,439 common shares prior to August 8, 2019, and is at the discretion of the
Company’s Board of Directors.
Under the Credit Facility agreement, the Company is subject to financial covenants. The Credit Facility
contains a maximum consolidated total debt to total capitalization ratio financial covenant of 50%. Should
the ratio exceed 42.5%, an EBITDA interest coverage ratio of not less than 2.0 to 1.0, calculated on the
trailing 12 month basis, must be maintained. Total capitalization for this covenant is defined as the sum of
consolidated total debt and consolidated net worth; this financial covenant is measured on the last day of
each reporting period.
As at December 31, 2018, the Company is in compliance with all financial covenants, and expects to be in
compliance for the next 12 months.
The Company is not subject to any statutory capital requirements. Under the Company’s Option Plan,
commitments exist to issue common shares.
There were no changes to the Company’s approach to managing capital during the year.
17. Commitments and contingencies
(a) Key dates in the softwood lumber duty dispute
Under the softwood lumber agreement (“SLA”) between Canada and the United States (“US”), the
Company’s exports to the US were assessed an export tax by the Canadian Government. The SLA
expired on October 12, 2015, eliminating export tax measures on Canadian softwood lumber shipments
to the US.
The twelve-month standstill period of the SLA, which precluded the US lumber industry from petitioning
for trade relief against Canadian softwood lumber producers, expired on October 12, 2016.
On November 25, 2016, the US lumber industry petitioned the US Department of Commerce (“DoC”)
and the US International Trade Commission (“ITC”) seeking Countervailing (“CVD”) and Anti-dumping
duties (“AD”) on Canadian softwood lumber shipments to the US.
On January 6, 2017, the ITC concluded that there was “reasonable indication” that softwood lumber
products from Canada materially injured US producers, allowing the DoC to proceed with its ongoing
CVD and AD investigations on these products.
On April 24, 2017, the DoC announced a preliminary CVD rate of 19.88% for “all other” Canadian lumber
producers including Western. The DoC also made a preliminary determination on critical circumstances
that resulted in 90-day retroactive application of CVD. On June 26, 2017, the DoC announced an AD
rate of 6.87% for “all other” Canadian lumber producers including Western. The DoC also made a
preliminary determination on critical circumstances that resulted in 90-day retroactive application of AD.
49
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
17. Commitments and contingencies (continued)
(a) Key dates in the softwood lumber duty dispute (continued)
On November 2, 2017, the DoC announced reduced, final CVD and AD rates of 14.25% and 6.58%,
respectively, for “all other” Canadian lumber producers including Western. In addition, the DoC
concluded that critical circumstances did not exist for CVD but did exist for AD.
On December 7, 2017, the ITC made an affirmative final determination that softwood lumber from
Canada materially injured the US lumber industry. The ITC also concluded that critical circumstances
did not exist for AD. The final rates communicated by the DoC on November 2, 2017 became effective
December 28, 2017.
On January 3, 2018, DoC published amended final determinations, resulting in reduced, final CVD and
AD rates of 14.19% and 6.04% respectively for “all other” Canadian lumber producers including Western.
(b) Lumber duties and export tax
Cash deposits for CVD were required for lumber imports to the US effective April 28, 2017 through
August 25, 2017, after which they were not applicable pending the ITC’s final CVD determination. Cash
deposits for CVD resumed on publication of ITC final affirmative CVD determination in the US Federal
Register on December 28, 2017.
Cash deposits for AD were required for lumber imports to the US effective June 30, 2017 until December
26, 2017, and resumed on publication of the ITC final affirmative injury determination on December 28,
2017. As at December 31, 2018, Western had $64.2 million of cash on deposit with the US Department
of Treasury in respect of these softwood lumber duties (December 31, 2017: $18.0 million).
In 2017, the Company recorded an export tax recovery of $3.5 million arising from the difference between
export duties paid at preliminary determination rates and the latest final duty rates, which is presented
net of export tax expense in the consolidated statement of comprehensive income. A corresponding
increase was recognized in other assets in the consolidated statement of financial position. Incremental
export duty recoveries from any future change in CVD and AD rates will be netted against export tax
expense and included in other assets. In 2018, the Company recorded a further export tax recovery of
$0.3 million due to changes in foreign exchange rates.
(c) Litigation and claims
In the normal course of its business activities, the Company may be subject to a number of claims and
legal actions that may be made by customers, unions, suppliers and others in respect of which either
provision has been made or for which no material liability is expected. Where the Company is not able
to determine the outcome of these disputes no amounts have been accrued in these financial
statements.
(d) Long-term fibre supply agreements
Accounting policy
The Company recorded the price premium as deferred revenue and has granted a first charge over the
acquired assets (including a tree farm license with an allowable annual cut of 844,000 cubic metres,
4,771 hectares of private timberlands and other capital improvements and equipment) to secure certain
of these obligations.
In addition, certain of the Company’s long term fibre supply agreements with third parties have minimum
volume requirements and may, in the case of a failure to produce the minimum volume, require the
Company to conduct whole log chipping or sell saw logs, which could reduce log availability for our
sawmill, source the deficiency from third parties at additional cost to the Company or pay the party to
the fibre supply agreement a penalty calculated based on the provisions contained in the relevant
agreement. Should Western take significant market related curtailments in its sawmills, the volume of
chips produced is reduced and accordingly there is greater risk that the Company may not meet its
contractual obligations, if it is not possible to secure replacement chips on the open market during that
period.
The Company satisfied its annual fibre commitments for 2018.
50
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
17. Commitments and contingencies (continued)
(e) Operating leases
Accounting policy
Leases of property, plant and equipment that transfer to the Company substantially all of the risks and
rewards of ownership are classified as finance leases. The leased assets are measured initially at an
amount equal to the lower of their fair value and the present value of the minimum lease payments.
Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy
applicable to that asset.
Assets held under other leases are classified as operating leases and are not recognized in the
Company’s statement of financial position.
Payments made under operating leases are recognized in profit or loss on a straight-line basis over the
term of the lease. Lease incentives received are recognized as an integral part of the total lease expense,
over the term of the lease. Minimum lease payments made under finance leases are apportioned
between the finance expense and the reduction of the outstanding liability. The finance expense is
allocated to each period during the lease term so as to produce a constant periodic rate of interest on
the remaining balance of the liability.
Supporting information
Future minimum lease payments at December 31, 2018 under operating leases were as follows:
2019
2020
2021
2022
2023
Thereafter
$
3.7
3.3
2.9
2.2
1.9
5.7
19.7
$
(f) Pension funding commitments
The Company is committed to making estimated annual special payments in relation to its salaried
pension plans of $3.1 million for 2019 and approximately $2.0 million per year on average for 2020 to
2032, or until such time as a new funding valuation may lead to a change in the amount of payments
required.
(g) Tax correspondence
In May 2018, the Company received correspondence from the Canada Revenue Agency (“CRA”)
regarding certain restructuring transactions, occurring in 2004 and 2007 to 2011, and the general anti-
avoidance rule. Management believes the CRA’s position is without merit. Management is prepared to
defend its position if a notice of reassessment is issued, and as such, the Company has not recognized
any income tax provision at December 31, 2018 relating to this matter.
18. Employee benefits
Accounting policy
(a) Termination benefits
Termination benefits are expensed at the earlier of when the Company can no longer withdraw the offer
of those benefits and when the Company recognizes costs for a restructuring. If benefits are not
expected to be settled wholly within twelve months of the reporting date they are discounted.
(b) Short-term employee benefits
Short-term employee benefit obligations, including bonus plans, are measured on an undiscounted basis
and are expensed as the related service is provided. A liability is recognized for the amount expected to
be paid if the Company has a present legal or constructive obligation to pay this amount as a result of
past service provided by the employee and the obligation can be estimated reliably.
51
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18. Employee benefits (continued)
(c) Employee future benefits
The Company has various defined benefit and defined contribution plans that provide pension or other
retirement benefits to most of its salaried employees and certain hourly employees not covered by forest
industry union plans. The Company also provides other post-employment benefits and pension bridging
benefits to eligible retired employees.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will
receive on retirement, usually dependent on one or more factors such as age, years of service and
compensation. The Company’s net obligation in respect of its defined benefit plans is calculated
separately for each plan by estimating the amount of future benefit that employees have earned in return
for their service in the current and prior periods; that benefit is discounted to determine its present value,
and the fair value of the plan assets is deducted in arriving at the obligation. The calculation is performed
annually by a qualified actuary using the actuarial cost projected unit credit method.
When the calculation results in a potential asset to the Company, the recognized asset is limited to the
present value of economic benefits available in the form of any future refunds from the defined benefit
plan or reductions in future contributions to the defined benefit plan. In order to calculate the present
value of economic benefits, consideration is given to any minimum funding requirements that apply to
any defined benefit plan.
Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the
return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest),
are recognized immediately in other comprehensive income. The Company determines the net interest
expense (income) on the net defined liability for the period by applying the discount rate used to measure
the defined benefit obligation at the beginning of the annual period to the then-net defined liability, taking
into account any changes in the net defined benefit liability during the period as a result of contributions
and benefit payments. Net interest expense and other expenses related to defined benefit plans are
recognized in net income.
When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that
relates to past service or the gain or loss on curtailment is recognized immediately in net income. The
Company recognizes gains and losses on settlement of a defined benefit plan when the settlement
occurs. A defined contribution plan is a retirement plan under which the Company pays fixed
contributions into a separate entity. For Western’s defined contribution plan, the Company makes
contributions to privately administered investment funds on behalf of the plan members. The Company
has no further payment obligations once the contributions have been paid.
The contributions are recognized as employee benefit expense in net income for the period during which
services are rendered by employees. Prepaid contributions are recognized as an asset to the extent that
a cash refund or a reduction in the future payments is available.
For hourly employees covered by forest industry union defined benefit pension plans, the Company’s
contributions as required under the collective agreements are charged to net income for the period.
52
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18. Employee benefits (continued)
Supporting information
Information about the Company's defined benefit salaried pension plans and other non-pension benefits, in
aggregate, is as follows:
December 31, 2018
December 31, 2017
Salaried
Pension Plans
Non-pension
Plans
Salaried
Pension Plans
Non-pension
Plans
Plan assets:
Fair value, beginning of year
Company contributions
Benefits and administrative expenses paid
Actual return on assets
Fair value, end of year
Accrued benefit obligation:
Balance, beginning of year
Current service costs and administrative expenses
Benefits and administrative expenses paid
Interest cost
Actuarial loss (gain)
Balance, end of year
Deficit recognized in Statement of
Financial Position (Note 11)
Cumulative actuarial gains (losses), beginning of year
Actuarial gains (losses) recognized directly in OCI
Cumulative actuarial gains (losses), end of year
112.5
3.7
(8.6)
(1.6)
106.0
129.1
0.3
(8.6)
4.1
(2.9)
122.0
(34.7)
(2.4)
(37.1)
$
$
-
$
0.2
(0.2)
-
$
-
-
$
0.3
(0.3)
-
$
-
$
$
$
$
$
$
$
$
$
$
$
(16.0)
$
(3.0)
$
(16.6)
$
(4.8)
$
$
$
$
$
$
$
$
5.8
-
(0.3)
0.2
(0.9)
4.8
0.4
0.9
1.3
109.2
3.9
(8.9)
8.3
112.5
126.5
0.3
(8.9)
4.5
6.7
129.1
(32.3)
(2.4)
(34.7)
4.8
-
(0.2)
0.1
(1.7)
3.0
1.3
1.7
3.0
Experience gains (losses):
Experience gains (losses) on plan assets:
Amount
Percentage of plan assets
Experience gains (losses) on plan liabilities:
Amount
Percentage of plan assets
December 31, 2018
December 31, 2017
Salaried
Pension Plans
Non-pension
Plans
Salaried
Pension Plans
Non-pension
Plans
$
(5.4)
(5.11)%
n/a
n/a
$
4.3
3.79%
n/a
n/a
$
(0.1)
(0.05)%
$
0.6
20.45%
$
(2.0)
(1.53)%
-
$
0.00%
53
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18. Employee benefits (continued)
The Company has several funded and unfunded defined benefit plans, a defined contribution pension plan
and a group RRSP that provide retirement benefits to substantially all salaried employees and certain hourly
employees. In addition, the Company provides other unfunded post-employment benefits to certain former
salaried and hourly employees.
The funded and unfunded defined benefit pension plans were closed to new entrants effective June 30,
2006. No further benefits accrue under these plans for years of service after December 31, 2010, and no
further benefits accrue under these plans for compensation increases effective December 31, 2016. The
Company’s other post-employment benefit plans are non-contributory and include a range of health care and
other benefits.
Total cash payments for employee future benefits for the year ended December 31, 2018 were $17.0 million
(December 31, 2017: $17.4 million), consisting of cash contributed by the Company to its funded pension
plans, cash payments directly to beneficiaries for its unfunded other benefit plans, and cash contributed to
the forest industry union defined benefit plans.
In relation to defined benefit plans, the Company measures the fair value of plan assets and the accrued
benefit obligations for accounting purposes as at December 31 of each year. The most recent actuarial
valuations of the funded defined benefit pension plans were performed at December 31, 2016. The next
actuarial valuation for both the funded and unfunded defined benefit plans and other unfunded post-
employment benefit plans will be prepared for December 31, 2019. Included in the accrued benefit
obligations and plan assets for salaried pension plans, presented above, are accrued benefit obligations of
$116.2 million at December 31, 2018 (December 31, 2017: $123.0 million) in respect of plans that are wholly
or partially funded.
The following is a breakdown of the defined benefit pension plan assets by nature of investment categories:
Equity securities
Debt securities
Other
December 31,
December 31,
2018
2017
28%
69%
3%
100%
32%
65%
3%
100%
The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations
(expressed as weighted averages) are as follows:
December 31,
2018
December 31,
2017
December 31, 2018
Increase (Decrease) of Accrued Benefit
Discount rate, beginning of year for:
Pension plans
Non-pension plans
Discount rate, end of year for:
Pension plans
Non-pension plans
Rate of compensation increase for all plans
Health care and medical cost trend rate
3.33%
3.25%
3.60%
3.45%
0.01%
3.67%
3.55%
3.33%
3.25%
0.01%
5.61% in 2019
4.88% in 2018
grading to 3.86% grading to 3.65%
in 2026
in 2029
Obligation w ith Change in Assumption
1% Decrease
1% Increase
n/a
n/a
n/a
n/a
12,059,900
231,300
(14,500,800)
(265,800)
(47,900)
44,400
(149,400)
154,200
Future mortality
n/a
n/a
314,700
(317,900)
54
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18. Employee benefits (continued)
The Company's salaried employees’ pension and non-pension benefits expense is as follows:
December 31, 2018
December 31, 2017
Salaried
Pension Plans
Non-pension
Plans
Salaried
Pension Plans
Non-pension
Plans
Defined benefit plans:
Current service costs and administrative expenses
Net interest costs
Cost of defined benefit plans
Total cost of employee post-retirement benefits
$
$
0.3
0.5
0.8
0.8
-
$
0.1
0.1
0.1
$
0.3
0.5
0.8
0.8
-
$
0.2
0.2
0.2
$
$
$
The Company is committed to make funding contributions to its defined benefit plans of $3.1 million during
2019.
The Company’s unionized employees are members of industry-wide pension plans to which the Company
contributes a predetermined amount per hour worked by an employee. The Company’s liability is limited to
its contributions. The pension expense for these plans is equal to the Company’s contributions. For 2018,
such contributions amounted to $9.4 million (2017: $9.7 million).
19. Financial instruments – fair values and risk management
Accounting policy
The Company has adopted IFRS 9, Financial Instruments, with a date of initial application of January 1,
2018. IFRS 9 sets out requirements for recognizing and measuring financial assets, financial liabilities, and
certain contracts to buy or sell non‐financial items. IFRS 9 replaces IAS 39, Financial Instruments:
Recognition and Measurement. It largely retains the existing requirements in IAS 39 for the classification and
measurement of financial liabilities. IFRS 9 eliminates IAS 39 categories for financial assets of held to
maturity, loans and receivables, and available for sale. The adoption of IFRS 9 has not had a significant
effect on the Company’s accounting policies related to financial liabilities. The impact of IFRS 9 on the
classification of financial assets is set out below.
(a) Financial assets
The Company classifies its financial assets in the following categories: amortized cost, fair value through
other comprehensive income (“FVOCI”) – debt investment; FVOCI – equity investment; or fair value
through profit and loss (“FVTPL”). This classification of a financial asset is based on the business model
in which a financial asset is managed and its contractual cash flow characteristics
The Company initially recognizes loans and receivables on the date that they are originated. All other
financial assets are recognized initially on the trade date at which the Company becomes a party to the
contractual provisions of the instrument.
The Company derecognizes a financial asset when the contractual cash flows from the asset expire, or
it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which
substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in
transferred financial assets that is created or retained by the Company is recognized as a separate asset
or liability.
A financial asset is measured at amortized cost if it meets both of the following conditions, and is not
designated as at FVTPL:
• it is held within a business model whose objective is to hold assets to collect contractual cash flows;
and
• its contractual terms give rise on specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
The Company does not currently have any debt or equity investments classified as measured at FVOCI.
55
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
19. Financial instruments – fair values and risk management (continued)
(a) Financial assets (continued)
All financial assets not measured at amortized cost or FVOCI are measured at FVTPL. This includes all
derivative financial assets. On initial recognition, the Company may irrevocably designate a financial
asset that otherwise meets the requirements to be measured at amortized cost or at FVOCI as at FVTPL
if doing so reduces an accounting mismatch that would otherwise arise.
A financial asset not measured at FVTPL is initially measured at fair value plus transaction costs that
are directly attributable to its acquisition. A financial asset is classified at fair value through profit or loss
if it is classified as held for trading or is designated as such upon initial recognition. Upon initial
recognition, directly attributable transaction costs are recognized in net income as incurred. Financial
assets at fair value through profit or loss are measured at fair value, and changes therein are recognized
in net income. Financial assets at fair value through profit or loss are comprised of certain investments
and forward exchange contracts.
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in
an active market. Such assets are initially recognized at transaction price plus any directly attributable
transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized
cost using the effective interest method, less any impairment losses.
Loans and receivables comprise cash and cash equivalents, trade and other receivables. Cash and cash
equivalents comprises cash balances and short-term investments with original maturities of 90 days or
less.
A financial asset not carried at fair value through profit or loss is assessed at each reporting date to
determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective
evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the
loss event had a negative effect on the estimated future cash flows of that asset that can be estimated
reliably.
IFRS 9 also replaces the incurred loss model in IAS 39 with an expected credit loss (“ECL”) model. The
new impairment model applies to financial assets measured at amortized costs, contract assets and
debt investments at FVOCI. Under IFRS 9, credit losses are recognized earlier than under IAS 39. The
financial assets held at amortized cost consist of cash and cash equivalents and trade and other
receivables.
Under IFRS 9, loss allowances are measured on either of 12 month ECLs where the ECLs result from
all possible default events within the 12 months after the reporting date; or lifetime ECLs, where the
ECLs result from all possible default events over the expected life of a financial instrument.
The Company measures loss allowances at an amount equal to twelve months ECLs for cash and cash
equivalent balances where credit risk has not increased significantly since initial recognition. The
Company has elected to measure loss allowances for trade receivables and any future contract assets
at an amount equal to lifetime ECLs
ECLs are a probability‐weighted estimate of credit losses. Credit losses are measured as the present
value of all expected cash shortfalls and are discounted at the effective interest rate of the financial
asset. At each reporting date the Company assesses whether financial assets carried at amortized costs
are credit‐impaired. A financial asset is considered credit‐impaired when one or more events that have
a detrimental impact on the estimated future cash flows of the financial asset have occurred.
Loss allowances for financial assets measured at amortized cost are deducted from the gross carrying
amount of the assets. Impairment losses related to trade and other receivables, including contract
assets, are presented separately in the statement of comprehensive income.
No adjustment to credit losses was required on adoption of IFRS 9.
56
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
19. Financial instruments – fair values and risk management (continued)
(b) Financial liabilities
The Company initially recognizes debt issued on the date that it is originated. The Company
derecognizes a financial liability when its contractual obligations are discharged, cancelled, or expire.
The Company’s non-derivative financial liabilities consist of long-term debt, as well as accounts payable
and accrued liabilities. These financial liabilities are recognized initially at fair value less any directly
attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured
at amortized cost using the effective interest method.
(c) Derivative financial instruments
The Company may enter into derivative financial instruments (foreign currency forward contracts) in
order to mitigate its exposure to foreign exchange risk. These financial instruments are measured at
FVTPL. The Company’s policy is not to use derivative financial instruments for trading or speculative
purposes. These instruments have not been designated as hedges for accounting purposes, and they
are carried on the statement of financial position at fair value with changes in value being recognized as
gains or losses within sales in net income for the period.
Embedded derivatives are separated from the host contract and accounted for separately if (i) the
economic characteristics and risks of the host contract and the embedded derivative are not closely
related, (ii) a separate instrument with the same terms as the embedded derivative would meet the
definition of a derivative, and (iii) the combined instrument is not measured at fair value through profit or
loss. Changes in the fair value of separable embedded derivatives are recognized immediately in net
income.
Financial assets and liabilities are offset and the net amount presented in the statement of financial
position when, and only when, the Company has a legal right to offset the amounts and intends either
to settle on a net basis or to realize the asset and settle the liability simultaneously.
(d) Accounting classifications and fair values
The following table shows the carrying amounts and fair values of financial assets and financial liabilities,
including their levels in the fair valuation hierarchy. It does not include fair value information for financial
assets or liabilities not measured at fair value if the carrying amount is a reasonable approximation of
fair value. There has been no movement between fair value levels since December 31, 2017.
December 31, 2018
December 31, 2017
Mandatory at
at FVTPL
Amortized
Cost
Total
Mandatory
at FVTPL
Amortized
Cost
Total
Financial assets
Market-based investments
Foreign currency forward contracts
Cash and cash equivalents
Trade and other receivables
Total financial assets
Financial liabilities
Foreign currency forward contracts
Accounts payable and accrued liabilities
Long term debt (Note 9)
Total financial liabilities
$
$
$
$
4.9
-
-
-
4.9
-
$
-
8.4
91.3
99.7
$
4.9
-
8.4
91.3
104.6
5.1
0.7
-
-
5.8
-
$
-
35.3
85.5
120.8
$
5.1
0.7
35.3
85.5
126.6
$
$
$
$
Mandatory
at FVTPL
Other Financial
Liabilities
Total
Mandatory
at FVTPL
Other Financial
Liabilities
Total
$
$
2.2
-
-
2.2
$
-
130.5
7.0
137.5
$
$
2.2
130.5
7.0
139.7
$
$
-
-
-
$
-
$
-
98.9
-
98.9
$
$
-
98.9
-
98.9
$
57
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
19. Financial instruments – fair values and risk management (continued)
(e) Financial risk management
The use of financial instruments exposes the Company to credit risk, liquidity risk, and market risk. Other
than as described below, Management does not consider the risks to be significant to the Company.
The Board of Directors has oversight responsibility for the Company’s risk management framework. The
Company identifies, analyzes and actively manages the financial market risks associated with changes
in foreign exchange rates, interest rates and commodity prices. Western has established risk
management policies and controls to identify and analyze the risks faced by the Company, to set
appropriate risk limits and to monitor risks and adherence to limits. Currently, the Company is only
engaged in foreign exchange forward contract activities.
(i) Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial
instrument fails to meet is contractual obligations and arises principally from the Company’s
receivable from customers, and cash and cash equivalents. The carrying amount of the Company’s
financial assets represents the maximum credit exposure.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each
customer. However, Management also considers the demographics of the Company’s customer
base, including the default risk of the industry and country in which customers operate, as these
factors may have an influence on credit risk. The Company has determined that there is no
concentration of credit risk either geographically or by counterparty.
Sales transactions are made through the extension of credit to customers and are recorded at the
point in time the sale is recognized. Accordingly, fluctuations in collectability may affect the carrying
value of the underlying accounts receivable. Management balances the credit risk through rigorously
and continually reviewing customer credit profiles. The Company has established policies and
controls to review the creditworthiness of new customers, including review of credit ratings. The
Company’s general practice is to insure substantially all North American lumber receivables for 90%
of value with the Export Development Corporation or Coface Canada, while substantially all sales
outside of North America are sold on either a cash basis or with secured instruments, which reduces
the Company’s exposure to bad debts.
The Company regularly reviews the collectability of accounts receivable and makes provisions
where the collectability is uncertain. Historically the Company’s bad debts have been minimal and
as at December 31, 2018, the Company had an allowance for doubtful customer accounts of nil
(December 31, 2017: nil).
The aging of trade and other receivables at the reporting date that were not impaired was as follows:
December 31, 2018
December 31, 2017
Gross value
Impairment
Gross value
Impairment
Not past due
Past due, 0 - 30 days
Past due, 31 - 120 days
$
$
85.0
6.1
0.2
91.3
-
$
-
-
$
-
73.6
12.5
0.1
86.2
-
$
-
-
$
-
$
$
The Company held cash and cash equivalents of $8.4 million at December 31, 2018 (December 31,
2017: $35.3 million), which represents its maximum credit exposure on these assets. The cash and
cash equivalents are held at highly rated financial institutions and as such, the Company does not
believe that these are exposed to significant credit risk.
(ii) Interest rate risk
The Company is exposed to interest rate risk through its current financial assets and financial
obligations bearing variable interest rates. Based on the Company’s debt structure at December 31,
2018, a change of 1% in interest rates would result in an immaterial change to the annual net income
(2017: immaterial change). The Company does not currently use derivative instruments to reduce
its exposure to interest rate risk.
58
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
19. Financial instruments – fair values and risk management (continued)
(e) Financial risk management (continued)
(iii) Currency risk
Certain of the Company’s sales transactions are denominated in foreign currencies, principally, the
USD and Japanese Yen (“JPY”), and accordingly the Company is exposed to currency risk
associated with changes in foreign exchange rates. To assist in managing this exchange risk, the
Company sells forward contracts with a maximum term for each transaction of up to one year. The
Company does not consider the credit risk associated with the counterparty risk to be significant.
During 2018, the Company entered into forward contracts to sell USD and JPY in order to mitigate
a portion of the foreign currency risk. At December 31, 2018, the Company had outstanding
obligations to sell an aggregate USD$62.3 million at an average exchange rate of CAD$1.33 per
USD with maturities through March 28, 2019, and to sell JPY 155.0 million at a rate of JPY 80.40
per CAD with maturities through January 9, 2019.
All foreign currency gains and losses on forward contracts to December 31, 2018 have been
recognized in sales in the consolidated statement of comprehensive income and the fair value of
these instruments at December 31, 2018 was a net liability of $2.2 million which is included in
accounts payable and other liabilities on the consolidated statement of financial position (December
31, 2017: net asset of $0.7 million). A net loss of $5.1 million (2017: net gain of $0.7 million) was
recognized in sales in the consolidated statement of comprehensive income on the change in fair
values of the foreign exchange contracts.
An increase (decrease) of 1% in the value of the CAD as compared to the JPY would result in an
immaterial gain (loss) in relation to the JPY Yen/CAD foreign exchange contracts held at December
31, 2018. An increase (decrease) of 1% in the value of the CAD as compared to the USD would
result in a gain (loss) of approximately $0.7 million in relation to the USD foreign exchange contracts
held at December 31, 2018.
Certain receivable balances at December 31, 2018 are denominated in foreign currencies,
principally, the USD. Accordingly, fluctuations in foreign exchange rates may affect the carrying
value of the underlying accounts receivable. As of December 31, 2018, the Company’s accounts
receivable denominated in USD totaled USD$38.0 million. An increase (decrease) in the value of
the Canadian dollar by USD$0.01 would result in a decrease (increase) in USD denominated
accounts receivable at year end of approximately $0.4 million. In addition, as at December 31, 2018,
the Company had a total of USD$1.9 million in USD denominated cash and cash equivalents. An
increase (decrease) in the value of the Canadian dollar by USD$0.01 would result in an immaterial
change to USD denominated cash and cash equivalents at year end.
(iv) Commodity price risk
The Company does not enter into commodity contracts other than to meet the Company’s expected
usage and sale requirements and such contracts are not settled net.
59
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
19. Financial instruments – fair values and risk management (continued)
(v) Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations
associated with its financial liabilities that are settled by delivering cash or another financial asset.
Management mitigates any liquidity risk associated with the subsequent payment of liabilities
through the continual monitoring of expenditures and forecasting of liquidity resources. The
Company maintains a revolving credit facility that can be drawn down to meet short-term financing
and liquidity needs.
As at December 31, 2018, the Company had $242.0 million (December 31, 2017: $234.0 million)
available under its credit facility. The following are the contractual maturities of financial liabilities,
including estimated interest payments:
Carrying
amount
$
$
132.7
7.0
139.7
Contractual
cash flows
132.7
$
11.5
144.2
$
Accounts payable and accrued liabilities
Long term debt
20. Finance costs
Accounting policy
6 months
or less
$
132.7
0.6
133.3
$
6 - 12
months
-
$
0.6
0.6
$
2 - 3 years
-
$
10.3
10.3
$
4 - 5 years
-
$
-
$
-
More than 5
years
-
$
-
$
-
Finance costs comprise interest expense on long-term debt and the revolving credit facility, amortization of
deferred financing costs, unwinding of the discount on the reforestation obligation, changes in the fair value
of investments recognized immediately through net income and net interest on the net defined benefit plan
obligation. All finance costs are recognized in net income during the period using the effective interest method
with the exception of the net interest on the net defined benefit obligation, which is recognized as described
in Note 18.
Supporting information
Long-term debt
Net interest - defined benefit plan obligation
Revolving credit facility
Amortization of deferred financing costs
Unwinding of discount on provisions
Other
21. Operating restructuring items
Years ended December 31,
2018
2017
$
$
0.8
0.9
0.3
0.5
0.3
(0.1)
2.7
0.6
1.1
0.5
0.3
0.3
(0.3)
2.5
$
$
Included in operating restructuring expenses in 2018 were $4.8 million (2017: $14.4 million) which included
$2.2 million of non-operating costs incurred subsequent to the indefinite curtailment of the Company’s
Somass sawmill, $1.4 million in severance and related expenses attributable to ongoing business
optimization initiatives, and $0.6 million incurred to retrain employees impacted by the closure of the
Englewood train. Expenses incurred in 2017 included $11.7 million in ongoing non-operating costs and
voluntary severance to certain salaried and all hourly employees of the Somass sawmill, and $2.4 million of
severance related to the closure of the Englewood train.
60
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
22. Segmented information
Accounting policy
A business segment is a group of assets and operations engaged in providing products or services that are
subject to risks and returns that are different from those of other business segments. The Company is an
integrated forest products company operating in one business segment comprised of timber harvesting, log
sales and lumber manufacturing and sales in world-wide markets.
A geographical segment is engaged in providing products or services within a particular economic
environment that is subject to risks and returns that are different from those of segments operating in other
economic environments. Western’s log and lumber products are sold worldwide. Substantially all of
Western’s property, plant and equipment, biological assets and timber licences are located in British
Columbia, Canada. The Company manages its business as a single operating segment. The Company
purchases and harvests logs which are then manufactured into lumber products at the Company’s sawmills,
or sold. Supporting information is included in Note 23.
23. Revenue
The Company has adopted IFRS 15, Revenue from Contracts with Customers, with a date of initial
application of January 1, 2018. The adoption of IFRS 15 does not have a material impact on these
consolidated financial statements, other than in the form of additional disclosures included herein. The
Company has updated its accounting policy for revenue recognition to reflect the qualitative changes of the
new standard, as set out below.
In the comparative period, revenue was measured at the fair value of consideration received or receivable,
net of rebates and discounts. Revenue from sale of goods was recognized when the significant risks and
rewards of ownership had been transferred to the customer, recovery of the consideration was probable, the
associated costs and possible return of goods could be estimated reliably, there was no continuing
management involvement with the goods and the amount of revenue could be measured reliably.
Accounting policy
Revenue from the sale of goods is measured based on the consideration specified in a contract with a
customer, net of rebates and discounts, and after eliminating intercompany sales. Revenue is recognized
when control over a product transfers from the Company to the customer. The timing of transfer of control
varies depending on the individual term of the contract of sale.
Amounts charged to customers for shipping and handling are recognized as revenue as services are
provided, and shipping and handling costs, lumber duties, and export taxes incurred by the Company are
recorded in costs and expenses.
The following is a description of principal activities from which the Company generates its revenue.
Lumber
Revenue is recognized when control over lumber is transferred to the customer. The timing of transfer of
control varies depending on the individual terms of the contract of sale, but is typically at the time lumber is
loaded onto the mode of transportation. The amount of revenue recognized is adjusted for discounts related
to early payment at the point in time control is transferred, based on historical experience.
Logs
Revenue is recognized when control over logs is transferred to the customer. The timing of transfer of control
varies depending on the individual terms of the contract of sale, but is typically at the time logs are loaded
onto the vessel or delivered to the transfer point, and payment is secured. No discounts are offered for logs.
By-products
Revenue is recognized when control over by-products is transferred to the customer, the timing of this
transfer of control varies depending on the individual terms of the contract of sale, but is typically at the time
by-products leave the Company’s facilities or are scaled at the pick-up location. Invoices are generated and
revenue is recognized at that point in time. No discounts are offered for by-products.
61
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
23. Revenue (continued)
Supporting information
(a) Disaggregation of revenue
In the following table, revenue is disaggregated by primary geographical market, based on the known origin
of the customer, and by major products.
Year Ended
December 31,
2018
2017
Primary geographical markets
Canada
United States
China
Japan
Other
Europe
Major Products
Lumber
Logs
By-products
$
$
449.1
290.8
190.9
152.0
100.0
13.9
1,196.7
952.9
160.0
83.8
1,196.7
$
$
$
$
$
$
372.4
286.4
221.0
153.0
79.7
30.9
1,143.4
858.2
214.8
70.4
1,143.4
(b) Contract balances
The following table provides information about receivables and contract liabilities from contracts with
customers.
Receivables
Contract liabilities
December 31,
2018
$
91.3
54.4
2017
$
86.2
56.4
The contract liabilities relate to the consideration received from a customer for a long-term fibre supply
contract and are recognized as deferred revenue, for which revenue is recognized straight-line over the term
of the contract. The contract liabilities decreased $2.0 million during the year ended December 31, 2018 as
the amount was recognized as revenue.
Contract costs
The Company will capitalize costs to obtain contracts and amortize fees when related revenues are
recognized, where the amortization period is greater than one year.
62
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2018 and 2017
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
24. Related parties
Accounting policy
Key management personnel are the Company’s directors and executive officers as disclosed in its 2018 and
2017 Annual Reports as applicable.
Supporting information
Compensation of key management personnel
The key management personnel of the Company include the executive management team and members of
the Board of Directors. Key management personnel compensation comprised:
Years ended December 31,
2017
2018
Salaries, directors' fees and short-term benefits
Post-employment benefits
Share-based compensation, including mark-to-market adjustment
$
$
7.2
0.3
2.7
10.2
6.6
0.3
4.4
11.3
$
$
At December 31, 2018, $9.1 million of key management compensation costs were included in accounts
payable and accrued liabilities and other liabilities (December 31, 2017: $9.9 million).
25. Expense categorization
Expenses by function:
Administration
Distribution expenses
Cost of goods sold
Costs by nature:
Compensation costs
Amortization in cost of goods sold
Amortization in selling and administration
Years ended December 31,
2018
2017
$
$
$
$
Years ended December 31,
2018
2017
$
$
$
$
21.1
144.5
927.7
1,093.3
213.4
39.3
0.9
253.6
21.9
129.9
874.6
1,026.4
223.0
35.4
0.9
259.3
Compensation costs are included in cost of goods sold and selling and administration.
26. Subsequent event
On February 1, 2019, the Company completed an acquisition of the assets of Columbia Vista Corporation
and certain related entities located in Vancouver, Washington for consideration of US$30.5 million, subject
to a working capital adjustment.
63
Suite 800
1055 West Georgia Street
Royal Centre, PO Box 11122
Vancouver, British Columbia
Canada V6E 3P3
Telephone: 604 648 4500
www.westernforest.com
info@westernforest.com
Trading on the TSX as “WEF”