Western Forest Products Inc.
2019 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, 2019, to help securityholders 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, 2019 and 2018, which can be found
on SEDAR at www.sedar.com.
The Company has prepared the consolidated financial statements for the years ended December 31, 2019 and 2018 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. The Company has adopted IFRS 16, Leases, with a date of initial application of January
1, 2019, using a modified retrospective approach. Under the modified retrospective approach, the cumulative effect of initial
application has been recognized in retained earnings at January 1, 2019, and comparative information has not been restated
and continues to be reported under International Accounting Standards (“IAS”) 17, Leases.
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 certain 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 ratio 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, the United Steelworkers Local 1-1937 labour dispute
and the impact of the dispute, the regulatory framework, future costs, available harvest levels, capital allocation including
issuance of dividends, 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 the Company’s products, the
Company’s ability to export its products, competition and selling prices, international trade disputes, changes in foreign currency
exchange rates, labour disputes and disruptions, natural disasters, relations with First Nations groups, First Nation’s claims and
settlements, changes in laws, the availability of allowable annual cut and fibre, 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.
1 Earnings Before Interest, Tax, Depreciation and Amortization
1
Unless otherwise noted, the information in this discussion and analysis is updated to February 11, 2020.
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,
2019
2018
2017
Revenue
Lumber
Logs
By-products
Total revenue
Adjusted EBITDA
Adjusted EBITDA margin
Basic and diluted earnings (loss) per share (in dollars)
Cash dividends declared per share (in dollars)
$
$
$
$
$
$
628.3
144.0
35.4
807.7
(1.5)
-0.2%
(0.12)
0.0875
952.9
160.0
83.8
1,196.7
143.5
12.0%
0.18
0.0800
$
$
$
$
$
$
858.2
214.8
70.4
1,143.4
152.6
13.3%
0.19
0.0800
Operating income (loss) prior to restructuring and other items
Net income (loss)
(46.7)
(46.7)
103.4
69.2
117.0
74.4
Total Assets
Net Debt (Cash) (2)
(1)
(2) Net debt is defined as the sum of long-term debt, revolving credit facility, less cash and cash equivalents.
Included in Appendix A is a table of selected results for the last eight quarters.
$
$
782.5
111.3
855.8
(2.4)
$
799.6
(35.3)
Overview
Financial results in 2019 were significantly impacted by the strike action (the “Strike”) by the United
Steelworkers Local 1-1937 (“USW”), which commenced July 1, 2019. The Strike followed a period of weak
markets for forest products and a more challenging operating environment in British Columbia (“BC”).
Revenue for 2019 was $807.7 million, as compared to revenue of $1,196.7 million in the prior year. Adjusted
EBITDA for 2019 was negative $1.5 million, as compared to adjusted EBITDA of $143.5 million in 2018,
while the net loss for 2019 was $46.7 million, as compared to net income of $69.2 million in 2018.
We took steps to mitigate the Strike’s impact on our customers by selling unencumbered inventories,
processing certain unencumbered logs at custom cut facilities and growing our wholesale lumber program.
In addition, we took steps to protect the balance sheet by deferring certain capital expenditures, managing
expenses and drawing down working capital.
Despite the impact of the Strike and a more challenging operating environment, we continued to make
significant progress implementing our strategic initiatives in 2019, including:
• Growing our specialty products business with the asset acquisition of Vancouver, Washington based
Columbia Vista Corporation and related entities on February 1, 2019. See “Summary of 2019 Annual
Results – Columbia Vista Acquisition” for further information.
• Advancing our strategic partnerships with First Nations and continuing to reposition our coastal tenure
assets. On March 29, 2019, we completed the sale of a 7% interest in our newly formed TFL 44 Limited
Partnership (“TFL 44 LP”) to the Huumiis Ventures Limited Partnership (a limited partnership
beneficially owned by the Huu-ay-aht First Nations) (“HVLP”) for gross proceeds of $7.3 million. See
“Summary of 2019 Annual Results – Sale of Ownership Interest in Port Alberni Forest Operations” for
further information.
• Substantially completing equipment and building upgrades at our Arlington facility and commencing
with commissioning and the ramp up of lumber remanufacturing operations. Our Arlington facility will
assist us in re-positioning and growing our product lines, streamlining our logistics and distribution
platform moving us closer to the final customer.
• More than doubling our wholesale lumber business shipments to 34 million board feet in 2019, as
compared to 16 million board feet in 2018. Our wholesale lumber business will allow us to offer an
expanded product line, making us more meaningful to our selected customers and further enhancing
the viability and success of our coastal sawmills. Our wholesale lumber business has also helped play
an important role in supporting our customers during the Strike.
2
• Executing our sales and marketing strategy, which focuses on the production and sale of targeted,
high-margin products of scale to selected customers.
• Further demonstrating our commitment to top tier governance practices. In 2019, we appointed Michael
Waites as independent Chair of the Board, added independent directors Laura Cillis and Cheri Phyfer
to the Board as Directors, and reconstituted the membership of the Board sub-committees.
• Publishing our inaugural sustainability report to provide expanded environmental, social and
governance disclosure of our progress in, and commitment to, defining a higher standard in sustainable
management and environmental stewardship.
•
Implementing important foundational systems and adjusting our organizational structure and staffing,
in support of our growth strategy.
• Continuing with our balanced approach to capital allocation by returning $34.0 million to shareholders
through regular, quarterly dividends and repurchasing $15.9 million of our outstanding common shares
for cancellation under our normal course issuer bid in 2019.
On February 10, 2020, the Company announced that it had reached a tentative collective agreement with
the USW. The tentative agreement is subject to a ratification vote by USW membership. The USW
bargaining committee has advised that they will be recommending its members accept the agreement.
As we look forward to 2020, we are excited to have our employees and contractors return to work. Moving
forward, we will continue to align our production volumes to match market demand and will look to strengthen
our customer relationships. Our long-term focus remains the same; implementing our strategic initiatives to
strengthen our foundation; grow our base; and grow our business. We remain committed to a balanced
approach to capital allocation, while also considering internal and external growth opportunities to grow long-
term shareholder value.
3
Summary of Selected Quarterly and Annual Results (1)
(millions of Canadian dollars except per share amounts and where otherwise noted)
Q4
2019
Q4
2018
Q3
2019
Annual
Annual
2019
2018
Summary Information
Revenue
Lumber
Logs
By-products
Total revenue
Freight
Export tax
Stumpage
Adjusted EBITDA
Adjusted EBITDA margin
$
$
$
66.1
12.1
1.9
80.1
230.9
36.2
17.7
284.8
109.7
27.4
4.5
141.6
$
$
628.3
144.0
35.4
807.7
$
952.9
160.0
83.8
1,196.7
$
$
$
$
$
5.1
3.4
-
$
24.4
10.1
13.8
9.5
5.5
-
$
64.1
27.8
26.0
$
90.6
43.0
52.7
$
(18.1)
-22.6%
$
18.0
6.3%
$
(16.6)
-11.7%
$
(1.5)
-0.2%
$
143.5
12.0%
Operating income (loss) prior to restructuring and other items
Net income (loss)
Basic and diluted earnings (loss) per share (in dollars)
$
(29.6)
(29.2)
(0.09)
$
7.7
5.3
0.02
$
(24.2)
(18.7)
(0.05)
$
(46.7)
(46.7)
(0.12)
$
103.4
69.2
0.18
Operating Information
Lumber(2)
Lumber Shipments – millions of board feet
Western Red Cedar
Japan Specialty
Niche
Commodity
Total
18
13
4
9
44
47
37
24
110
218
26
19
13
32
90
139
102
79
228
548
205
138
96
441
880
Lumber Production – millions of board feet
Lumber Price – per thousand board feet
Wholesale Lumber Shipments - millions of board feet
$
34
1,502
10
$
200
1,059
3
$
48
1,219
11
$
491
1,147
34
$
864
1,083
16
Logs(3)
Log Shipments – thousands of cubic metres
Export
Domestic
Pulp
Total
Net production – thousands of cubic metres(4)
Saw log purchases – thousands of cubic metres
Log Price – per cubic metre(5)
Illustrative Lumber Average Price Data(6)
Price Basis
22
70
43
135
1
222
146
369
2
193
51
246
129
842
315
1,286
65
1,037
407
1,509
21
34
87
$
1,135
212
98
$
21
84
110
$
2,214
564
105
$
4,328
979
106
$
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
$
$
$
$
$
$
$
$
$
4,478
1,340
2,291
1,095
827
1,035
1,085
1,234
397
$
$
$
$
$
$
$
$
$
5,133
1,418
2,245
1,146
1,000
1,200
1,080
1,358
440
$
$
$
$
$
$
$
$
$
4,400
1,340
2,246
1,095
855
1,072
1,080
1,206
401
$
$
$
$
$
$
$
$
$
4,492
1,346
2,257
1,096
879
1,096
1,081
1,256
409
$
$
$
$
$
$
$
$
$
5,100
1,493
2,134
1,171
949
1,189
1,075
1,369
486
Average Exchange Rate – CAD to USD
Average Exchange Rate – CAD to JPY
0.758
82.37
0.756
85.32
0.757
81.27
0.754
82.18
0.771
85.19
(1) Included in Appendix A is a table of selected results from the last eight quarters.
(2) Includes Columbia Vista operations, acquired February 1, 2019, and wholesale lumber shipments.
(3) BC business only.
(4) Net production is sorted log production, net of residuals and waste.
(5) The log revenue used to determine average price per cubic metre has been reduced by the associated shipping costs arranged in the respective
(6) Sourced from Random Lengths in USD/Mfbm, except Hemlock Lumber Metric RG Utility that is sourced from China Bulletin.
periods to enable comparability of unit prices.
4
Summary of Fourth Quarter 2019 Results
Fourth quarter results were significantly impacted by the Strike, as all of our timberlands and most of our BC
based manufacturing operations were curtailed. We took steps to mitigate the Strike’s impact on our
customers, business and cash flows by selling the majority of our remaining unencumbered lumber
inventory, processing certain unencumbered logs at custom cut facilities, drawing down working capital, and
deferring certain expenditures.
Adjusted EBITDA for the fourth quarter of 2019 was negative $18.1 million, as compared to positive adjusted
EBITDA of $18.0 million from the same period last year. Operating loss prior to restructuring and other items
was $29.6 million, as compared to operating income of $7.7 million in the same period last year.
Sales
Lumber and log sales volume and revenue were impacted by the Strike. Lumber revenue in the fourth quarter
was $66.1 million, a decrease of 71.4% from the same period last year. Lumber shipment volumes were
79.8% lower than the same period last year due to the Strike, as most of our manufacturing operations were
shutdown in the fourth quarter of 2019. We sold the majority of our remaining unencumbered lumber
inventory, processed certain unencumbered logs at custom cut facilities, and continued to execute on our
wholesale lumber program to service our customers and help mitigate the impact of the Strike. Our United
States (“US”) based Columbia Vista division continued to perform in line with our expectations and has been
a positive addition to our business and product mix.
Our average realized lumber pricing increased 41.8% as the result of an improved specialty product mix,
which was partially offset by a stronger Canadian dollar (“CAD”) to United States dollar (“USD”). Specialty
lumber represented 79.1% of fourth quarter shipments compared to 49.5% in the same period last year, as
we leveraged our wholesale lumber business and custom cut production to supply our customers.
Log revenue was $12.1 million in the fourth quarter of 2019, a decrease of 66.6% from the same period last
year. To mitigate the impact of the Strike on our business, we sold certain unencumbered log inventory to
help manage cash flow and reduce working capital levels.
By-product revenue was $1.9 million, a decrease of 89.3% as compared to the same period last year as
most of our BC coastal operations were shut down due to the Strike.
Operations
To support our selected customers during the Strike, we continued to redirect available inventory to active
divisions. We operated on a sub-optimal basis resulting in higher transportation and operating costs.
Operating expenses included $16.7 million arising from curtailed operations and related operating
inefficiencies as a result of the Strike.
Leading up to the Strike, we drew down inventory at USW-certified operations to supply our remanufacturing
and custom cut operations. However, as certain inventory was encumbered by the Strike and degraded over
the fourth quarter of 2019, we expensed an additional $2.4 million provision against this restricted inventory.
Lumber production of 34 million board feet was 83.0% lower than the same period last year. Incremental
production from our US-based Columbia Vista division, acquired in 2019, and volumes from our custom cut
program was more than offset by the curtailment of our BC operations due to the Strike.
We produced 21,000 cubic meters of logs from our BC coastal operations in the fourth quarter of 2019
compared to production of 1,135,000 cubic metres in the same quarter of last year. Fourth quarter log
production in 2019 was sourced from joint ventures and limited partnerships, as all our USW-certified
timberlands operations were curtailed due to the Strike.
BC coastal saw log purchases were 34,000 cubic metres, an 84.0% decrease from the same period last
year. Weaker markets and government policy decisions led to a significant decline in coastal log harvest
that reduced market log availability. We sourced our saw log purchases from pre-existing purchase
commitments and our joint venture arrangements.
Freight expense decreased by $19.3 million from the same period last year due to lower shipment volumes.
5
Fourth quarter adjusted EBITDA and operating income included $3.4 million of countervailing duty (“CVD”)
and anti-dumping duty (“AD”), as compared to $10.1 million in the same period last year. Duty expense
declined as a result of reduced US-destined lumber shipment volumes. For further information on CVD and
AD see “Softwood Lumber Dispute and US Market Update”.
Selling and Administration Expense
Fourth quarter selling and administration expense was $8.0 million in 2019 as compared to $7.6 million in
the same period last year. Incremental legal expenses relating to the Strike more than offset cost mitigation
savings.
Finance Costs
Finance costs were $2.2 million, compared to $0.7 million in the same period last year. This was primarily
due to a higher average outstanding debt balance and higher average interest rates in 2019. As at December
31, 2019, the Company had drawn $114.1 million on its credit facility. See “Financial Position and Liquidity”
for further information.
Net Income (Loss)
Net loss for the fourth quarter of 2019 was $29.2 million, as compared to net income of $5.3 million for the
same period of 2018. Results were significantly impacted by the Strike.
Summary of 2019 Annual Results
Adjusted EBITDA for the year was negative $1.5 million, as compared to positive $143.5 million from the
same period last year. Operating loss prior to restructuring and other items was $46.7 million, compared to
operating income of $103.4 million during the same period last year.
Sales
Lumber revenue was $628.3 million, a decrease of 34.1% from the same period last year, primarily due to
the Strike and more challenging market conditions. Despite the decline in market pricing, our average lumber
price realizations increased, benefitting from a higher specialty product mix and a weaker CAD to USD.
Specialty lumber represented 58.3% of 2019 annual shipments, compared to 49.9% last year. Despite a
more challenging year, we were successful in more than doubling our wholesale lumber volume to service
our customers and help mitigate the impact of the Strike.
Log revenue was $144.0 million, a decrease of 10.0% compared to the same period last year. Log revenue
benefited from the resumption of our export log sales program in the second quarter of 2019 but was offset
by the impact of the Strike in the third and fourth quarters of 2019.
By-products revenue decreased to $35.4 million, from $83.8 million last year, primarily due to lower
production and shipments as a result of the Strike. Other factors included declining BC coastal chip prices
and lower chip purchase-and-resale volume.
Operations
Lumber production of 491 million board feet was 43.2% lower than the same period last year. Market-related
sawmill curtailments and the Strike led to lower production, which more than offset the inclusion of results
from our US-based Columbia Vista division.
Log production was 2,214,000 cubic metres, 48.8% lower than the same period last year, primarily due to
the Strike in the second half of 2019.
BC coastal saw log purchases were 564,000 cubic metres, a 42.4% decrease from the same period last
year, as we managed log purchases to available capacity to support customer needs.
Freight expense decreased by $26.5 million as compared to last year, primarily due to lower shipment
volumes as a result of the Strike.
6
Adjusted EBITDA and operating income included $27.8 million of CVD and AD expense, as compared to
$43.0 million in 2018. Duty expense declined as a result of reduced US-destined lumber shipment volumes
due to the Strike.
Selling and Administration Expense
Selling and administration expense was $31.1 million, as compared to $32.0 million during the same period
last year. We took steps to reduce and manage expenses in order to mitigate increased legal expense and
operating losses resulting from the Strike.
Finance Costs
Finance costs were $7.8 million, compared to $2.7 million in 2018, primarily due to comparatively higher
average outstanding debt and higher average interest rate in 2019.
As a result of adopting IFRS 16, Leases on January 1, 2019, we recognized $0.8 million of finance costs on
lease payments in 2019. In comparative periods, leasing finance costs were recognized in operating income.
Net Income (Loss)
Net loss for 2019 was $46.7 million, as compared to net income of $69.2 million last year. Net income for
the year was lower due to the Strike, which largely curtailed operations in the second half of 2019.
Columbia Vista Asset Acquisition
On February 1, 2019, we completed the asset acquisition of Vancouver, Washington based Columbia Vista
Corporation and related entities. 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.
Sale of Ownership Interest in Port Alberni Forest Operations
On March 29, 2019, we completed the sale of a 7% interest in our newly formed TFL 44 LP to HVLP for
gross proceeds of $7.3 million. As part of the agreement, HVLP may acquire an additional interest in the
TFL 44 LP, which may include a majority interest, subject to further negotiations. TFL 44 LP’s assets consist
of TFL 44 and certain other associated assets and liabilities of our Port Alberni Forest Operation. We will
continue to source fibre from TFL 44 LP to support our BC manufacturing facilities.
Arlington Operation
During 2019, we completed infrastructure and equipment upgrades and commenced secondary processing.
However, the expected ramp up of production at the facility has been partially impacted by the Strike and a
lack of wholesale lumber supply due to market conditions. Our Arlington facility is currently operating on a
reduced basis due to a lack of lumber supply resulting from the Strike.
Operating Restructuring Items
We incurred $3.5 million of operating restructuring costs in 2019, including $1.4 million of non-operating
costs incurred due to the indefinite curtailment of the Company’s Somass sawmill in 2017. During the fourth
quarter of 2019, we incurred $2.1 million in severance and related expenses due to a reduction of
approximately 10% in salaried employees as a cost mitigation initiative to limit losses arising from the Strike.
Operating restructuring costs were $4.8 million in 2018, due primarily to the indefinite curtailment of our
Somass sawmill, business optimization initiatives and closure of the Englewood train.
7
Income Taxes
Lower operating earnings led to an income tax recovery of $16.7 million being recognized in 2019, as
compared to income tax expense of $25.6 million in 2018.
At December 31, 2019, the Company and its subsidiaries had unused non-capital loss carry forwards
totalling approximately $24.1 million in Canada, and $5.2 million in the US, which can be used to reduce
taxable income. In addition, the Company has unused capital losses carried forward of approximately $87.9
million in Canada, which are available indefinitely.
Labour Relations Update
Western began negotiations with the USW, the union representing approximately 1,500 of our hourly
employees and 1,500 employees working for our timberland contractors in BC, in April 2019 for a new
collective agreement to replace our prior agreement, which expired mid-June 2019.
The USW served seventy-two hours’ notice of strike action on the Company and some of its contractors on
June 28, 2019. On July 1, 2019, the USW commenced a strike. The Strike is ongoing for all of our USW
certified manufacturing and timberlands operations. The Strike is also indirectly impacting certain non-USW
certified manufacturing operations, including our Ladysmith sawmill (due to insufficient log supply) and our
Value-Added remanufacturing facility (due to a lack of lumber supply). Our US based Arlington and Columbia
Vista divisions continue to operate, although our Arlington facility is operating on a reduced basis due to a
lack of lumber supply caused by the Strike.
Upon receiving strike notice from the USW, we commenced our work stoppage contingency plan with a goal
to protect our balance sheet while mitigating the impact of the Strike on our Company, customers and
business partners.
On September 13, 2019, the Company and the USW commenced mediation with independent mediators;
however, the USW withdrew from mediation with the Company and independent mediators after several
hours of talks. The Company and USW subsequently met with the independent mediators on several
occasions to resume talks, but on December 17, 2019, negotiations reached an impasse.
On February 6, 2020, the BC Minster of Labour appointed Special Mediators to work with the Company and
USW for a period of 10 days to determine if a negotiated settlement could be reached. On February 10,
2020, the Company announced that terms of a tentative collective agreement had been reached. The
tentative agreement is subject to a ratification vote by USW membership. The USW bargaining committee
has advised that they will be recommending its members accept the agreement. The USW has advised its
members that the ratification voting will occur shortly. For a comprehensive history of the Strike please see
“Risks and Uncertainties – Employees and Labour Relations”.
Despite terms of a tentative collective agreement being reached, the Strike is expected to have a negative
impact on our first quarter results in 2020 compared to the same period last year, but we are unable to
determine the magnitude of that impact at this time.
BC Government Forest Policies
In 2018, the BC Provincial Government (the “Province”) introduced a Coastal Revitalization Initiative and
further policy initiatives that will affect the BC forest sector regulatory framework. On January 17, 2019, the
Premier announced the Province’s commitment to make changes to BC’s log export policies or rules, Bill 13
and waste policies with the intent to increase domestic and value-added manufacturing in BC.
On April 1, 2019, the Province announced the creation of fibre recovery zones, which are intended to
increase the supply of residual fibre from primary harvesting for secondary users. Western estimates that
approximately 70% of our timberland operations will be impacted with the creation of fibre recovery zones.
The impacts to our business include the potential for higher costs and lower log harvest volumes. The
Province has been clear that they do not want to see unintended consequences from the policy
implementation. We continue to collaboratively engage with the Province and other stakeholders to ensure
that the desired outcome of the policy, less fibre waste and more fibre for domestic manufacturing and pulp
production, is met without the unintended consequences of higher costs and less harvest volume for
timberland operators.
8
On April 11, 2019, the Province announced Bill 22, Forest Amendment Act, 2019, which came into force on
May 30, 2019. The amendments to the Forest Act will require tenure holders to receive approval from the
Minister before disposing or transferring a tenure agreement to a third party. These amendments will enable
the Minister to refuse to approve, or place conditions on the approval of, a disposition or transfer if it is
deemed not to be in the public interest or detrimental to competition in the buying or selling of timber or
residuals.
On May 16, 2019, Bill 21, Forest and Range Practices Amendment Act, 2019, designed to increase
opportunities for public input, improve information sharing on forest planning, strengthen the Minister’s ability
to manage forest activity, expand the definition of wildlife to help protect at-risk species and improve and
streamline range-use planning was put into force.
On July 10, 2019, the Province announced the application of a targeted fee-in-lieu of manufacturing for
exported logs harvested from BC Timber Sales, as a step towards ensuring that more logs are processed
in BC.
On July 17, 2019, the Province announced that a two-person panel had been appointed to lead an Old
Growth Strategic Review and provide a report to the Minister of Forests, Lands, Natural Resource
Operations and Rural Development (the “MFLNRORD”). The panel will report back to government in spring
2020 with recommendations that are expected to inform a new approach to old-growth management for BC.
On November 28, 2019, Bill 41, Declaration on the Rights of Indigenous Peoples Act (the “Act”) came into
force. The Act is intended to guide the implementation of the principles of the United Nations Declaration on
the Rights of Indigenous Peoples (“UNDRIP”) and makes BC the first province in Canada to legally
implement UNDRIP. The Act requires the Province to align all laws with UNDRIP, to develop an action plan
to achieve this, and regularly report to the legislature to monitor progress. The current Federal Government
has also pledged to implement UNDRIP and the Calls to Action of the Truth and Reconciliation Commission.
Significant expectation has been raised among Aboriginal groups in BC and across the country as to the
impact that this Act and the Federal Government’s commitments may have on efforts to achieve true
reconciliation with Aboriginal groups. At this time, the Company is unable to predict the outcome of the Act
and the implementation of these commitments on Western’s ongoing operations or on any sale of its non-
core assets and private lands.
In December 2019, the MFLNRORD, indicated that there would be a delay in expanding the fee-in-lieu
payment for raw log exports to all cutting permits on the BC coast by six months and that the Province would
be shrinking the penalties and zones for fibre recovery zones. Specific details of these policies changes
have not been disclosed.
On January 21, 2020, the Province announced changes to the Manufactured Forest Products Regulation
effective July 1, 2020 to ensure more accessibility to fibre for local manufacturers. The regulation
amendments require lumber that is made from Western Red Cedar (“WRC”) or cypress (yellow cedar) to be
fully manufactured to be eligible for export. Fully manufactured is defined as lumber that will not be kiln-
dried, planed or re-sawn at a facility outside of BC.
The impact these policy initiatives may have on our operations cannot be determined at this time.
Separately, on December 20, 2019, the Company was notified by the MFLNRORD that an alternative
method of scale would apply for all the Company’s timber that was cut prior to July 1, 2019 and had not
been scaled. The Company is required to compile and submit a report of all the timber to MFLNRORD,
which will result in stumpage expense becoming payable shortly thereafter. The Company has requested
clarification from MFLNRORD and cannot determine the financial impact at this time. We have not accrued
for any incremental stumpage expense that may become payable under this alternative scaling method as
at December 31, 2019.
Sawmill and Remanufacturing Curtailments
Due to market conditions in 2019, our Cowichan Bay sawmill was temporarily curtailed for a two-week period
beginning March 25, 2019, and our Alberni Pacific sawmill was temporarily curtailed for a four-week period
beginning March 18, 2019. Our Ladysmith sawmill was temporary curtailed for a two-week period beginning
May 6, 2019, due to constrained log supply.
9
On June 6, 2019, we announced temporary production curtailments at three of our sawmills to align
production volumes to customer demand. We curtailed our Duke Point sawmill for two weeks and our Saltair
sawmill for one week in June. We reduced operating levels at our Chemainus sawmill from 120 hours per
week to 80 hours per week.
On July 24, 2019, we announced an additional temporary curtailment at our Ladysmith sawmill due to illegal
strike action taken by the USW, which impeded log supply to the mill. Subsequent to this announcement,
the Labour Relations Board confirmed their earlier ruling that the USW tactics were illegal and ordered the
USW to refrain from impeding log delivery to the mill. The Ladysmith sawmill continued to operate until it
was curtailed on August 23, 2019, due to limited log supply.
On September 6, 2019, our BC Value-Added remanufacturing facility was curtailed in response to limited
lumber supply as a result of the Strike. The facility restarted during the fourth quarter of 2019, but its
operations were limited.
Due to limited lumber volumes from our suppliers our Arlington remanufacturing facility in Washington State
operated sporadically in the second half of 2019.
Financial Position and Liquidity
(millions of Canadian dollars except where otherwise noted)
Q4
2019
Q4
2018
Q3
2019
Annual
2019
Annual
2018
Selected Cash Flow Items
Operating Activities
Net income (loss)
Amortization
Income taxes paid
Other
Subtotal
Change in non-cash working capital
Cash provided by operating activities
Investing Activities
Additions to property, plant and equipment
Additions to capital logging roads
Purchase of Arlington facility
Purchase of Columbia Vista
Proceeds from non-controlling interest
Other
Cash provided by (used in) investing activities
Financing Activities
Draw on (repayment of) long-term debt
Dividends
Share repurchases
Other
Cash provided by (used in) financing activities
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)
Equity
Total liquidity (2)
Financial ratios:
Current assets to current liabilities
Net debt to capitalization (3)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(29.2)
12.4
-
(1.3)
(18.1)
24.9
6.8
(1.4)
(0.2)
-
-
-
2.4
0.8
1.3
(8.5)
-
(3.4)
(10.6)
5.3
9.9
-
2.9
18.1
(12.5)
5.6
(27.4)
(3.6)
-
-
-
2.0
(29.0)
-
$
(8.7)
(9.1)
6.8
(11.0)
$
(18.7)
9.2
6.1
(12.5)
(15.9)
38.2
22.3
(2.4)
(1.3)
-
-
0.8
1.5
(1.4)
(7.5)
(8.4)
(1.9)
(3.3)
(21.1)
(46.7)
45.4
(17.0)
(11.2)
(29.5)
40.0
10.5
(26.7)
(10.5)
-
(37.7)
7.0
4.7
(63.2)
107.1
(34.0)
(15.9)
(10.8)
46.4
69.2
40.2
0.3
23.6
133.3
(15.1)
118.2
(70.6)
(12.9)
(11.6)
-
-
3.1
(92.0)
7.0
(34.3)
(25.2)
(0.6)
(53.1)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(3.0)
$
(34.4)
$
(0.2)
$
(6.3)
$
(26.9)
$
2.1
188.9
48.6
113.4
111.3
481.8
136.9
$
8.4
297.9
142.7
6.0
(2.4)
572.9
250.4
$
5.1
222.4
57.8
112.0
106.9
519.1
141.3
3.89
18.8%
2.09
0.0%
3.85
17.1%
(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.
10
Cash provided by operating activities in 2019 was $10.5 million as compared to $118.2 million in 2018. We
successfully reduced our non-cash working capital by $40.0 million in 2019 to partly offset significantly
reduced cash from operations resulting from the Strike.
Cash used in investing activities was $63.2 million in 2019, which includes the $37.7 million asset acquisition
of Columbia Vista and $7.3 million to complete infrastructure and equipment upgrades at our Arlington
facility. Cash used in investing activities in 2018 was $92.0 million, including the $11.6 million purchase of
the Arlington facility.
In the second half of 2019, we reduced our capital spending in order to manage cash flow during the Strike,
and incurred only safety, environmental and committed capital expenditures. These capital expenditures
were partially offset by proceeds from the sale of an ownership interest in TFL 44 LP and the sale of certain
non-core land assets. Our strategic capital program is discussed in more detail under “Strategy and Outlook”.
Cash provided by financing activities increased to $46.4 million in 2019, as compared to cash used of $53.1
million in 2018. In 2019, we returned $34.0 million to shareholders through quarterly dividends and
repurchased our common shares for cancellation under our normal course issuer bid for $15.9 million.
Liquidity and Capital Resources
On August 8, 2018, we entered into a $250 million syndicated credit facility. The facility matures on August
1, 2022, and includes an accordion feature to access an additional $100 million of debt. The credit facility,
in addition to cash generated from operations, will be used to support working capital requirements, debt
servicing commitments and capital expenditures.
Total liquidity was $136.9 million at December 31, 2019, compared to $250.4 million at the end of 2018.
Liquidity is comprised of cash and cash equivalents of $2.1 million and unused availability under the credit
facility of $134.8 million.
At December 31, 2019, the Company had contractual commitments to acquire property, plant and equipment
in the amount of $7.5 million.
Based on our current forecasts, we expect sufficient liquidity will be available to meet these commitments
as well as our other obligations in 2020. The Company was in compliance with all its financial covenants as
at December 31, 2019.
Summary of Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2019, and our payments due
for each of the next five years and thereafter, including estimated interest payments:
Total
2020
2021
2022
2023
2024
Thereafter
$
35.0
16.2
130.2
20.2
24.3
$
35.0
16.2
6.0
5.6
8.7
-
$
-
3.0
4.8
4.2
-
$
-
121.2
3.7
2.6
-
$
-
-
1.7
1.7
-
$
-
-
1.5
1.3
-
$
-
-
2.9
5.8
19.6
245.5
$
2.6
74.1
$
2.6
14.6
$
2.6
130.1
$
2.5
5.9
$
2.5
5.3
$
6.8
15.5
$
(millions of Canadian dollars)
Accounts payable and
accrued liabilities
Purchase commitments
Long-term debt
Lease liabilities
Reforestation obligation
Defined benefit pension
plan funding obligation
Capital Allocation
Normal Course Issuer Bid
On August 2, 2019, the Company renewed its Normal Course Issuer Bid (“NCIB”) permitting the purchase
and cancellation of up to 18,763,888 of the Company’s common shares or approximately 5% of the common
shares issued and outstanding as of August 1, 2019. The Company also entered into an automatic share
purchase plan with its designated broker to facilitate purchases of its common shares under the NCIB at
times when the Company would ordinarily not be permitted to purchase its common shares due to regulatory
restrictions or self-imposed blackout periods.
11
The Company’s previous NCIB to purchase for cancellation up to 19,662,439 common shares expired on
August 7, 2019. Under the previous NCIB, the Company purchased 18,381,621 common shares for $35.4
million, at a volume weighted average price of $1.92 per common share, representing approximately 4.7%
of the total shares outstanding at the commencement of our previous NCIB.
During 2019, the Company repurchased 8,873,353 common shares under the NCIB for $15.9 million at an
average price of $1.79 per common share. As at February 11, 2020, 18,763,888 common shares remain
available to be purchased under the current NCIB. The NCIB expires on August 7, 2020.
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 of Return on Capital Employed.
Continuing to guide our actions are the strategic initiatives presented below, with selected accomplishments:
Strengthen the Foundation
• 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.
• Our strategic capital investments have allowed us to increase the production of targeted products
and supported the optimization of our coastal operations.
• We have invested in our people and systems to create a platform for pursuing margin-focused
growth opportunities.
• We continue to pursue long-term relationships with coastal First Nations to create mutually beneficial
opportunities. In 2019, we completed the sale of an ownership interest in our Port Alberni Forest
Operation to HVLP, aligning our interests and introducing an opportunity to potentially involve other
First Nations in a shared vision for forestry.
Grow the Base
• We optimized our operations and invested in our sawmills and timberlands to improve margins and
position ourselves for growth. We continue to look for opportunities to further optimize our operations
to enhance profit margins.
• We implemented multiple non-capital margin improvement programs to improve our cost structure
and optimize our supply chain.
• The success of our business relationships with First Nations has and continues to drive incremental
log volume and enabled Western to grow specialty lumber production in recent years.
• We are executing on our sales and marketing strategy, driving the production and sale of targeted,
high-margin products of scale to selected customers that value our product offerings.
12
Explore Opportunities
•
•
In 2018, we acquired our Arlington distribution and processing facility. The facility allows the
Company to increase the production of targeted, finished products while also providing a centralized
warehousing and distribution centre to more effectively service our selected US customers.
In 2019, we acquired the assets of Columbia Vista in Vancouver, Washington, enabling us to offer
a broader array of Douglas fir specialty products to our selected customers in both the US and
Japan.
• We 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 our business and long-term shareholder value.
Sales & Marketing Strategy Update
We continue to progress with the execution of our sales and marketing strategy, which 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. Our
Columbia Vista division continues to perform in line with our expectations and has been a positive addition
to our business and product mix. During 2019 we continued to develop and evaluate growth opportunities
for our wholesale lumber business, including more than doubling our shipments to 34 million board feet.
Market Outlook
Our long-term view of market fundamentals remains unchanged. In North America, rising lumber
consumption will be driven by increased new home construction, a robust repair and renovation sector and
growth of mass timber building technologies. Growing demand and reduced supply due to North American
sawmill curtailments is expected to improve market fundamentals and benefit the industry long-term.
Despite positive long-term growth drivers, lumber markets were challenged in 2019 as North American
weather events, skilled labour constraints and higher mortgage rates stalled US new home construction and
muted growth in repair and renovation spending. In response to weak demand, temporary and permanent
production curtailments were announced in the forestry sector. The supply impacts of these announcements
are expected to support lumber pricing in 2020.
We are encouraged by the positive market sentiment regarding WRC products heading into the spring
building season. Low in-market inventories and recent BC coastal cedar manufacturing closures should
benefit WRC product pricing going forward.
In Japan, we expect steady demand for our Douglas fir products, however increased competition from
European engineered wood products may pressure pricing. We expect market share erosion and weaker
pricing for BC coastal Hemlock lumber in Japan due to the supply shortages as a result of the Strike and
increased competition from Japanese Government subsidized domestic species. The Strike has resulted in
certain Japanese Hemlock lumber customers switching to competing products. We plan to leverage
Columbia Vista’s strong and loyal Douglas fir customer base, as well as develop marketing strategies, to
help regain our Japanese Hemlock lumber market share.
We anticipate demand for appearance Niche products to improve, resulting in modest price gains. In
addition, we expect steady demand in North America for timbers and industrial products due to large scale
industrial oil and gas projects currently underway in Canada.
Commodity lumber markets in North America are likely to benefit from previously announced temporary and
permanent production curtailments, but we expect any pricing gains to be modest. The Chinese log market
continues to be influenced by increased supply of lower priced, beetle impacted logs from Europe. We expect
the log market in China to remain competitive over the near term. In the short term, the coronavirus could
result in a temporary slow down of log and lumber imports to China. However, a government commitment
to housing and continued positive economic growth should support long-term demand for logs and lumber
in China.
13
We expect domestic saw log prices to increase in response to reduced log availability and improving lumber
markets. Log supply on the BC coast is expected to remain constrained, as recent government initiates that
have increased harvest costs are expected to challenge harvest economics.
We expect modest improvements in pulp log and chip pricing in 2020 due to limited supply.
Strategic Capital Program
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.
Given the challenging operating environment on the BC coast, in part due to the uncertainty around BC
government policies, we have scaled back our capital investment plans. Until there is an improved operating
environment or greater clarity on the impact of BC government policies, the Company has reduced strategic
capital investment in BC.
We will continue to evaluate opportunities to invest strategic capital in jurisdictions that create opportunity to
grow long-term shareholder value.
Softwood Lumber Dispute and US Market Update
The US application of duties continues a long-standing pattern of US protectionist action against Canadian
lumber producers. We disagree with the inclusion of specialty lumber products, particularly WRC 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. For a comprehensive history of the softwood
lumber trade dispute and related North American Free Trade Agreement (“NAFTA”) challenge proceedings,
please see “Risks and Uncertainties – Softwood Lumber Dispute”.
Western expensed $27.8 million of export duties in 2019, comprised of CVD and AD at a combined rate of
20.23% on all lumber it sold into the US. On February 3, 2020, the US Department of Commerce (“DoC”)
issued preliminary revised rates in the CVD and AD first administrative review of shipments for the years
ended December 31, 2017 and 2018. The combined preliminary revised rates were 8.37% for 2017 and
8.21% for 2018. The DoC may revise these rates between preliminary and the final determination expected
in August 2020. Cash deposits continue at the current rate of 20.23% until the final determinations are
published, at which time the 2018 rate will apply to US-destined lumber sales.
At December 31, 2019, Western had $90.9 million of cash on deposit with the US Department of Treasury
in respect of these softwood lumber duties.
Including wholesale lumber shipments, our sales to the US market represent approximately 27% of our total
revenue in 2019. Our distribution and processing centre in Arlington, Washington and our Columbia Vista
division in Vancouver, Washington are expected to partially mitigate the damaging effects of duties on our
products destined for the US market. We intend to leverage our flexible operating platform to continue to
partially mitigate any challenges that arise from this trade dispute.
14
Non-GAAP Measures
Reference is made in this MD&A to the following non-GAAP measures: Adjusted EBITDA, Adjusted EBITDA
margin, and Net debt to capitalization. These measures are used to our operating results 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 Canadian dollars except where otherwise noted)
Q4
2019
Q4
2018
Q3
2019
Annual
2019
Annual
2018
Adjusted EBITDA
Net income (loss)
Add:
Amortization
Changes in fair value of biological assets, net
Operating restructuring items
Other (income) expense (1)
Finance costs
Current income tax expense (recovery)
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: Equity
Capitalization
$
(29.2)
$
5.3
$
(18.7)
$
(46.7)
$
69.2
12.4
1.4
2.1
2.8
2.2
(3.4)
(6.6)
(18.1)
$
9.9
0.4
(0.4)
0.9
0.7
-
1.2
18.0
$
9.2
(1.4)
0.3
(0.7)
1.9
(9.6)
2.6
(16.6)
$
45.4
2.3
3.5
2.9
7.8
(13.0)
(3.7)
(1.5)
$
40.2
(0.1)
4.8
1.1
2.7
14.3
11.3
143.5
$
$
80.1
(18.1)
-22.6%
$
284.8
18.0
6.3%
$
141.6
(16.6)
-11.7%
$
807.7
(1.5)
-0.2%
$
1,196.7
143.5
12.0%
$
$
113.4
(2.1)
111.3
6.0
(8.4)
(2.4)
$
$
$
$
111.3
481.8
593.1
$
(2.4)
572.9
570.5
$
$
$
112.0
(5.1)
106.9
$
$
106.9
519.1
626.0
Net debt to capitalization
18.8%
-
17.1%
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.
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.
15
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.
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.
16
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 and 10 of our audited annual consolidated financial statements for the year ended
December 31, 2019 for further information on the accounting standards referenced below.
New Accounting Standards
The Company has adopted IFRS 16, Leases (“IFRS 16”), with a date of initial application of January 1, 2019,
using a modified retrospective approach. Under the modified retrospective approach, the cumulative effect
of initial application has been recognized in retained earnings at January 1, 2019, and comparative
information has not been restated and continues to be reported under IAS 17, Leases.
On transition to IFRS 16, the Company elected to apply a practical expedient to grandfather the assessment
of which transactions are leases. IFRS 16 only applies to contracts that were previously recognized as
leases. Contracts that were not recognized as leases under IAS 17 were not reassessed for whether there
is a lease. As such, the definition of a lease under IFRS 16 was applied only to contracts entered into or
changed after January 1, 2019.
As a result of the adoption of IFRS 16, the Company recorded right of use assets (“ROU assets”) and lease
liabilities of $17.0 million as at January 1, 2019. During the year ended December 31, 2019, the Company
recognized amortization of $4.8 million in operating income and finance costs of $0.8 million relating to these
ROU assets and lease liabilities. The adoption of IFRS 16 had no impact on the overall cash flow of the
Company.
Accounting Standards Not Yet Applied
A number of new and amended IFRS standards are not yet effective for the year ended December 31, 2019
and have not been applied in preparing these financial statements. None of the standards are currently
considered by the Company to be significant or likely to have a material impact on future financial
statements.
17
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 Japanese Yen (“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 2019, 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, 2019, the Company had forward contracts in
place to sell an aggregate USD $12.0 million (2018: USD $62.3 million; JPY 155.0 million). A net gain of
$0.7 million was recognized on contracts that matured during year (2018: net loss of $5.1 million), which is
included in sales in the consolidated statement of comprehensive income.
Off-Balance Sheet Arrangements
Other than short-term and low-value leases for which recognition exemptions are applied under IFRS 16,
the Company does not have any off-balance sheet arrangements as at December 31, 2019.
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,
2018
2019
Salaries, directors' fees and short-term benefits
Post-employment benefits
Share-based compensation, including mark-to-market adjustment
Risks and Uncertainties
$
$
4.5
0.4
(1.2)
3.7
7.2
0.3
2.7
10.2
$
$
The following risks and uncertainties may have a material adverse effect on our operations or our financial
condition:
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
USW, which holds two collective agreements with the Company, one of which expired mid-June 2019 and
which Western has been in negotiations with the USW since April 2019 for a new collective agreement. We
applied to the BC Labour Relations Board (“Labour Relations Board”) on June 25, 2019 for the appointment
of a mediator to assist in negotiations.
The USW served seventy-two hours’ notice of strike action on the Company and some of its contractors on
June 28, 2019, and on July 1, 2019, the USW commenced the Strike. The Strike is ongoing for all of our
USW certified manufacturing and timberlands operations. The Strike is also indirectly impacting certain non-
USW certified manufacturing operations, including our Ladysmith sawmill (due to insufficient log supply) and
our Value-Added remanufacturing facility (due to a lack of lumber supply). Our US based Arlington and
Columbia Vista divisions continue to operate, although our Arlington facility is operating on a reduced basis
due to a lack of lumber supply caused by the Strike.
Upon receiving strike notice from the USW, we commenced our work stoppage contingency plan with a goal
to protect our balance sheet while mitigating the impact of the Strike on our Company, customers and
business partners.
18
On September 4, 2019, we announced the expectation to begin mediation between the Company and USW
with an independent mediator on September 13, 2019. The independent mediator was agreed to by both
the Company and the USW but was not appointed by the Labour Relations Board. On September 13, 2019,
the USW withdrew from the mediation after several hours of talks, and the mediators informed the Company
that the USW would not be returning for talks scheduled for September 14, 2019. On October 17, 2019, we
announced that the Company and USW were set to resume talks with the mediators. However, on October
31, 2019, we announced that no further mediation dates had been scheduled and we requested that the
USW join us in binding arbitration in order to resolve the dispute.
After resuming talks, the Company announced on November 18, 2019 that active negotiations were no
longer occurring and that no future mediation dates had been scheduled. On December 10, 2019, we
announced that the Company and USW were set to resume talks with the mediators. However, on December
17, 2019, we announced that negotiations had reached an impasse and no future mediation dates had been
scheduled.
On February 4, 2020, the Company announced that the independent mediators had withdrawn from the
mediation process as they saw no basis for a negotiated settlement at the time.
On February 6, 2020, the BC Minster of Labour appointed Special Mediators to work with the Company and
USW for a period of 10 days to determine if a negotiated settlement could be reached. On February 10,
2020, the Company announced that terms of a tentative collective agreement had been reached. The
tentative agreement is subject to a ratification vote by USW membership. The USW bargaining committee
has advised that they will be recommending its members accept the agreement.
A separate collective agreement with the USW covering 4 office clerical employees expired December 31,
2019. The Pulp, Paper & Woodworkers of Canada (“PPWC”) represents the remaining unionized employees
of the Company. The PPWC collective agreement for the Ladysmith Sawmill (82 employees), expired on
December 31, 2019. The PPWC also represents the unionized employees at our Value-Added
Remanufacturing Operation (86 employees) with whom the collective agreement expires October 14, 2021.
Contract negotiations for the expired USW clerical and PPWC agreements have not commenced and are
pending resolution to the Strike. Should the Company be unable to negotiate an acceptable contract for the
USW clerical and PPWC collective agreements a strike or lockout could occur.
Continuation of the Strike, or a strike or lockout relating to one of our other collective agreements, could
create significant disruption of operations, may affect our ability to meet the immediate needs or our
customers, or could have 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.
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, permits and
authorizations, 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.
19
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 be 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
Allowable Annual Cut (“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 Province introduced a Coastal Revitalization Initiative and further policy initiatives that will affect
the BC forest sector regulatory framework. 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. On April 1, 2019, the Province announced the creation of fibre
recovery zones, which are intended to increase the supply of residual fibre from primary harvesting for
secondary users. Western estimates that approximately 70% of our timberland operations will be impacted
with the creation of fibre recovery zones. The impacts to our business include the potential for higher costs
and lower log harvest volumes. The Province has been clear that it does not want to see unintended
consequences from the policy implementation. We continue to collaboratively engage with the Province and
other stakeholders to ensure that the desired outcome of the policy, less fibre waste and more fibre for
domestic manufacturing and pulp production, is met without the unintended consequences of higher costs
and less harvest volume for timberland operators.
On April 11, 2019, the Province announced Bill 22, Forest Amendment Act, 2019, which came into force on
May 30, 2019. The amendments to the Forest Act will require tenure holders to receive approval from the
Minister before disposing or transferring a tenure agreement to a third party. These amendments will enable
the Minister to refuse to approve, or place conditions on the approval of, a disposition or transfer if it is
deemed not to be in the public interest or detrimental to competition in the buying or selling of timber or
residuals.
On May 16, 2019, Bill 21, Forest and Range Practices Amendment Act, 2019, designed to increase
opportunities for public input, improve information sharing on forest planning, strengthen the Minister’s ability
to manage forest activity, expand the definition of wildlife to help protect at-risk species and improve and
streamline range-use planning was put into force.
On July 10, 2019, the Province announced the application of a targeted fee-in-lieu of manufacturing for
exported logs harvested from BC Timber Sales, as a step towards ensuring that more logs are processed
in BC.
On July 17, 2019, the Province announced that a two-person panel had been appointed to lead an Old
Growth Strategic Review and provide a report to the Minister of Forests, Lands, Natural Resource
Operations and Rural Development. The panel will report back to government in spring 2020 with
recommendations that are expected to inform a new approach to old-growth management for BC.
20
On November 28, 2019, Bill 41, Declaration on the Rights of Indigenous Peoples Act came into force. The
Act is intended to guide the implementation of the principles of the UNDRIP and makes BC the first province
in Canada to legally implement UNDRIP. The Act requires the Provincial Government to align all laws with
UNDRIP, to develop an action plan to achieve this, and regularly report to the legislature to monitor progress.
The current Federal Government has also pledged to implement UNDRIP and the Calls to Action of the
Truth and Reconciliation Commission. Significant expectation has been raised among Aboriginal groups in
BC and across the country as to the impact that this Act and the Federal Government’s commitments may
have on efforts to achieve true reconciliation with Aboriginal groups. At this time, the Company is unable to
predict the outcome of the Act and the implementation of these commitments on Western’s ongoing
operations or on any sale of its non-core assets and private lands.
In December 2019, the BC Minister of Forests, Lands, Natural Resource Operations and Rural Development
indicated a delay in expanding the fee-in-lieu payment for raw log exports to all cutting permits on the BC
Coast by six months and indicated shrinking the penalties and zones for fibre recovery zones. Specific
details of these policies changes have not been disclosed.
In January 2020, the Province announced changes to the Manufactured Forest Products Regulation
effective July 1, 2020 to ensure more accessibility to fibre for local manufacturers. The regulation
amendments require timber that is made from WRC or cypress (yellow cedar) to be fully manufactured to
be eligible for export. Fully manufactured is defined as timber that will not be kiln-dried, planed or re-sawn
at a facility outside of BC.
The impact that these policy initiatives and prospective policy initiatives or regulatory changes may have on
our operations cannot be determined at this time.
In addition, Western is subject to 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.
First Nations Land Claims
First Nations groups have made claims of rights and title to substantial portions of land in BC, 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 (the “Court”) 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 Court 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 BC in order to resolve these
claims. This section provides an overview of recent developments in First Nations land claims and
settlements that have or may affect the Company.
In June 2014, the Court released its decision on the Aboriginal title claim by the Tsilhqot’in Nation of BC,
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 Province 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.
21
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.
In January 2017, the Nuchatlaht First Nation filed a Notice of Civil Claim against Canada, the Province of
BC 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 The Company’s Forest Licence A19231 and certain
timber licences held by the Company. 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. Dzawada’enuxw’s legal counsel has agreed to not require Western to file a Response to
Civil Claim at this time.
In November 2019, the Wei Wai Kum First Nation filed a petition with the BC Supreme Court against the
Province of BC regarding its decision to offer the Company a replacement tenure for TFL 25. The Wei Wai
Kum First Nation claim that the Province did not adequately consult and sufficiently accommodate them in
relation to the Province’s decision to offer a replacement tenure. Wei Wai Kum First Nation’s counsel has
granted the Province and Western an extension to the period of time to respond to the Petition and no fixed
time limit has been set at this time.
In July 2013, the Ehattesaht First Nation filed a petition with the BC Supreme Court against the Province of
BC 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 BC, 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 Province 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.
22
In April 2008, the Kwakiutl First Nation commenced litigation in the BC Supreme Court against the Province
of BC, 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
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.
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 2020. 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 Province may seek to remove areas from the
Company’s various forest tenures.
The Company is currently unable to predict the outcome of these First Nation negotiations and legal
proceedings on Western’s ongoing operations, including operational delays or access to harvesting rights,
or on any sale of its non-core assets and private forestry 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.
In addition to the implementation of Bill 41 (see “Risks and Uncertainties – Regulatory Risks”), 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 Province 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.
Softwood Lumber Dispute
The softwood lumber agreement (“SLA”) between Canada and the US, 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 DoC and the USITC 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
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.
23
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.
On January 3, 2018, the 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.
On February 3, 2020, the DoC issued preliminary revised rates in the CVD and AD first administrative review
of shipments for the years ended December 31, 2017 and 2018. The preliminary revised CVD rate was set
at 6.71% and 6.55%, for 2017 and 2018, respectively, while the preliminary revised AD rate was set at 1.66%
for both 2017 and 2018. The DoC may revise these rates between preliminary and the final determination
expected in August 2020. Cash deposits continue at the rates published on January 3, 2018 until the final
determinations are published, at which time the 2018 rate will apply on lumber shipments to the US.
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 USITC were
received in October 2018 and we filed our response in late 2018, which was subsequently presented to a
NAFTA hearing panel in May 2019. Unfortunately, in September 2019 the NAFTA panel chose not to remand
our separate-like product challenge back to the USITC. The lack of remand effectively ends our ability to
challenge the USITC’s finding that WRC and Yellow Cedar products are not a distinct product group, or
interchangeable in their use, from commodity lumber.
On September 4, 2019, the NAFTA panel remanded the Canadian government’s injury case back to the
USITC. On December 19, 2019 the USITC reaffirmed its determination that softwood lumber products from
Canada materially injured US producers. Therefore, we expect the Canadian government to contest the
USITC’s finding and for the remand process to be ongoing. On April 9, 2019, a World Trade Organization
(“WTO”) panel ruled on certain matters relating to the application of softwood lumber AD, concluding that
the US violated international trade rules in the way it calculated AD duties. Included in the ruling, the WTO
panel allowed the US to use "zeroing" in its calculation of AD, which Canada appealed in June 2019. The
practice of zeroing had previously been disallowed by the WTO with regard to softwood lumber. The final
determination of AD is subject to additional appeals from both the US and Canada.
Including wholesale lumber shipments, our sales to the US market represents approximately 27% of
Western’s total revenue under normal operating conditions. Our distribution and processing centre in
Arlington, Washington and our Columbia Vista division in Vancouver, Washington are expected to partially
mitigate the damaging effects of duties on our products destined for the US market. We intend to leverage
our flexible operating platform to continue to partially mitigate any challenges that arise from this trade
dispute.
This dispute may have an adverse impact on our financial condition and could also result in increased costs
resulting from the administrative burden of such proceedings. It is unclear at this time when any duty
amounts paid will be recovered or if amounts paid in excess of the amended final rates will be refunded.
24
Availability of Fibre and Dependency on Fibre Obtained from Government Timber Tenures
Substantially all of the timberlands in BC in which we operate are owned by the Province and administered
by 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 US 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.
Stumpage Fees
Stumpage is the fee that the Province charges forest companies for timber harvested from Crown land in
BC. 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, 2019. 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.
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 Northern bleached softwood kraft 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.
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.
25
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.
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, with active operations, and based on current operating metrics, we estimate that
operating earnings would 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.
26
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,
windstorms, 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. This may impact
our operations, our timber supply or the operations of our customers. 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.
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:
• 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.
27
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 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. The Company’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.
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.
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, tariffs and other barriers;
changes in regulatory requirements;
• 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, under normal operating conditions, by approximately $4.3 million, and $0.4 million, respectively.
28
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.
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. We
are unable to assess the potential implication of such changes.
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 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 prices for its products.
Continuation of the Dividend Program
We declared and paid total quarterly cash dividends of $0.09 per outstanding common share during the four
quarters ended December 31, 2019. 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, 2019. 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.
29
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, 2019.
There have been changes in the Company’s internal controls over financial reporting (“ICFR”) during the
second quarter of 2019 resulting from the Company’s implementation of a new enterprise resource planning
system (“ERP”); however, there have been no changes in the Company’s ICFR in the year ended December
31, 2019 that have materially affected, or are reasonably likely to materially affect, its ICFR.
During the ERP implementation, the Company’s internal controls were maintained or supplemented by
controls added during the system implementation and related business process improvements. The
Company performed fulsome system conversion testing to ensure that prior period balances were translated
into the new system completely and accurately.
Outstanding Share Data
As of February 11, 2020, there were 375,197,166 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, 2019, 2,487,950 options were granted,
600,000 previously granted options were exercised and 796,178 options were forfeited. As of February 11,
2019, 13,057,129 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.
30
Management’s Discussion and Analysis – Appendix A
Summary of Selected Results for the Last Eight Quarters
(millions of Canadian dollars except
per share amounts and where noted)
2019
Q4
Q3
Average Exchange Rate – USD to CAD
Average Exchange Rate – CAD to USD
1.327
0.754
1.320
0.758
1.321
0.757
2019
Q2
1.337
0.748
2018
Q1
2018
Q4
Q3
Q2
Q1
1.329
0.752
1.296
0.771
1.322
0.756
1.307
0.765
1.291
0.775
1.265
0.791
Financial Perform ance
Revenue
Lumber
Logs
By-products
Total revenue
Adjusted EBITDA
Adjusted EBITDA margin
Earnings (loss) per share:
$
$
$
628.3
144.0
35.4
807.7
66.1
12.1
1.9
80.1
109.7
27.4
4.5
141.6
$
$
233.6
63.3
13.4
310.3
$
$
218.9
41.2
15.6
275.7
$
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
$
$
$
$
$
(16.6)
(18.1)
(1.5)
-0.2% -22.6% -11.7%
$
$
15.1
4.9%
$
18.1
6.6%
$
143.5
12.0%
$
$
18.0
43.0
6.3% 11.0% 15.3% 14.7%
32.3
50.2
$
$
Net income (loss), basic and diluted
$
(0.12)
$
(0.09)
$
(0.05)
$
-
$
-
$
0.18
$
0.02
$
0.04
$
0.07
$
0.05
Operating Statistics
Lum ber(1),(2)
Production
Shipments - Total
Price
Logs (3)
Net production
Saw log purchases
Log availability
Shipments
Price(4)
mmfbm
mmfbm
$/mfbm
491
548
1,147
$
34
44
1,502
$
48
90
1,219
$
206
211
1,107
$
202
203
1,078
$
864
880
1,083
$
200
218
1,059
$
221
212
1,124
$
234
235
1,088
$
209
215
1,061
$
000 m3
000 m3
000 m3
000 m3
$/m3
2,214
564
2,778
1,286
105
$
21
34
55
135
87
$
21
84
105
246
110
$
1,250
238
1,488
536
112
$
922
208
1,130
369
112
$
4,327
979
5,306
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
$
Share Repurchases and Dividends
Shares repurchased (millions)
Shares repurchased
Dividends paid
8.9
15.9
34.0
$
$
-
$
-
$
8.5
1.2
1.9
8.4
$
$
3.8
6.6
8.5
$
$
3.9
7.4
8.6
$
$
11.7
25.2
34.4
$
$
4.9
9.1
8.7
$
$
4.6
10.4
8.8
$
$
1.6
4.1
8.9
$
$
0.6
1.6
7.9
$
$
Figures in the table above may not equal or sum to figures presented elsewhere due to rounding.
Includes Columbia Vista acquired February 1, 2019, and wholesale lumber shipments.
"mmfbm" = millions of board feet; "mfbm" = thousands of board feet.
(1)
(2)
(3) Coastal BC business only. Net production is sorted log production, net of residuals and waste. Log availability is net production
plus saw log purchases.
(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) Third and fourth quarter 2019 results reflect the curtailment of coastal BC operations due to the Strike.
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.
31
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 11, 2020 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 11, 2020
32
KPMG LLP
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
Fax (604) 691-3031
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of 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 December 31, 2019 and December 31, 2018
the consolidated statements of comprehensive income (loss) for the years then ended
the consolidated statements of changes in shareholders’ equity (deficit) 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 December 31, 2019 and December 31, 2018, and its
consolidated financial performance and its consolidated cash flows for the years then ended in
accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. 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.
33
Other Information
Management is responsible for the other information. Other information comprises:
Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
Annual Report filed with the relevant Canadian Securities Commissions.
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 (IFRS), and for such internal control as
management determines is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Company or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
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.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit.
34
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 11, 2020
35
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
Inventory (Note 4)
Prepaid expenses and other assets
Income taxes receivable (Note 11)
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 11)
Liabilities and Equity
Current liabilities:
Accounts payable and accrued liabilities
Income taxes payable (Note 11)
Current portion of lease liabilities (Note 10)
Reforestation obligation (Note 13)
Non-current liabilities:
Long-term debt (Note 9)
Long-term lease liabilities (Note 10)
Reforestation obligation (Note 13)
Deferred income tax liabilities (Note 11)
Other liabilities (Note 12)
Deferred revenue (Note 25(b))
Equity:
Share capital (Note 14)
Contributed surplus
Translation reserve
Retained earnings (deficit)
Total equity attributable to equity shareholders of the Company
Non-controlling interest (Note 28)
Commitments and contingencies (Note 18)
Subsequent event (Note 18(b))
See accompanying notes to these consolidated financial statements.
Approved on behalf of the Board:
December 31,
December 31,
2019
2018
$
2.1
23.4
132.0
14.7
16.7
188.9
414.9
109.2
56.0
13.4
0.1
$
8.4
91.3
174.9
23.3
-
297.9
369.9
113.2
58.3
15.8
0.7
$
782.5
$
855.8
$
35.0
$
119.2
-
4.9
8.7
48.6
113.4
15.0
14.7
37.0
18.8
52.4
299.9
479.9
9.6
(0.9)
(6.8)
481.8
0.8
482.6
13.5
-
10.0
142.7
6.0
-
15.7
40.3
23.8
54.4
282.9
491.1
9.1
-
72.7
572.9
-
572.9
$
782.5
$
855.8
"Michael T. Waites"
Chair
"Don Demens"
President & Chief Executive Officer
36
Western Forest Products Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Expressed in millions of Canadian dollars except for share and per share amounts)
Revenue (Note 25)
Costs and expenses:
Cost of goods sold
Freight
Export tax (Note 18)
Selling and administration
Operating income (loss) prior to restructuring and other items
Operating restructuring items (Note 23)
Other income (expense)(Note 21)
Operating income (loss)
Finance costs (Note 22)
Income (loss) before income taxes
Current income tax (expense) recovery (Note 11)
Deferred income tax (expense) recovery (Note 11)
Net income (loss)
Net income (loss) attributable to equity shareholders of the Company
Net income (loss) attributable to non-controlling interest (Note 28)
Other comprehensive income (loss)
Items that will not be reclassified to profit or loss:
Defined benefit plan actuarial gain (loss) (Note 19)
Income tax (expense) recovery on other comprehensive gain (loss) (Note 11)
Total items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss:
Foreign exchange translation of foreign operations
Total comprehensive income (loss)
Net income (loss) per share (in dollars)(Note 16)
Basic and diluted earnings (loss) per share
Weighted average number of common shares outstanding (thousands)
Basic
Diluted
See accompanying notes to these consolidated financial statements.
Years ended
December 31,
2019
2018
$
807.7
$
1,196.7
731.4
64.1
27.8
31.1
854.4
(46.7)
(3.5)
(5.4)
(55.6)
(7.8)
(63.4)
13.0
3.7
16.7
(46.7)
(46.3)
(0.4)
(46.7)
1.0
(0.3)
0.7
(0.9)
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
69.2
-
69.2
(0.7)
0.2
(0.5)
-
$
(46.9)
$
68.7
$
(0.12)
$
0.18
377,633
379,195
392,333
396,107
37
Western Forest Products Inc.
Consolidated Statements of Changes in Shareholders’ Equity
(Expressed in millions of Canadian dollars)
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
Exercise of stock options
Repurchase of shares
Dividends
Total transactions with owners, recorded directly in equity
Share
Capital
Contributed
Surplus
Translation
Reserve
Retained
Earnings
(Deficit)
Non-
controlling
Interest
Total
Equity
$
505.5
$
8.7
$
-
$
48.5
$
-
$
562.7
-
-
-
-
-
-
0.6
(15.0)
-
(14.4)
-
-
-
-
0.8
(0.4)
-
-
0.4
-
-
-
-
-
-
-
-
-
69.2
(0.7)
0.2
68.7
-
-
(10.2)
(34.3)
(44.5)
-
-
-
-
-
-
-
-
-
69.2
(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
Balance at December 31, 2018
Net loss
Other comprehensive income:
Defined benefit plan actuarial gain recognized
Income tax expense on other comprehensive income
Foreign exchange translation of foreign operations
Total comprehensive income (loss)
Share-based payment transactions recognized in equity (Note 14)
Non-controlling interest (Note 28)
Exercise of stock options (Note 14)
Repurchase of shares (Note 14)
Dividends
Total transactions with owners, recorded directly in equity
$
491.1
$
9.1
$
-
$
72.7
$
-
$
572.9
-
-
-
-
-
-
-
0.1
(11.3)
-
(11.2)
-
-
-
-
-
0.6
-
(0.1)
-
-
0.5
-
(46.3)
(0.4)
(46.7)
-
-
(0.9)
(0.9)
-
-
-
-
-
-
1.0
(0.3)
-
(45.6)
-
5.0
-
(4.9)
(34.0)
(33.9)
-
-
-
(0.4)
-
1.2
-
-
-
1.2
1.0
(0.3)
(0.9)
(46.9)
0.6
6.2
-
(16.2)
(34.0)
(43.4)
Balance at December 31, 2019
$
479.9
$
9.6
$
(0.9)
$
(6.8)
$
0.8
$
482.6
See accompanying notes to these consolidated financial statements.
38
Western Forest Products Inc.
Consolidated Statements of Cash Flows
(Expressed in millions of Canadian dollars)
Cash provided by (used in):
Operating activities:
Net income (loss) from continuing operations
Items not involving cash:
Amortization of property, plant and equipment (Note 5)
Amortization of timber licenses (Note 6)
Loss (gain) on disposal of assets
Change in fair value of biological assets (Note 7)
Change in reforestation obligation (Note 13)
Amortization of deferred revenue
Share-based compensation, including mark-to-market adjustment
Net finance costs
Income tax expense (recovery) (Note 11)
Change in pension liability (Note 19)
Export tax receivable
Other
Income taxes received (paid)
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)
Purchase of Columbia Vista (Note 29)
Proceeds from disposal of assets
Proceeds from disposition of minority interest in subsidiary, net (Note 28)
Financing activities:
Interest paid
Draw on long-term debt (Note 9)
Payment of lease liabilities (Note 10)
Repurchase of shares (Note 14)
Dividends
Proceeds from exercise of stock options, net (Note 14)
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,
2019
2018
$
(46.7)
$
69.2
41.4
4.0
0.7
2.3
(2.2)
(2.0)
(1.3)
7.8
(16.7)
(2.8)
0.2
2.8
(17.0)
(29.5)
67.9
49.6
11.9
(89.4)
40.0
10.5
(37.2)
-
(37.7)
4.7
7.0
(63.2)
(5.3)
107.1
(5.1)
(15.9)
(34.0)
(0.4)
46.4
36.2
4.0
(0.5)
(0.1)
0.4
(2.0)
1.7
2.7
25.6
(3.1)
(0.3)
(0.8)
0.3
133.3
(5.2)
(22.9)
(4.3)
17.3
(15.1)
118.2
(83.5)
(11.6)
-
3.1
-
(92.0)
(1.0)
7.0
-
(25.2)
(34.3)
0.4
(53.1)
(6.3)
8.4
2.1
$
(26.9)
35.3
8.4
$
39
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(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 softwood 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, 2019 and 2018 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 (“TSX”), 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 prior period figures 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
11, 2020.
(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, 2019 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.
40
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(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 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.
For each foreign operation, the Company determines the functional currency, and items included in the
financial statements of each entity are measured using that functional currency. The Company’s foreign
operations are in the US and have the US dollar as the functional currency.
On consolidation, the assets and liabilities of foreign operations are translated into Canadian dollars
using the rate of exchange in effect at the reporting date, and their statements of earnings and
comprehensive earnings are translated using exchange rates in effect at the dates of the transactions.
The exchange differences arising on translation for consolidation are recognized in other comprehensive
income (“OCI”). On disposal of a foreign operation, the component of OCI relating to that particular
foreign operation is recognized in net earnings.
(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.
41
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(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
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 11
Note 13
Note 15
Note 18
Note 19
Measurement of net realizable value of inventories
Measurement of fair value less costs to sell of standing timber
Measurement of the present value of lease liabilities: key assumptions about
the future lease payments and the discount rate used
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 – certain 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 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 20
for more details.
When measuring the fair value of an asset or liability, Western uses market observable data to the
extent 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.
42
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(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 (“CGU”). 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 time
value of money and 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;
and
(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.
43
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(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
December 31,
2019
December 31,
2018
$
$
97.5
35.4
15.6
148.5
(11.0)
(5.0)
(0.5)
(16.5)
$
$
$
$
$
$
125.7
51.7
13.1
190.5
(8.8)
(6.3)
(0.5)
(15.6)
Total carrying value of inventory
$
132.0
$
174.9
The carrying amount of inventory recorded at net realizable value was $47.5 million at December 31, 2019
(2018: $79.4 million), with the remaining inventory recorded at cost.
During 2019, $731.4 million (2018: $927.7 million) of inventory was charged to cost of sales which includes
a $0.9 million increase (2018: $7.2 million increase) 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.
44
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
5. Property, plant and equipment (continued)
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.
Cost
Balance at January 1, 2018
Additions
Arlington facility
Disposals
Balance at December 31, 2018
Adoption of IFRS 16 (Note 10)
Additions
Columbia Vista assets (Note 29)
Disposals
Effect of movements in exchange rates
Balance at December 31, 2019
Accumulated amortization and impairments
Balance at January 1, 2018
Amortization
Disposals
Impairments
Balance at December 31, 2018
Amortization
Disposals
Impairments
Balance at December 31, 2019
Carrying amounts
At December 31, 2018
At December 31, 2019
6. Timber licences
Accounting policy
$
Buildings &
equipment
341.9
70.6
7.9
(6.7)
413.7
-
27.8
21.0
(1.1)
(0.6)
460.8
$
150.8
23.0
(6.4)
0.1
167.5
26.6
(0.9)
0.3
193.5
$
Logging
roads
191.9
12.9
-
-
204.8
-
9.4
-
-
-
$
214.2
$
156.8
13.2
-
-
170.0
10.0
-
-
$
180.0
$
Land
87.8
-
3.7
(2.3)
89.2
Right of use
assets
-
$
-
-
-
-
$
Total
621.6
83.5
11.6
(9.0)
707.7
-
-
10.6
(5.2)
(0.3)
94.3
$
17.0
6.8
0.8
(0.6)
-
24.0
$
17.0
44.0
32.4
(6.9)
(0.9)
793.3
$
0.1
-
-
0.2
0.3
-
-
-
0.3
-
$
-
-
-
-
4.8
(0.2)
-
4.6
$
307.7
36.2
(6.4)
0.3
337.8
41.4
(1.1)
0.3
378.4
$
$
$
$
$
$
$
$
246.2
267.3
$
$
34.8
34.2
$
$
88.9
94.0
$
-
$
19.4
$
$
369.9
414.9
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.
45
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
6. Timber licences (continued)
Supporting information
Cost
Balance at December 31, 2018
Balance at December 31, 2019
Accumulated amortization
Balance at January 1, 2018
Amortization
Balance at December 31, 2018
Amortization
Balance at December 31, 2019
Carrying amounts
At December 31, 2018
At December 31, 2019
7. Biological assets
Accounting policy
$
170.7
$
170.7
$
53.5
4.0
$
57.5
4.0
$
61.5
$
113.2
$
109.2
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 is 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 depreciation.
Supporting information
(a) Reconciliation of carrying amount
Carrying value, beginning of year
Change in fair value less costs to sell (Note 21)
Change in fair value due to growth and pricing
Harvested timber transferred to inventory
Carrying value, end of year
Years ended December 31,
2019
2018
$
$
58.3
(2.8)
5.6
(5.1)
56.0
58.2
-
5.6
(5.5)
58.3
$
$
At December 31, 2019, private timberlands comprised an area of approximately 23,293 hectares
(December 31, 2018: 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, 2019, the Company harvested and scaled approximately 132,897 cubic
metres (“m3”) of logs from its private timberlands, which had a fair value less costs to sell of $115 per m3
at the date of harvest (2018: 141,609 m3 and $106 per m3, respectively).
46
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
7. Biological assets (continued)
(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 $56.0 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 ($79
- $178, weighted average $102).
Estimated harvest costs per m3 ($60 -
$86, weighted average $67).
Estimated harvest annual volume
(155,000 - 160,400 m3, weighted
average 155,200 m3).
Risk-adjusted discount rate (weighted
average 7.25%).
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.
8. Other assets
Investments
Export tax receivable (Note 18(b))
Deferred transaction costs
9. Long-term debt
Accounting policy
December 31,
2019
December 31,
2018
$
$
9.0
3.6
0.8
13.4
11.1
3.8
0.9
15.8
$
$
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.
47
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
9. Long-term debt (continued)
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 certain financial benchmarks.
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 17).
At December 31, 2019, $114.1 million was outstanding under the Company’s Credit Facility. The interest
rate for the Credit Facility was 5.45% at December 31, 2019 (2018: 4.65%). The Company was in compliance
with its financial covenants at December 31, 2019.
December 31,
2019
December 31,
2018
Long-term debt
Less transaction costs
Available
Drawings
Outstanding letters of credit
Unused portion of Credit Facility
10. Lease liabilities
Accounting policy
$
$
$
$
$
$
114.1
(0.7)
113.4
250.0
(114.1)
(1.1)
134.8
7.0
(1.0)
6.0
250.0
(7.0)
(1.0)
242.0
$
$
IFRS 16, Leases (“IFRS 16”) - Policy application from January 1, 2019
When a contract is entered into, the Company will assess if a contract is, or contains, a lease. A contract is,
or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of
time in exchange for consideration.
This policy is applied to contracts entered into, or changed, on or after January 1, 2019. The Company
adopted IFRS 16 on January 1, 2019 using a modified retrospective approach, whereby the cumulative effect
of initially applying the standard was recognized with no adjustment to retained earnings at January 1, 2019.
The comparative information presented for 2018 has not been restated and continues to be reported under
IAS 17, Leases, (“IAS 17”) and related interpretations.
The Company applied certain practical expedients on adoption of IFRS 16, allowing for the use of hindsight
to assess the lease term for contracts with extension options, the exclusion of initial direct costs from
measurement of the right of use asset and the exclusion of leases with a term of less than one year remaining
at the transition date.
As a lessee
The Company recognizes a right of use asset and lease liability at the lease commencement date. At this
date, the right of use asset is measured at cost. Cost includes the initial amount of the lease liability, adjusted
for lease payments made before this date as well as any initial direct costs incurred. Cost also includes an
estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset and restoring
the site on which it is located, less any lease incentives received.
48
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
10. Lease liabilities (continued)
The right of use asset is depreciated using the straight-line method from the lease commencement date to
the earlier of the end of the lease term or the end of the useful life of the right of use asset. The estimated
useful lives of right of use assets are determined in the same manner as those of property plant and
equipment. Right of use assets are adjusted for impairments and/or re-measurements of the lease liability.
At the lease commencement date, the lease liability is measured at the present value of the future lease
payments. The lease payments are discounted using the interest rate implicit in the lease, or, if that rate
cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its
incremental borrowing rate as the discount rate.
Lease payments included in the measurement of the lease liability consist of:
•
•
•
•
fixed payments, including in-substance fixed payments;
variable lease payments that depend on an index or a rate, initially measured using the index or rate
as at the commencement date;
amounts expected to be payable under residual value guarantees; and
the exercise price of a purchase option that the Company is reasonably certain to exercise, and
penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate
early.
The lease liability is measured at amortized cost using the effective interest method. The lease liability is re-
measured when there is a change in future lease payments due to a change in an index or rate, a change in
the Company’s estimate of an amount payable under residual value guarantee, or if there is a change in the
assessment of whether the Company will exercise a purchase, termination or extension option. When the
lease liability is re-measured, a corresponding adjustment is made to the right of use asset, or recognized in
net income if the carrying amount of the right of use asset has been reduced to zero.
The Company presents right of use assets in property, plant and equipment and lease liabilities separately
on the consolidated statement of financial position.
The Company elected not to recognize right of use assets and corresponding lease liabilities for leases with
a term of one year or less and low value leases, including office fixtures and information technology
equipment. The Company recognizes these lease payments as an expense on a straight-line basis over the
term of the lease.
Under IAS 17 - Policy application before January 1, 2019
In the comparative period, 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.
49
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
10. Lease liabilities (continued)
As a lessor
When the Company acts as a lessor, it determines at the inception of the lease whether the lease is a finance
or operating lease. Leases that transfer to the Company substantially all of the risks and rewards of
ownership are classified as finance leases. If the risks and rewards of ownership are not transferred, the
lease is classified as an operating lease.
The Company recognizes lease payments received under operating leases as income on a straight-line
basis over the lease term as part of other income.
The accounting policies as a lessor in the comparative period are consistent with IFRS 16.
Supporting information
Changes in the lease liabilities are as follows:
Lease liabilities, beginning of year
At adoption of IFRS 16
Additions
Disposals
Finace costs
Lease payments
Lease liabilities, end of year
Less current portion
December 31,
2019
-
$
17.0
7.6
(0.4)
0.8
(5.1)
19.9
4.9
15.0
$
The weighted average incremental borrowing rate used to determine lease obligations at adoption and during
the year ended December 31, 2019 was approximately 4.5%. In its annual consolidated financial statements
as at and for the year ended December 31, 2018, the Company disclosed $19.7 million of operating lease
commitments. These, discounted at the incremental borrowing rate as at January 1, 2019, resulted in an
opening lease liability of $17.0 million.
In addition to the above, the Company recognized an expense of $2.6 million during the year ended
December 31, 2019, relating to short term and low value lease payments that were previously treated as
rental agreements.
11. 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.
50
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
11. Income taxes (continued)
(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 (recovery)
Current period
Deferred income tax expense (recovery)
Origination and reversal of temporary differences
Years ended December 31,
2019
2018
$
(13.0)
$
14.3
(3.7)
11.3
Total income tax expense (recovery)
$
(16.7)
$
25.6
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,
2019
2018
Income tax expense (recovery) at the statutory rate of 27.00% (2018 - 27.00%)
Difference in tax rates
Over (under) provided for in prior periods
Other permanent differences
Reinstatement of (use of) investment tax credits
Total tax expense (recovery) - 26.38% (2018 - 27.10%)
$
$
(17.1)
0.6
(0.3)
(0.3)
0.4
(16.7)
25.6
0.2
0.2
-
(0.4)
25.6
$
$
51
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
11. Income taxes (continued)
The components of recognized deferred income tax assets and liabilities are as follows:
For the Year ended December 31, 2019
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, 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
Opening
Balance
Recognized in Recognized in Recognized in
Taxes Payable OCI & Equity
Profit or Loss
Ending
Balance
$
1.0
5.4
14.2
20.6
$
7.2
(0.7)
6.1
12.6
-
$
-
-
-
$
(0.7)
(0.3)
-
(1.0)
$
7.5
4.4
20.3
32.2
(30.5)
(8.6)
(21.1)
(60.2)
(1.8)
1.0
(8.1)
(8.9)
-
-
-
-
-
-
-
-
(32.3)
(7.6)
(29.2)
(69.1)
$
(39.6)
$
3.7
$
-
$
(1.0)
$
(36.9)
$
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)
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, 2019, the Company and its subsidiaries
have unused non-capital tax losses carried forward totalling $5.2 million in the US (2018: $2.1 million) and
$24.1 million in Canada (2018: $2.0 million), which can be used to reduce taxable income. The Company
has unused capital losses carried forward of approximately $87.9 million (2018: $93.7 million) available to
be utilized against future capital gains indefinitely.
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
December 31,
2019
December 31,
2018
$
21.1
$
19.0
87.9
93.7
$
109.0
$
112.7
52
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
12. Other liabilities
December 31,
2019
December 31,
2018
Employee future benefits obligation (Note 19)
Environmental accruals
Performance share unit plan liabilities, non-current (Note 15(c))
Other
13. Reforestation obligation
Accounting policy
$
$
15.3
1.9
0.2
1.4
18.8
19.0
1.5
1.8
1.5
23.8
$
$
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,
2019
2018
Reforestation obligation, beginning of year
Reforestation provision charged
Reforestation expenditures
Unwind of discount
Reforestation obligation, end of year
Less current portion
$
$
25.7
5.5
(8.0)
0.2
23.4
8.7
14.7
25.3
8.6
(8.5)
0.3
25.7
10.0
15.7
$
$
The reforestation expenditures are expected to occur over the next one to ten years and have been
discounted at risk-free rates of 1.68% to 1.74% (2018: 1.86% to 1.97%). The total undiscounted amount of
the estimated future expenditures required to settle the reforestation obligation at December 31, 2019 is
$24.3 million (December 31, 2018: $26.7 million).
14. 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.
53
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
14. Share capital (continued)
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:
Number of
Common Shares
Amount
Balance at January 1, 2018
Exercise of stock options
Repurchase of shares
Balance at December 31, 2018
Exercise of stock options
Repurchase of shares
Balance at December 31, 2019
394,776,092
660,000
(11,695,573)
383,740,519
330,000
(8,873,353)
$
$
505.5
0.6
(15.0)
491.1
0.1
(11.3)
375,197,166
$
479.9
During the year ended December 31, 2019, cash dividends of $0.0225 per common share were paid for
each of the quarters ended March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019.
An aggregate of $34.0 million (2018: $34.3 million) in dividends was paid to shareholders in 2019.
On August 2, 2019, the Company renewed a Normal Course Issuer Bid (“NCIB”) permitting the purchase
and cancellation up to 18,763,888 of the common shares or approximately 5% of the common shares issued
and outstanding as of August 1, 2019. The NCIB expires on August 7, 2020.
In 2019, the Company repurchased 8,873,353 common shares under the NCIB (2018: 11,695,573) for $15.9
million at an average price of $1.79 per common share (2018: $25.2 million and $2.15, respectively), of which
$11.0 million was charged to share capital and $4.9 million was charged to retained earnings (2018: $15.0
million and $10.2 million, respectively). In addition to the common shares repurchased under the NCIB,
270,000 options were exercised for the issuance of common shares on a cashless basis, resulting in a
decrease in share capital of $0.3 million (2018: nil) (Note 15(a)).
15. 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.
54
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
15. 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, 2019, the Company granted 2,487,950 options with a fair value of
$0.9 million. Weighted average assumptions applied in the option pricing model included exercise price
of $1.94, risk-free interest rate of 1.88%, a volatility rate of 31.86%, and an expected life of seven years.
The following table summarizes the change in options outstanding during the years ended December
31, 2019 and 2018:
Year ended December 31, 2019
Year ended December 31, 2018
Number of Options
Weighted average
exercise price
Number of Options
Weighted average
exercise price
$
$
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
11,965,357
2,487,950
(600,000)
(796,178)
13,057,129
$
$
During the year ended December 31, 2019, 330,000 options were exercised for the issuance of common
shares, and 270,000 options were exercised on a cashless basis.
Details of options outstanding under the Option Plan as at December 31, 2019 are as follows:
Exercise
Price
Number outstanding
December 31, 2019
Weighted average
remaining option life
(years)
Weighted average
exercise price
Number exercisable
December 31, 2019
Weighted average
exercise price
$0.22 - $0.96
$1.27 - $1.97
$2.09 - $2.75
3,250,000
4,727,806
5,079,323
13,057,129
2.2
6.7
5.9
5.3
$
$
$
$
In 2019, the Company recorded equity-based compensation expense for these options of $0.6 million
(2018: expense of $0.8 million), with a corresponding increase to contributed surplus.
1.73
1.94
0.22
2.33
1.80
0.93
1.75
2.39
1.79
11,718,483
1,235,788
(660,000)
(328,914)
11,965,357
3,250,000
2,041,050
3,315,515
8,606,564
1.56
2.74
0.59
2.13
1.72
0.93
1.49
2.39
1.62
55
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
15. 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.
Year ended December 31, 2019
Year ended December 31, 2018
Number of DSU
Weighted average
unit value
Number of DSU
Weighted average
unit value
Outstanding, beginning of year
Granted
Redeemed
Outstanding, end of year
1,468,754
320,425
(49,488)
1,739,691
1.32
1.44
1.71
1.33
1,282,219
186,535
-
1,468,754
$
$
$
$
1.18
2.32
-
1.32
In 2019, the Company recorded equity-based compensation recovery for these DSUs of $0.9 million
(2018: recovery of $0.6 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 year
Granted
Redeemed
Forfeited
Outstanding, end of year
Years ended December 31,
2019
2018
1,715,332
835,574
(577,130)
(120,961)
1,852,815
1,582,285
562,049
(429,002)
-
1,715,332
In 2019, the Company recorded equity-based compensation recovery for these PSUs of $0.9 million
(2018: expense of $1.3 million), with a corresponding decrease to accounts payable and accrued
liabilities and other liabilities.
56
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
16. 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 (loss) 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.
17. 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, 2019, the Company had $114.1 million drawn in its debt facilities and a 18.8% net debt
to capitalization ratio (2018: 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 at the discretion of the
Company’s Board of Directors.
In the current year, the Company renewed an NCIB permitting the purchase and cancellation up to
18,763,888 common shares prior to August 7, 2020, and is at the discretion of the Company’s Board of
Directors.
Under the Credit Facility agreement, the Company is subject to certain financial covenants. As at December
31, 2019, 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.
18. Commitments and contingencies
(a) Key dates in the softwood lumber duty dispute
Under the softwood lumber agreement (“SLA”) between Canada and the 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.
In the years 2016 through 2018 there were several announcements made by US Department of
Commerce (“DoC”) and the US International Trade Commission (“ITC”) outlining rates on Countervailing
(“CVD”) and Anti-dumping duties (“AD”) on Canadian softwood lumber shipments to the US. The
Company disclosed these in its audited annual consolidated financial statements for the year ended
December 31, 2018.
(b) US 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, and from December 28, 2017 onwards.
Cash deposits for AD were required for lumber imports to the US effective June 30, 2017 until December
26, 2017, and from December 28, 2017 onwards.
57
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18. Commitments and contingencies (continued)
(b) US lumber duties and export tax (continued)
In the fourth quarter of 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. A corresponding receivable was recognized in other assets in the consolidated statement of
financial position. This export tax receivable was $3.6 million at December 31, 2019 as a result of foreign
exchange revaluation (December 31, 2018: $3.8 million). Incremental export duty recoveries from any
future change in CVD and AD final rates will be netted against export tax expense and included in other
assets.
On February 3, 2020, the DoC issued preliminary revised rates in the CVD and AD first administrative
review of shipments for the years ended December 31, 2017 and 2018. The DoC may revise these rates
between preliminary and the final determination expected in August 2020. Cash deposits continue at the
combined duty rate of 20.23% until the final determinations are published, after which the 2018 rate will
apply. The following table summarizes the cash deposit rates in effect and the preliminary revised rates
published on February 3, 2020:
Years ended December 31,
2018
2017
2019
Duty expense
$
27.8
$
43.0
$
15.8
Cash deposit rate, CVD
Cash deposit rate, AD
Cash deposit rate, combined
Preliminary revised rate, CVD
Preliminary revised rate, AD
Preliminary revised rate, combined
14.19%
6.04%
20.23%
14.19%
6.04%
20.23%
6.55%
1.66%
8.21%
14.19%
6.04%
20.23%
6.71%
1.66%
8.37%
As at December 31, 2019, the Company had $90.9 million of cash on deposit with the US Department
of Treasury in respect of these softwood lumber duties (December 31, 2018: $64.2 million).
(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
The Company recorded the price premium as deferred revenue and has granted a first charge over the
acquired assets (including a tree farm licence 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.
Based on the exercise of force majeure provisions in connection with strike action by the United
Steelworkers Local 1-1937, the Company has satisfied annual fibre commitments for the year ending
December 31, 2019.
58
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
18. Commitments and contingencies (continued)
(e) Timber bond obligations
As a result of the Columbia Vista acquisition (Note 29), the Company assumed timber bond obligations,
as a requirement to support certain US timber sales. As at December 31, 2019, the Company had
outstanding bonds in the amount of $3.9 million (December 31, 2018: nil).
(f) Purchase commitments
As at December 31, 2019, the Company had contracts to acquire property, plant and equipment in the
amount of $7.5 million (2018: nil). In addition, as at December 31, 2019, the Company had contractual
commitments to purchase wholesale lumber totalling $8.7 million (2018: nil).
(g) Pension funding commitments
The Company is committed to making estimated annual special payments for its salaried pension plans
of $2.6 million for 2020 and approximately $1.3 million per year on average for 2021 to 2033, or until
such time as a new funding valuation may lead to a change in the amount of payments required.
19. 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.
(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.
59
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
19. Employee benefits (continued)
(c) Employee future benefits (continued)
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.
Supporting information
Information about the Company's defined benefit salaried pension plans and other non-pension benefits, in
aggregate, is as follows:
December 31, 2019
December 31, 2018
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 12)
Cumulative actuarial gains (losses), beginning of year
Actuarial gains (losses) recognized directly in OCI
Cumulative actuarial gains (losses), end of year
106.0
3.2
(8.6)
12.5
113.1
122.0
0.3
(8.6)
4.2
7.6
125.5
(37.1)
1.1
(36.0)
$
$
-
$
0.3
(0.3)
-
$
-
-
$
0.2
(0.2)
-
$
-
$
$
$
$
$
$
$
$
$
$
$
(12.4)
$
(2.9)
$
(16.0)
$
(3.0)
$
$
$
$
$
$
$
$
4.8
-
(0.2)
0.1
(1.7)
3.0
1.3
1.7
3.0
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)
3.0
-
(0.3)
0.1
0.1
2.9
3.0
(0.1)
2.9
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, 2019
December 31, 2018
Salaried
Pension Plans
Non-pension
Plans
Salaried
Pension Plans
Non-pension
Plans
$
8.8
7.80%
n/a
n/a
$
(5.4)
(5.11)%
n/a
n/a
$
0.7
0.58%
-
$
0.00%
$
(0.1)
(0.05)%
$
0.6
20.45%
60
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
19. 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, 2019 were $12.2 million
(December 31, 2018: $17.0 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, 2018. 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, 2021. Included in the accrued benefit
obligations and plan assets for salaried pension plans, presented above, are accrued benefit obligations of
$119.8 million at December 31, 2019 (December 31, 2018: $116.2 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,
2019
2018
27%
71%
2%
100%
28%
69%
3%
100%
The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations
(expressed as weighted averages) are as follows:
December 31,
2019
December 31,
2018
December 31, 2019
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
3.60%
3.45%
2.98%
2.95%
0.01%
3.33%
3.25%
3.60%
3.45%
0.01%
5.61% in 2020
5.61% in 2019
grading to 3.86% grading to 3.86%
in 2029
in 2029
Obligation w ith Change in Assumption
1% Decrease
1% Increase
n/a
n/a
n/a
n/a
12,453,700
237,300
(15,001,700)
(273,300)
(48,400)
44,800
(150,900)
156,100
Future mortality
n/a
n/a
358,700
(362,500)
61
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
19. Employee benefits (continued)
The Company's salaried employees’ pension and non-pension benefits expense is as follows:
December 31, 2019
December 31, 2018
Salaried
Pension Plans
Non-pension
Plans
Salaried
Pension Plans
Non-pension
Plans
Defined benefit plans:
Current service costs and administrative expenses
Net interest costs
Total cost of employee post-retirement benefits
$
$
0.3
0.5
0.8
-
$
0.1
0.1
$
$
$
0.3
0.5
0.8
-
$
0.1
0.1
$
The Company is committed to make funding contributions to its defined benefit plans of $2.6 million during
2020.
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 2019,
such contributions amounted to $4.9 million (2018: $9.4 million).
20. Financial instruments – fair values and risk management
Accounting policy
IFRS 9, Financial Instruments (“IFRS 9”) sets out requirements for recognizing and measuring financial
assets, financial liabilities and some contracts to buy or sell non-financial items, as described 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.
62
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
20. 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 is comprised of 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 uses an expected credit loss (“ECL”) model to test for impairment, which applies to financial
assets measured at amortized costs, contract assets and debt investments at FVOCI. Financial assets
held at amortized cost consist of cash and cash equivalents and trade and other receivables. 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.
63
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
20. 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, 2018.
December 31, 2019
December 31, 2018
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
$
$
$
4.9
0.2
-
-
5.1
-
$
-
2.1
23.2
25.3
$
4.9
0.2
2.1
23.2
30.4
4.9
-
-
-
4.9
-
$
-
8.4
91.3
99.7
$
$
4.9
-
8.4
91.3
104.6
$
$
$
$
Mandatory Other Financial
at FVTPL
Liabilities
Total
Mandatory Other Financial
at FVTPL
Liabilities
Total
Financial liabilities
Foreign currency forward contracts
Accounts payable and accrued liabilities
Lease liabilities (Note 10)
Long-term debt (Note 9)
Total financial liabilities
$
-
-
-
-
$
-
$
-
35.0
19.9
114.1
169.0
$
$
-
35.0
19.9
114.1
169.0
$
$
2.2
-
-
$
-
117.0
-
$
2.2
117.0
-
$
-
2.2
7.0
124.0
$
7.0
126.2
$
64
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
20. 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 its contractual obligations and arises principally from the Company’s
receivables 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, 2019, the Company had an allowance for doubtful customer accounts of nil
(December 31, 2018: nil).
The aging of trade and other receivables at the reporting date that were not impaired was as follows:
Not past due
Past due 0-30 days
Past due 31-120 days
December 31, 2019
December 31, 2018
Gross value
Impairment
Gross value
Impairment
$
22.6
0.3
0.5
-
$
-
-
$
85.0
6.1
0.2
-
$
-
-
$
23.4
$
-
$
91.3
$
-
The Company held cash and cash equivalents of $2.1 million at December 31, 2019 (December 31,
2018: $8.4 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,
2019, a change of 1% in interest rates would result in a change of approximately $0.8 million to
annual net income (2018: immaterial change). The Company does not currently use derivative
instruments to reduce its exposure to interest rate risk.
65
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
20. 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
United States Dollar (“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 2019, 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, 2019, the Company had outstanding
obligations to sell an aggregate USD$12.0 million at an average exchange rate of CAD$1.3160 per
USD with maturities through January 30, 2020 (2018: USD $62.3 million at an average exchange
rate of CAD1.3300 per USD; JPY 155.0 million at a rate of JPY 80.40 per CAD).
All foreign currency gains and losses on forward contracts to December 31, 2019 have been
recognized in sales in the consolidated statement of comprehensive income and the fair value of
these instruments at December 31, 2019 was a net asset of $0.2 million which is included in trade
and other receivables on the consolidated statement of financial position (December 31, 2018: net
liability of $2.2 million). A net gain of $0.7 million (2018: net loss of $5.1 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 USD would result in a
gain (loss) of approximately $0.2 million in relation to the USD foreign exchange contracts held at
December 31, 2019.
Certain receivable balances at December 31, 2019 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, 2019, the Company’s accounts
receivable denominated in USD totaled USD$9.7 million. An increase (decrease) in the value of the
Canadian dollar by USD$0.01 would result in an immaterial change to USD denominated accounts
receivable. In addition, as at December 31, 2019, the Company had a total of USD$1.5 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.
(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, 2019, the Company had $134.8 million (December 31, 2018: $242.0 million)
available under its Credit Facility. The following are the contractual maturities of financial liabilities,
including estimated interest payments:
Carrying
amount
Contractual
cash flows
6 months
or less
6 - 12
months
2 - 3 years
4 - 5 years
More than 5
years
Accounts payable and accrued liabilities
Lease liabilities
Long-term debt
$
$
$
35.0
19.9
114.1
169.0
35.0
20.2
130.2
185.4
$
$
$
35.0
2.8
3.0
40.8
-
$
2.8
3.0
5.8
$
-
$
8.5
124.2
132.7
$
-
$
3.2
-
3.2
$
-
$
2.9
-
2.9
$
66
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
21. Other income (expense)
Years ended December 31,
2019
2018
Change in fair value of biological assets (Note 7)
Loss on disposal of assets
Other
22. Finance costs
Accounting policy
$
$
(2.8)
(0.7)
(1.9)
(5.4)
-
$
0.5
(1.6)
(1.1)
$
Finance costs comprise interest expense on long-term debt and the 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 19.
Supporting information
Years ended December 31,
2019
2018
Long-term debt
Net interest - defined benefit plan obligation
Finance costs - lease liabilities
Revolving credit facility
Amortization of deferred financing costs
Unwinding of discount on provisions
Other
23. Operating restructuring items
$
$
5.7
0.6
0.8
-
0.3
0.2
0.2
7.8
0.8
0.6
-
0.3
0.5
0.3
0.2
2.7
$
$
Included in operating restructuring expenses in 2019 were $3.5 million (2018: $4.8 million) which included
$1.4 million of non-operating costs incurred subsequent to the indefinite curtailment of the Company’s
Somass sawmill, and $2.1 million in severance and related expenses attributable to ongoing business
optimization initiatives.
24. 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. A large portion 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.
67
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
25. Revenue
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.
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,
2019
2018
Primary geographical markets
Canada
United States
China
Japan
Other
Europe
Major Products
Lumber
Logs
By-products
$
$
275.9
216.2
133.5
118.6
47.5
16.0
807.7
628.3
144.0
35.4
807.7
$
$
$
$
$
$
449.1
290.8
190.9
152.0
100.0
13.9
1,196.7
952.9
160.0
83.8
1,196.7
68
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
25. Revenue (continued)
(b) Contract balances
The following table provides information about receivables and contract liabilities from contracts with
customers.
Receivables
Contract liabilities
December 31,
2019
2018
$
23.4
52.4
$
91.3
54.4
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,
2019 as the amount was recognized as revenue.
(c) 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.
26. Related parties
Accounting policy
Key management personnel are the Company’s directors and executive officers as disclosed in its 2019 and
2018 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,
2018
2019
Salaries, directors' fees and short-term benefits
Post-employment benefits
Share-based compensation, including mark-to-market adjustment
$
$
4.5
0.4
(1.2)
3.7
7.2
0.3
2.7
10.2
$
$
At December 31, 2019, $3.5 million of key management compensation costs were included in accounts
payable and accrued liabilities and other liabilities (December 31, 2018: $9.1 million).
27. Expense categorization
Expenses by function:
Administration
Distribution expenses
Cost of goods sold
Years ended December 31,
2019
2018
$
$
19.9
103.1
731.4
854.4
21.1
144.5
927.7
1,093.3
$
$
69
Western Forest Products Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 2019 and 2018
(Tabular amounts expressed in millions of Canadian dollars except number of shares and per share amounts)
27. Expense categorization (continued)
Selected costs by nature:
Compensation costs
Amortization in cost of goods sold
Amortization in selling and administration
Years ended December 31,
2019
2018
$
155.5
43.8
1.6
$
213.4
39.3
0.9
Compensation costs are included in cost of goods sold and selling and administration.
28. Non-controlling interest
On March 29, 2019, the Company completed the sale of a 7% ownership interest in its newly formed TFL 44
Limited Partnership (“TFL 44 LP”) to Huumiis Ventures Limited Partnership, a limited partnership beneficially
owned by the Huu-ay-aht First Nations. The Company received $7.3 million in exchange for the 7%
ownership interest in TFL 44 LP.
29. Business combination
On February 1, 2019, the Company completed the acquisition of the assets of Columbia Vista Corporation
and certain related entities (“Columbia Vista”) located in Vancouver, Washington for consideration of
USD$28.4 million (CAD$37.7 million). Included in total consideration was USD$23.8 million (CAD$31.6
million) for the fair value of property, plant and equipment. The acquisition was accounted for as a business
combination, with Western deemed to be the acquirer.
Columbia Vista is a lumber manufacturer that focuses production on Douglas Fir specialty products for the
Japan and US markets. This acquisition aligns with the Company’s margin-focused business strategy, and
the newly combined Company brings together a complementary mix of products, customer relationships and
employees.
The Company incurred total acquisition-related other expenses of $1.4 million, of which $0.7 million was
recognized in net income during the year ended December 31, 2019, and $0.7 million was recognized in the
year-ended December 31, 2018. Since the acquisition date, Columbia Vista has contributed revenue of $69.0
million and net income of $4.1 million.
The following table presents the purchase price allocation to the identifiable assets and liabilities based on
their estimated fair values on the acquisition date.
Consideration allocated to:
Land
Buildings
Equipment
Inventory
Prepaid expenses and other
Right of use assets
Lease liabilities
Accounts payable
Total consideration
$
$
10.6
5.3
15.7
6.6
3.5
0.8
(0.8)
(4.0)
37.7
The fair value of property, plant & equipment was determined considering asset replacement value, net
realizable value of the assets acquired and other factors.
70
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”