2017
ANNUAL REPORT
S
T
E
L
L
A
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J
O
N
E
S
2
0
1
7
A
N
N
U
A
L
R
E
P
O
R
T
167.9
73.1
25.7
2007
2012
2017
NET INCOME GROWTH SINCE 2007
$1,886.1 M
IN TOTAL SALES
$207.4 M
OF OPERATING INCOME
$167.9 M
OF NET INCOME
A
Quarter Century
Building On Our Expertise
of
Railway Ties
Stella-Jones is a principal supplier
of the more than twenty million ties
purchased annually by the railroad
industry in North America.
94.4
34.5%
OF SALES
651.5
404.5
$651.5 M 2017
SALES
2007
2012
2017
SALES GROWTH SINCE 2007
34.7%
OF SALES
654.0
Utility Poles
Offering an unparalleled security of
supply, Stella-Jones is one of the
continent’s largest producers of
129.8
pressure-treated poles.
218.5
$654.0 M 2017
SALES
2007
2012
2017
SALES GROWTH SINCE 2007
1
2017 Annual Report
Stella-Jones Inc.
19.4%
OF SALES
5.0%
OF SALES
6.4%
OF SALES
366.2
Residential Lumber
Diversifying within its core
competence, Stella-Jones has made
residential lumber a rapidly growing
component of its core product
offering.
29.6
35.5
$366.2 M 2017
SALES
2007
2012
2017
SALES GROWTH SINCE 2007
Industrial Products
Stella-Jones generates additional
revenues by pre-plating ties for railway
clients, and by manufac tu ring marine
pilings, bridge timbers, highway guardrail
posts and panelized railway crossings.
15.9
94.5
59.0
$94.5 M 2017
SALES
2007
2012
2017
SALES GROWTH SINCE 2007
Logs and Lumber
119.9
Untreated lumber, as well as logs unsuitable
for use as poles, are marketed by Stella-
Jones as significant sources of ancillary
revenue and key to ensuring reliability and
minimizing costs for our poles and lumber.
$119.9 M 2017
SALES
N/A
2007
N/A
2012
2017
SALES GROWTH SINCE 2007
2
2017 Annual Report
Stella-Jones Inc.
5-Year Financial
Performance
For the years ended December 31
(millions of dollars, except per share data and ratios)
2017
$
2016
$
2015
$
2014
$
2013
$
OPERATING RESULTS
Sales
Operating income 1
Net income
FINANCIAL POSITION
Working capital
Total assets
Total debt 2
Shareholders’ equity
PER SHARE DATA
Basic earnings per common share
Diluted earnings per common share
Book value
Dividend per share
Average number of shares outstanding (000’s)
Average number of diluted shares outstanding (000’s)
Shares outstanding at year end (000’s)
FINANCIAL RATIOS
Operating margin
Return on average equity
Total debt 2 to total capitalization
Total debt 2 to trailing 12-month EBITDA 1
Working capital
1,886.1
1,838.4
1,559.3
1,249.5
1,011.3
207.4
167.9
233.2
153.9
220.1
141.4
155.7
103.8
138.7
92.5
779.4
1,786.0
455.6
1,115.5
2.42
2.42
16.09
0.44
69,324
69,333
69,342
928.0
854.4
615.1
517.0
1,960.9
1,778.9
1,289.0
1,071.9
694.0
1,026.4
669.9
913.5
444.6
692.3
372.9
572.2
2.22
2.22
14.81
0.40
69,215
69,231
69,303
2.05
2.04
13.21
0.32
69,018
69,153
69,137
1.51
1.50
10.04
0.28
68,802
69,027
68,949
1.35
1.34
8.33
0.20
68,681
69,053
68,697
11.0%
15.7%
12.7%
15.9%
14.1%
17.6%
12.5%
16.4%
13.7%
17.8%
0.29:1
0.40:1
0.42:1
0.39:1
0.39:1
1.89
7.04
2.62
8.58
2.75
6.36
2.52
8.33
2.41
8.97
1 These items are financial measures not prescribed by International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board and Chartered
Professional Accountant Canada Handbook Part 1 and are not likely to be comparable to similar measures presented by other issuers. Please refer to the Non-IFRS financial measures
section in the management’s discussion and analysis.
2
Including the current portion of long-term debt.
3
2017 Annual Report
Stella-Jones Inc.
Continued
Strength
As we mark the 25th anniversary of Stella-Jones’ founding,
and in line with the pattern of decades of success, we remain
singularly devoted to the pressure treatment of wood, and the
manufacture of high-quality railway ties, utility poles, residential
lumber and ancillary treated wood products. Following that
same historic pattern, the efficiency of our Company’s network
in 2017 once again improved, and our market reach and sales
also grew. These are the effects of our disciplined approach of
adhering strictly to our core competence – and increasingly
leveraging that specialized expertise to benefit our clients and
shareholders.
For Stella-Jones, 2017 was a year of Company-wide integration, with
negotiations leading to the smaller-scale, yet synergistic, early 2018
acquisition of the operations of Prairie Forest Products, a treated lumber and
pole producer. This purchase also represented the extension of our treating
facility network into the province of Manitoba for the first time. It was also a
year during which we faced strong commercial headwinds, particularly in the
railway tie sector which I referred to in my report last year.
4
2017 Annual Report
Stella-Jones Inc.
The Stella-Jones
Advantage
High inventory levels, which started to build across the industry in the fourth
Our Team: Stronger Together
quarter of 2016, put pressure on prices and margins. These inventories only
Numerous strategic acquisitions have
reached more normal historical levels during the latter part of 2017. Margins
brought assets, systems, market intelligence
also came under pressure in the utility pole product category, although this
and seasoned personnel to Stella-Jones.
situation mainly reflects our greater reach in the U.S. southeast, where the
With the resulting economies of scale,
predominant wood species gives rise to a different sales and margin mix for
leveraged network efficiencies, and ever-
the Company. Finally, our residential lumber activities had to cope with steep
increasing reliability as a supplier, our
rises in lumber prices in Canada and the United States, but the strength of
continent-wide team has consistently
Stella-Jones’ network still produced solid growth.
expanded the Company’s market reach.
Despite these challenges and without any boost from large-scale acquisitions,
Stella-Jones achieved a 17th consecutive year of sales and net income
Well-Positioned Network
growth. Consolidated sales and net income in 2017 reached $1.89 billion and
The network of Stella-Jones facilities
$168.0 million, respectively, compared with $1.84 billion and $154.0 million
spread across Canada and the U.S. reflect
in the previous year. Once again, the Company’s overall financial strength was
a methodical expansion strategy that has
demonstrated by a net reduction in total debt of more than $200.0 million.
achieved unrivalled continental coverage in
the wood-treating industry.
As Stella-Jones begins its second quarter century, we are optimistic about
the prospects for 2018 in all sectors of our business. The essential need
both in Canada and the United States to upgrade the infrastructure of the rail
and utility networks will underpin demand for our ties and poles, and strong
Expanding Possibilities
with Our Expertise
economic growth in both countries will provide support for our residential
Adhering to its core competence,
lumber sales.
Stella-Jones progressively strengthens its
expertise and the reliability of its products.
On behalf of the Board, I thank our shareholders for their continued support,
The Company thereby enhances the
and all our employees for their excellent and productive contribution in a year
confidence of its customers while
that tested our proven strengths.
widening its client base.
Tom A. Bruce Jones, CBE
Chairman of the Board
5
2017 Annual Report
Stella-Jones Inc.
Building
on Success
In 2017, for the seventeenth consecutive year, Stella-Jones
generated increased revenues and higher net income. This
record of sustained growth and increasing profitability has
been achieved by virtue of a tightly focused strategy that
combines strategic acquisitions, core product offerings and
steadily improved network efficiency.
Year after year, these principal characteristics of the Stella-
Jones business model have enhanced the Company’s market
scope, steadily enlarged its potential, and made it a consistent,
deeply entrenched and highly trusted force in the North
American wood treating industry. The result has been, and
continues to be, progressively heightened shareholder value.
6
Stella-Jones Inc.2017 Annual Report
Q
How did Stella-Jones perform in
New milestones in revenue and net income were reached by Stella-Jones in 2017. These
2017, and what were the main
achievements were driven by the continental reach of our network, the productivity of our people
factors contributing to its results?
and the confidence of our clients.
Annual sales amounted to $1.89 billion. Excluding the conversion effect caused by fluctuations
in the value of the Canadian dollar vis-à-vis the U.S. dollar and full-year contribution from 2016
acquisitions, sales rose by approximately 1.1%.
Net income totaled $167.9 million, or $2.42 per diluted share, compared with $153.9 million, or
$2.22 per diluted share, the previous year. The increase, which includes the gains from a one-time
non-cash deferred tax remeasurement for our U.S. subsidiaries from recent changes in the U.S.
Federal corporate income tax laws, represents the seventeenth straight year in which net income
has improved.
Q
How would you describe market
Throughout the year, demand remained generally healthy for our treated wood railway ties, utility
demand for the Company’s
poles and residential lumber. Our margins were negatively affected by pricing pressures in the
products in 2017, and its impact
railway tie category and by overall product mix. Still, the Company’s year-over-year larger presence
upon Stella-Jones’ performance?
in the utility pole and residential lumber markets helped partially offset the effect of lower year-
over-year pricing in the tie category.
7
2017 Annual Report
Stella-Jones Inc.
ASSURED CONTINUITY OF SUPPLY, MADE POSSIBLE BY A NETWORK OF THIRTY-
EIGHT PRODUCTION FACILITIES, TWELVE POLE PEELING FACILITIES AND A COAL
TAR DISTILLERY WHICH SPAN SIX PROVINCES AND NINETEEN STATES, IS A
DISTINGUISHING FEATURE OF STELLA-JONES’ SERVICE TO ITS CUSTOMERS.
8
Stella-Jones Inc.2017 Annual Report Q
As we look back on 2017 and
While Stella-Jones paused its acquisition program in 2017, the Company used its strong cash
forward to 2018 and beyond,
flow to reduce debt. The excellent financial condition of the Company also allowed for an increase
how would you characterize the
in dividend payments to shareholders. Dividend payments have now increased for thirteen
Company’s financial position?
consecutive years.
With our ratio of long-term debt to equity substantially improved, and with a strong working capital
position, the key aspects that signal a solid, well-grounded, forward-looking and growing company
are precisely the same aspects that characterize the financial position of Stella-Jones.
Q
How did the railway tie category
A critical and enduring part of North America’s freight and passenger transportation system
perform in 2017?
consists of hundreds of thousands of miles of railway track. These tracks are held together by
millions of crossties which must be replaced as they age. Stella-Jones is one of the continent’s
foremost suppliers of this vital product.
In 2017, given generally positive economic conditions, railway operators continued to invest in
new track and track upgrades. Although year-over-year pricing pressures affected revenues, as
the market needed to orderly dispose of high tie inventories and pass through lower untreated tie
costs, our sales volume for the year remained relatively healthy. Railway ties accounted for 34.5%
of total revenues.
Q
What results were achieved in the
Stella-Jones has always played a role in supplying this basic element of North America’s industrial
utility pole category?
infrastructure. The pressure-treated utility pole has long remained a key component for the
transmission and distribution of electricity and telecommunications. Over the last few decades,
Stella-Jones has grown substantially, such that today our Company is one of the continent’s
largest suppliers of poles, providing them in any required size, from a range of diverse wood
species and with a variety of preservative options.
In the utility pole category in 2017, we saw a gradual return to historical levels of maintenance
demand across the continent. In addition, our higher profile in the southeastern United States
improved our sales in that region. If we exclude the sales from acquisitions and the currency
conversion effect, the Company’s revenue from utility poles increased organically by 6.9%. The
category accounted for 34.7% of total sales.
Q
During the past year, did the
Yes. Our growing participation in the residential lumber market over the last few years reflects
Company see continued growth in
both our core expertise and strict business model. On the one hand, we are widely acknowledged
its sales of residential lumber?
experts in the pressure treatment of wood, and on the other hand, our model prescribes that
our diversification initiatives should align with our established competence. Accordingly, the
manufacture of pressure treated lumber for outdoor renovation projects has proven a perfect fit
for expanding our business.
9
2017 Annual Report
Stella-Jones Inc.
One Step Further with
Stella-Jones
Stella-Jones is powerfully demonstrating that adherence to core
competence does not preclude expansive diversification. In recent years,
the Company’s expertise in the pressure treatment of utility poles and
railway ties has enabled the Company to become a major supplier of
pressure-treated residential lumber used for outdoor applications such
as decks and fences. Thanks to the Company’s reputation for quality,
competitive pricing and reliable supply, Stella-Jones has continued to
grow this product category.
In 2017, we saw continued growth in residential lumber sales. With production capacity in both
Canada and the United States, and as the reputation of our brand strengthened, sales reached
$366.2 million, up approximately 6.0% over 2016. This increase also resulted from passing on higher
untreated lumber costs. Residential lumber accounted for 19.4% of total sales during the year.
Q
Apart from the three main
Yes, and significantly so. As we have done for many years, we supplied wood-treated products
product categories for which
for niche markets, and specialized services for our railway clients. In the category which we call
Stella-Jones is well known, did
Industrial Products, demand remained stable with revenue amounting to $94.5 million.
the Company generate revenue
from ancillary activities?
Finally, in our fifth category which we call Logs and Lumber and which involves the marketing of
untreated lumber as well as logs unsuitable for use as poles, sales were also important, totalling
$119.9 million.
Q
What additions or improvements
In regards to our network, we focused on applying the extensive experience we have gained
were made to Stella-Jones’
over many years in integrating acquisitions and unlocking synergies. Contributing to the goal of
network in 2017?
optimizing our efficiencies, the plants and other assets which the Company purchased in 2016 in
Texas, Louisiana and Canada have now been successfully integrated into our network.
Subsequent to year end, our acquisition of Prairie Forest Products, a treated lumber and wood
pole manufacturing facility in Manitoba, further reinforced the reliability of our production network
and distribution capabilities.
Moreover, our new state-of-the-art pole peeling and treating facility in Wisconsin, which became
fully operational in 2017, has made Stella-Jones a stronger supplier to our existing customers in
the utility pole market – and an increasingly attractive option for new customers.
10
2017 Annual Report
Stella-Jones Inc.
Q
What are the Company’s prospects
The Company is well positioned for growth. The reasons for our favourable outlook are clear:
going forward?
Following a consistent focus for decades, the Stella-Jones production network continues to
be fine-tuned with best practices derived from a score of acquisitions. Our extended network,
strategically located across the continent to optimize sourcing, production and delivery, brings to
all of our product categories a host of economies of scale.
Railway tie demand is effectively continuous by virtue of the need for replacements as ties age.
Stella-Jones’ position in this market is wide-ranging, and bolstered by longstanding customer
relationships.
In the utility pole market, where orders for renewed infrastructure are also relatively stable and
expected to grow in the years ahead, Stella-Jones offers a matchless range of products, and its
brand has become synonymous with assured supply.
As a participant in the residential lumber business, Stella-Jones has gained significant scope in
a short period of time. As we continue to apply our wood treating expertise, sourcing experience
and marketing resources to this category, we have every confidence that our market penetration
will grow.
The foregoing factors are only magnified by the positive outlook that typifies most forecasts for
the North American economy. Given the essential infrastructure roles within that economy that
are played by the industries we serve, we anticipate sustained demand for our core products –
and a corresponding growth in shareholder value.
I wish to take this opportunity to thank all the members of the Stella-Jones family of companies.
Our staff throughout the continent, at every posting and location, deserves our gratitude for their
skill and dedication. My thanks go out equally to the members of our Board for their counsel, and
our shareholders for their confidence and support.
Brian McManus
President and Chief Executive Officer
11
2017 Annual Report
Stella-Jones Inc.
2
3
4
5
1
15
17
16
18
19
20
22
23
24
25
26
21
14
11
10
9
13
12
6
8
7
38
39
37
36
35
28
27
32
33
34
31
29
30
Treating Facilities
Coal Tar Distillery
1 New Westminster, BC
14 Truro, NS
2 Prince George, BC
15 Arlington, WA
3 Galloway, BC
4 Carseland, AB
5 Neepawa, MB
16 Tacoma, WA
17 Sheridan, OR
18 Eugene, OR
27 Bangor, WI
28 Cameron, WI
29 Memphis, TN
30 Scooba, MS
31 Fulton, KY
6 South River, ON
19 Silver Springs, NV
32 Winslow, IN
7 Guelph, ON
8 Stouffville, ON
20 Eloy, AZ
21 Lufkin, TX
9 Peterborough, ON
22 Russellville, AR
10 Gatineau, QC
23 Rison, AR
11 Rivière-Rouge, QC
24 Converse, LA
12 Delson, QC
13 Sorel-Tracy, QC
25 Pineville, LA
26 Alexandria, LA
33 Montevallo, AL
34 Clanton, AL
35 Cordele, GA
36 Whitmire, SC
37 Goshen, VA
38 Dubois, PA
39 McAllisterville, PA
12
2017 Annual Report
Stella-Jones Inc.
13
MANAGEMENT’S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2017 AND 2016
2017 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 14
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSION & ANALYSIS
The following is Stella-Jones Inc.’s management discussion and
analysis (“MD&A”). Throughout this MD&A, the terms “Company”
and “Stella-Jones” shall mean Stella-Jones Inc., and shall include its
independent operating subsidiaries.
American states and are complemented by an extensive distribution
network across North America. As at December 31, 2017, Stella-
Jones’ workforce numbered approximately 1,880 employees.
This MD&A and the Company’s audited consolidated financial
statements were approved by the Board of Directors on March 13,
2018. The MD&A provides a review of the significant developments
and results of operations of the Company during the fiscal year
ended December 31, 2017 compared with the fiscal year ended
December 31, 2016. The MD&A should be read in conjunction with
the Company’s audited consolidated financial statements for the years
ended December 31, 2017 and 2016 and the notes thereto.
The MD&A contains statements that are forward-looking in nature.
Such statements involve known and unknown risks and uncertainties
that may cause the actual results of the Company to be materially
different from those expressed or implied by such forward-looking
statements. Such items include, among others: general economic
and business conditions, product selling prices, raw material and
operating costs, changes in foreign currency rates and other factors
referenced herein and in the Company’s continuous disclosure filings.
Unless required to do so under applicable securities legislation, the
Company’s management does not assume any obligation to update
or revise forward-looking statements to reflect new information, future
events or other changes.
The Company’s audited consolidated financial statements are reported
in Canadian dollars and are prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”) and Chartered Professional
Accountant (“CPA”) Canada Handbook Part I. All amounts in this
MD&A are in Canadian dollars unless otherwise indicated.
Additional information, including the Company’s annual information
form, quarterly and annual reports, and supplementary information is
available on the SEDAR web site at www.sedar.com. Press releases
and other information are also available in the Investor/Media Centre
section of the Company’s web site at www.stella-jones.com.
OUR BUSINESS
Stella-Jones Inc. is a leading producer and marketer of pressure
treated wood products. The Company supplies North America’s
railroad operators with railway ties and timbers, and the continent’s
electrical utilities and telecommunication companies with utility poles.
Stella-Jones also manufactures and distributes residential lumber and
accessories to retailers for outdoor applications, as well as industrial
products which include marine and foundation pilings, construction
timbers, wood for bridges and coal tar based products. The Company’s
common shares are listed on the Toronto Stock Exchange (TSX: SJ).
As at March 13, 2018, the Company operated thirty-eight wood
treating plants, twelve pole peeling facilities and a coal tar distillery.
These facilities are located in six Canadian provinces and nineteen
Stella-Jones Inc.
Stella-Jones enjoys a number of key attributes which should further
enhance the Company’s strategic positioning and competitive
advantage in the wood treating industry. Among these are the ability to
service clients from multiple plants, a solid financial position that allows
the Company to stockpile and air-season green wood for major long-
term contracts, a long-standing stable source of wood supply, and a
registration to produce and sell the wood preservative, creosote.
OUR MISSION
Stella-Jones’ objective is to be the performance leader in the
wood preserving industry and a model corporate citizen, exercising
environmental responsibility and integrity.
Stella-Jones will achieve these goals by focusing on customer
satisfaction, core products, key markets, innovative work practices
and the optimal use of its resources.
Stella-Jones is committed to providing a safe, respectful and
productive environment for its employees, where problem solving,
initiative and high standards of performance are rewarded.
NON-IFRS FINANCIAL MEASURES
This MD&A contains financial measures not prescribed by IFRS and
not likely to be comparable to similar measures presented by other
issuers. These measures are as follows:
• Operating income before depreciation of property, plant and
equipment and amortization of intangible assets (also referred to
as earnings before interest, taxes, depreciation and amortization
[“EBITDA”]).
• Operating income.
• Cash flow from operating activities before changes in non-cash
working capital components and interest and income taxes paid.
• Operating margin: Operating income divided by sales.
• Return on average equity: Net income divided by the mathematical
average of current year’s shareholders’ equity and the previous
year’s shareholders’ equity.
• Working capital ratio: Total current assets divided by total current
liabilities.
• Total debt to total capitalization: Long-term debt (including the
current portion) divided by the sum of shareholders’ equity and long-
term debt (including the current portion).
• Total debt to EBITDA: Long-term debt (including the current portion)
divided by EBITDA.
Management considers these non-IFRS measures to be useful
information
the
Company’s financial condition and operating results as they provide
additional measures of its performance.
to assist knowledgeable
regarding
investors
MANAGEMENT’S DISCUSSION AND ANALYSIS
15
Reconciliation of EBITDA and operating
income to net income*
(in millions of dollars)
Net income for the period
Plus:
Provision for (recovery of) income taxes
Financial expenses
Operating income
Depreciation and amortization
EBITDA
* Numbers may not add exactly due to rounding.
Three-month periods ended
Fiscal years ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
$
51.1
(26.0)
3.9
29.0
8.1
37.1
$
18.5
5.4
4.2
28.2
8.8
36.9
$
167.9
20.5
19.0
207.4
33.2
240.6
$
153.9
61.5
17.9
233.2
31.6
264.8
SELECTED ANNUAL FINANCIAL INFORMATION (years ended December 31)
Income
(in millions of dollars, except per share data)
Sales
Operating income
Net income
Basic earnings per common share
Diluted earnings per common share
Financial Position
(in millions of dollars)
Current assets
Total assets
Long-term debt 1
Total liabilities
Shareholders’ equity
1
Including the current portion.
KEY PERFORMANCE INDICATORS (years ended December 31)
Operating margin
Return on average equity
Working capital ratio
Total debt to total capitalization
Total debt to EBITDA
Dividend per share
2017
$
2016
$
2015
$
1,886.1
1,838.4
1,559.3
207.4
167.9
2.42
2.42
2017
$
908.4
1,786.0
455.6
670.4
1,115.5
233.2
153.9
2.22
2.22
2016
$
1,050.4
1,960.9
694.0
934.5
1,026.4
220.1
141.4
2.05
2.04
2015
$
1,013.8
1,778.9
669.9
865.4
913.5
2017
11.0%
15.7%
7.04
0.29:1
1.89
$0.44
2016
12.7%
15.9%
8.58
0.40:1
2.62
$0.40
2015
14.1%
17.6%
6.36
0.42:1
2.75
$0.32
2017 Annual Report
16
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOREIGN EXCHANGE
The table below shows exchange rates applicable to the years ended December 31, 2017 and 2016. Average rates are used to translate sales
and expenses for the periods mentioned, while closing rates translate assets and liabilities of foreign operations and monetary assets and liabilities
of the Canadian operations.
Cdn$/US$
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year
2017
2016
Average
Closing
Average
Closing
1.3240
1.3491
1.2664
1.2754
1.3038
1.3310
1.2977
1.2480
1.2545
1.2545
1.3792
1.2886
1.3030
1.3319
1.3257
1.2987
1.2917
1.3117
1.3427
1.3427
INDUSTRY OVERVIEW
ANNUALIZED RAILWAY TIE PURCHASES AND INVENTORY
(in millions of ties)
Railway ties
As reported by the Railway Tie Association (“RTA”), railway tie purchases
for 2017 stood at 23.4 million ties, representing a slight decrease from
24.2 million ties in 2016. The RTA calculates purchases based on the
difference between monthly production and the change in inventory,
as reported by its members. Lower demand led to adjustments in
production levels, resulting in a sharp reduction in industry inventory,
which stood at 18.0 million ties as at December 31, 2017. As a result,
the inventory-to-sales ratio reached 0.77:1 as at December 31, 2017,
down from 0.91:1 twelve months earlier, and in-line with the previous
ten-year average ratio of 0.79:1.
In the last decade, volatile fuel prices and persistent highway
congestion have increasingly caused shippers to favour rail, a more
fuel efficient transportation mode, over trucks. The resulting increase
in rail transportation volume, combined with an aging infrastructure,
yielded greater demand for products and services related to the
modernization and extension of the North American rail network,
including railway ties.
Reflecting a stronger economy compared to the previous year, total
traffic on North American railroads increased by 4.8% in 2017,
according to data released by the Association of American Railroads.
Carload volume increased by 4.2%, mainly due to higher shipments
of coal, as well as of metals and minerals, while intermodal trailer and
container volume rose 5.3% from 2016 levels.
30
20
10
0
25
20
15
10
5
0
1992
1997
2002
2007
2012
2017
Source: Railway Tie Association
Purchases
Inventory
FREIGHT HAULED ON NORTH AMERICAN RAILROADS
(in millions of units)
2012
2013
2014
2015
2016
2017
Source: Association of American Railroads
Intermodal
Carloads
Stella-Jones Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
17
OPERATING RESULTS
Sales
Sales for the year ended December 31, 2017 reached $1,886.1 million, up 2.6% from last year’s sales of $1,838.4 million. Acquisitions completed
in 2016 contributed additional sales of $44.0 million throughout 2017, while the conversion effect from fluctuations in the value of the Canadian
dollar, Stella-Jones’ reporting currency, versus the U.S. dollar, decreased the value of U.S. dollar denominated sales by about $17.0 million when
compared with the previous year. Excluding these factors, sales increased approximately $20.8 million, or 1.1%.
SALES BY PRODUCT CATEGORY
(% of sales)
RAILWAY TIES
34.5%
UTILITY POLES
34.7%
RAILWAY TIES
39.0%
UTILITY POLES
31.5%
2017
$1,886.1 M
2016
$1,838.4 M
LOGS AND
LUMBER
6.4%
INDUSTRIAL
PRODUCTS
5.0%
RESIDENTIAL
LUMBER
19.4%
LOGS AND
LUMBER
5.5%
INDUSTRIAL
PRODUCTS
5.2%
RESIDENTIAL
LUMBER
18.8%
Railway ties
Railway tie sales for 2017 amounted to $651.5 million, versus sales of $716.3 million
in 2016. Excluding the conversion effect from fluctuations in the value of the
Canadian dollar against the U.S. currency, railway tie sales decreased approximately
$58.0 million, or 8.1%, mainly due to lower year-over-year pricing. Railway tie sales
accounted for 34.5% of the Company’s total sales in 2017.
RAILWAY TIE SALES
(in millions of $)
716.3
651.5
Utility poles
Utility pole sales reached $654.0 million in 2017, representing an increase of $74.7 million,
or 12.9%, from sales of $579.2 million in 2016. Excluding the additional contribution
from acquisitions completed in 2016 and the currency conversion effect, sales increased
approximately $40.0 million, or 6.9%. This improvement essentially reflects organic sales
growth in the southeastern United States and a return to historical maintenance demand in
2017. Utility pole sales accounted for 34.7% of the Company’s total sales in 2017.
2017
2016
UTILITY POLE SALES
(in millions of $)
654.0
579.2
2017
2016
RESIDENTIAL LUMBER SALES
(in millions of $)
366.2
345.7
2017 Annual Report
2017
2016
INDUSTRIAL PRODUCT SALES
(in millions of $)
94.5
96.3
2017
2016
LOGS AND LUMBER SALES
(in millions of $)
119.9
100.8
2017
2016
RAILWAY TIE SALES
(in millions of $)
716.3
651.5
2017
2016
UTILITY POLE SALES
(in millions of $)
654.0
579.2
2017
2016
RESIDENTIAL LUMBER SALES
(in millions of $)
366.2
345.7
2017
2016
INDUSTRIAL PRODUCT SALES
(in millions of $)
94.5
96.3
2017
2016
LOGS AND LUMBER SALES
(in millions of $)
119.9
100.8
2017
2016
18
MANAGEMENT’S DISCUSSION AND ANALYSIS
Residential lumber
Sales in the residential lumber category totalled $366.2 million in 2017, up from
$345.7 million in 2016. Excluding the currency conversion effect, sales increased
$21.5 million, or 6.2%, mainly reflecting higher year-over-year selling prices explained by
untreated lumber cost increases. Residential lumber accounted for 19.4% of Stella-Jones’
sales in 2017.
Industrial products
Industrial product sales were $94.5 million in 2017, compared with $96.3 million in 2016.
Excluding the additional contribution from acquisitions completed in 2016 and the currency
conversion effect, sales decreased 2.3%, mainly due to lower sales of marine pilings in
Canada. Industrial products represented 5.0% of sales in 2017.
Logs and lumber
Logs and lumber sales amounted to $119.9 million in 2017, up from $100.8 million in
2016. This increase reflects the timing of lumber purchase and resale activities, the timing
of timber harvesting, as well as higher selling prices due to increased lumber costs. Logs
and lumber represented 6.4% of sales in 2017.
Stella-Jones Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
19
SALES BY GEOGRAPHIC REGION
(% of sales)
2017
2016
70.2%
UNITED STATES
29.8%
CANADA
70.9%
UNITED STATES
29.1%
CANADA
$ 1,324.2 M $ 561.9 M
$ 1,302.6 M $ 535.8 M
Sales in the United States amounted to $1,324.2 million, or 70.2%
of sales in 2017, representing an increase of $21.6 million, or 1.7%,
over 2016. The year-over-year rise mainly stems from higher sales in
the utility pole and residential lumber product categories, as well as
from the additional contribution from acquisitions completed in 2016.
These factors were partially offset by lower railway tie sales and a
lower conversion rate on U.S. dollar denominated sales.
Sales in Canada increased by $26.1 million, or 4.9% in 2017 to reach
$561.9 million, representing 29.8% of Stella-Jones’ total sales. The
variation is attributable to higher sales in the residential lumber and
logs and lumber product categories mainly arising from higher year-
over-year selling prices due to increased lumber costs.
Cost of sales
Cost of sales, including depreciation of property, plant and equipment,
as well as amortization of intangible assets, was $1,586.3 million,
or 84.1% of sales, in 2017. This compares with $1,504.6 million, or
81.8% of sales, in 2016. The increase in absolute dollars essentially
reflects a higher business volume for the year and increased untreated
lumber costs in the residential lumber category, partially offset by a
lower average rate applied to convert U.S. dollar denominated costs.
As a percentage of sales, the increase is mainly attributable to lower
selling prices for railway ties and a less favourable geographical mix in
the utility pole category.
Depreciation and amortization charges totalled $33.2 million for the
year ended December 31, 2017, versus $31.6 million a year earlier.
The year-over-year increase is mainly due to the depreciation and
amortization charges related to the tangible and intangible assets of
the 2016 acquisitions for the full year, as well as to higher depreciation
charges related to the completion of construction of a new wood
treating facility in Cameron, Wisconsin.
As a result, gross profit reached $299.9 million or 15.9% of sales in
2017, versus $333.7 million or 18.2% of sales in 2016.
Selling and administrative
Selling and administrative expenses for 2017 were $93.8 million, or
5.0% of sales, compared with expenses of $95.0 million, or 5.2% of
sales, in 2016. The variation in monetary terms mainly results from
a decrease of $2.1 million in profit sharing expenses, a $1.1 million
reduction in stock-based compensation, as well as the effect of
currency translation on U.S.-based selling and administrative expenses.
Last year’s expenses also included approximately $2.9 million in
acquisition costs directly related to business acquisitions completed
in 2016.
Other losses (gains), net
Stella-Jones’ other net gains of $1.3 million for the year ended
December 31, 2017 mainly consisted of a $4.1 million foreign
exchange gain and a $2.1 million reversal of a provision for site
remediation, partially offset by a $3.2 million expense on freight and
distribution accruals and a $1.3 million loss on asset disposal. In
2016, other net losses of $5.5 million were mostly related to final site
remediation provisions of $5.2 million related to a non-operating site.
The Company’s exposure to foreign exchange gains or losses from
currency fluctuations is related to its sales and purchases in U.S. dollars
by its Canadian-based operations and to U.S. dollar denominated long-
term debt held by its Canadian company. Stella-Jones U.S. Holding
Corporation, the Company’s wholly-owned U.S. subsidiary, is a foreign
operation that has a different functional currency from that of the
Company and foreign exchange gains and losses on translating its
financial statements are deferred in shareholders’ equity. The Company
monitors its transactions in U.S. dollars generated by Canadian-based
operations. Its basic hedging activity for economic purposes consists
of entering into foreign exchange forward contracts for the sale of
U.S. dollars and purchasing certain goods and services in U.S. dollars.
The Company will also consider foreign exchange forward contracts
for the purchase of U.S. dollars for significant purchases of goods and
services that are not covered by natural hedges.
2017 Annual Report
20
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial expenses
Financial expenses reached $19.0 million in 2017, up from
$17.9 million in 2016. This increase is attributable to a higher
fixed interest rate applicable to the senior notes issued through
a private placement on January 17, 2017, partially offset by the
effect of local currency conversion on financial expenses related
to the Company’s U.S. dollar denominated borrowings.
Income before income taxes and income tax expenses
Stella-Jones generated income before income taxes of $188.4 million,
or 10.0% of sales, in 2017, versus $215.4 million, or 11.7% of sales,
in 2016. The year-over-year decrease in income before income taxes
is attributable to lower gross profit, as detailed above.
Stella-Jones’ provision for income taxes totaled $20.5 million in
2017, representing an effective tax rate of 10.9%. In 2016, income
tax expenses stood at $61.5 million, equivalent to an effective rate
of 28.5%. The lower effective tax rate for 2017 reflects changes to
the U.S. Federal Corporate income tax rate following the enactment
of the Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. The
Act will favourably affect the Company’s U.S. subsidiaries, specifically
by reducing the top federal corporate income tax rate from 35.0%
to 21.0%, effective January 1, 2018. Although the Act only comes
into effect on January 1, 2018, changes to the tax rates required the
remeasurement of the deferred income tax liability as at December
31, 2017. As a result of the reduction in tax rates, a one-off non-cash
deferred tax benefit of $30.0 million was recognized in the statement
of income for the fourth quarter ended December 31, 2017 which
explains the lower effective tax rate for 2017. Management expects
the Company’s overall effective tax rate for 2018 to be approximately
26.0%.
Net income
Net income for the year ended December 31, 2017 reached
$167.9 million, or $2.42 per diluted share, compared with
$153.9 million, or $2.22 per diluted share, in 2016. This represents
a year-over-year increase in net income of 9.1%.
BUSINESS ACQUISITION
On December 19, 2017, the Company completed the acquisition of
substantially all the operating assets employed in the business of
Wood Products Industries Inc. (“WPI”) located in South River, Ontario.
The Company plans on using these assets to treat residential lumber.
Total cash outlay associated with the acquisition was approximately
$4.2 million, excluding acquisition costs of approximately $234,000,
recognized in the consolidated statement of income under selling
and administrative expenses. The Company financed the acquisition
through its existing syndicated credit facilities.
SUBSEQUENT EVENT
On February 9, 2018, the Company completed the acquisition of
substantially all the operating assets employed in the business of
Prairie Forest Products (“PFP”), a division of Prendiville Industries Ltd.
located at its wood treating facility in Neepawa, Manitoba, as well as
at its peeling facility in Birch River, Manitoba. PFP manufactures, sells
and distributes utility poles and residential lumber and sales for the
twelve-month period ending October 31, 2017 were approximately
$35.1 million.
Total cash outlay associated with the acquisition was $26.5 million,
excluding acquisition costs of approximately $326,000 of which
$159,000 was recognized in the 2017 consolidated statement of
income under selling and administrative expenses. The Company
financed the transaction through its existing syndicated credit facilities.
At the time of preparing the MD&A, Management did not have on
hand all the required information to determine the fair value of assets
acquired and liabilities assumed. Preliminary information indicates that
property plant and equipment and inventory represent approximately
$7.8 million and $9.5 million respectively from the total purchase price
of $26.5 million.
Stella-Jones Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
21
QUARTERLY RESULTS
The Company’s sales follow a seasonal pattern, with railway tie, utility pole and industrial product shipments strongest in the second and third
quarters to provide industrial end users with product for their summer maintenance projects. Residential lumber sales also follow a similar seasonal
pattern. In the fall and winter seasons, there tends to be less activity; thus the first and fourth quarters are typically characterized by relatively lower
sales levels.
The table below sets forth selected financial information for the Company’s last eight quarters, ending with the most recently completed financial
year:
2017
For the quarters ended
March 31
June 30
Sept. 30
Dec. 31
Total
(in millions of dollars, except per share data)
$
$
$
$
$
Sales
396.9
594.2
517.6
377.4
1,886.1
Operating income before depreciation of property,
plant and equipment and amortization of intangible assets 1
Operating income 1
Net income for the period
Earnings per common share
Basic and diluted
2016
49.1
40.8
25.9
83.1
74.5
48.9
71.3
63.1
42.0
37.1
29.0
51.1
240.6
207.4
167.9
0.37
0.71
0.61
0.74
2.42
For the quarters ended
March 31
June 30
Sept. 30
Dec. 31
Total
(in millions of dollars, except per share data)
$
$
$
$
$
Sales
421.0
563.1
512.6
341.7
1,838.4
Operating income before depreciation of property,
plant and equipment and amortization of intangible assets 1
Operating income 1
Net income for the period
Earnings per common share
Basic and diluted
61.7
54.6
35.0
89.9
83.2
54.7
76.3
67.3
45.7
36.9
28.2
18.5
264.8
233.2
153.9
0.51
0.79
0.66
0.27
2.22
1 Operating income before depreciation of property, plant and equipment and amortization of intangible assets and operating income are financial measures not prescribed by
IFRS and are not likely to be comparable to similar measures presented by other issuers. Management considers they represent useful information for comparison with other
similar operations in the industry, as they present financial results related to industry practice, not affected by non-cash charges or capital structure. Operating income before
depreciation of property, plant and equipment and amortization of intangible assets and operating income are readily reconcilable to net income presented in the consolidated
financial statements, as there are no adjustments for unusual or non-recurring items.
Note: due to rounding, the sum of results for the quarters may differ slightly from the total shown for the full year.
2017 Annual Report
The value of accounts receivable stood at $163.5 million as at
December 31, 2017, up from $160.8 million as at December 31, 2016.
The variation results from higher business activity in the fourth quarter
of 2017 compared to last year, partially offset by the effect of local
currency translation on U.S. dollar denominated accounts receivable.
The value of inventories reached $718.5 million as at December 31,
2017, versus $854.6 million as at December 31, 2016. This decrease
essentially stems from lower untreated railway tie prices and volumes
as well as the effect of local currency translation on U.S. inventories.
Because of the long periods required to air season wood, which can
occasionally exceed nine months before a sale is concluded, inventories
are a significant component of working capital. In addition, important
raw material and finished goods inventory are required at certain times
of the year to support the residential lumber product category. However,
solid relationships and long-term contracts with certain customers
enable the Company to better ascertain inventory requirements. The
Company believes that its cash flows from operations and available
credit facilities are adequate to meet its working capital requirements
for the foreseeable future.
Property, plant and equipment amounted to $472.0 million as at
December 31, 2017, compared with $463.7 million as at December
31, 2016. This increase is essentially related to purchases of property,
plant and equipment for the year ($52.2 million), partially offset by a
depreciation charge of $17.9 million and the effect of local currency
translation on U.S.-based property, plant and equipment.
The value of intangible assets reached $124.4 million as at December
31, 2017. Intangible assets include customer relationships, the
discounted value of the non-compete agreements, a creosote
registration, cutting rights, standing timber and a favourable land
lease agreement. As at December 31, 2016, intangible assets were
$147.3 million. The year-over-year decrease is mainly explained by an
amortization charge of $15.3 million for 2017 and the effect of local
currency translation on U.S. dollar denominated intangible assets.
As at December 31, 2017, the value of goodwill stood at $270.3 million,
down from $287.4 million a year earlier. This decrease in goodwill
mostly reflects the effect of local currency translation on U.S. dollar
denominated goodwill.
22
MANAGEMENT’S DISCUSSION AND ANALYSIS
Fourth Quarter Results
Sales for the fourth quarter of 2017 amounted to $377.4 million, up
10.4% from sales of $341.7 million for the same period in 2016.
Excluding the conversion effect from fluctuations in the value of the
Canadian dollar, versus the U.S. dollar, sales increased approximately
$48.3 million, or 14.1%.
Sales of railway ties reached $118.0 million, versus $113.1 million
last year. Excluding the currency conversion effect, railway tie sales
rose 8.7% driven by higher year-over-year volume. Utility pole sales
amounted to $162.9 million, up 12.7% from $144.6 million last
year. Excluding the contribution from acquisitions and the currency
conversion effect, sales grew 14.5% as a result of organic sales growth
in the southeastern United States and healthy maintenance demand.
Residential lumber sales reached $48.6 million, up from $44.5 million
last year, reflecting solid market demand. Industrial product sales
amounted to $20.0 million, up from $15.0 million a year ago, as a
result of higher sales of rail related products. Finally, logs and lumber
sales stood at $27.9 million, versus $24.5 million last year, driven in
most part by the passthrough of higher lumber cost to customers.
Gross profit amounted to $53.5 million, or 14.2% of sales, in the
fourth quarter of 2017, versus $52.0 million, or 15.2% of sales, in the
fourth quarter of 2016. The decrease as a percentage of sales mainly
reflects the sales mix within each product category and softer pricing
in certain regions. Operating income totalled $29.0 million, or 7.7% of
sales, in the fourth quarter of 2017, versus $28.2 million, or 8.2% of
sales, last year.
Net income for the period reached $51.1 million, or $0.74 per diluted
share, compared with $18.5 million, or $0.27 per diluted share, in the
prior year. The year-over-year increase is attributable to a one-off non-
cash tax benefit stemming from the remeasurement of deferred tax
liabilities following a reduction in the U.S. top federal corporate income
tax rate.
STATEMENT OF FINANCIAL POSITION
As a majority of the Company’s assets and liabilities are denominated
in U.S. dollars, exchange rate variations may significantly affect their
value. As such, the depreciation of the U.S. dollar relative to the
Canadian dollar as at December 31, 2017, compared to December 31,
2016 (see Foreign Exchange on page 16), results in a lower value of
assets and liabilities denominated in U.S. dollars, when expressed in
Canadian dollars.
Assets
As at December 31, 2017, total assets and current assets reached
$1.79 billion and $908.4 million, respectively, down from $1.96 billion
and $1.05 billion, respectively, as at December 31, 2016. These
decreases are mainly attributable to a reduction in inventories and to
the effect of local currency translation on U.S.-based assets.
Stella-Jones Inc.
Liabilities
As at December 31, 2017, Stella-Jones’ total liabilities stood at
$670.4 million, down from $934.5 million as at December 31, 2016.
This variation mainly reflects the decrease in total long-term debt, as
explained below, and the effect of local currency translation on U.S.
dollar denominated liabilities.
The value of current liabilities was $129.0 million as at December 31,
2017, up from $122.4 million a year earlier. This variation is essentially
due to a $10.1 million increase in accounts payable and accrued
liabilities related to higher business activity in the fourth quarter of
2017 compared to last year.
The Company’s long-term debt, including the current portion, amounted
to $455.6 million as at December 31, 2017, versus $694.0 million
as at December 31, 2016. The decrease essentially reflects a solid
operating cash flow generation during the year, as well as the effect of
local currency translation on U.S. dollar denominated long-term debt.
As at December 31, 2017, an amount of $354.5 million was available
against the Company’s syndicated credit facilities of $595.9 million
(US$475.0 million).
Shareholders’ equity
Shareholders’ equity was $1.12 billion as at December 31, 2017
compared with $1.03 billion as at December 31, 2016. This increase
is attributable to net income of $167.9 million for the year, partially
offset by dividends on common shares totalling $30.5 million and
a $48.7 million unfavourable variation in the value of accumulated
other comprehensive income resulting from the effect of currency
fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth summarized cash flow components for
the periods indicated:
Summary of cash flows (years ended December 31)
(in millions of dollars)
Operating activities
Financing activities
Investing activities
Net change in cash and
cash equivalents
Cash and cash equivalents –
beginning
Cash and cash equivalents –
end
2017
$
301.1
(239.9)
(58.5)
2.7
3.7
6.4
2016
$
181.8
(9.5)
(175.6)
(3.3)
7.0
3.7
MANAGEMENT’S DISCUSSION AND ANALYSIS
23
The Company’s activities, acquisitions and purchases of property, plant
and equipment are primarily financed by cash flows from operating
activities, available cash, long-term debt, and the issuance of common
shares. The Company plans on spending between $30.0 million to
$40.0 million on property, plant and equipment in the upcoming year,
half of which is related to efficiency improvements with the balance
dedicated to sustaining operations. The Company’s syndicated
credit facilities are made available for a five-year term and are thus
considered long-term debt.
Cash flow from operating activities before changes in non-cash
working capital components and interest and income taxes paid
was $245.7 million for the year ended December 31, 2017, versus
$268.9 million in 2016. This variation mostly reflects a lower operating
income for the year.
Changes in non-cash working capital components increased liquidity
by $105.7 million in 2017. The main element of this variation was a
decrease of $103.2 million in inventories related to lower untreated
railway tie prices and volumes. In 2016, changes in non-cash working
capital components had reduced liquidity by $30.1 million, mainly due
to a $39.9 million increase in inventories.
Interest and income taxes paid further reduced liquidity by $15.8 million
and $34.5 million, respectively, in 2017, versus $18.6 million and $38.3
million, respectively, a year earlier. The decrease in interest paid mainly
stems from lower year-over-year borrowings, while the decrease in
income taxes paid reflects a lower balance of taxes receivable as at
December 31, 2017.
As a result, cash flows provided by operating activities were
$301.1 million
in comparison with
$181.8 million in 2016.
in 2017, up significantly
Financing activities for the year ended December 31, 2017 reduced
liquidity by $239.9 million. The main factor explaining this cash usage
was a net decrease of $391.8 million in the syndicated credit facilities
resulting from a solid operating cash flow generation and the payment
of dividends on common shares totalling $30.5 million. These factors
were partially offset by a $184.4 million net increase in long-term
debt mainly resulting from the January 17, 2017 private placement for
which proceeds were used to pay down a portion of the Company’s
syndicated credit facilities. For the year ended December 31, 2016,
financing activities had required liquidity of $9.5 million.
Investing activities required $58.5 million in cash during 2017.
Purchases of property, plant and equipment required an investment
of $52.2 million, including $4.1 million to finalize the construction of
a new pole peeling and pole treating facility in Cameron, Wisconsin,
while business acquisitions resulted in a cash outlay of $5.8 million.
In 2016, cash flows from investing activities had decreased liquidity
by $175.6 million due to business acquisitions ($107.3 million) and
purchases of property, plant and equipment ($63.2 million).
2017 Annual Report
24
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL OBLIGATIONS
The following table details the maturities of the financial obligations as at December 31, 2017:
(in millions of dollars)
Accounts payable and accrued liabilities
Long-term debt obligations
Minimum payments under operating lease obligations
Non-compete agreements
Total
Carrying Contractual
Amount Cash flow
Less than
1 year
1 – 3
years
4 – 5 More than
5 years
years
$
111.2
455.6
—
5.5
$
111.2
538.4
80.1
5.8
$
111.2
20.1
22.7
1.7
572.3
735.5
155.7
$
—
42.3
30.7
2.9
75.9
$
—
265.2
14.1
1.2
$
—
210.8
12.6
—
280.5
223.4
Note: due to rounding, the sum of results may differ slightly from totals.
SHARE AND STOCK OPTION INFORMATION
DIVIDENDS
As at December 31, 2017, the capital stock issued and outstanding
consisted of 69,342,095 common shares (69,303,307 as at
December 31, 2016). The following table presents the outstanding
capital stock activity for the year ended December 31, 2017:
Year Ended Dec. 31, 2017
Number of shares (in ‘000s)
Balance – Beginning of year
Stock option plan
Employee share purchase plans
Balance – End of year
69,303
10
29
69,342
As at March 13, 2018, the capital stock issued and outstanding
consisted of 69,342,095 common shares.
As at December 31, 2017, the number of outstanding options to
acquire common shares issued under the Company’s Stock Option
Plan was 45,000 (December 31, 2016 – 55,000) of which 33,000
(December 31, 2016 – 31,000) were exercisable. As at March 13,
2018, the number of outstanding options was 45,000 of which 33,000
were exercisable.
In 2017, the Board of Directors of Stella-Jones declared the following
quarterly dividends:
• $0.11 per common share payable on April 28, 2017 to
shareholders of record at the close of business on April 3, 2017.
• $0.11 per common share payable on June 27, 2017 to
shareholders of record at the close of business on June 5, 2017.
• $0.11 per common share payable on September 22, 2017 to
shareholders of record at the close of business on
September 1, 2017.
• $0.11 per common share payable on December 21, 2017 to
shareholders of record at the close of business on
December 4, 2017.
Subsequent to the end of the year, on March 13, 2018, the Board
declared a quarterly dividend of $0.12 per common share payable on
April 27, 2018 to shareholders of record at the close of business on
April 6, 2018.
The declaration, amount and date of any future dividends will continue
to be considered by the Board of Directors of the Company based upon
and subject to the Company’s covenants in its loan documentation as
well as its financial performance and cash requirements. There can
be no assurance as to the amount or timing of such dividends in the
future.
Stella-Jones Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
25
COMMITMENTS AND CONTINGENCIES
The Company is from time to time involved in various claims and legal
proceedings arising in the ordinary course of business. It is the opinion
of Management that a final determination of these proceedings cannot
be made at this time but should not materially affect the Company’s
financial position or results of operations.
The Company has issued guarantees amounting to $19.0 million
(2016 – $28.9 million) under letters of credit and various bid and
performance bonds. The Company’s management does not believe
these guarantees are likely to be called on and, as such, no provisions
have been recorded in the consolidated financial statements.
The Company’s operations are subject to Canadian federal and
provincial as well as U.S. federal and state environmental laws and
regulations governing, among other matters, air emissions, waste
management and wastewater effluent discharges. The Company
takes measures to comply with such laws and regulations. However,
the measures taken are subject to the uncertainties of changing legal
requirements, enforcement practices and developing technological
processes.
CURRENT ECONOMIC CONDITIONS
Operations
The Company’s core railway tie and utility pole product categories
are integral to the North American basic transportation and utility
infrastructure. Such infrastructure needs to be regularly maintained
which provides Stella-Jones with relatively steady demand for its
core products. In periods of economic growth, the Company may also
benefit from additional demand stemming from expansions to the
railway and telecommunication networks.
Based on current market conditions, and assuming stable currencies,
Stella-Jones’ total sales and operating margins are expected to
improve progressively in 2018 when compared to 2017. Operating
margins will remain softer in the first half of 2018.
In the railway tie product category, North American railroads will
continue to maintain their continental rail network, as operators
constantly seek optimal line efficiency. The Company is anticipating
that 2018 annual railway tie sales should be relatively stable when
compared to 2017. Meanwhile, softer pricing is expected to continue
to negatively impact operating margins in the first half of the year,
which should gradually return to historical levels by the end of 2018.
In the utility pole product category, demand for regular maintenance
projects has historically been relatively steady. Following a return
to normal demand patterns in 2017, the Company expects a better
sales mix within the product category in 2018. However, these factors
should be offset by slight cost increases for certain wood species and
the timing of price adjustments.
In the residential lumber product category, the Company expects to
further benefit from continued demand for new construction and
outdoor renovation projects in the North American residential and
commercial markets. Sales for 2018 are also expected to increase as
a result of higher wood cost.
Liquidity
As at December 31, 2017, the Company was in full compliance
with its debt covenants and contractual obligations. In addition, as
at December 31, 2017 an amount of $354.5 million was available
against the Company’s syndicated credit facilities of $595.9 million
(US$475.0 million).
Accounts receivable increased slightly in 2017, as the impact of higher
business activity in the fourth quarter of 2017 compared to last year
more than offset the effect of local currency translation on U.S. dollar
denominated accounts receivable. Management considers that all
recorded accounts receivable are fully collectible as major customers,
mainly Class 1 railroad operators, large retailers and large-scale utility
service providers, have good credit standing and limited history of
default.
Inventories decreased in 2017 due to lower untreated railway tie prices
and volume as well as the effect of local currency translation on U.S.
inventories. To ensure efficient treating operations, given that air-dried
wood reduces treatment cycles, inventory turnover has historically
been relatively low. Nevertheless, Management continuously monitors
the levels of inventory and market demand for its products. Production
is adjusted accordingly to optimize efficiency and capacity utilization.
RISKS AND UNCERTAINTIES
Economic Conditions
The difficulties in certain global credit markets, softening economies
and an apprehension among customers may negatively impact
the markets the Company serves in all of its operating categories.
Additionally, certain negative economic conditions may affect most or
all of the markets it serves at the same time, reducing demand for its
products and adversely affecting its operating results. These economic
conditions may also impact the financial condition of one or more of
the Company’s key suppliers, which could affect its ability to secure
raw materials and components to meet its customers’ demand for its
products.
Dependence on Major Customers
The Company is dependent on major customers for a significant portion
of its sales, and the loss of one or more of its major customers could
result in a significant reduction in its profitability. For the year ended
December 31, 2017, the Company’s top ten customers accounted
for approximately 46.4% of its sales. During this same period, the
Company’s two largest customers accounted for approximately 15.6%
and 10.0%, respectively, of its total sales.
2017 Annual Report
26
MANAGEMENT’S DISCUSSION AND ANALYSIS
Availability and Cost of Raw Materials
Management considers that the Company may be affected by potential
fluctuations in wood prices. While the Company has entered into long-
term cutting licenses and benefits from long-standing relationships
with private woodland owners and other suppliers, there can be no
assurance that such licenses will be respected or renewed on expiry,
or that its suppliers will continue to provide adequate timber to the
Company.
In addition, there are a limited number of suppliers for certain
preservatives that the Company employs in its production process,
which lessens the availability of alternate sources of supply in the
event of unforeseen shortages or disruptions of production. While the
Company is mitigating this risk by researching and identifying alternate
suppliers outside of its traditional sources of supply, there can be no
assurance that it will be able to secure the supply of all materials
required to manufacture its products.
Environmental Risk
The Company is subject to a variety of environmental laws and
regulations, including those relating to emissions to the air, discharges
into water, releases of hazardous and toxic substances, and remediation
of contaminated sites. These environmental laws and regulations
require the Company to obtain various environmental registrations,
licenses, permits and other approvals, as well as carry out inspections,
compliance testing and meet timely reporting requirements in order to
operate its manufacturing and operating facilities.
Compliance with these environmental laws and regulations will
continue to affect the Company’s operations by imposing operating
and maintenance costs and capital expenditures. Failure to comply
could result in civil or criminal enforcement actions, which could result,
among others, in the payment of substantial fines, often calculated
on a daily basis, or in extreme cases, the disruption or suspension of
operations at the affected facility.
Under various federal, provincial, state and local laws and regulations,
the Company could, as the owner, lessor or operator, be liable for
the costs of removal or remediation of contamination at its sites.
The remediation costs and other costs required to clean up or treat
contaminated sites could be substantial. However, in certain cases,
the Company benefits from indemnities from the former owners of
its sites. Contamination on and from the Company’s sites may subject
it to liability to third parties or governmental authorities for injuries to
persons, property or the environment and could adversely affect the
Company’s ability to sell or rent its properties or to borrow money using
such properties as collateral.
The possibility of major changes in environmental laws and regulations
is another risk faced by the Company. While it is not possible to predict
the outcome and nature of these changes, they could substantially
increase the Company’s capital expenditures and compliance costs at
the facilities affected.
While the Company has been party to environmental litigation in the
past, which have included, among others, claims for adverse physical
effects and diminution of property value, the outcomes and associated
costs have not been material. There is, however, no guarantee that
this will continue to be the case in the future, as the result of disputes
regarding environmental matters and conclusions of environmental
litigation cannot be predicted.
The Company’s business has grown and its image strengthened, in
large part by its consistent production and delivery of high quality
products, while maintaining as well, a high level of environmental
responsibility. Claims of environmentally irresponsible practices by
regulatory authorities or local communities could harm the reputation
of the Company. Adverse publicity resulting from actual or perceived
violations of environmental laws and regulations could negatively impact
customer loyalty, reduce demand, lead to a weakening of confidence
in the marketplace and ultimately, a reduction in the Company’s share
price. These effects could result even if the allegations are not valid
and the Company is not found liable.
Risks Related to Acquisitions
As part of its growth strategy, the Company intends to acquire
additional complementary businesses where such transactions are
economically and strategically justified. There can be no assurance
that the Company will succeed in effectively managing the integration
of other businesses which it might acquire. If the expected synergies
do not materialize, or if the Company fails to successfully integrate
such new businesses into its existing operations, this could have a
material adverse effect on the Company’s business, operating results,
profitability and financial position. The Company may also incur costs
and direct Management’s attention to potential acquisitions which may
never be consummated.
In addition, although
the Company performs due diligence
investigations in connection with its acquisitions, an acquired business
could have liabilities that the Company fails or is unable to uncover
prior to acquisition and for which the Company may be responsible.
Such liabilities could have a material adverse effect on the Company’s
business operating results, profitability and financial position.
Litigation Risk
The Company is subject to the risk of litigation in the ordinary
course of business by employees, customers, suppliers, competitors,
shareholders, government agencies, or others, through private actions,
class actions, administrative proceedings, regulatory actions or other
litigation. The outcome of litigation is difficult to assess or quantify.
Claimants in these types of lawsuits or claims may seek recovery
of very large or indeterminate amounts, and the magnitude of the
potential loss relating to these lawsuits or claims may remain unknown
for substantial periods of time. Regardless of outcome, litigation could
result in substantial costs to the Company. In addition, litigation could
divert Management’s attention and resources away from the day-to-
day operations of the Company’s business.
Stella-Jones Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
27
Insurance Coverage
The Company maintains property, casualty, general liability and
workers’ compensation insurance, but such insurance may not cover
all risks associated with the hazards of its business and is subject to
limitations, including deductibles and maximum liabilities covered. The
Company may incur losses beyond the limits, or outside the coverage,
of its insurance policies, including liabilities for environmental
compliance and remediation. In addition, from time to time, various
types of insurance for companies in the Company’s industry have not
been available on commercially acceptable terms or, in some cases,
have not been available at all. In the future, the Company may not
be able to obtain coverage at current levels, and its premiums may
increase significantly on coverage that it maintains.
Influence by Stella Jones International S.A.
As at December 31, 2017, Stella Jones International S.A. (“SJ
International”) owned or controlled 26,572,836 common shares of the
Company, which represented approximately 38.3% of the outstanding
common shares. On February 21, 2018, SJ International sold 5,000,000
shares as part of a secondary offering and reduced its ownership to
31.1%. Under this current share ownership, SJ International maintains
the ability to influence all matters submitted to the shareholders for
approval, including without limitation, the election and removal of
directors, amendments to the articles of incorporation and by-laws
and the approval of any business combination. The interests of SJ
International may not in all cases be aligned with interests of the other
shareholders.
Currency Risk
The Company is exposed to currency risks due to its export of goods
manufactured in Canada. The Company strives to mitigate such risks
by purchases of goods and services denominated in U.S. dollars. The
Company may also use foreign exchange forward contracts to hedge
contracted net cash inflows and outflows of U.S. dollars. The use of
such currency hedges involves specific risks including the possible
default by the other party to the transaction or illiquidity. Given these
risks, there is a possibility that the use of hedges may result in losses
greater than if hedging had not been used.
Interest Rate Fluctuations
As at December 31, 2017, all of the Company’s long-term debt was
at fixed interest rates, therefore reducing the Company’s exposure
to interest rate risk. The Company enters into interest rate swap
agreements in order to reduce the impact of fluctuating interest rates
on its long-term debt. These swap agreements require the periodic
exchange of payments without the exchange of the notional principal
amount on which the payments are based. The Company designates its
interest rate hedge agreements as cash flow hedges of the underlying
debt. Interest expense on the debt is adjusted to include the payments
made or received under the interest rate swap agreements. However,
if interest rates increase, the debt service obligations on the variable
rate indebtedness of the Company would increase even though the
amount borrowed remained the same, and this could have adverse
effect on the Company’s business operating results, profitability and
financial position.
Customers’ Credit Risk
The Company carries a substantial level of trade accounts receivable
on its statement of financial position. This value is spread amongst
numerous contracts and clients. Trade accounts receivable include an
element of credit risk should the counterparty be unable to meet its
obligations. Although the Company reduces this risk by dealing primarily
with Class 1 railways, as well as with utility and telecommunication
companies and other major corporations, there can be no assurance
that outstanding accounts receivable will be paid on a timely basis or
at all.
Cyber Risk
The Company relies on information technology to process, transmit
and store electronic data in its daily business activities. Despite its
security design and controls, and those of third-party providers,
the Company’s information technology and infrastructure may be
vulnerable to cyber-attacks by hackers or breach due to employee
error, malfeasance or other disruptions. Any such breach could result
in operational disruption and increased costs or the misappropriation
of sensitive data that could disrupt operations, subject the Company to
litigation and have a negative impact on its reputation. To limit exposure
to incidents that may affect confidentiality, integrity and availability of
information, the Company has invested in data privacy controls, threat
protections as well as detection and mitigation policies, procedures
and controls.
Corporate Tax Risk
In estimating the Company’s income tax payable, Management uses
accounting principles to determine income tax positions that are
likely to be sustained by applicable tax authorities. However, there is
no assurance that tax benefits or tax liability will not materially differ
from estimates or expectations. The tax legislation, regulation and
interpretation that apply to the Company’s operations are continually
changing. In addition, future tax benefits and liabilities are dependent
on factors that are inherently uncertain and subject to change,
including future earnings, future tax rates, and anticipated business in
the various jurisdictions in which Stella-Jones operates. Moreover, the
Company’s tax returns are continually subject to review by applicable
tax authorities. These tax authorities determine the actual amounts of
taxes payable or receivable, any future tax benefits or liabilities and the
income tax expense that Stella-Jones may ultimately recognize. Such
determinations may become final and binding on the Company. Any of
the above factors could have a material adverse effect on net income
or cash flow.
2017 Annual Report
28
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
SIGNIFICANT ACCOUNTING POLICIES
The Company uses derivative instruments to provide economic
hedges to mitigate various risks. The fair values of these instruments
represent the amount of the consideration that could be exchanged
in an arm’s length transaction between willing parties who are under
no compulsion to act. The fair value of these derivatives is determined
using prices in active markets, where available. When no such market
is available, valuation techniques are applied such as discounted cash
flow analysis. The valuation technique incorporates all factors that
would be considered in setting a price, including the Company’s own
credit risk, as well as the credit risk of the counterparty.
Interest Rate Risk Management
Interest rate risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in market
interest rates. The Company enters into both fixed and floating rate
debt. The risk management objective is to minimize the potential for
changes in interest rates to cause adverse changes in cash flows to
the Company. The Company enters into interest rate swap agreements
in order to reduce the impact of fluctuating interest rates on its short-
and long-term debt. As at December 31, 2017, the Company had
several interest rate swap agreements hedging $232.1 million in
debts and having maturity dates ranging from April 2021 to December
2021. These instruments are presented at fair value and designated
as cash flow hedges. The ratio as at December 31, 2017, of fixed and
floating debt was 100.0% and 0.0%, respectively, including the effects
of interest rate swap positions (66.25% and 33.75%, respectively, as
at December 31, 2016).
Foreign Exchange Risk Management
The Company’s financial results are reported in Canadian dollars, while
a portion of its Canadian-based operations are in U.S. dollars. Foreign
exchange risk is the risk that fluctuations in foreign exchange rates
may have on operating results and cash flows. The Company’s risk
management objective is to reduce cash flow risk related to foreign
denominated cash flows. When the natural hedge of sales and
purchases does not match, the Company considers foreign exchange
forward contracts to hedge contracted net cash inflows and outflows
of U.S. dollars. As at December 31, 2017, the Company had no foreign
exchange forward contract agreements in place.
The Company’s significant accounting policies are described in Note
2 to the December 31, 2017 and 2016 audited consolidated financial
statements.
The Company prepares its consolidated financial statements in
accordance with IFRS as issued by the IASB and CPA Canada
Handbook Part I.
The preparation of financial statements in conformity with IFRS
requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. Significant items subject to estimates and
assumptions include the estimated useful life of assets, impairment
of goodwill, determination of the fair value of the assets acquired and
liabilities assumed in the context of an acquisition and impairment of
long-lived assets. It is possible that actual results could differ from
those estimates, and such differences could be material. Estimates
are reviewed periodically and, as adjustments become necessary, they
are reported in the consolidated statement of income in the period in
which they become known.
CHANGES IN ACCOUNTING POLICIES
The Company has adopted the following revised standard along with
any consequential amendments, effective January 1, 2017. This change
was made in accordance with the applicable transitional provisions.
IAS 7 - Statement of Cash Flows
On January 29, 2016, the IASB published amendments to IAS 7,
Statement of Cash Flows. The amendments are intended to clarify
IAS 7 to improve information provided to users of financial statements
about an entity’s financing activities. The adoption of this revised
standard requires the Company to provide incremental disclosure in its
annual consolidated financial statements.
Impact of accounting pronouncements not yet implemented
Diesel and Petroleum Price Risk Management
Diesel and petroleum price risk is the risk that future cash flows
will fluctuate because of changes in price of diesel and petroleum.
In order to manage its exposure to diesel and petroleum prices and
to help mitigate volatility in operating cash flow, the Company uses
derivative commodity contracts based on the New York Harbor Ultra
Low Sulfur Diesel Heating Oil to reduce the risk of fluctuating prices
on these commodities. As at December 31, 2017, the Company had
commodity hedges for 1.2 million gallons of diesel and petroleum.
These instruments are presented at fair value and were not designated
for hedge accounting purposes.
IFRS 9 - Financial Instruments
The final version of IFRS 9, Financial Instruments (“IFRS 9”), was
issued by the IASB in July 2014 and will replace IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9 introduces a
model for classification and measurement, a single, forward-looking
expected loss impairment model and a substantially reformed approach
to hedge accounting. The new single, principle-based approach for
determining the classification of financial assets is driven by cash flow
characteristics and the business model in which an asset is held. The
new model also results in a single impairment model being applied
to all financial instruments, which will require more timely recognition
Stella-Jones Inc.
of expected credit losses. It also includes changes in respect of an
entity’s own credit risk in measuring liabilities elected to be measured
at fair value, so that gains caused by the deterioration of an entity’s
own credit risk on such liabilities are no longer recognized in profit
or loss. IFRS 9, which is to be applied retrospectively, is effective for
annual periods beginning on or after January 1, 2018. In addition,
an entity’s own credit risk changes can be applied early in isolation
without otherwise changing the accounting for financial instruments.
Management has not identified any material impacts resulting from the
transition to IFRS 9.
IFRS 15 - Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with
Customers, to specify how and when to recognize revenue as well as
requiring the provision of more informative and relevant disclosures.
IFRS 15 supersedes IAS 18, Revenue, IAS 11, Construction Contracts,
and other revenue related interpretations. In September 2015, the
IASB issued an amendment to IFRS 15 to defer the effective date by
one year to 2018. Management has not identified any material impacts
resulting from the transition to IFRS 15.
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16, Leases, which supersedes
IAS 17, Leases, and the related interpretations on leases: IFRIC 4,
Determining whether an arrangement contains a lease, SIC 15,
Operating Leases – Incentives and SIC 27, Evaluating the substance
of transactions in the legal form of a lease. The standard is effective
for annual periods beginning on or after January 1, 2019, with earlier
application permitted for companies that also apply IFRS 15, Revenue
from Contracts with Customers. The Company is currently evaluating
the impact of the standard on its consolidated financial statements.
The Company’s future minimum payments under operating leases
amount to $80.1 million. Under the new standard the Company will
recognize, in the statement of financial position, an asset (the right to
use the leased items), equivalent to the actualized cash flows of the
future minimum payments, and a corresponding financial liability.
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains appropriate information systems, procedures
and controls to ensure that information used internally and disclosed
externally is complete, accurate, reliable and timely. The disclosure
controls and procedures (“DC&P”) are designed to provide reasonable
assurance that information required to be disclosed in the annual
filings, interim filings or other reports filed under securities legislation
is recorded, processed, summarized and reported within the time
periods specified in the securities legislation and include controls
and procedures designed to ensure that information required to
be disclosed is accumulated and communicated to Management,
including its certifying officers, as appropriate to allow timely decisions
regarding required disclosure.
MANAGEMENT’S DISCUSSION AND ANALYSIS
29
The President and Chief Executive Officer and the Senior Vice-
President and Chief Financial Officer of the Company have evaluated,
or caused the evaluation of, under their direct supervision, the design
and operating effectiveness of the Company’s DC&P (as defined in
Regulation 52-109 - Certification of Disclosure in Issuer’s Annual and
Interim Filings) as at December 31, 2017, and have concluded that
such DC&P were designed and operating effectively.
INTERNAL CONTROL OVER FINANCIAL REPORTING
is
responsible
Management
for establishing and maintaining
adequate internal controls over financial reporting (“ICFR”) to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with IFRS.
Management has evaluated the design and operating effectiveness of
its ICFR as defined in Regulation 52-109 – Certification of Disclosure
in Issuer’s Annual and Interim Filings. The evaluation was based on
the criteria established in the “Internal Control-Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). This evaluation was performed by the President
and Chief Executive Officer and the Senior Vice-President and
Chief Financial Officer of the Company with the assistance of other
Company Management and staff to the extent deemed necessary.
Based on this evaluation, the President and Chief Executive Officer
and the Senior Vice-President and Chief Financial Officer concluded
that the ICFR were appropriately designed and operating effectively,
as at December 31, 2017.
In spite of its evaluation, Management does recognize that any
controls and procedures, no matter how well designed and operated,
can only provide reasonable assurance and not absolute assurance of
achieving the desired control objectives.
CHANGES IN INTERNAL CONTROL OVER
FINANCIAL REPORTING
No changes were made to the design of ICFR during the period from
October 1, 2017 to December 31, 2017 that have materially affected
or are reasonably likely to materially affect the Company’s ICFR.
2017 Annual Report
30
MANAGEMENT’S DISCUSSION AND ANALYSIS
OUTLOOK
The Company’s railway tie and utility pole product categories are
essential components of the North American basic transportation
and utility infrastructure. Such infrastructure needs to be regularly
maintained which provides Stella-Jones with relatively steady demand
for these products. In periods of economic growth, the Company may
also benefit from additional demand stemming from expansions to the
railway and telecommunication networks.
Based on current market conditions, and assuming stable currencies,
Stella-Jones’ total sales and operating margins are expected to improve
progressively in 2018 when compared to 2017. Operating margins will
remain softer in the first half of 2018. The Company’s overall effective
tax rate for 2018 is expected to be approximately 26.0%.
As one of the largest North American providers of industrial treated
wood products, Stella-Jones will leverage the strength of its
continental network to capture more of its existing clients’ business
in its core railway tie and utility pole markets, while diligently seeking
market opportunities in all product categories. The Company will also
remain focused on improving operating efficiencies throughout the
organization.
In the short-term, the Company will focus on integrating the PFP
acquisition as well as optimizing operating capacity and minimizing
costs throughout the organization. Cash generation and maintaining
a prudent use of leverage remain priorities for Management. The solid
cash flows provided by operating activities will be used to reduce debt,
invest in working capital as well as in property, plant and equipment and
in maintaining an optimal dividend policy to the benefit of shareholders.
In the railway tie product category, North American railroads will continue
to maintain their continental rail network, as operators constantly seek
optimal line efficiency. The Company is anticipating that 2018 annual
railway tie sales should be relatively stable when compared to 2017.
Meanwhile, softer pricing may continue to negatively impact operating
margins in the first half of the year, which should gradually return to
historical levels by the end of 2018.
Over the long-term, the Company’s strategic vision, focused on
continental expansion, remains intact, as Management believes
that the fundamentals of each product category will remain strong.
A solid financial position will allow Stella-Jones to continue to seek
opportunities to further expand its presence in its core markets. These
opportunities must meet its stringent investment requirements, provide
synergistic opportunities, and add value for shareholders.
March 13, 2018
In the utility pole product category, demand for regular maintenance
projects has historically been relatively steady. Following a return
to normal demand patterns in 2017, the Company expects a better
sales mix within the product category in 2018. However, these factors
should be offset by slight cost increases for certain wood species and
the timing of price adjustments.
In the residential lumber product category, the Company expects to
further benefit from continued demand for new construction and
outdoor renovation projects in the North American residential and
commercial markets. Sales for 2018 are also expected to increase as
pricing will reflect the higher wood cost.
Stella-Jones Inc.
CONSOLIDATED FINANCIAL STATEMENTS
31
December 31, 2017 and 2016
Management’s Statement of Responsibility for Financial Information
The consolidated financial statements contained in this Annual Report are the responsibility of Management, and have been prepared in accordance
with International Financial Reporting Standards. Where necessary, Management has made judgments and estimates of the outcome of events
and transactions, with due consideration given to materiality. Management is also responsible for all other information in the Annual Report and
for ensuring that this information is consistent, where appropriate, with the information and data included in the consolidated financial statements.
The Company maintains a system of internal controls to provide reasonable assurance as to the reliability of the financial records and safeguarding
of its assets. The consolidated financial statements have been examined by the Company’s independent auditors, PricewaterhouseCoopers LLP,
and they have issued their report thereon.
The Board of Directors is responsible for overseeing Management in the performance of its responsibilities for financial reporting. The Board of
Directors exercises its responsibilities through the Audit Committee, which is comprised of five independent directors. The Audit Committee meets
from time to time with Management and the Company’s independent auditors to review the financial statements and matters relating to the audit.
The Company’s independent auditors have full and free access to the Audit Committee. The consolidated financial statements have been reviewed
by the Audit Committee, who recommended their approval by the Board of Directors.
Brian McManus
President and Chief Executive Officer
Éric Vachon, CPA, CA
Senior Vice-President and Chief Financial Officer
Saint-Laurent, Québec
March 13, 2018
2017 Annual Report
32
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Stella-Jones Inc.
We have audited the accompanying consolidated financial statements of Stella-Jones Inc. and its subsidiaries, which comprise the consolidated
statement of financial position as at December 31, 2017 and 2016 and the consolidated statements of change in shareholders’ equity, income,
comprehensive income and cash flow for the years then ended, and the related notes, which comprise a summary of significant accounting policies
and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Stella-Jones Inc. and its
subsidiaries as at December 31, 2017 and 2016 and their financial performance and their cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Montréal, Québec
March 13, 2018
1 FCPA auditor, FCA, public accountancy permit No. A116853
Stella-Jones Inc.
ASSETS
Current assets
Cash
Restricted cash
Accounts receivable
Derivative financial instruments
Inventories
Prepaid expenses
Income taxes receivable
Non-current assets
Property, plant and equipment
Intangible assets
Goodwill
Derivative financial instruments
Other assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities
Current portion of long-term debt
Current portion of provisions and other long-term liabilities
Non-current liabilities
Long-term debt
Deferred income taxes
Provisions and other long-term liabilities
Employee future benefits
Derivative financial instruments
Shareholders’ equity
Capital stock
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Commitments and contingencies
Subsequent events
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
33
As at December 31, 2017 and 2016
(expressed in thousands of Canadian dollars)
Note
2017
$
2016
$
6,430
—
163,458
473
718,462
18,435
1,122
2,267
1,452
160,755
1,739
854,556
23,934
5,720
908,380
1,050,423
472,041
124,364
270,261
6,173
4,761
463,650
147,314
287,367
5,056
7,134
1,785,980
1,960,944
111,206
5,695
12,114
101,142
6,707
14,590
129,015
122,439
449,945
72,408
11,392
7,675
—
687,320
101,171
16,480
6,753
363
670,435
934,526
220,467
298
809,022
85,758
1,115,545
1,785,980
219,119
258
672,620
134,421
1,026,418
1,960,944
5
18
6
7
8
8
18
9
10
11
10
15
11
16
18
13
17
22
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors,
Tom A. Bruce Jones, CBE
Director
George J. Bunze, CPA, CMA
Director
2017 Annual Report
34
CONSOLIDATED STATEMENTS OF CHANGE IN SHAREHOLDERS’ EQUITY
For the years ended December 31, 2017 and 2016
(expressed in thousands of Canadian dollars)
Accumulated other comprehensive income
Translation of
long-term
debts
designated
as net
investment
hedges
Foreign
currency
translation
adjustment
Unrealized
gains on
cash flow
hedges
Total
shareholders’
equity
Total
Capital
stock
Contributed
surplus
Retained
earnings
Balance – January 1, 2016
216,474
503
546,402
247,092
(97,184)
215
150,123
913,502
$
$
$
$
$
$
$
$
Comprehensive income (loss)
Net income for the year
Other comprehensive income (loss)
Comprehensive income (loss)
for the year
Dividends on common shares
—
—
—
—
— 153,898
—
—
—
— 153,898
—
9
(23,968)
4,652
3,614
(15,702)
(15,693)
— 153,907
(23,968)
4,652
3,614
(15,702) 138,205
—
(27,689)
Exercise of stock options
1,479
(401)
Employee share purchase plans
1,166
—
Stock-based compensation (note 13)
—
156
—
—
—
2,645
(245)
(27,689)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(27,689)
1,078
1,166
156
(25,289)
Balance – December 31, 2016
219,119
258
672,620
223,124
(92,532)
3,829
134,421 1,026,418
Balance – January 1, 2017
219,119
258
672,620
223,124
(92,532)
3,829
134,421 1,026,418
Comprehensive income (loss)
Net income for the year
Other comprehensive income (loss)
Comprehensive income (loss)
for the year
Dividends on common shares
Exercise of stock options
Employee share purchase plans
Stock-based compensation (note 13)
—
—
—
—
146
1,202
—
— 167,889
—
—
—
— 167,889
—
(983)
(72,504)
23,111
730
(48,663)
(49,646)
— 166,906
(72,504)
23,111
730
(48,663) 118,243
—
(30,504)
(47)
—
87
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(30,504)
99
1,202
87
(29,116)
1,348
40
(30,504)
Balance – December 31, 2017
220,467
298
809,022
150,620
(69,421)
4,559
85,758 1,115,545
The accompanying notes are an integral part of these consolidated financial statements.
Stella-Jones Inc.
Sales
Expenses
Cost of sales
Selling and administrative
Other losses (gains), net
Operating income
Financial expenses
Income before income taxes
Provision for (recovery of) income taxes
Current
Deferred
Net income for the year
Basic earnings per common share
Diluted earnings per common share
CONSOLIDATED STATEMENTS OF INCOME
35
For the years ended December 31, 2017 and 2016
(expressed in thousands of Canadian dollars, except earnings per common share)
Note
2017
$
2016
$
1,886,142
1,838,353
1,586,263
1,504,639
93,828
(1,337)
94,962
5,509
14
1,678,754
1,605,110
14
15
15
13
13
207,388
19,009
188,379
233,243
17,859
215,384
41,566
(21,076)
20,490
47,526
13,960
61,486
167,889
153,898
2.42
2.42
2.22
2.22
The accompanying notes are an integral part of these consolidated financial statements.
2017 Annual Report
36
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2017 and 2016
(expressed in thousands of Canadian dollars)
Net income for the year
Other comprehensive income
Items that may subsequently be reclassified to net income
2017
$
2016
$
167,889
153,898
Net change in losses on translation of financial statements of foreign operations
(81,920)
(26,863)
Income taxes on change in losses on translation of financial statements
of foreign operations
Change in gains on translation of long-term debts designated
as hedges of net investment in foreign operations
Income taxes on change in gains on translation of long-term debts
designated as hedges of net investment in foreign operations
Change in gains on fair value of derivatives designated as cash flow hedges
Income taxes on change in gains on fair value of derivatives designated
as cash flow hedges
Items that will not subsequently be reclassified to net income
Remeasurements of post-retirement benefit obligations
Income taxes on remeasurements of post-retirement benefit obligations
Comprehensive income for the year
The accompanying notes are an integral part of these consolidated financial statements.
9,416
2,895
29,332
7,291
(6,221)
1,026
(2,639)
4,897
(296)
(1,283)
(737)
(246)
40
(31)
(49,646)
(15,693)
118,243
138,205
Stella-Jones Inc.
Cash flows provided by (used in)
Operating activities
Net income for the year
Adjustments for
Depreciation of property, plant and equipment
Amortization of intangible assets
Financial expenses
Current income taxes expense
Deferred income taxes
Restricted stock units expense
Other
Changes in non-cash working capital components and others
Accounts receivable
Inventories
Prepaid expenses
Income taxes receivable
Accounts payable and accrued liabilities
Asset retirement obligations
Provisions and other long-term liabilities
Interest paid
Income taxes paid
Financing activities
Increase in deferred financing costs
Net change in syndicated credit facilities
Increase in long-term debt
Repayment of long-term debt
Net change in non-competes payable
Dividend on common shares
Proceeds from issuance of common shares
Investing activities
Decrease (increase) in other assets
Business acquisitions
Increase in intangible assets
Purchase of property, plant and equipment
Proceeds on disposal of assets
Net change in cash and cash equivalents during the year
Cash and cash equivalents – Beginning of year
Cash and cash equivalents – End of year
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOW
37
For the years ended December 31, 2017 and 2016
(expressed in thousands of Canadian dollars)
Note
2017
$
2016
$
167,889
153,898
7
8
15
15
12
12
12
12
4
12
17,919
15,285
19,009
41,566
(21,076)
4,549
571
245,712
(11,026)
103,213
4,380
(2,746)
16,694
(3,369)
(1,494)
105,652
(15,797)
(34,454)
301,113
(1,132)
(391,796)
195,870
(11,507)
(2,156)
(30,504)
1,301
(239,924)
(710)
(5,792)
(477)
(52,175)
676
15,784
15,803
17,859
47,526
13,960
5,538
(1,499)
268,869
21,017
(39,858)
3,117
(499)
5,785
2,038
(21,676)
(30,076)
(18,648)
(38,317)
181,828
(1,051)
70,738
—
(59,176)
5,452
(27,689)
2,244
(9,482)
952
(107,305)
(6,381)
(63,212)
346
(58,478)
(175,600)
2,711
3,719
6,430
(3,254)
6,973
3,719
2017 Annual Report
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
1 DESCRIPTION OF THE BUSINESS
Stella-Jones Inc. (the “Company”) is a leading producer and marketer of pressure treated wood products. The Company supplies North
America’s railroad operators with railway ties and timbers, and the continent’s electrical utilities and telecommunication companies with utility
poles. Stella-Jones Inc. also manufactures and distributes residential lumber and accessories to retailers for outdoor applications, as well
as industrial products which include marine and foundation pilings, construction timbers, wood for bridges and coal tar based products. The
Company has treating and pole peeling facilities across Canada and the United States and sells its products primarily in these two countries.
The Company’s headquarters are located at 3100 de la Côte-Vertu Blvd., in Saint-Laurent, Quebec, Canada. The Company is incorporated
under the Canada Business Corporations Act, and its common shares are listed on the Toronto Stock Exchange (“TSX”) under the stock
symbol SJ.
2 SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board (“IASB”) and Chartered Professional Accountants Canada Handbook Part I.
These consolidated financial statements were approved by the Board of Directors on March 13, 2018.
Basis of measurement
The consolidated financial statements have been prepared under the historical cost convention, except for derivative financial instruments
and certain long-term liabilities which are measured at fair value. The Company has consistently applied the same accounting policies for all
periods presented, except for the newly adopted standards.
Principles of consolidation
Subsidiaries
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company owns 100% of
the equity interests of its subsidiaries. The significant subsidiaries are as follows:
Subsidiary
Parent
Stella-Jones U.S. Holding Corporation (“SJ Holding”)
Stella-Jones Inc.
Stella-Jones Corporation
Stella-Jones U.S. Holding Corporation
McFarland Cascade Holdings, Inc. (“McFarland”)
Stella-Jones Corporation
Cascade Pole and Lumber Company
McFarland Cascade Holdings, Inc.
McFarland Cascade Pole & Lumber Company
McFarland Cascade Holdings, Inc.
Stella-Jones CDN Finance Inc.
Stella-Jones Inc.
Stella-Jones U.S. Finance II Corporation
Stella-Jones U.S. Holding Corporation
Stella-Jones U.S. II LLC
Stella-Jones U.S. Holding Corporation
Stella-Jones U.S. Finance III Corporation
Stella-Jones U.S. Holding Corporation
Stella-Jones U.S. III L.L.C.
Kisatchie Midnight Express, LLC
Lufkin Creosoting Co., Inc.
Stella-Jones U.S. Holding Corporation
McFarland Cascade Holdings, Inc.
McFarland Cascade Holdings, Inc.
Country of
incorporation
United States
United States
United States
United States
United States
Canada
United States
United States
United States
United States
United States
United States
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of consolidation (continued)
Subsidiaries (continued)
On October 24, 2017, SJ Holding incorporated Stella-Jones U.S. III L.L.C., a wholly-owned Limited Liability Company, and Stella-Jones U.S.
Finance III Corporation, a wholly owned corporation, both under the laws of Delaware.
On November 29, 2017, Stella-Jones Inc. disposed of its participation in SJ Holding in favor of Canadalux S.à.r.l. Shortly after on the same
day, Canadalux S.à.r.l. was liquidated into Stella-Jones Inc.
The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability
to affect those returns through its power over the entity. The existence and effect of potential voting rights that are currently exercisable or
convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date
on which control is transferred to the Company. They are de-consolidated from the date that control ceases.
Business combinations
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Company. The consideration transferred for
the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the group.
The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement.
Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date.
The excess of the aggregate of the consideration transferred, the fair value of any non-controlling interest in the acquiree and the acquisition-
date fair value of any previous equity interest in the acquiree over the fair value of the group’s share of the net identifiable assets acquired and
liabilities assumed is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the
difference is recognized directly in the consolidated statement of income. Accounting policies of the subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the Company.
Foreign currency translation
a) Functional and presentation currency
Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic
environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Canadian
dollars, which is the Company’s presentation currency.
b) Foreign currency transactions
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. Revenue and expenses denominated in a foreign currency are translated by applying the monthly average exchange
rates. Monetary assets and liabilities denominated in foreign currencies are translated at the rate in effect at the statement of financial
position date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary
assets and liabilities not denominated in the functional currency are recognized in the consolidated statement of income within other
losses (gains), net, except for qualifying cash flow hedges which are recognized in other comprehensive income and deferred in
accumulated other comprehensive income in shareholders’ equity.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional
currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on translation are
recognized in the consolidated statement of income, except for differences arising on the translation of available-for-sale (equity)
investments and foreign currency differences arising on the translation of a financial liability designated as a hedge of a net investment,
which are recognized in other comprehensive income.
Non-monetary assets and liabilities denominated in foreign currencies that are measured at cost remain translated in the functional
currency at historical exchange rates.
2017 Annual Report
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency translation (continued)
c) Foreign operations
The financial statements of entities that have a functional currency different from that of the Company are translated using the rate
in effect at the statement of financial position date for assets and liabilities, and the monthly average exchange rates during the year for
revenues and expenses. Adjustments arising from this translation are recorded in accumulated other comprehensive income in
shareholders’ equity.
d) Hedges of net investments in foreign operations
Foreign currency differences arising on the translation of a financial liability designated as a hedge of net investment in foreign operations
are recognized in other comprehensive income to the extent that the hedge is effective, and are presented within equity. To the extent
that the hedge is ineffective, such differences are recognized in the consolidated statement of income. When the hedged portion of a
net investment (the subsidiary) is disposed of, the relevant amount in equity is transferred to the consolidated statement of income as
part of the gain or loss on disposal.
Revenue recognition
Revenue from the sale of products is recognized when the entity has transferred to the buyer the significant risks and rewards of ownership
of the goods, the entity does not retain either continuing managerial involvement to the degree usually associated with ownership or effective
control over the goods sold, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the
transaction will flow to the entity, and the costs incurred or to be incurred in respect of the sale, can be measured reliably. Revenue is net of
trade or volume discounts, returns and allowances and claims for damaged goods.
The Company also offers to treat wood products owned by third parties. Revenue from these treating services are recognized when the
service is rendered.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, bank balances and short-term liquid investments with initial maturities of three months or
less.
Restricted cash
Restricted cash consists of an amount deposited in an escrow account and intended for capital improvements to be realized in the short-term.
Accounts receivable
Accounts receivable are amounts due from customers from the sale of products or services rendered in the ordinary course of business.
Accounts receivable are classified as current assets if payment is due within one year or less. Accounts receivable are recognized initially at
fair value and subsequently measured at amortized cost, less provision for doubtful accounts.
Inventories
Inventories of raw materials are valued at the lower of weighted average cost and net realizable value. Finished goods are valued at the lower
of weighted average cost and net realizable value and include the cost of raw materials, direct labour and manufacturing overhead expenses.
Net realizable value is the estimated selling price less cost necessary to make the sale.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
41
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, plant and equipment
Property, plant and equipment are recorded at cost, including borrowing costs incurred during the construction period, less accumulated
depreciation. The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant
parts, and depreciates separately each such part. Depreciation is calculated on a straight-line basis using rates based on the estimated useful
lives of the assets.
Buildings
Production equipment
Rolling stock
Office equipment
Useful life
7 to 60 years
5 to 60 years
3 to 20 years
2 to 10 years
The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at the end of each reporting period.
Financial expenses
Borrowing costs are recognized as financial expenses in the consolidated statement of income in the period in which they are incurred.
Borrowing costs attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets, until
such time as the assets are substantially ready for their intended use.
Intangible assets
Intangible assets with finite useful lives are recorded at cost and are amortized over their useful lives. Intangible assets with indefinite useful
lives are recorded at cost and are not amortized. The amortization method and estimate of the useful life of an intangible asset are reviewed
on an annual basis.
Customer relationships
Customer relationships
Non-compete agreements
Creosote registration
Method
Straight-line
Declining balance
Straight-line
–
Useful life
3 to 12 years
6% to 20%
3 to 5 years
Indefinite
Standing timber costs are recorded at cost less accumulated amortization, which is provided on the basis of timber volumes harvested. In
Canada, the Company has perpetual cutting rights where planning and site preparation costs for specific geographical areas are capitalized
until the harvest process can begin. Amortization amounts are charged to operations based on a pro rata calculation of timber volumes
harvested over the estimated volumes to be harvested in the specific area.
Cutting rights are recorded at cost less accumulated amortization, which is provided on the basis of timber volumes harvested. Amortization
amounts are charged to operations based on a pro rata calculation of timber volumes harvested over the estimated volumes to be harvested
during a forty-year period, and are applied against the historical cost.
The amortization expense is included in cost of sales in the consolidated statements of income.
The creosote registration is subject to an annual impairment test or more frequently if events or changes in circumstances indicate that it
might be impaired.
2017 Annual Report
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
In the context of an acquisition, goodwill represents the excess of the consideration transferred over the fair value of the Company’s share of
the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non controlling interest in the acquiree at
the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses
on goodwill are not reversed. For the purpose of impairment testing, goodwill is allocated to cash-generating units (“CGUs”) or groups of
CGUs that are expected to benefit from the business combination in which the goodwill arose. The Company defines CGUs as either plants
specialized in the treatment of utility poles and residential lumber or plants specialized in the treatment of railway ties.
Impairment
Impairments are recorded when the recoverable amounts of assets are less than their carrying amounts. The recoverable amount is the
higher of an asset’s fair value less cost of disposal and its value in use. Impairment losses are evaluated for potential reversals when events
or changes in circumstances warrant such consideration, except goodwill.
Non-financial assets
The carrying values of non-financial assets with finite lives, such as property, plant and equipment and intangible assets with finite useful
lives, are assessed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.
Long-lived assets that are not amortized are subject to an annual impairment test. The recoverable amount is the higher of an asset’s fair
value less costs of disposal and its value in use (being the present value of the expected future cash flows of the relevant asset or CGU).
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. For the purpose of
assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs). Non-financial
assets other than goodwill that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
Leases
The Company leases certain property, plant and equipment.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.
Payments made under operating leases, net of any incentives received from the lessor, are charged to the consolidated statement of income
on a straight-line basis over the term of the lease.
Leases of property, plant and equipment where the Company assumes substantially all the risks and rewards of ownership are classified
as finance leases. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the leased property and the
present value of the minimum lease payments.
Each finance lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance
outstanding. The corresponding rental obligations, net of finance charges, are included in long-term debt. The interest element of the finance
cost is charged to the consolidated statement of income over the lease term so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period.
The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis
consistent with the depreciation policy the Company adopts for depreciable assets that are owned. If there is reasonable certainty that the
Company will obtain ownership by the end of the lease term, the period of expected use is the useful life of the asset; otherwise, the asset is
depreciated over the shorter of the lease term and its useful life.
Non-current assets held for sale
Non-current assets are classified as assets held for sale when their carrying amount is to be recovered principally through a sales transaction
and a sale is considered highly probable. They are stated at the lower of carrying amount and fair value less cost of disposal if their carrying
amount is to be recovered principally through a sales transaction rather than through continuing use.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
43
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Provisions
Provisions for site remediation and other provisions are recognized when the Company has a legal or constructive obligation as a result of
past events, when it is probable that an outflow of resources will be required to settle the obligation and when a reliable estimate can be
made of the amount of the obligation. If some or all of the expenditure required to settle a provision is expected to be reimbursed by another
party, the reimbursement is recorded in the consolidated statement of financial position as a separate asset, but only if it is virtually certain
that reimbursement will be received.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that
reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to
passage of time is recognized as a financial expense.
The Company considers the current portion of the provision to be an obligation whose settlement is expected to occur within the next twelve
months.
Site remediation obligations
Site remediation obligations relate to the discounted present value of estimated future expenditures associated with the obligations of
restoring the environmental integrity of certain properties. The Company reviews estimates of future site remediation expenditures on
an ongoing basis and records any revisions, along with the accretion expense on existing obligations, in other losses (gains), net in the
consolidated statement of income.
At each reporting date, the liability is remeasured for changes in discount rates and in the estimate of the amount, timing and cost of the work
to be carried out.
Income taxes
The tax expense comprises current and deferred tax. Tax expense is recognized in the consolidated statement of income, except to the extent
that it relates to items recognized in other comprehensive income or directly to shareholders’ equity.
Current tax
The current income tax charge is based on the results for the period as adjusted for items that are not taxable or not deductible. Tax
adjustments from prior years are also recorded in current tax. Current tax is calculated using tax rates and laws that were enacted or
substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to
situations in which applicable tax regulation is subject to interpretation. Provisions are established where appropriate on the basis of amounts
expected to be paid to the tax authorities. During the year, the tax provision calculation is based on an estimate of the annual tax rate.
Deferred tax
Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and
their carrying amounts in the consolidated financial statements. Deferred income tax is determined on a non-discounted basis using tax rates
and laws that have been enacted or substantively enacted at the consolidated statement of financial position date and are expected to apply
when the deferred tax asset or liability is settled. Deferred tax assets are recognized to the extent that it is probable that the assets can be
recovered.
Deferred income tax assets and liabilities are presented as non-current.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax
liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the
same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Deferred tax assets and liabilities are not recognized in respect of temporary differences that arise on initial recognition of assets and
liabilities acquired other than in a business combination.
2017 Annual Report
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Employee future benefits
Other post-retirement benefit programs
The Company provides other post-retirement healthcare benefits to certain retirees. The entitlement to these benefits is usually conditional
on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these
benefits are attributed from the date when service by the employee first leads to benefits under the plan, until the date when further service by
the employee will lead to no material amount of further benefits. Actuarial gains and losses arising from experience adjustments and changes
in actuarial assumptions are charged or credited to other comprehensive income in the period in which they arise.
The cost of future benefits earned by employees is established by actuarial calculations using the projected benefit method pro-rated on
years of service based on Management’s best estimate of economic and demographic assumptions.
Defined benefit pension plan
The Company accrues obligations and related costs under defined benefit pension plans, net of plan assets. The cost of pensions earned by
employees is actuarially determined using the projected unit credit method and Management’s best estimate of expected plan investment
performance, salary escalation, retirement ages of employees and discount rates on obligations. Past service costs from plan amendments
are recognized in net income when incurred.
Remeasurements consisting of actuarial gains and losses, the actual return on plan assets (excluding the net interest component) and any
change in the asset ceiling are recognized in other comprehensive income. The amounts recognized in other comprehensive income are
recognized immediately in retained earnings without recycling to the consolidated statements of income in subsequent periods.
Stock-based compensation and other stock-based payments
The Company operates a number of equity-settled and cash-settled share-based compensation plans under which it receives services from
employees as consideration for equity instruments of the Company or cash payments.
Equity-settled plan
The Company accounts for stock options granted to employees using the fair value method. Under this method, compensation expense for
stock options granted is measured at fair value at the grant date using the Black-Scholes valuation model and is charged to operations over
the vesting period of the options granted, with a corresponding credit to contributed surplus. For grants of share-based awards with graded
vesting, each tranche is considered a separate grant with a different vesting date and fair value. Any consideration paid on the exercise of
stock options is credited to capital stock together with any related stock-based compensation expense included in contributed surplus.
Cash-settled plan
The Company has restricted stock units (“RSUs”) and measures the liability incurred and the compensation expenses at fair value by applying
the Black-Scholes valuation model. The compensation expenses are recognized in the consolidated statements of income over the vesting
periods. Until the liability is settled, the fair value of that liability is remeasured at each reporting date, with changes in fair value recognized in
the consolidated statements of income.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
45
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial instruments
Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument.
Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the
Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when the obligation specified
in the contract is discharged, cancelled or expires.
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position when
there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and
settle the liability simultaneously.
At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the
instruments were acquired:
a) Financial assets and financial liabilities at fair value through profit or loss: A financial asset or financial liability is classified in this category
if acquired principally for the purpose of selling or repurchasing in the short term. Derivatives are also included in this category unless
they are designated as hedges. Interest rate swap agreements, foreign exchange forward contracts and derivative commodity contracts
are considered by the Company as derivative financial instruments and, if required, are designated as cash flow hedges (see (e) below).
Financial instruments in this category are recognized initially and subsequently at fair value. Transaction costs are expensed in the
consolidated statement of income. Gains and losses arising from changes in fair value are presented in the consolidated statement of
income as part of other gains and losses in the period in which they arise. Financial assets and financial liabilities at fair value through
profit or loss are classified as current except for the portion expected to be realized or paid beyond twelve months of the consolidated
statement of financial position date, which is classified as non-current.
b) Available-for-sale investments: Available-for-sale investments are non-derivatives that are either designated in this category or not
classified in any of the other categories.
Available-for-sale investments are recognized initially at fair value plus transaction costs and are subsequently carried at fair value. Gains
or losses arising from changes in fair value are recognized in other comprehensive income. Available-for-sale investments are classified
as non-current unless they mature within twelve months, or Management expects to dispose of them within twelve months.
Interest on available-for-sale investments, calculated using the effective interest method, is recognized in the consolidated statement of
income as part of interest income. Dividends on available-for-sale equity instruments are recognized in the consolidated statement of
income as part of other gains and losses when the Company’s right to receive payment is established. When an available-for-sale
investment is sold or impaired, the accumulated gains or losses are moved from accumulated other comprehensive income to the
consolidated statement of income and are included in other gains and losses.
c) Loans and receivables: Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market. The Company’s loans and receivables comprise accounts receivable and cash and cash equivalents, and are
included in current assets due to their short-term nature.
Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans
and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method
less a provision for impairment, if any.
2017 Annual Report
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial instruments (continued)
d) Financial liabilities at amortized cost: Financial liabilities at amortized cost include accounts payable and accrued liabilities, bank
indebtedness and long-term debt. Accounts payable and accrued liabilities are initially recognized at the amount required to be paid,
less, when material, a discount to reduce the payables to fair value. Subsequently, accounts payable and accrued liabilities are measured
at amortized cost using the effective interest method. Bank indebtedness and long-term debt are recognized initially at fair value, net of
any transaction costs incurred, and subsequently at amortized cost using the effective interest method.
Financial liabilities are classified as current liabilities if payment is due within twelve months. Otherwise, they are presented as non-
current liabilities.
e) Derivative financial instruments: The Company uses derivatives in the form of interest rate swap agreements to manage risks related to
its variable rate debt, foreign exchange forward contracts to limit its exposure to the fluctuations of the U.S. dollar and derivative
commodity contracts to limit its exposure to the fluctuation of diesel and petroleum prices. All derivatives classified as held-for-trading
are included in the consolidated statement of financial position and are classified as current or non-current based on the contractual
terms specific to the instrument, with gains and losses on remeasurement recorded in income. All derivatives qualifying for hedge
accounting are included in the consolidated statement of financial position and are classified as current or non-current based on the
contractual terms specific to the instruments, with gains and losses on remeasurement included in other comprehensive income.
Hedging transactions
As part of its hedging strategy, the Company considers foreign exchange forward contracts to limit its exposure under contracted cash
inflows of sales denominated in U.S. dollars from its Canadian-based operations. The Company also considers interest rate swap agreements
in order to reduce the impact of fluctuating interest rates on its short-term and long-term debt. These contracts are treated as cash flow
hedges for accounting purposes and are not fair-valued through profit and loss.
Effective derivative financial instruments held for cash flow hedging purposes are recognized at fair value, and the changes in fair value
related to the effective portion of the hedge are recognized in other comprehensive income. The changes in fair value related to the ineffective
portion of the hedge are immediately recorded in the consolidated statement of income. The changes in fair value of foreign exchange forward
contracts and interest rate swap agreements recognized in other comprehensive income are reclassified in the consolidated statement of
income under sales and financial expenses respectively in the periods during which the cash flows constituting the hedged item affect
income.
When the derivative financial instrument no longer qualifies as an effective hedge, or when the hedging instrument is sold or terminated prior
to maturity, hedge accounting, if applicable, is discontinued prospectively. Accumulated other comprehensive income related to a foreign
exchange forward contract or interest swap hedges that cease to be effective is reclassified in the consolidated statement of income under
other losses (gains), net and financial expenses respectively in the periods during which the cash flows constituting the hedged item affect
income. Furthermore, if the hedged item is sold or terminated prior to maturity, hedge accounting is discontinued, and the related accumulated
other comprehensive income is then reclassified in the consolidated statement of income.
The Company designated a portion of its U.S. dollar-denominated long-term debt as a hedge of its net investment in foreign operations. For
such debt designated as a hedge of the net investment in foreign operations, exchange gains and losses are recognized in accumulated other
comprehensive income.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
47
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per share
Basic earnings per share is calculated by dividing the net income for the period attributable to equity owners of the Company by the weighted
average number of common shares outstanding during the year.
Diluted earnings per share is calculated using the treasury stock method. Under this method, earnings per share data are computed as if the
options were exercised at the beginning of the year (or at the time of issuance, if later) and as if the funds obtained from exercise were used
to purchase common shares of the Company at the average market price during the period.
Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The
chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been
identified as the senior management team, which makes strategic and operational decisions.
Change in accounting policies
The Company has adopted the following revised standard, along with any consequential amendments, effective January 1, 2017. This change
was made in accordance with the applicable transitional provisions.
IAS 7 - Statement of Cash Flows
On January 29, 2016, the IASB published amendments to IAS 7, Statement of Cash Flows. The amendments are intended to clarify IAS 7 to
improve information provided to users of financial statements about an entity’s financing activities. The incremental disclosures can be found
in Note 12.
Impact of accounting pronouncements not yet implemented
IFRS 15 – Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, to specify how and when to recognize revenue as well as
requiring the provision of more informative and relevant disclosures. IFRS 15 supersedes IAS 18, Revenue, IAS 11, Construction Contracts,
and other revenue related interpretations. In September 2015, the IASB issued an amendment to IFRS 15 to defer the effective date by one
year to 2018. Management has not identified any material impacts resulting from the transition to IFRS 15.
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16, Leases, which supersedes IAS 17, Leases, and the related interpretations on leases: IFRIC 4,
Determining whether an arrangement contains a lease, SIC 15, Operating Leases – Incentives and SIC 27, Evaluating the substance of
transactions in the legal form of a lease. The standard is effective for annual periods beginning on or after January 1, 2019, with earlier
application permitted for companies that also apply IFRS 15, Revenue from Contracts with Customers. The Company is currently evaluating
the impact of the standard on its consolidated financial statements. The Company’s future minimum payments under operating leases
amount to $80,134. Under the new standard the Company will recognize, in the statement of financial position, an asset (the right to use the
leased items), equivalent to the actualized cash flows of the future minimum payments, and a corresponding financial liability.
IFRS 9 – Financial Instruments
The final version of IFRS 9, Financial instruments (“IFRS 9”), was issued by the IASB in July 2014 and will replace IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9 introduces a model for classification and measurement, a single, forward-looking
expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle-based approach for
determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The
new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of
expected credit losses. It also includes changes in respect of an entity’s own credit risk in measuring liabilities elected to be measured at fair
value, so that gains caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognized in profit or loss. IFRS
9, which is to be applied retrospectively, is effective for annual periods beginning on or after January 1, 2018. In addition, an entity’s own
credit risk changes can be applied early in isolation without otherwise changing the accounting for financial instruments. Management has
not identified any material impacts resulting from the transition to IFRS 9.
2017 Annual Report
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of financial statements in conformity with IFRS requires Management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Significant items subject to estimates and assumptions include the
estimated useful life of assets, impairment of goodwill, determination of the fair value of the assets acquired and liabilities assumed in the
context of an acquisition and impairment of long-lived assets. Management also makes estimates and assumptions in the context of business
combination mainly with sale forecast, margin forecast, income tax rate and discount rate. It is possible that actual results could differ from
those estimates, and such differences could be material. Estimates are reviewed periodically and, as adjustments become necessary, they are
reported in the consolidated statement of income in the period in which they become known.
4 BUSINESS ACQUISITIONS
a) On December 19, 2017, the Company completed the acquisition of substantially all the operating assets employed in the businesses of
Wood Products Industries Inc. (“WPI”) located in South River, Ontario. The Company plans on using these assets to treat residential
lumber.
Total cash outlay associated with the acquisition was approximately $4,245, excluding acquisition costs of approximately $234,
recognized in the consolidated statement of income under selling and administrative expenses. The Company financed the acquisition
through its existing syndicated credit facilities.
b) On December 21, 2016, the Company completed the acquisition of substantially all the operating assets employed in the businesses
of Bois KMS (GMI) Ltée (“KMS”) and Northern Pressure Treated Wood (N.P.T.W.) Ltd (“NPTW”). KMS and NPTW manufacture treated
wood utility poles in their facilities located in Rivière-Rouge, Québec and Kirkland Lake, Ontario, respectively, and were acquired for
synergistic reasons.
Total cash outlay associated with the acquisition was $19,249, excluding acquisition costs of approximately $1,048, recognized in
the 2016 consolidated statement of income under selling and administrative expenses. The Company financed the acquisition through
its existing syndicated credit facilities.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
49
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
4 BUSINESS ACQUISITIONS (CONTINUED)
The following is a final summary of the assets acquired, the liabilities assumed and the consideration transferred at fair value as at the
acquisition date. No significant adjustments were made to the preliminary fair value determination.
Assets acquired
Inventories
Property, plant and equipment
Customer relationships
Goodwill
Deferred income tax assets
Liabilities assumed
Accounts payable and accrued liabilities
Site remediation provision
Total net assets acquired and liabilities assumed
Consideration transferred
Cash
Consideration payable
Consideration transferred
$
4,488
6,923
1,050
6,934
930
20,325
78
937
19,310
19,249
61
19,310
The Company’s valuation of intangible assets has identified customer relationships having a thirty-five month useful life. Significant
assumptions used in the determination of intangible assets, as defined by Management, include year-over-year sales growth, discount
rate and operating income before depreciation and amortization margin. Goodwill is amortized and is deductible for Canadian tax
purposes, and represents the future economic value associated with the enhanced procurement network, acquired workforce and
synergies with the Company’s operations. Goodwill is allocated to a CGU defined as plants specialized in the treatment of utility poles
and residential lumber.
2017 Annual Report
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
4 BUSINESS ACQUISITIONS (CONTINUED)
c) On June 3, 2016, the Company completed, through a wholly-owned U.S. subsidiary, the acquisition of the equity interests of 440
Investments, LLC, the parent company of Kisatchie Treating, L.L.C., Kisatchie Pole & Piling, L.L.C., Kisatchie Trucking, LLC and Kisatchie
Midnight Express, LLC (collectively, “Kisatchie”). Kisatchie produces treated poles, pilings and timbers, with two wood treating facilities
in Converse and Pineville, Louisiana and was acquired for synergistic reasons.
Total cash outlay associated with the acquisition was $46,153 (US$35,659), excluding acquisition costs of approximately $873,
recognized in the 2016 consolidated statement of income under selling and administrative expenses.
The following is a final summary of the assets acquired, the liabilities assumed and the consideration transferred at fair value as at the
acquisition date. No significant adjustments were made to the preliminary fair value determination. The original transaction was made in
U.S. dollars and converted into Canadian dollars as at the acquisition date.
Assets acquired
Cash acquired
Accounts receivable
Inventories
Prepaids
Property, plant and equipment
Customer relationships
Goodwill
Liabilities assumed
Accounts payable and accrued liabilities
Long-term debt
Deferred income tax liabilities
Site remediation provision
Total net assets acquired and liabilities assumed
Consideration transferred
Cash
Unsecured promissory note
Consideration payable
Consideration transferred
$
2,628
5,312
12,930
150
21,217
6,860
17,523
66,620
1,680
8,775
63
1,195
54,907
46,153
7,838
916
54,907
The Company’s valuation of intangible assets has identified customer relationships amortized at a declining rate of 20.00%. Significant
assumptions used in the determination of intangible assets, as defined by Management, include year-over-year sales growth, discount
rate and operating income before depreciation and amortization margin. Goodwill is amortized and deductible for U.S. tax purposes,
and represents the future economic value associated with the enhanced procurement network, acquired workforce and synergies with
the Company’s operations. Goodwill is allocated to a CGU defined as plants specialized in the treatment of utility poles and residential
lumber.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
51
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
4 BUSINESS ACQUISITIONS (CONTINUED)
The Company financed the acquisition through a combination of its existing syndicated credit facilities, an unsecured promissory note
of $9,128 (US$7,052) and assumed a promissory note secured by the land of the Pineville facility having a balance of US$5,685. The
unsecured promissory note bears interest at 1.41%, is payable in three installments, including interest, of US$1,500 in June 2019 and
2020 and US$4,500 in June 2021. This unsecured promissory note was recorded at a fair value of $7,838 (US$6,056), using an
effective interest rate of 5.00%. The secured promissory note bears interest of 5.76%, is payable in quarterly installments of US$162
up to July 2028 and was recorded at a fair value of $8,775 (US$6,780) using an effective interest rate of 4.00%.
d) On June 3, 2016, the Company completed, through a wholly-owned U.S. subsidiary, the acquisition of the shares of Lufkin Creosoting
Co., Inc. (“Lufkin Creosoting”). Lufkin Creosoting produces treated poles and timbers at its wood treating facility in Lufkin, Texas and
was acquired for synergistic reasons.
Total cash outlay associated with the acquisition was $46,503 (US$35,929), excluding acquisition costs of approximately $978,
recognized in the 2016 consolidated statement of income under selling and administrative expenses.
The following is a final summary of the assets acquired, the liabilities assumed and the consideration transferred at fair value as at the
acquisition date. No significant adjustments were made to the preliminary fair value determination. The original transaction was made in
U.S. dollars and converted into Canadian dollars as at the acquisition date.
Assets acquired
Cash acquired
Accounts receivable
Inventories
Property, plant and equipment
Customer relationships
Goodwill
Liabilities assumed
Accounts payable and accrued liabilities
Deferred income tax liabilities
Site remediation provision
Total net assets acquired and liabilities assumed
Consideration transferred
Cash
Unsecured promissory note
Consideration receivable
Consideration transferred
$
1,074
19,734
5,261
16,244
10,290
23,701
76,304
13,777
9,421
842
52,264
46,503
7,838
(2,077)
52,264
2017 Annual Report
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
4 BUSINESS ACQUISITIONS (CONTINUED)
The Company’s valuation of intangible assets has identified customer relationships amortized at a declining rate of 20.00%. Significant
assumptions used in the determination of intangible assets, as defined by Management, include year-over-year sales growth, discount
rate and operating income before depreciation and amortization margin. Goodwill is not amortized and not deductible for U.S. tax
purposes, and represents the future economic value associated with the enhanced procurement network, acquired workforce and
synergies with the Company’s operations. Goodwill is allocated to a CGU defined as plants specialized in the treatment of utility poles
and residential lumber.
The Company financed the acquisition through a combination of its existing syndicated credit facilities and an unsecured promissory
note of $9,128 (US$7,052), bearing interest at 1.41%. The note is payable in three installments, including interest, of US$1,500 in June
2019 and 2020 and US$4,500 in June 2021.The promissory note was fair valued at $7,838 (US$6,056) using an effective interest
rate of 5.00%.
5 ACCOUNTS RECEIVABLE
Trade receivables
Less: Provision for doubtful accounts
Trade receivables – net
Other receivables
2017
$
159,964
(991)
158,973
4,485
163,458
As at December 31, 2017, trade receivables of $60,618 (2016 – $58,557) were past due but not impaired.
The aging of gross trade receivables at each reporting date was as follows:
Current
Past due 1-30 days
Past due 31-60 days
Past due more than 60 days
6
INVENTORIES
Raw materials
Finished goods
Stella-Jones Inc.
2017
$
98,355
43,416
9,230
8,963
159,964
2017
$
423,312
295,150
718,462
2016
$
142,801
(268)
142,533
18,222
160,755
2016
$
83,976
40,129
6,311
12,385
142,801
2016
$
554,142
300,414
854,556
7 PROPERTY, PLANT AND EQUIPMENT
As at January 1, 2016
Cost
Accumulated depreciation
Net book amount
Year ended December 31, 2016
Opening net book amount
Business acquisitions
Additions
Disposals
Depreciation
Depreciation included in inventory
As at December 31, 2016
Cost
Accumulated depreciation
Net book amount
Year ended December 31, 2017
Opening net book amount
Business acquisitions
Additions
Disposals
Depreciation
Depreciation included in inventory
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
53
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
Land
Buildings
Production
equipment
$
$
$
Rolling
stock
$
Others
$
Total
$
42,607
88,980
298,481
18,167
14,461
462,696
—
(14,036)
(56,289)
(9,982)
(6,855)
(87,162)
42,607
74,944
242,192
8,185
7,606
375,534
42,607
74,944
242,192
8,185
7,606
375,534
3,788
7,623
21,986
10,677
283
44,357
270
18,740
42,001
2,456
5,031
68,498
—
(83)
(576)
—
(659)
(2,541)
(8,584)
(3,511)
(1,148)
(15,784)
(193)
(544)
(455)
138
(523)
(1,715)
(10)
(6,581)
45,981
113,768
356,892
29,815
19,724
566,180
—
(16,542)
(64,602)
(12,901)
(8,485)
(102,530)
45,981
97,226
292,290
16,914
11,239
463,650
45,981
97,226
292,290
16,914
11,239
463,650
204
941
3,353
301
9
4,808
4,384
4,250
35,337
1,130
4,266
49,367
(143)
(235)
(998)
(629)
(4)
(2,009)
(2,879)
(9,705)
(3,798)
(1,537)
(17,919)
(187)
(526)
(478)
(884)
(644)
(1,835)
(304)
(24,021)
—
—
—
—
—
Exchange differences
(684)
(1,347)
(4,678)
Closing net book amount
45,981
97,226
292,290
16,914
11,239
463,650
Exchange differences
(1,974)
(5,516)
(15,343)
Closing net book amount
48,452
93,600
304,408
12,556
13,025
472,041
As at December 31, 2017
Cost
Accumulated depreciation
Net book amount
48,452
112,272
376,203
27,944
23,505
588,376
—
(18,672)
(71,795)
(15,388)
(10,480)
(116,335)
48,452
93,600
304,408
12,556
13,025
472,041
2017 Annual Report
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
8
INTANGIBLE ASSETS AND GOODWILL
The intangible assets include customer relationships, non-compete agreements, cutting rights, standing timber, a favourable land lease
agreement and a creosote registration.
Customer relationships comprise long-term agreements with certain customers and ongoing business relationships. The acquisition cost was
established based on future benefits associated with these relationships.
The acquisition cost of the non-compete agreements was established based on the discounted value of future payments using a discount
rate ranging from 2.90% to 3.00%.
Impairment tests for goodwill
Goodwill is allocated for impairment testing purposes to CGUs which reflect how it is monitored for internal management purposes.
The recoverable amount of a CGU is determined based on fair value less cost to dispose (“FVLCTD”) calculations. FVLCTD calculations
use cash flow projections based on financial budgets covering a five-year period that are based on the latest budgets for revenue and cost
as approved by senior management. Cash flow projections beyond five years are based on Management’s forecasts and assume a growth
rate not exceeding gross domestic product for the respective countries. Post-tax cash flow projections are discounted using a real post-tax
discount rate of 8.00%. One percent real growth rates are assumed in perpetuity for most of the businesses given the commodity nature of
the majority of the products (i.e. volume growth is assumed to be offset by real price declines). The assumptions used in calculating FVLCTD
have considered the current economic environment.
The carrying value of goodwill is allocated to the following CGUs:
CGUs
Plants specialized in the treatment of utility poles and residential lumber
Plants specialized in the treatment of railway ties
2017
$
128,898
141,363
270,261
2016
$
136,066
151,301
287,367
Impairment tests for intangible assets with indefinite useful life
The only intangible asset with indefinite useful life is the creosote registration. This registration provides the Company with the right to
produce and import creosote out of its Memphis, Tennessee facility. The Company’s approach to creosote supply is to produce a portion of
its requirements and to buy the remainder on the open market. As a result, the creosote registration procures the advantage of being able
to produce, which is less expensive than buying on the market. Moreover, when procuring creosote on the market, the import feature of the
registration enables the Company to negotiate better pricing.
The recoverable amount of the creosote registration is determined based on value-in-use calculations. Value-in-use calculations use cash
flow projections based on financial budgets covering a five-year period that are based on the latest forecasts for cost savings as approved
by senior management. Cash flow projections beyond five years are based on internal management forecasts and assume a growth rate not
exceeding domestic product for the respective countries. Pre-tax cash flow projections are discounted using a real pre-tax discount rate of
8.00%. One percent real growth rates are assumed in perpetuity for most of the business given the commodity nature of the majority of the
products (i.e. volume growth is assumed to be offset by real price declines).
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
55
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
8
INTANGIBLE ASSETS AND GOODWILL (CONTINUED)
The net book amount of these intangible assets was as follows:
Intangible assets
Cutting
rights
Customer Non-compete
agreements
relationships
$
$
$
Creosote
registration
$
Others
$
Total
$
Goodwill
$
As at January 1, 2016
Cost
6,821
141,262
11,601
7,606
43,222
210,512
245,696
Accumulated amortization
(1,242)
(53,276)
(9,576)
(5,482)
—
(69,576)
—
Net book amount
5,579
87,986
2,025
2,124
43,222
140,936
245,696
Year ended December 31, 2016
Opening net book balance
5,579
87,986
2,025
2,124
43,222
140,936
245,696
Business acquistions
Additions
Amortization
—
—
—
19,294
—
—
6,051
(14,349)
(1,454)
Amortization included in inventory
(213)
—
Exchange differences
—
(1,513)
—
27
—
330
—
(473)
—
—
—
—
19,294
47,251
6,381
(15,803)
(686)
—
—
—
(33)
(1,289)
(2,808)
(5,580)
Closing net book amount
5,366
91,418
6,649
1,948
41,933
147,314
287,367
As at December 31, 2016
Cost
6,821
157,626
17,413
7,903
41,933
231,696
287,367
Accumulated amortization
(1,455)
(66,208)
(10,764)
(5,955)
—
(84,382)
—
Net book amount
5,366
91,418
6,649
1,948
41,933
147,314
287,367
Year ended December 31, 2017
Opening net book balance
5,366
91,418
6,649
1,948
41,933
147,314
287,367
Business acquisitions
Additions
Amortization
—
—
—
—
—
—
—
(13,445)
(1,840)
—
477
—
Amortization included in inventory
(176)
—
—
(519)
—
—
—
—
—
477
(15,285)
(695)
844
—
—
—
Exchange differences
—
(4,255)
(367)
(70)
(2,755)
(7,447)
(17,950)
Closing net book amount
5,190
73,718
4,442
1,836
39,178
124,364
270,261
As at December 31, 2017
Cost
6,821
148,740
16,270
8,310
39,178
219,319
270,261
Accumulated amortization
(1,631)
(75,022)
(11,828)
(6,474)
—
(94,955)
—
Net book amount
5,190
73,718
4,442
1,836
39,178
124,364
270,261
2017 Annual Report
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
9 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Trade payables
Amounts due to related parties
Accrued expenses
Other payables
10 LONG-TERM DEBT
Syndicated credit facilities
Unsecured senior notes
Unsecured promissory note
Unsecured promissory note
Secured promissory note
Unsecured promissory note
Balance of purchase price
Unsecured promissory note
Unsecured promissory note
Balance of purchase price
Unsecured promissory note
Unsecured promissory note
Deferred financing costs
Less: Current portion of long-term debt
Less: Current portion of deferred financing costs
Total current portion of long-term debt
Note
20
Note
10(a)
10(b)
10(c)
10(d)
10(e)
10(f)
10(g)
10(h)
10(i)
10(j)
10(k)
10(k)
Stella-Jones Inc.
2017
$
41,373
380
51,761
17,692
111,206
2017
$
232,083
188,176
7,972
7,972
7,422
7,000
2,278
2,008
586
844
—
—
456,341
(701)
455,640
5,791
(96)
5,695
449,945
2016
$
31,770
632
39,507
29,233
101,142
2016
$
646,487
—
8,265
8,265
8,682
10,872
2,701
2,776
1,214
—
4,143
980
694,385
(358)
694,027
6,919
(212)
6,707
687,320
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
57
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
10 LONG-TERM DEBT (CONTINUED)
a) The Company’s syndicated credit facilities consist of an unsecured revolving facility in the amount of US$325,000 available until
February 26, 2022, an unsecured term facility in the amount of US$50,000 available until February 26, 2018 and an unsecured term
facility in the amount of US$100,000 available until February 26, 2019 made available to the Company and SJ Holding (the
“Borrowers”), a wholly-owned subsidiary of the Company, by a syndicate of lenders under a fifth amended and restated credit agreement
(the “Credit Agreement”) dated as of February 26, 2016, and amended on May 18, 2016. As at December 31, 2017 the syndicated
credit facilities provided financing up to US$475,000 of which US$282,574 was available. Additionally, the Credit Agreement makes
available an accordion option whereas upon request, the Company could increase the revolving facility by US$125,000.
During 2017, the Company made certain amendments to the Credit Agreement and changes to the revolving facility. On February 3,
2017, the Borrowers obtained a one-year extension to February 26, 2022 of the revolving facility. On July 5, 2017, the Borrowers
requested a reduction of the revolving facility from US$425,000 to $US325,000.
Borrowings under the syndicated credit facilities may be obtained in the form of Canadian prime rate loans, bankers’ acceptances
(“BAs”), U.S. base rate loans, LIBOR loans in U.S. dollars and letters of credit. The interest rate margin with respect to Canadian prime
rate loans and U.S. base rate loans will range from 0.00% to 1.25% based on the Credit Agreement’s pricing grid. The interest rate
margin with respect to BAs, LIBOR loans and fees for letters of credit will range from 1.00% to 2.25% based on the Credit Agreement’s
pricing grid.
The Company enters into interest rate swap agreements in order to reduce the impact of fluctuating interest rates on its debt. Details
of the outstanding interest rate swap agreements as at December 31, 2017 are provided in Note 18, Financial instruments. As at
December 31, 2017, borrowings by Canadian entities denominated in U.S. dollars represented $232,083 (US$185,000) and the total
amount was designated as a hedge of net investment in foreign operations.
The Company has demand loan agreements, with two banks participating in the syndicated credit facilities, providing financing up to
US$50,000 under terms and conditions similar to those under the Credit Agreement. This indebtedness, if required by the Company, will
be presented under short term liabilities as the banks have the option to request reimbursement of their loans at any time. As at
December 31, 2017 no amounts were drawn under the demand loan agreements.
In order to maintain the syndicated credit facilities and the demand loans in place, the Company needs to comply with affirmative
covenants, negative covenants, reporting requirements and financial ratios consisting of a total debt to EBITDA ratio of no more than
3.50:1 and an interest coverage ratio equal to or greater than 3.00:1. As at December 31, 2017, the Company was in full compliance
with these covenants, requirements and ratios. Additionally, the Credit Agreement prohibits the Company from paying dividends
aggregating in any one year in excess of 50.00% of the Company’s consolidated net income for the preceding year if the total debt to
EBITDA ratio is greater than 3.25:1. In the case where the total debt to EBITDA ratio is equal or lower than 3.25:1, there are no
restrictions to the payment of dividends, so long as the Company is otherwise in compliance with the terms of its Credit Agreement.
b) On January 17, 2017, the Company concluded a US$150,000 private placement with certain U.S. investors. Pursuant to the private
placement, the Company entered into a note purchase agreement providing for the issuance by Stella-Jones Inc. of senior notes -
series A in the aggregate amount of US$75,000 bearing interest at 3.54% payable in a single instalment at maturity on January 17,
2024 and senior notes - series B in the aggregate amount of US$75,000 bearing interest at 3.81%, payable in a single instalment at
maturity on January 17, 2027. Such notes are unsecured and proceeds were used to reimburse a portion of the revolving credit facility.
The notes were designated as hedges of net investment in foreign operations.
In order to maintain the senior notes in place, the Company needs to comply with affirmative covenants, negative covenants, reporting
requirements and financial ratios comprised of the total debt to EBITDA ratio of not more than 3.50:1, the interest coverage ratio equal
to or greater than 2.50:1 and a priority debt to equity ratio not more than 15%. As at December 31, 2017, the Company was in full
compliance with these covenants, requirements and ratios.
2017 Annual Report
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
10 LONG-TERM DEBT (CONTINUED)
c) As part of the Kisatchie acquisition, the Company issued an unsecured promissory note of $9,128 (US$7,052) bearing interest at
1.41%. The note is payable in three instalments, including interest, of US$1,500 in June 2019 and 2020 and US$4,500 in June 2021.
The note was initially recorded at a fair value of $7,838 (US$6,056) using an effective interest rate of 5.00%. The difference between
the face value and the fair value of the note is being accreted on an effective yield basis over its term.
d) As part of the Lufkin Creosoting acquisition, the Company issued an unsecured promissory note of $9,128 (US$7,052) bearing interest
at 1.41%. The note is payable in three instalments, including interest, of US$1,500 in June 2019 and 2020 and US$4,500 in June
2021. The note was initially recorded at a fair value of $7,838 (US$6,056) using an effective interest rate of 5.00%. The difference
between the face value and the fair value of the note is being accreted on an effective yield basis over its term.
e) As part of the Kisatchie acquisition, the Company assumed a promissory note, secured by the land of the Pineville facility, of US$5,685
bearing interest at 5.76%. The note is payable in quarterly instalments, including interest, of US$163, up to July 2028. The note was
initially recorded at a fair value of $8,775 (US$6,780) using an effective interest rate of 4.00%. The difference between the face value
and the fair value of the note is being accreted on an effective yield basis over its term.
f) Pursuant to a business acquisition on May 22, 2014, the Company issued an unsecured promissory note of $15,466 (US$14,169)
bearing interest at 1.93%. The note is payable in five equal annual instalments, including interest, of US$3,000, up to May 2019. The
note was initially recorded at a fair value of $13,426 (US$12,301) using an effective interest rate of 7.00%. The difference between the
face value and the fair value of the note is being accreted on an effective yield basis over its term.
g) Pursuant to a business acquisition on October 1, 2015, the Company recorded a balance of purchase price of $5,800 bearing no
interest. The balance of purchase price is payable in five annual instalments of $2,900 in October 2016, $500 in October 2017 and
$800 in October 2018, 2019 and 2020, respectively. The balance of purchase price was initially recorded at a fair value of $5,430 using
an interest rate of 2.91%. The difference between the face value and the fair value of the balance of purchase price is being accreted
on an effective yield basis over its term.
The balance of purchase price is guaranteed by five irrevocable letters of credit in the same amount and with the same maturity date as
the future payments.
h) Pursuant to a business acquisition on September 1, 2015, the Company issued an unsecured promissory note of $3,993 (US$3,000)
bearing no interest. The note is payable in five equal annual instalments of US$600, up to September 2020. The note was initially
recorded at a fair value of $3,275 (US$2,460) using an effective interest rate of 7.00%. The difference between the face value and the
fair value of the note is being accreted on an effective yield basis over its term.
i)
Pursuant to a business acquisition completed on December 4, 2015, the Company issued an unsecured promissory note of $1,939
(US$1,451) bearing interest at 1.68%. The note is payable in three equal annual instalments, including interest, of US$500, up to
December 2018. The note was initially recorded at a fair value of $1,754 (US$1,312) using an effective interest rate of 7.00%. The
difference between the face value and the fair value of the note is being accreted on an effective yield basis over its term.
j) As part of the WPI acquisition completed on December 19, 2017, the Company recorded a balance of purchase price of $900 bearing
no interest. The balance of purchase price is payable in quarterly installments of $75 in March, June, September and December of each
year, up to December 2020. The balance of purchase price was initially recorded at a fair value of $844 using an effective interest rate
of 3.29%. The difference between the face value and the fair value of the balance of purchase price is being accreted on an effective
yield basis over its term.
k) These debts were reimbursed in 2017 in accordance with the agreement.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
59
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
10 LONG-TERM DEBT (CONTINUED)
l)
The repayment requirements on the long-term debt during the next five years and thereafter are as follows:
2018
2019
2020
2021
2022
Thereafter
Fair value adjustment
Principal
$
6,543
9,631
5,916
11,062
232,649
192,142
457,943
(1,602)
456,341
m) The aggregate fair value of the Company’s long-term debt was estimated at $453,478 as at December 31, 2017 (2016 – $694,385)
based on discounted future cash flows, using interest rates available to the Company for issues with similar terms and average maturities.
11 PROVISIONS AND OTHER LONG-TERM LIABILITIES
Provisions
Other long-term liabilities
Site
remediation
$
Others
$
Total
$
RSUs
$
Non-
competes
payable
$
Total
$
Grand
total
$
Balance as at January 1, 2016
11,641
4,280
15,921
13,219
2,355
15,574
31,495
5,121
2,974
785
5,906
10,951
5,936
16,887
22,793
—
2,974
(62)
(858)
(920)
—
—
—
—
—
—
2,974
(920)
(2,954)
(455)
(3,409)
(21,214)
(598)
(21,812)
(25,221)
Additions
Business acquisitions
Provision reversal
Payments
Interest accretion
Additions
Business acquisitions
Provision reversal
Payments
Interest accretion
Exchange differences
(233)
(88)
(321)
—
—
—
—
—
127
143
127
143
127
(178)
Balance as at December 31, 2016
16,487
3,664
20,151
2,956
7,963
10,919
31,070
911
58
1,786
2,697
727
—
58
(2,331)
(106)
(2,437)
—
—
—
—
—
727
3,424
—
—
58
(2,437)
(2,183)
(1,504)
(3,687)
(1,435)
(2,156)
(3,591)
(7,278)
Exchange differences
(898)
(134)
(1,032)
—
—
—
—
—
155
155
155
(454)
(454)
(1,486)
Balance as at December 31, 2017
12,044
3,706
15,750
2,248
5,508
7,756
23,506
2017 Annual Report
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
11 PROVISIONS AND OTHER LONG-TERM LIABILITIES (CONTINUED)
Analysis of provisions and other long-term liabilities:
Current
Provisions
Other long-term liabilities
Total current
Non-current
Provisions
Other long-term liabilities
Total non-current
2017
$
9,141
2,973
12,114
6,609
4,783
11,392
23,506
2016
$
10,785
3,805
14,590
9,366
7,114
16,480
31,070
Provisions
Site remediation
Site remediation obligations represent discounted cash flow estimates relating to future environmental remediation costs of current and
former treating sites for a period ranging from one to fifteen years. These discounted cash flow have been estimated using a pre-tax rate of
3.63% that reflect current market assessment of the time value of money and the risk specific to the obligation.
As of December 31, 2017, a total site remediation provision of $12,044 ($16,487 as of December 31, 2016) was recorded to support the
ongoing compliance efforts.
Other long-term liabilities
Restricted stock units
The Company has a long-term incentive plan, for certain executives and key employees, under which grants of RSUs are permitted upon
the Company attaining a minimum 12.50% return on capital employed. When this condition is met, the number of RSUs granted is based on
a percentage of the individual’s salary, divided by the average trading price of the Company’s common shares on the TSX for the five days
immediately preceding the grant date.
The RSUs are full-value phantom shares payable in cash on the third anniversary of their date of grant, provided the individual is still employed
by the Company. The amount to be paid is determined by multiplying the number of RSUs by the six-month average trading price of the
Company’s common shares on the TSX immediately preceding the anniversary.
The RSUs granted on March 17, 2014 reached their third year anniversary on March 17, 2017 and were fully paid.
On March 16, 2015 and March 21, 2016 the Company granted a total of 63,336 RSUs to certain executives and key employees as part of
the long-term incentive plan.
On May 6, 2013, as part of a five-year incentive agreement and pursuant to the Stella-Jones Inc. long-term incentive plan, the Company
granted 400,000 RSUs to the President and Chief Executive Officer (the “President”), with a vesting date of May 6, 2016. As part of the
agreement, in the event that the President voluntarily leaves the employment of the Company prior to the fifth anniversary of the incentive
agreement, any amounts paid to him will be reimbursed to the Company. In the event that the President is required to cease his functions
prior to the fifth anniversary of the incentive agreement due to long-term disability or death, he shall be entitled to a prorated payment.
The compensation expense related to the five-year agreement will be recognized in the consolidated statement of income over a five-year
period. On May 6, 2016, the full amount of $19,106 was paid under these RSUs. The difference between the amount paid and the expense
recognized in the consolidated statement of income has been recorded as a prepaid expense and will be amortized over the remaining two-
year period. As of December 31, 2017, the prepaid balance was $1,592 ($5,413 as of December 31, 2016).
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
61
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
12 CASH FLOW INFORMATION
a) Liabilities from financing activities
The following table presents the movements in the liabilities from financing activities for the twelve-month period ended December 31,
2017:
Liabilities from financing activities
Long-term
debt
Syndicated
credit
facilities
Non-competes
payable
$
$
$
Total
$
Balance as at December 31, 2016
(47,898)
(646,487)
(7,963)
(702,348)
Cash flows provided by (used in)
Foreign exchange adjustments
Other non-cash movements
(184,363)
8,704
—
391,796
22,608
—
Balance as at December 31, 2017
(223,557)
(232,083)
2,156
454
(155)
(5,508)
209,589
31,766
(155)
(461,148)
b) Cash and cash equivalents
The following table presents the reconciliation of the amount of cash and cash equivalents:
Cash
Restricted cash
Balance per statement of cash flows
2017
$
6,430
—
6,430
2016
$
2,267
1,452
3,719
2017 Annual Report
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
13 CAPITAL STOCK
Number of common shares outstanding – Beginning of year*
Stock option plan*
Employee share purchase plans*
Number of common shares outstanding – End of year*
* Number of common shares is presented in thousands.
a) Capital stock consists of the following:
Authorized
An unlimited number of preferred shares issuable in series
An unlimited number of common shares
b) Earnings per share
2017
69,303
10
29
69,342
2016
69,137
139
27
69,303
The following table provides the reconciliation between basic earnings per common share and diluted earnings per common share:
Net income applicable to common shares
Weighted average number of common shares outstanding*
Effect of dilutive stock options*
Weighted average number of diluted common shares outstanding*
Basic earnings per common share**
Diluted earnings per common share**
* Number of shares is presented in thousands.
** Basic and diluted earnings per common share are presented in dollars per share.
2017
$ 167,889
69,324
9
69,333
$ 2.42
$ 2.42
2016
$ 153,898
69,215
16
69,231
$ 2.22
$ 2.22
c) Stock option plan
The Company has a stock option plan (the “Plan”) for directors, officers and employees whereby the Board of Directors or a committee
appointed for such purpose (“Committee”) may, from time to time, grant to directors, officers or employees of the Company options to
acquire common shares in such numbers, for such terms and at such exercise prices as are determined by the Board of Directors or such
Committee. The stated purpose of the Plan is to secure for the Company and its shareholders the benefits of incentives inherent in share
ownership by directors, officers and employees of the Company.
The aggregate number of common shares in respect of which options may be granted is 4,800,000 and no optionee may hold options to
purchase common shares exceeding 5.00% of the number of common shares issued and outstanding from time to time. The exercise
price of an option shall not be lower than the closing price of the common shares on the TSX on the last trading day immediately
preceding the date of the granting of the option. Each option shall be exercisable during a period established by the Board of Directors or
Committee, and the term of the option may not exceed 10 years. Options will not be assignable and will terminate, in the case of an
employee, either 30 or 180 days following cessation of service with the Company, depending on the circumstances of such cessation,
and in the case of a director who is not an employee of the Company, either 30 or 180 days following the date on which such optionee
ceases to be a director of the Company, depending on the circumstances.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
63
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
13 CAPITAL STOCK (CONTINUED)
Changes in the number of options outstanding under the Plan were as follows:
2017
Weighted
average
exercise
price**
$
34.57
9.90
—
40.05
36.79
Number
of options*
55
(10)
—
45
33
2016
Weighted
average
exercise
price**
$
15.35
7.75
—
34.57
28.59
Number
of options*
194
(139)
—
55
31
Outstanding – Beginning of year
Exercised
Granted
Outstanding – End of year
Options exercisable – End of year
The following options were outstanding under the Plan as at December 31, 2017:
Date granted
May 2013
November 2015
Options outstanding
Options exercisable
Number
of options*
Exercise
price**
Number
of options*
Exercise
price**
Expiration
date
$
22.13
49.01
15
30
45
$
22.13
49.01
15
18
33
May 2023
November 2025
* Number of options is presented in thousands.
** Exercise price is presented in dollars per option.
d) Stock-based compensation
The Company records expenses related to the fair value of the stock options granted under the Plan using the Black Scholes option
pricing model. This model determines the fair value of stock options granted and amortizes it to income over the vesting period. No
options were granted during 2017. The 2017 expense recorded for stock-based compensation amortized to earnings was $87
(2016 – $156).
e) Employee share purchase plans
The aggregate number of common shares reserved for issuance under the Company’s two employee share purchase plans is 1,000,000.
Under the first plan, Company employees who are Canadian residents are eligible to purchase common shares from the Company at an
amount equal to 90.00% of the market price. Employees who hold common shares in the employee share purchase plan for eighteen
months following the date of acquisition of such shares receive additional common shares of the Company equivalent to 10.00% of the
amount of their contributions made on the date of acquisition. In 2017, 15,621 common shares (2016 – 13,271) were issued to
Canadian resident employees at an average price of $39.52 per share (2016 – $39.50).
2017 Annual Report
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
13 CAPITAL STOCK (CONTINUED)
e) Employee share purchase plans (continued)
Under the second plan, Company employees who are U.S. residents are eligible to purchase common shares from the Company at
market price. Employees who hold common shares in the employee share purchase plan for eighteen months following the date of
acquisition of such shares receive additional common shares of the Company equivalent to 10.00% of the amount of their contributions
made on the date of acquisition. In 2017, 13,167 common shares (2016 – 13,680) were issued to U.S. resident employees at an
average price of $41.65 per share (2016 – $43.11).
As at December 31, 2017, the total number of common shares issued under these plans is 885,975 (2016 – 857,187), having a market
value of $44,742, using the Company’s TSX closing share price on December 29, 2017 of $50,50, which was the last day of trading
in 2017.
14 EXPENSES BY NATURE
Raw materials and consumables
Employee benefit expenses
Depreciation and amortization
Other expenses incurred in manufacturing process
Freight
Other expenses
Employee benefit expenses
Salaries, wages and benefits
Share options granted to directors and employees
RSUs
Pension costs
Group registered retirement savings plans
Employee benefit expenses are included in cost of sales and selling and administrative expenses.
Financial expenses
Interest on syndicated credit facilities
Interest on promissory notes and non-compete agreements
Interest on unsecured senior notes
Interest on debentures
Stella-Jones Inc.
2017
$
9,596
2,613
6,800
—
19,009
2017
$
1,324,289
135,302
33,204
56,678
91,430
37,851
2016
$
1,252,578
141,839
31,587
44,767
91,141
43,198
1,678,754
1,605,110
2017
$
123,355
87
4,549
1,990
5,321
135,302
2016
$
128,841
156
5,538
1,993
5,311
141,839
2016
$
14,760
2,278
—
821
17,859
15
INCOME TAXES
Current tax
Current tax on income for the year
Adjustments in respect of prior years
Total current tax
Deferred tax
Origination and reversal of temporary differences
Impact of change in tax rate
Adjustments in respect of prior years
Total deferred tax
Income tax expense
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
65
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
2017
$
40,450
1,116
41,566
12,379
(30,094)
(3,361)
(21,076)
20,490
2016
$
50,464
(2,938)
47,526
11,020
(225)
3,165
13,960
61,486
The tax on the Company’s income before income tax differs from the theoretical amount that would arise using the weighted average tax rate
applicable to income of the consolidated entities as follows:
Income before income tax
Tax calculated at domestic tax rates of 26.24% (2016 – 26.40%)
applicable to income in the respective countries
Tax effects of:
Difference in tax rate of foreign subsidiaries
Income not subject to tax
Expenses not deductible for tax purposes
Remeasurement of deferred tax – change in tax rate
Adjustments in respect of prior years
Exchange revaluation of deferred tax
Manufacturing and processing tax credit
Income tax expense
2017
$
188,379
49,431
12,930
(7,759)
409
(30,094)
(2,245)
(462)
(1,720)
20,490
2016
$
215,384
56,861
14,074
(6,999)
475
(225)
227
8
(2,935)
61,486
2017 Annual Report
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
15
INCOME TAXES (CONTINUED)
The analysis of deferred tax assets and deferred tax liabilities is as follows:
Deferred tax assets
To be recovered after more than 12 months
To be recovered within 12 months
Deferred tax liabilities
To be reversed after more than 12 months
To be reversed within 12 months
Deferred tax liability, net
The gross movement on the deferred income tax account is as follows:
As at January 1
Recognized in the statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31
2017
$
5,554
8,243
(86,081)
(124)
(72,408)
2017
$
(101,171)
21,076
2,697
140
4,850
(72,408)
2016
$
4,474
12,499
(117,688)
(456)
(101,171)
2016
$
(78,564)
(13,960)
(1,058)
(8,966)
1,377
(101,171)
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
67
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
15
INCOME TAXES (CONTINUED)
The movement in deferred income tax assets and liabilities during the year, without taking into consideration the offsetting of balances within
the same tax jurisdiction, is as follows:
Unrealized
foreign
exchange on
debts and
translation
of foreign
operations
Cumulative
losses
$
$
1,165
1,571
(504)
—
—
2,232
(2,232)
—
—
—
—
—
—
—
—
—
—
2,231
1,150
—
—
3,381
Deferred
pension
benefits
$
2,283
(40)
(31)
—
(47)
2,165
112
(246)
—
(80)
1,951
Reserves
$
13,586
(1,205)
—
336
(237)
12,480
(3,606)
—
180
(589)
8,465
Unrealized
foreign
exchange on
debts and
translation
of foreign
operations
$
(1,679)
(1,130)
760
—
—
(2,049)
—
2,049
—
—
—
Property,
plant and
equipment
$
(64,330)
(13,568)
—
(4,992)
1,081
(81,809)
15,492
—
(40)
4,271
(62,086)
Intangible
assets
$
(29,493)
919
—
(4,310)
580
(32,304)
8,563
—
—
1,523
(22,218)
Others
$
Total
$
10
57
29
—
—
96
(96)
—
—
—
—
17,044
383
(506)
336
(284)
16,973
(3,591)
904
180
(669)
13,797
Others
$
(106)
(564)
(1,312)
—
—
(1,982)
612
(256)
—
(275)
(1,901)
Total
$
(95,608)
(14,343)
(552)
(9,302)
1,661
(118,144)
24,667
1,793
(40)
5,519
(86,205)
Deferred tax assets
As at January 1, 2016
Recognized in the statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2016
Recognized in the statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2017
Deferred tax liabilities
As at January 1, 2016
Recognized in the statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2016
Recognized in the statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2017
Deferred income tax liabilities have not been recognized for the withholding tax and other taxes that would be payable on the unremitted
earnings of certain subsidiaries. Such amounts are permanently reinvested. Unremitted earnings totaled $398,767 as at December 31, 2017
(2016 – $318,721).
On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act, which included a number of provisions that will
affect the Company’s U.S. subsidiaries, specifically the reduction in the top federal corporate income tax rate from 35% to 21%, effective
January 1, 2018. The Company recognized a tax benefit of $30,040 in the consolidated statement of income resulting from the revaluation
of the deferred tax liability.
2017 Annual Report
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
16 EMPLOYEE FUTURE BENEFITS
For its Canadian operations, the Company recognizes costs for several types of employee future benefits. Post-employment benefits are
offered to certain retired employees and consist of group health and dental care, life insurance and complementary retirement benefits. The
Company contributes to a multi-employer plan for certain hourly employees and to three defined benefit pension plans for salaried and certain
non-union hourly wage employees.
For its U.S. operations, the Company’s wholly-owned subsidiary, McFarland, contributes to two defined benefit pension plans.
All other active employees are entitled to a group registered retirement savings plan to which the Company matches one and a half times
the employee contribution. The Company’s contribution cannot exceed 6.00% of the employee’s annual base salary. The recognized costs for
employee future benefits were as follows:
Post-retirement benefits
Defined benefit pension plans
Contributions to multi-employer plan
Contributions to group registered retirement savings plans
2017
$
156
1,411
423
5,321
The net amount recognized on the consolidated statement of financial position is detailed as follows:
Liabilities
Accrued benefit liability included in employee future benefits
Accrued benefit obligation, included in employee future benefits
2017
$
(5,174)
(2,501)
(7,675)
2016
$
166
1,392
435
5,311
2016
$
(4,534)
(2,219)
(6,753)
a) The post-retirement benefits program is not funded and, since June 1, 2011, this program is closed to new participants. For this program,
the Company measures its accrued benefit obligations for accounting purposes as at December 31 of each year. The most recent
actuarial valuation of this plan was as at July 1, 2015, and the next required valuation will be as at July 1, 2018.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
69
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
16 EMPLOYEE FUTURE BENEFITS (CONTINUED)
The following information as established by independent actuaries pertains to the Company’s post-retirement benefits program:
Accrued benefit obligation
Balance – Beginning of year
Current service cost
Interest cost
Benefits payments
Remeasurement adjustments
Plan experience
Changes in demographic assumptions
Changes in financial assumptions
Balance – End of year
Plan assets
Employer’s contributions
Benefits paid
Fair value – End of year
Accrued benefit obligation
The significant assumptions used are as follows:
Accrued benefit obligation as at December 31
Discount rate
Benefit costs for the year ended December 31
Discount rate
2017
$
2,219
68
88
(62)
—
—
188
2,501
62
(62)
—
2,501
2017
%
3.40
3.90
2016
$
2,327
71
95
(66)
(124)
(114)
30
2,219
66
(66)
—
2,219
2016
%
3.90
4.00
For measurement purposes, a 6.50% annual rate of increase in the per capita cost of covered health care benefits was assumed starting
in 2015. This rate is assumed to decrease gradually by 0.38% per year, to reach 5.00% in 2020. An increase or decrease of 1.00% in
this rate would have the following impact:
Impact on accrued benefit obligation
Impact on benefit costs
Increase of 1%
Decrease of 1%
$
86
2
$
(73)
(2)
2017 Annual Report
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
16 EMPLOYEE FUTURE BENEFITS (CONTINUED)
The items of the Company’s post-retirement benefits program costs recognized during the year are as follows:
Current service cost
Interest cost
Post-retirement benefits program costs recognized
Consolidated statement of comprehensive income
Year ended December 31
Actuarial gains (losses)
Total recognized in other comprehensive income before income tax
Accumulated actuarial (losses) gains recognized in other
comprehensive income
Balance of actuarial losses as at January 1
Net actuarial gains (losses) recognized in the year, net of tax
Balance of actuarial losses as at December 31
2017
$
68
88
156
2017
$
(188)
(188)
2017
$
(228)
(124)
(352)
2016
$
71
95
166
2016
$
208
208
2016
$
(351)
123
(228)
b) The Company’s Canadian defined benefit pension plans base the benefits on the length of service and final average earnings. The
McFarland defined benefit pension plans base the benefits on the length of service and flat dollar amounts payable monthly. The
Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each
year.
Actuarial valuations are updated every three years, and the latest valuations performed for the five existing pension plans are as follows:
Plan 1 Canadian pension plan – Closed to new participants
Plan 2 Canadian pension plan – Closed to new participants
Plan 3 Canadian pension plan – Closed to new participants
Plan 4 U.S. pension plan – Closed to new participants
Plan 5 U.S. pension plan
Date of last
actuarial valuation
December 31, 2016
December 31, 2014
December 31, 2015
December 31, 2015
December 31, 2015
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
71
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
16 EMPLOYEE FUTURE BENEFITS (CONTINUED)
Information about the Company’s defined benefit pension plans other than the multi-employer defined benefit plan, in aggregate, is as
follows:
Accrued benefit obligation
Balance – Beginning of year
Current service cost
Interest cost
Benefits payments
Remeasurement adjustments
Plan experience
Changes in demographic assumptions
Changes in financial assumptions
Exchange difference
Balance – End of year
Plan assets
Fair value – Beginning of year
Interest income on plan assets
Return on plan asset excluding interest income
Employer’s contributions
Employee’s contributions
Effect of asset ceiling
Benefits paid
Exchange difference
Fair value – End of year
Accrued benefit liability
2017
$
27,440
1,025
1,076
(821)
(947)
330
1,949
(650)
29,402
22,906
665
513
1,102
35
263
(821)
(435)
24,228
(5,174)
2016
$
27,545
1,009
1,099
(2,730)
778
(172)
443
(532)
27,440
22,719
680
1,133
1,468
36
(263)
(2,730)
(137)
22,906
(4,534)
Included in the above accrued benefit obligation and fair value of plan assets at year-end are the following amounts in respect of benefit
plans that are not fully funded:
Accrued benefit obligation
Fair value of plan assets
Funded status – Plan deficit
2017
$
(13,309)
7,652
(5,657)
2016
$
(12,716)
7,340
(5,376)
2017 Annual Report
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
16 EMPLOYEE FUTURE BENEFITS (CONTINUED)
The percentage of plan assets consists of the following for the year ended December 31:
Listed equity securities
Listed debt securities
Guaranteed insurance contracts
Short-term investments and cash
The significant weighted average assumptions used are as follows:
Accrued benefit obligation as at December 31
Discount rate
Rate of compensation increase
Benefit costs for the year ended December 31
Discount rate
2017
%
31.00
42.00
26.00
1.00
100.00
2017
%
3.50
3.25
3.90
The items of the Company’s defined benefit plan costs recognized during the year are as follows:
Current service cost, net of employee’s contributions
Interest cost
Interest income on plan assets
Defined benefit plan expense
2017
$
1,000
1,076
(665)
1,411
Expected contributions to the defined benefit pension plans for the year ending December 31, 2018 are $996.
2016
%
40.00
31.00
27.00
2.00
100.00
2016
%
3.90
3.25
4.00
2016
$
973
1,099
(680)
1,392
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
73
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
16 EMPLOYEE FUTURE BENEFITS (CONTINUED)
Consolidated statement of comprehensive income
Year ended December 31
Actuarial losses
Total recognized in other comprehensive income before income tax
Accumulated actuarial losses recognized in other
comprehensive income
Balance of actuarial losses as at January 1
Net actuarial losses recognized in the year, net of tax
Balance of actuarial losses as at December 31
2017
$
(549)
(549)
2017
$
(3,153)
(859)
(4,012)
2016
$
(168)
(168)
2016
$
(3,039)
(114)
(3,153)
17 COMMITMENTS AND CONTINGENCIES
a) The Company has issued guarantees amounting to $19,036 (2016 – $28,880) under letters of credit and various bid and performance
bonds. The Company’s management does not believe these guarantees are likely to be called on. As a result, no provisions have been
recorded in the consolidated financial statements.
b) Future minimum payments under operating leases related to land, equipment and rolling stock are as follows:
2018
2019
2020
2021
2022
Thereafter
$
22,747
17,672
13,042
8,747
5,334
12,592
80,134
c) The Company’s operations are subject to Canadian federal and provincial as well as U.S. federal and state environmental laws and
regulations governing, among other matters, air emissions, waste management and wastewater effluent discharges. The Company
takes measures to comply with such laws and regulations. However, the measures taken are subject to the uncertainties of changing
legal requirements, enforcement practices and developing technological processes.
d) The Company has contracts whereby third party licensees that harvest certain areas assume the responsibility for reforestation. Should
the third party licensees fail to perform, the Company is responsible for these additional future reforestation costs, which are currently
estimated to be $410 (2016 – $281). Payments, if any, required as a result of this contingency will be expensed in the period in which
they are determined and are not included in the provision for reforestation.
2017 Annual Report
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
18 FINANCIAL INSTRUMENTS
Financial instruments, carrying values and fair values
The Company has determined that the fair value of its short-term financial assets and financial liabilities approximates their carrying amounts
as at the consolidated statement of financial position dates because of the short-term maturity of those instruments. The fair values of the
long-term receivables and interest-bearing financial liabilities also approximate their carrying amounts unless otherwise disclosed elsewhere
in these consolidated financial statements.
The fair value of interest rate swap agreements, foreign exchange forward contract agreements and derivative commodity contacts have
been recorded using mark-to-market information. The following table provides a summary of these fair values which are detailed further in
this note:
Current assets
Interest rate swap agreements
Derivative commodity contracts
Non-current assets
Interest rate swap agreements
Derivative commodity contracts
Non-current liabilities
Interest rate swap agreements
Foreign exchange forward contracts
2017
$
—
473
473
6,173
—
6,173
—
—
—
2016
$
311
1,428
1,739
4,989
67
5,056
109
254
363
Credit risk
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.
At December 31, 2017, the Company’s credit exposure consists primarily of the carrying amount of cash and cash equivalents, accounts
receivable and derivative financial instruments.
Credit risk associated with cash and cash equivalent, and derivative financial instruments is minimised by dealing with creditworthy financial
institutions.
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. Management believes that the
credit risk of accounts receivable is limited because the Company deals primarily with railroad companies, public service companies and utility
and telecommunication companies as well as other major corporations.
Management has established a credit policy under which each new customer is analyzed individually for creditworthiness before the
Company’s standard payment and delivery terms and conditions are offered. The Company’s review includes external ratings, where available,
and credit references from other suppliers. Purchase limits are established for each customer, which represent the maximum open amount
not requiring additional approval from Management. A monthly review of the accounts receivable aging is performed by Management for
each selling location. Customers that fail to meet the Company’s benchmark creditworthiness may transact with the Company only on a
prepayment basis.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
75
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
18 FINANCIAL INSTRUMENTS (CONTINUED)
Credit risk (continued)
Note 5 provides details on the receivable aging as well as on the provision for doubtful accounts for the years ended December 31, 2017
and 2016. The Company’s largest customer had sales representing 15.60% of the total sales for the twelve-month period ending December
31, 2017 (2016 – 15.30%) and an account receivable balance of $6,152 as at December 31, 2017 (2016 – $4,127).
Price risk
The Company is exposed to commodity price risk on diesel and petroleum. The Company uses derivative commodity contracts based on the
New York Harbor Ultra Low Sulfur Diesel Heating Oil to help manage its cash flows with regards to these commodities. The Company does
not designate these derivatives as cash flow hedges of anticipated purchases of diesel and petroleum. Gains or losses from these derivative
financial instruments are recorded in the consolidated statements of income under other losses (gain), net. The following table summarizes
the derivative commodity contracts as at December 31, 2017 and 2016:
Hedged item
Diesel and petroleum
Diesel and petroleum
Hedged item
Diesel and petroleum
Diesel and petroleum
Diesel and petroleum
Gallons
Effective date
Maturity date
Fixed rate
2017
600,000*
January 2018
December 2018
600,000*
January 2018
December 2018
US$1.72
US$1.61
2016
Gallons
Effective date
Maturity date
Fixed rate
3,000,000*
January 2017
December 2017
1,680,000*
January 2017
December 2017
600,000*
January 2018
December 2018
US$1.50
US$1.65
US$1.72
* Represents a volume evenly split throughout the year.
The fair value of the above derivative commodity hedges based on cash settlement requirements as at December 31, 2017 is an asset
of $473 recorded under current assets (2016 – a total asset of $1,495 of which $67 was recorded under non-current assets) in the
consolidated statement of financial position. The fair value of these hedge agreements have been determined by obtaining mark-to-market
values as at December 31, 2017 and 2016 from a third party. This type of measurement falls under Level 2 in the fair value hierarchy as per
IFRS 7, Financial Instruments: Disclosures. A description of each level of the hierarchy is as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
Inputs other than quoted prices included within Level 1 that are observable for these assets or liabilities,
either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3:
Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to
managing liquidity is to ensure, on a long-term basis, that it will always have sufficient liquidity to meet its liabilities when due, under both
normal and stressed conditions, without incurring losses or risking damage to its reputation.
The Company ensures that it has sufficient credit facilities to support working capital, meet expected operational expenses and service
financial obligations. Inventories are a significant component of working capital because of the long periods required to air-season wood,
which can occasionally exceed nine months before a sale is made.
2017 Annual Report
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
18 FINANCIAL INSTRUMENTS (CONTINUED)
Liquidity risk (continued)
The Company monitors all financial liabilities and ensures it will have sufficient liquidity to meet these future payments. The operating activities
of the Company are the primary source of cash flows. The Company also has syndicated credit facilities (Note 10(a)) made available by a
syndicate of lenders which can be used for working capital and general corporate requirements. As at December 31, 2017, an amount of
$354,489 (US$282,574) (2016 - $112,513 (US$83,796) was available under the Company’s syndicated credit facilities. The following table
details the maturities of the financial liabilities as at December 31:
Carrying Contractual
amount cash flows
Less than
1 year
1 and 3
years
3 and 5 More than
5 years
years
Between Between
2017
Accounts payable and accrued liabilities
111,206
111,206
111,206
$
$
$
$
—
$
—
$
—
Long-term debt obligations
455,640
538,383
20,067
42,321
265,193
210,802
Non-competes payable
5,508
5,896
1,694
2,948
1,254
—
572,354
655,485
132,967
45,269
266,447
210,802
Carrying Contractual
amount cash flows
Less than
1 year
1 and 3
years
3 and 5 More than
5 years
years
Between Between
2016
Accounts payable and accrued liabilities
101,142
101,142
101,142
$
$
$
$
—
$
—
$
—
Long-term debt obligations
694,027
773,926
25,184
53,315
689,583
5,844
Interest rate swap agreements
363
141
723
(153)
(429)
Non-competes payable
7,963
8,550
2,238
2,921
2,686
—
705
803,495
883,759
129,287
56,083
691,840
6,549
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company’s income or
the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures
within acceptable parameters while optimizing the return on risk.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
77
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
18 FINANCIAL INSTRUMENTS (CONTINUED)
Currency risk
The Company’s exposure to foreign exchange gains or losses from currency fluctuations is related to sales and purchases in U.S. dollars
by its Canadian-based operations and to U.S. dollar-denominated long-term debt held by its Canadian company. The Company monitors its
transactions in U.S. dollars generated by Canadian-based operations and enters into hedging transactions to mitigate its currency risk. The
Company’s basic hedging activity consists of entering into foreign exchange forward contracts for the sale of U.S. dollars and the purchase of
certain goods and services in U.S. dollars. The Company also considers foreign exchange forward contracts for the purchase of U.S. dollars
for significant purchases of goods and services that were not covered by natural hedges.
On November 1, 2016, the Company entered into a sixty-month foreign exchange forward contract agreement, selling US$500 per-month at
a strike rate of 1.385 and a fade-in rate of 1.178. The Company will obtain the strike rate as long as the spot exchange rate on the transaction
date is greater than or equal to the fade-in rate. If the spot exchange rate is lower than the fade-in rate, the transaction will not occur. On July
28, 2017, the Company terminated these contracts and received a cash settlement of $1,087. The fair value of this hedge agreement was
determined by obtaining mark-to-market values as at December 31, 2016 from a third party. This type of measurement falls under Level 2 in
the fair value hierarchy as per IFRS 7, Financial Instruments: Disclosures. These foreign exchange forward contract agreements did not qualify
for hedge accounting and the fair value based on cash settlement requirements as at December 31, 2016 was a $254 liability recorded
under non-current liabilities.
The following table provides information on the impact of a 10.00% strengthening of the U.S. dollar against the Canadian dollar on net income
and equity for the years ended December 31, 2017 and 2016. For a 10.00% weakening of the U.S. dollar against the Canadian dollar, there
would be an equal and opposite impact on net income, comprehensive income and equity:
Decrease (increase) of net income
Increase of equity
2017
$
(806)
37,352
2016
$
107
51,425
This analysis considers the impact of foreign exchange variance on financial assets and financial liabilities denominated in U.S. dollars which
are on the consolidated statement of financial position of the Canadian entities:
Assets
Cash
Accounts receivable
Liabilities
Accounts payable and accrued liabilities
Long-term debt
2017
$
11,484
2,545
14,029
5,968
—
5,968
2016
$
—
3,506
3,506
2,624
1,952
4,576
The foreign exchange impact for the U.S. dollar-denominated long-term debt, in the Canadian entities, has been excluded for the most part
from the sensitivity analysis for other comprehensive income, as the long-term debt is designated as a hedge of net investment in foreign
operations (Note 10).
2017 Annual Report
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
18 FINANCIAL INSTRUMENTS (CONTINUED)
Interest rate risk
As at December 31, 2017, the Company has mitigated its exposure to interest rate risk on long-term debt after giving effect to its interest
rate swap agreements; 100.00% (2016 – 66.25%) of the Company’s long-term debt is at fixed rates.
The Company enters into interest rate swap agreements in order to reduce the impact of fluctuating interest rates on its short- and long-term
debt. These swap agreements require the periodic exchange of payments without the exchange of the notional principal amount on which
the payments are based. The Company designates its interest rate hedge agreements as cash flow hedges of the underlying debt. Interest
expense on the debt is adjusted to include the payments made or received under the interest rate swap agreements.
The syndicated credit facilities defined in Note 10(a) is made available by a syndicate of bank lenders. The financing of these loans is tied to
the Canadian bank’s prime rate, the BA rate, the U.S. bank’s base rate or LIBOR. The Company has minimized its exposure to interest rate
fluctuations by entering into interest rate swaps as detailed below. The impact of a 10.00% increase in these rates on the closing annual
balance of the syndicated credit facilities, for borrowings that have not been swapped, would have increased interest expense by $146 for
the year ended December 31, 2017 (2016 – $684).
The following tables summarize the Company’s interest rate swap agreements as at December 31:
Notional
amount
Related debt instrument
US$85,000
US$100,000
Syndicated credit facilities
Syndicated credit facilities
Notional
amount
Related debt instrument
CA$63,000
Syndicated credit facilities
US$75,000
US$25,000
US$25,000
US$25,000
US$25,000
US$85,000
US$100,000
Syndicated credit facilities
Syndicated credit facilities
Syndicated credit facilities
Syndicated credit facilities
Syndicated credit facilities
Syndicated credit facilities
Syndicated credit facilities
Fixed
rate
%
1.68*
1.06*
Fixed
rate
%
0.70*
0.97*
0.71*
0.69*
0.71*
0.70*
1.68*
1.06*
Effective date
Maturity date
2017
Notional
equivalent
CA$
December 2015
April 2021
106,633
December 2017
December 2021
125,450
Effective date
Maturity date
2016
Notional
equivalent
CA$
February 2016
February 2018
63,000
June 2014
June 2017
100,702
December 2012
December 2017
December 2012
December 2017
December 2012
December 2017
December 2012
December 2017
33,567
33,567
33,567
33,567
December 2015
April 2021
114,129
December 2017
December 2021
134,270
* Plus applicable spread of 1.00% to 2.25% based on pricing grid included in the Credit Agreement.
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
79
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
18 FINANCIAL INSTRUMENTS (CONTINUED)
Interest rate risk (continued)
The Company’s interest rate swap agreements are designated as cash flow hedges. The cash flow hedge documentation allows the Company
to substitute the underlying debt as long as the hedge effectiveness is demonstrated. As at December 31, 2017, all cash flow hedges were
effective.
The fair value of these financial instruments has been determined by obtaining mark-to-market values as at December 31, 2017 from different
third parties. This type of measurement falls under Level 2 in the fair value hierarchy as per IFRS 7, Financial Instruments: Disclosures. The
fair value of the interest rate swap agreements based on cash settlement requirements as at December 31, 2017 is a non-current asset of
$6,173 recorded in the consolidated statement of financial position (2016 – a net asset of $5,191 of which an asset of $311 is recorded
in current assets, an asset of 4,989 is recorded in non-current assets and a liability of $109 is recorded in non-current liabilities). A
10.00% decrease in interest rates as at December 31, 2017 would have reduced the net gain recognized in other comprehensive income
by approximately $617 (2016 – $519). For a 10.00% increase in the interest rates, there would be an equal and opposite impact on the
net gain.
19 CAPITAL DISCLOSURES
The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its organic growth strategy and undertake selective
acquisitions, while at the same time taking a conservative approach to financial leverage and management of financial risk. The Company
manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders,
return capital to shareholders, issue new shares, or acquire or sell assets to improve its financial performance and flexibility.
The Company’s capital is composed of total debt, which includes bank indebtedness, and shareholders’ equity, which includes capital stock.
Total debt
Shareholders’ equity
Total capital
Total debt to total capitalization ratio
2017
$
455,640
1,115,545
1,571,185
0.29:1
2016
$
694,027
1,026,418
1,720,445
0.40:1
The Company’s primary uses of capital are to finance non-cash working capital and capital expenditures for capacity expansion as well as
acquisitions. The Company currently funds these requirements out of its internally generated cash flows and its syndicated credit facilities.
However, future corporate acquisitions may require new sources of financing.
The primary measure used by the Company to monitor its financial leverage is the total debt to total capitalization ratio, which it aims to
maintain within a range of 0.20:1 to 0.50:1. The total debt to total capitalization ratio is defined as total debt divided by total capital.
2017 Annual Report
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
20 RELATED PARTY TRANSACTIONS
a) Transactions
The Company had the following transactions with related parties:
Stella Jones International S.A.*
Marketing and technical service fees paid
Stella International S.A. and James Jones & Sons Limited**
Marketing and technical service fees paid
Other
2017
$
200
100
Legal fees charged by a firm in which a director of the Company is a partner
838
2016
$
200
100
1,202
* As of December 31, 2017, Stella Jones International S.A. holds, directly or indirectly, approximately 38.30% of the outstanding common shares of the Company.
Pursuant to the secondary offering closed on February 21, 2018, the percentage of outstanding common shares held by Stella International S.A. was reduced
to 31.10%.
** Stella International S.A. and James Jones & Sons Limited hold 51.00% and 49.00% of all voting shares of Stella Jones International S.A., respectively.
These transactions occurred in the normal course of operations and have been measured at fair value.
As at December 31, the consolidated statement of financial position includes the following amounts with related parties:
Accounts payable to Stella International S.A. and James Jones & Sons Limited
Accounts payable to Stella Jones International S.A.
Accounts payable to a firm in which a director of the Company is a partner
2017
$
25
50
305
380
2016
$
25
50
557
632
b) Key management compensation
Key management includes certain directors (executive and non-executive), and certain senior management. The compensation paid or
payable to key management for employee services is as follows:
2017
$
4,728
4,063
8,791
2016
$
5,494
4,435
9,929
Salaries, compensation and benefits
Share-based expenses
Stella-Jones Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
81
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
21 SEGMENT INFORMATION
The Company operates within two business segments which are the production and sale of pressure-treated wood and the procurement and
sales of logs and lumber.
The pressure-treated wood segment includes railway ties, utility poles, residential lumber and industrial products.
The logs and lumber segment comprises of the sales of logs harvested in the course of the Company’s procurement process that are
determined to be unsuitable for use as utility poles. Also included in this segment is the sale of excess lumber to local home-building markets.
Assets and net income related to the logs and lumber segment are nominal.
Operating plants are located in five Canadian provinces and nineteen American states. The Company also operates a large distribution
network across North America.
Sales attributed to countries based on location of customer are as follows:
Canada
U.S.
Sales by product as at December 31 are as follows:
Pressure-treated wood
Railway ties
Utility poles
Residential lumber
Industrial products
Logs and lumber
2017
$
561,905
1,324,237
1,886,142
2017
$
651,549
653,946
366,225
94,516
119,906
2016
$
535,800
1,302,553
1,838,353
2016
$
716,292
579,208
345,749
96,310
100,794
1,886,142
1,838,353
2017 Annual Report
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017 and 2016
(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)
21 SEGMENT INFORMATION (CONTINUED)
Property, plant and equipment, intangible assets and goodwill attributed to the countries based on location are as follows:
Property, plant and equipment
Canada
U.S.
Intangible assets
Canada
U.S.
Goodwill
Canada
U.S.
22 SUBSEQUENT EVENTS
2017
$
120,804
351,237
472,041
23,989
100,375
124,364
14,864
255,397
270,261
2016
$
104,835
358,815
463,650
26,374
120,940
147,314
14,164
273,203
287,367
a) On February 9, 2018, the Company completed the acquisition of substantially all the operating assets employed in the business of
Prairie Forest Products (“PFP”), a division of Prendiville Industries Ltd., located at its wood treating facility in Neepawa, Manitoba as well
as at its peeling facility in Birch River, Manitoba. PFP manufactures, sells and distributes utility poles and residential lumber and was
acquired for synergistic reasons. Sales for the twelve-month period ended October 31, 2017 were approximately $35,100.
Total cash outlay associated with the acquisition was $26,494 excluding acquisition costs of approximately $326 of which $159 was
recognized in the 2017 consolidated statement of income under selling and administrative expenses. The Company financed the
acquisition through its existing syndicated credit facilities.
At the time of preparing these consolidated financial statements, Management did not have on hand all the required information to
determine the fair value of assets acquired and liabilities assumed. Preliminary information indicates that property plant and equipment
and inventory represent approximately $7,763 and $9,500 respectively from the total purchase price of $26,494.
b) On March 13, 2018, the Board of Directors declared a quarterly dividend of $0.12 per common share payable on April 27, 2018 to
shareholders of record at the close of business on April 6, 2018.
23 COMPARATIVE FIGURES
Certain comparative figures have been reclassified in order to comply with the basis of presentation adopted in the current year.
Stella-Jones Inc.
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Tom A. Bruce Jones, CBE (1)
Chairman of the Board,
Stella-Jones Inc.
Chairman of the Board,
James Jones & Sons Limited
(Forest products company)
Larbert, Scotland
Director since July 1993
George J. Bunze, CPA, CMA (2) (3)
Vice-Chairman and Director,
Kruger Inc.
(Manufacturer of paper, tissue,
wood products, energy (hydro/
wind) and wine and spirits
products)
Montréal, Québec
Director since May 2001
Gianni Chiarva (3)
Vice-Chairman of the Board,
Stella-Jones Inc.
Chairman,
Stella Jones International S.A.
Milan, Italy
Director since July 1993
Katherine A. Lehman (2)
Managing Partner, Hilltop
Private Capital LLC
New York, NY, USA
Director since October 2016
Brian McManus
President and
Chief Executive Officer,
Stella-Jones Inc.
Montréal, Québec
Director since June 2001
83
Nycol Pageau-Goyette (1) (2) (3)
President, Pageau Goyette
et associés limitée
(Management services firm)
Montréal, Québec
Director since July 1993
James A. Manzi, Jr. (2)
Corporate Director
Tampa, FL, USA
Director since April 2015
Simon Pelletier (2) (4)
Senior Vice-President,
North American Sales
and Operations,
Metso (Manufacturer of mineral
processing equipment and
service provider to mining and
construction industries)
Senneville, Québec
Director since May 2012
Daniel Picotte (1)
Partner, Fasken Martineau
DuMoulin LLP (Law firm)
Montréal, Québec
Director since July 1993
Mary Webster (1)
Corporate Director
Wayzata, MN, USA
Director since May 2007
(1) Member of the Environmental,
Health and Safety Committee
(2) Member of the Audit Committee
(3) Member of the Remuneration
Committee
(4) Lead Director
A full report of Stella-Jones’ corporate
governance practices is set out in the
Management Proxy Circular for the May 3,
2018 Annual Meeting of Shareholders.
OFFICERS
Tom A. Bruce Jones, CBE
Chairman of the Board
Gianni Chiarva
Vice-Chairman of the Board
Brian McManus
President and
Chief Executive Officer
Éric Vachon, CPA, CA
Senior Vice-President and
Chief Financial Officer
Marla Eichenbaum
Vice-President,
General Counsel and
Secretary
Ian Jones
Senior Vice-President
Gordon Murray
Vice-President, Environment and
Technology and General Manager,
Atlantic Region
André Daigle
Vice-President,
Central Region
SUBSIDIARIES – SENIOR MANAGEMENT
Shane Campbell
Vice-President, Operations
McFarland Cascade
Holdings, Inc.
George Caric
Vice-President, Marketing
Stella-Jones Corporation
Kevin Comerford
Vice-President, Poles
and Residential Sales
McFarland Cascade
Holdings, Inc.
W.G. Downey, Jr.
Vice-President,
U.S. Tie Procurement
Stella-Jones Corporation
Marcell Driessen
Vice-President, Human Resources
Stella-Jones Corporation/
McFarland Cascade
Holdings, Inc.
Ian Jones
Senior Vice-President
McFarland Cascade
Holdings, Inc.
James Kenner
Vice-President and
General Counsel, U.S. Operations
Stella-Jones Corporation
Patrick Kirkham
Vice-President, Operations
Stella-Jones Corporation
Jim Raines
Vice-President, Sales
Stella-Jones Corporation
Michael Sylvester
Senior Vice-President,
Stella-Jones Corporation
David Whitted
Vice-President,
Sales Operations
Stella-Jones Corporation
Jon Younce
Vice-President, U.S. Fibre
and Transportation/Logistics
McFarland Cascade Holdings, Inc.
Ron Zeegers
Vice-President,
Operations, Western Canada
Stella-Jones Inc.
2017 Annual Report
84
OPERATING NETWORK – CANADA
CORPORATE HEAD OFFICE
ALBERTA
BRITISH COLUMBIA
Stella Jones Inc.
3100 de la Côte-Vertu Blvd.
Suite 300
Saint-Laurent, Québec
H4R 2J8
T: (514) 934-8666
F: (514) 934-5327
montreal@stella-jones.com
BRITISH COLUMBIA
Plant
7400 Galloway Mill Road
Galloway
British Columbia
V0B 1T2
T: (250) 429-3493
F: (250) 429-3931
galloway@stella-jones.com
Plant
39 miles SE of Calgary
Hwy. 24
Carseland, Alberta
T0J 0M0
T: (403) 934-4600
F: (403) 934-5880
carseland@stella-jones.com
Plant and Sales Office
25 Braid Street
New Westminster
British Columbia
V3L 3P2
T: (604) 521-4385
F: (604) 526-8597
n.west@stella-jones.com
Plant and Sales Office
7177 Pacific Street
Prince George
British Columbia
V2N 5S4
T: (250) 561-1161
F: (250) 561-0903
p.george@stella-jones.com
Fibre & Woodlands Dept.
4661 60th Street SE
Salmon Arm
British Columbia
V1E 1X2
T: (250) 832-1180
F: (250) 832-7933
salmonarm@stella-jones.com
MANITOBA
Plant
205 Hwy. 16 West
Neepawa, Manitoba
R0J 1H0
T: (204) 476-7700
F: (204) 476-2212
neepawa@stella-jones.com
NOVA SCOTIA
ONTARIO
Plant and Sales Office
278 Park Street
Truro, Nova Scotia
B2N 5C1
T: (902) 893-9456
F: (902) 893-3874
truro@stella-jones.com
Plant and Sales Office
Guelph Utility Pole
7818 Wellington Road 22
R.R. #5
Guelph, Ontario
N1H 6J2
T: (519) 822-3901
F: (519) 822-5411
guelph@stella-jones.com
ONTARIO
QUÉBEC
Plant and Sales Office
1 Ram Forest Road
Stouffville, Ontario
L4A 2G7
T: (905) 727-1164
F: (905) 727-7758
gormley@stella-jones.com
Plant and Sales Office
321 Lansdowne Street East
Peterborough, Ontario
K9J 7X6
T: (705) 745-3223
F: (705) 745-3793
peterborough@stella-jones.com
Plant and Sales Office
41 Rodier Street
Delson, Québec
J5B 2H8
T: (450) 632-2011
T: 1 (800) 387-5027
F: (450) 632-3211
delson@stella-jones.com
Plant and Sales Office
426 chemin de
Montréal East
Gatineau, Québec
J8M 1V6
T: (819) 986-8998
F: (819) 986-9875
gatineau@stella-jones.com
Plant
2210 chemin St-Roch
Sorel-Tracy, Québec
J3R 3L2
T: (450) 742-5977
F: (450) 742-8832
sorel@stella-jones.com
Plant
11045 Hwy. 124
South River, Ontario
P0A 1X0
T: (705) 386-2371
F: (705) 386-2335
sriver@stella-jones.com
QUÉBEC
Plant
2549 Chemin Francisco
Rivière-Rouge, Québec
J0T 1T0
T: (819) 275-3353
F: (819) 275-1002
rouge@stella-jones.com
Stella-Jones Inc.
OPERATING NETWORK – UNITED STATES
85
CORPORATE OFFICE
LEGAL AND COMPLIANCE
ALABAMA
Stella-Jones Corporation
Park West One
1000 Cliff Mine Road
Suite 500
Pittsburgh, PA
15275 U.S.A
T: (412) 325-0202
F: (412) 774-1689
sjcorp@stella-jones.com
Stella-Jones Corporation
15700 College Blvd.,
Suite 300
Lenexa, KS
66219 U.S.A.
T: (913) 948-9478
F: (913) 538-2226
sjcorp@stella-jones.com
Plant
Stella-Jones Corporation
100 McKinney Drive
Clanton, AL
35045 U.S.A.
T: (205) 280-3950
F: (205) 665-2545
sjcorp@stella-jones.com
Plant
Stella-Jones Corporation
1051 Highway 25 South
Montevallo, AL
35115 U.S.A.
T: (205) 679-4005
F: (205) 665-2545
sjcorp@stella-jones.com
ARIZONA
ARKANSAS
GEORGIA
INDIANA
Plant
McFarland Cascade
850 West Chambers St.
Eloy, AZ
85231 U.S.A.
T: (520) 466-7801
F: (520) 466-3607
info@mcfarland
cascade.com
Plant
Stella-Jones Corporation
4260 South
Arkansas Ave.
Russellville, AR
72802 U.S.A.
T: (479) 968-5085
F: (479) 968-4636
sjcorp@stella-jones.com
Plant
McFarland Cascade
6040 Highway 79N
Rison, AR
71665 U.S.A.
T: (870) 325-7070
F: (870) 325-7050
info@mcfarland
cascade.com
Plant
Stella-Jones Corporation
3500 Pateville Road
Cordele, GA
31015 U.S.A.
T: (229) 273-8012
F: (229) 273-8220
sjcorp@stella-jones.com
Plant
Stella-Jones Corporation
3818 S. County Road
50 E
Winslow, IN
47598 U.S.A.
T: (812) 789-5331
F: (812) 789-5335
sjcorp@stella-jones.com
KENTUCKY
LOUISIANA
Plant
Stella-Jones Corporation
3855 Highway 51 North
Fulton, KY
42041 U.S.A.
T: (270) 472-5557
F: (270) 472-5559
sjcorp@stella-jones.com
Plant
Stella-Jones Corporation
3600 Koppers Road
Alexandria, LA
71302 U.S.A.
T: (318) 442-5733
F: (318) 473-4378
sjcorp@stella-jones.com
Plant
McFarland Cascade
10020 Highway 483
Converse, LA
71419 U.S.A.
T: (318) 645-7525
F: (318) 645-7530
info@mcfarlandcascade.
com
Plant
McFarland Cascade
74 Wadley Street
Pineville, LA
71360 U.S.A.
T: (318) 442-4414
F: (318) 445-9144
info@mcfarlandcascade.
com
MISSISSIPPI
Plant
McFarland Cascade
13539 Highway 45
Scooba, MS
39358-7611 U.S.A.
T: (662) 476-8000
F: (601) 476-8005
info@mcfarland
cascade.com
NEVADA
OREGON
Plant
McFarland Cascade
1680 E Spruce Avenue
Silver Springs, NV
89429 U.S.A.
T: (775) 577-2000
F: (775) 577-9045
info@mcfarland
cascade.com
Plant and Office
McFarland Cascade
90049 Highway 99N.
Eugene, OR
97402 U.S.A.
T: (541) 689-1278
F: (541) 689-6027
info@mcfarland
cascade.com
Plant
McFarland Cascade
22125 SW
Rock Creek Road
Sheridan, OR
97378 U.S.A.
T: (503) 843-2122
F: (503) 843-7058
info@mcfarland
cascade.com
PENNSYLVANIA
Plant
Stella-Jones Corporation
5865 Route 235
McAlisterville, PA
17049 U.S.A.
T: (717) 463-2131
F: (717) 463-3998
sjcorp@stella-jones.com
Plant
Stella-Jones Corporation
392 Larkeytown Road
Dubois, PA
15801 U.S.A.
T: (814) 371-7331
F: (814) 375-0946
sjcorp@stella-jones.com
2017 Annual Report
86
OPERATING NETWORK – UNITED STATES
SOUTH CAROLINA
TENNESSEE
TEXAS
VIRGINIA
WASHINGTON
Plant
McFarland Cascade
1121 Delta Road
Whitmire, SC
29178 U.S.A.
T: (803) 694-3668
F: (803) 694-3976
info@mcfarland
cascade.com
Coal Tar Distillation
Facility
Stella-Jones Corporation
1471 Channel Avenue
Memphis, TN
38109 U.S.A.
T: (901) 942-3326
F: (901) 942-3128
sjcorp@stella-jones.com
Plant
McFarland Cascade
5865 US Highway 69
Lufkin, TX
75901 U.S.A.
T: (936) 824-2297
F: (936) 634-2100
info@mcfarlandcascade.
com
Plant
Stella-Jones Corporation
9223 Maury River Road
Goshen, VA
24439 U.S.A.
T: (540) 997-9251
F: (540) 997-0047
sjcorp@stella-jones.com
Plant and Corporate
Office
McFarland Cascade
1640 East Marc St.
Tacoma, WA
98421 U.S.A.
T: (253) 572-3033
F: (253) 382-3000
info@mcfarland
cascade.com
WASHINGTON
WISCONSIN
Plant
McFarland Cascade
6520 - 188th NE
Arlington, WA
98223 U.S.A.
T: (360) 435-2146
F: (360) 435-3035
info@mcfarland
cascade.com
Plant
Stella-Jones Corporation
W1038 County Road U
Bangor, WI
54614 U.S.A.
T: (608) 486-2700
F: (608) 486-4538
sjcorp@stella-jones.com
Plant
McFarland Cascade
1014 S. 1st Street
Cameron, WI
54822 U.S.A.
T: (715) 458-2018
F: (715) 458-2024
info@mcfarlandcascade.
com
Stella-Jones Inc.
Corporate
Information
Annual Meeting of Shareholders
May 3, 2018
10:00 a.m.
Hotel Omni Mont-Royal
Salon Pierre De Coubertin
1050 Sherbrooke Street West
Montréal, Québec
Stock Information
Shares listed: Toronto Stock Exchange
Ticker symbol: SJ
Initial public offering: 1994
52-week high/low (Jan. 1 – Dec. 31, 2017): $51.41 / $38.30
Share price at March 13, 2018: $47.30
Common shares outstanding as at December 31, 2017: 69.34 million
Dividend Policy
The Board of Directors considers a dividend on a quarterly basis, subject
to the Company’s financial covenants and conditional upon its financial
performance and cash requirements.
On March 13, 2018, the Board of Directors declared a quarterly
dividend of $0.12 per common share.
Transfer Agent and Registrar
Computershare Investor Services Inc.
Auditors
PricewaterhouseCoopers LLP
Legal Counsel
Fasken Martineau Dumoulin LLP
Cohen & Grigsby, P.C.
Foley & Lardner LLP
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WWW.STELLA-JONES.COM
Railway operators recognize Stella-Jones as one of North America’s
foremost producers of railway ties. Similarly, the providers of electricity
and telecommunications throughout the continent know Stella-Jones
as a principal producer of utility poles. This level of accomplishment,
authority and identity in the treated wood industry has consistently
positioned the Company to grow its business among both existing and
new customers.