TABLE OF CONTENTS
01 5-year Financial Highlights
02 Stella-Jones at a Glance
03 2018 Highlights
04 Chair’s Report
06 President’s Message
08 Building on a Strong Third Pillar
09 Stella-Jones’ Continental Network
10 Building on Our Reputation for Quality and Service
12 Building on Solid Performance
14 Share Information
16 Management’s Discussion and Analysis
44
Independent Auditor’s Report
47 Consolidated Financial Statements
ST ELL A-JONES .COM
5-YEAR FINANCIAL
HIGHLIGHTS
For the years ended December 31
(millions of dollars, except per share data and financial ratios)
2018
$
2017
$
2016
$
2015
$
2014
$
OPERATING RESULTS
Sales
EBITDA (1)
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
FINANCIAL RATIOS
Operating margin (1)
EBITDA margin (1)
Return on average equity (1)
Total debt (2) to total capitalization (1)
Total debt (2) to trailing 12-month EBITDA (1)
Working capital
2,123.9
1,886.1
1,838.4
1,559.3
1,249.5
244.4
206.3
137.6
243.1
207.4
167.9
264.8
233.2
153.9
243.4
220.1
141.4
176.3
155.7
103.8
909.0
779.4
928.0
854.4
615.1
2,062.2
1,786.0
1,960.9
1,778.9
1,289.0
513.5
455.6
694.0
1,281.4
1,115.5
1,026.4
669.9
913.5
444.6
692.3
1.98
1.98
18.50
2.42
2.42
16.09
2.22
2.22
14.81
2.05
2.04
13.21
1.51
1.50
10.04
9.7%
11.5%
11.5%
11.0%
12.9%
15.7%
12.7%
14.4%
15.9%
14.1%
15.6%
17.6%
0.29:1
0.29:1
0.40:1
0.42:1
2.10x
6.70
1.87x
7.04
2.62x
8.58
2.75x
6.36
12.5%
14.1%
16.4%
0.39:1
2.52x
8.33
(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 — Accounting 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.
2018 Annual report
1
1
2018 Annual report
STELLA-JONES
AT A GLANCE
Railway Ties
31.2%
Logs and
Lumber
7.2%
Utility Poles
34.1%
$2.1B
2018 SALES
Residential
Lumber
22.4%
Industrial
Products
5.1%
39
WOOD TREATING FACILITIES
2,110
EMPLOYEES
68%
SALES FROM U.S.
Stella-Jones Inc. 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 manufactures and distributes residential lumber and
accessories to retailers for outdoor applications, and industrial products for construction and marine applications. The Company’s
common shares are listed on the Toronto Stock Exchange.
2
Stella-Jones Inc. 2018
HIGHLIGHTS
Stella-Jones posted solid financial results in 2018 despite challenging market
conditions. The Company used its strong cash flow to grow the business,
both organically and through acquisitions and provided a solid return to
share holders. It remains in a healthy financial position to pursue its growth.
MARKET CONDITIONS
• Railway tie inventory levels tightened
• Lumber prices hit an all-time high in May 2018 followed by a sharp drop
• Sustained demand for the Company’s products
SOLID RESULTS
• Sales increased 12.6% and across all product categories
• EBITDA(1) marginally increased to $244.4 million, as it was negatively
impacted by a $7.9 million loss on derivative commodity contracts
• Net income decreased 18.0% to $137.6 million, primarily due to a loss
on derivative commodity contracts and the December 2017 U.S. tax reform
BALANCED CAPITAL ALLOCATION
• $54.5 million to make acquisitions
• $51.6 million for capital expenditures
• $33.3 million for dividends
• $4.0 million for share buybacks
STRONG BALANCE SHEET
• Total debt of $513.5 million
• Total debt to EBITDA(1) ratio of 2.10x
• Strong financial position to pursue acquisitions
NETWORK EXPANSION
• Acquired Prairie Forest Products in February
• Acquired Wood Preservers Incorporated in April
• Invested in its network to improve efficiencies and expand capacity
(1) This is a non-IFRS financial measure. Please refer to the Non-IFRS financial measures section in the
management’s discussion and analysis.
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
SALES
(in millions of $)
1,249.5
1,559.3
1,838.4
1,886.1
2,123.9
EBITDA(1)
(in millions of $)
176.3
243.4
264.8
243.1
244.4
NET INCOME
(in millions of $)
103.8
141.4
153.9
167.9
137.6
2018 Annual report
3
3
2018 Annual report
CHAIR’S REPORT
BUILDING
ON GOOD
GOVERNANCE
A MILESTONE YEAR
2018 was a milestone year for Stella-Jones. Stella Jones International SA sold its remaining holdings in the Company
and the two founding partners, Tom A. Bruce Jones and Gianni Chiarva, stepped down from the Board of Directors.
On behalf of Stella-Jones, I would like to thank them for their dedication and vision. They built Stella-Jones from a
four-plant wood-treating operation in 1992 to a leading North American railway tie, utility pole and treated lumber
supplier with close to 40 facilities today.
BOARD CHANGES
I was appointed Chair of the Board last September. I am honored
and delighted to accept this role and look forward to working with
the Board and Management to build upon the Company’s solid
core values and exceptional track record.
Furthermore, longstanding Board members Daniel Picotte and
Nycol Pageau-Goyette announced that they would be stepping
down in May of 2019. I would like to thank both Daniel and Nycol
for their many years of dedicated service. Finally, in December,
we welcomed Ms. Karen Laflamme, Executive Vice-President
and Chief Financial Officer, Retail, of Ivanhoé Cambridge, to the
Board. She is an accomplished executive who brings a wealth of
financial, accounting and business experience to Stella-Jones. I
am confident that Karen will make a positive contribution to the
Board and the Audit Committee.
Stella-Jones has nine Board members, composed of 44% women
and 78% independent Directors. This compares with 30% and
60% respectively, last year.
4
Stella-Jones Inc. BOLSTERING OUR GOVERNANCE
In 2018, the Board continued to build on its good governance
by enhancing some of its practices. Thus far, we established a
Governance and Nomination Committee comprised solely of
independent directors and instituted a process of renewal of the
Board which will continue to foster diversity.
In this same spirit, Stella-Jones recently published its inaugural
Environmental, Social and Governance (ESG) Report. While this
is our first report, we have been committed to ESG for many
years, including having implemented numerous safety and
environmental initiatives. In fact, we have long had in place a
dedicated Environmental, Health and Safety Committee of the
Board. We are committed to being a model corporate citizen
and to continuously improving our sustainability and other ESG
practices.
SOLID PERFORMANCE IN 2018
Despite challenging market conditions in 2018, Stella-Jones
finished the year with a solid performance. Revenues increased
12.6% and EBITDA(1) increased 0.5%. We also completed two
acquisitions, continued to invest in our network to better serve our
customers, increased our dividend for the fourteenth consecutive
year and instituted a Normal Course Issuer Bid.
On behalf of the Board, I would like to welcome our new
institutional shareholders and thank our long-term shareholders
for their continued support. I would also like to thank all of our
employees for their strong contribution in 2018.
Katherine A. Lehman
Chair of the Board
Establishment of
Governance and
Nomination Committee
Renewal of the Board
of Directors on which
78% are now independent
and 44% are women
Launch of inaugural
Environmental, Social and
Governance Report
(1) This is a non-IFRS financial measure. Please refer to the Non-IFRS financial measures section in the management’s discussion and analysis.
5
2018 Annual report PRESIDENT’S MESSAGE
BUILDING
ON OUR CORE ASSETS
NAVIGATING THROUGH CHALLENGING MARKET CONDITIONS
In a year filled with a multitude of challenges, our operational and sales teams deserve
praise for navigating through headwinds and delivering an 18th consecutive year of
increased revenues. Our bottom line was impacted when compared to last year, due to
the one-time benefits received from the 2017 tax reform enacted in the United States. We
witnessed a rise in lumber prices and a railway tie market characterized by a tightened
supply. Although these factors contracted our margins and net income, we achieved a
healthy increase in revenues stemming from higher pricing and sustained strong demand
in key product categories.
GENERATING SOLID RESULTS
In a generally robust North American economy, demand remained solid for Stella-Jones’ pressure-
treated wood railway ties, utility poles and residential lumber. Total sales in 2018 surpassed
the two billion-dollar mark for the first time in our history, reaching $2.1 billion. Excluding the
contribution from acquisitions and the impact from foreign exchange, sales rose by a robust
10.1%, primarily driven by pricing. As expected, net income decreased to $137.6 million, primarily
impacted by the effect of the U.S. tax reform last year, coupled with a loss related to derivative
commodity contracts.
GROWING OUR CORE PRODUCT CATEGORIES
In 2018, all of Stella-Jones’ product categories increased their year-over-year sales and generated
organic growth. Railway tie sales grew modestly to $662.4 million, as we progressively passed on
price increases to customers. Utility pole sales increased over 10% to $725.0 million, driven by
both strong demand and price increases and residential lumber sales increased by close to 30%
to $474.7 million, driven primarily by pricing. However, despite higher sales prices, our increasing
exposure to lumber costs has put downward pressure on our margins as a percentage of sales,
as price increases are a pass through to customers.
6
Stella-Jones Inc. ALLOCATING CAPITAL TO MAXIMIZE
SHAREHOLDER VALUE
In 2018, we generated $128.1 million of cash flow from
operations. We deployed capital primarily for acquisitions, capital
expenditures and providing a return to shareholders in the form of
dividends and share buybacks.
In terms of network expansion, we completed two acquisitions
totalling $54.5 million. We acquired Prairie Forest Products in
Manitoba, which manufactures treated wood utility poles and
treated residential lumber, and Wood Preservers Incorporated in
Sales increased
by 12.6% and EBITDA(1)
was up 0.5%
Virginia, a producer of marine and foundation pilings and treated
margins in 2019. In addition, our solid financial position will allow
utility poles. With these two additions, we closed 2018 operating
us to continue to seek opportunities to expand our presence in
thirty-nine wood treating plants and twelve pole peeling facilities.
our core markets.
During the year, we also invested $51.6 million to increase the
I want to take this opportunity to express my gratitude to all
capacity and efficiency of our network. In fact, the capital we
members of the Stella-Jones team. Your talents and devotion
deployed in our facilities in the Southeastern United States has
are what make our Company a strong and growing force in our
started to bear fruit in the form of improved efficiencies and we
industry. I also wish to thank our Board of Directors and the many
are well positioned to grow.
shareholders of Stella-Jones for your continuing confidence and
In 2018, we increased our dividend for a fourteenth consecutive
year to $0.48 per share, returning $33.3 million to shareholders.
At the end of the year, we put in place a Normal Course Issuer
Bid, representing an attractive and responsible investment and a
support.
complementary way to return value to shareholders. As at year
Brian McManus
end, we had repurchased common shares for approximately
President and Chief Executive Officer
$4.0 million.
OUTLOOK
As a manufacturer of basic components of North American
industrial infrastructure, Stella-Jones succeeds in tandem with the
dynamism and growth of the continental economy. As we enter
2019, the market continues to indicate ongoing robust demand
for our core products . Based on current market expectations and
assuming stable currencies and lumber prices, we expect the
Company to generate higher year-over-year sales and improved
(1) This is a non-IFRS financial measure. Please refer to the Non-IFRS financial measures section in the management’s discussion and analysis.
7
2018 Annual report BUILDING
ON A STRONG THIRD PILLAR
SALES BY PRODUCT CATEGORY
(in millions of $)
2,500
2,000
1,500
1,000
500
0
2014
2015
2015
2017
2018
Railway Ties
Utility Poles
Residential Lumber
Industrial Products
Logs & Lumber
DIVERSIFYING THE PRODUCT MIX
Over the course of the past 5 years, Stella-
Jones has success fully developed the residential
lumber product cate gory through acquisitions and
organic growth. Residentiel lumber has climbed
from 10% of its overall product mix in 2014 to
22% of total sales in 2018, gaining momentum
through dedicated market focus and higher
lumber prices passed through to customers. While
remaining continually focused on its railway tie
and utility pole businesses, Stella-Jones regards
residential lumber as an essential component of
its core product mix.
Residential lumber is an
essential component of
Stella-Jones’ core product mix
8
8
Stella-Jones Inc.
Stella-Jones Inc. STELLA-JONES’
CONTINENTAL NETWORK
1 New Westminster, BC
15 Arlington, WA
19 Silver Springs, NV
33 Montevallo, AL
2 Prince George, BC
3 Galloway, BC
4 Carseland, AB
5 Neepawa, MB
6 South River, ON
7 Guelph, ON
8 Stouffville, ON
16 Tacoma, WA
17 Sheridan, OR
18 Eugene, OR
20 Eloy, AZ
21 Lufkin, TX
22 Russellville, AR
9 Peterborough, ON
23 Rison, AR
10 Gatineau, QC
11 Rivière-Rouge, QC
12 Delson, QC
13 Sorel-Tracy, QC
14 Truro, NS
24 Converse, LA
25 Pineville, LA
26 Alexandria, LA
27 Bangor, WI
28 Cameron, WI
Treating Facilities
Coal Tar Distillery
29 Memphis, TN
30 Scooba, MS
31 Fulton, KY
32 Winslow, IN
34 Clanton, AL
35 Cordele, GA
36 Whitmire, SC
37 Goshen, VA
38 Warsaw, VA
39 Dubois, PA
40 McAllisterville, PA
9
2018 Annual report23411012131415161718192023263029273132333537739403489222421366511282538 BUILDING
ON OUR REPUTATION FOR QUALITY AND SERVICE
RAILWAY TIES
UTILITY POLES
$662 M
2018
REVENUES
2.7%
ORGANIC
GROWTH
31.2%
OF
REVENUES
$725 M
2018
REVENUES
11.2%
ORGANIC
GROWTH
34.1%
OF
REVENUES
Stella-Jones is an industry leader in the production of quality
Stella-Jones provides over one million pressure-treated poles
pressure treated railroad ties and timbers. We have the treating
per year to replace, upgrade and develop new electrical utility
capacity, sources of raw material supply and purchasing
and telecommunications lines across Canada and the United
power to meet the needs of Class 1, Short Line railroads
States. Wood poles are the backbone of North America’s
and commercial operators from coast to coast. Our extensive
electric grid and are a renewable resource, providing equal or
supplier network of over 1,200 hardwood sawmills allows us
superior strength, resiliency and service life when compared
to offer crossties and switch ties in a variety of sizes to meet
to any “wood pole equivalent” structure constructed from
our customers’ needs. Our agile continental network of wood
alternative materials, such as steel, concrete and fiberglass.
treating plants and distribution yards carry a large inventory to
Stella-Jones’ quality poles are made from a variety of premium
ensure that materials are delivered quickly and efficiently, even
wood species to suit a range of climates. Our custom
under urgent conditions.
manufacturing services meet the demands of our customers’
unique specifications across the continent.
In 2018, sales increased modestly, primarily as a result of
price increases in the second half of the year, partially offset
In 2018, sales increases were driven by greater market reach
by the Company supporting the transition of a Class 1 railroad
in the U.S. Southeast, increased project activity requiring
customer from a “treating services only” program to a full
transmission poles, healthy demand for replacement programs
service “black-tie” program in the first half of the year. Sales
and higher sales prices. Sales and margins for 2019 are
and margins for 2019 are expected to increase year-over-year,
expected to increase year-over-year, driven by both pricing
primarily driven by pricing.
and strong demand for replacement programs and increased
project-based sales.
10
Stella-Jones Inc. RESIDENTIAL LUMBER
INDUSTRIAL PRODUCTS
$109 M
1.1%
5.1%
2018 REVENUES
ORGANIC GROWTH
OF REVENUES
Stella-Jones is a leading supplier of pressure treated wood
products to the marine, industrial and civic sectors for outdoor
applications, producing wharf timbers, bridge timbers, crane
mats, railway crossings and laminated poles, and offering a
variety of select wood species and preservatives. In 2018, sales
increased modestly, explained in part by demand for rail-related
products and projects requiring laminated products. For 2019,
sales should increase due to the full-year contribution from
acquisitions.
LOGS & LUMBER
$153 M
26.8%
7.2%
2018 REVENUES
ORGANIC GROWTH
OF REVENUES
$475 M
2018
REVENUES
18.1%
ORGANIC
GROWTH
22.4%
OF
REVENUES
Stella-Jones provides seamless, end-to-end service to key
North American retailers, supplying hundreds of millions of
board feet of treated residential lumber across Canada and
the United States each year. A preferred supplier of treated
wood products for the dimensional lumber market, Stella-
Jones treats wood boards, plywood and dimensional lumber for
use in patios, decks, fences and other outdoor applications in
addition to providing customized services for the residential and
construction markets.
In 2018, sales increased significantly due to higher selling
prices, stemming from increased lumber costs passed through
to customers, and to increased volume due to the Company’s
This product category is used to optimize procurement, does
expanding market presence. For 2019, sales are expected
not generate margin and is fairly tied to the price of lumber.
to be stable, year-over-year, as stronger market demand is
In 2018, sales increased significantly as a result of higher
expected to be offset by lower selling prices to customers, as a
lumber prices which are passed through to customers as well
result of lower lumber costs.
as increased harvesting for poles which has generated more
log sales. For 2019, with the price of lumber coming down,
we expect sales to decrease and our consolidated margin to
benefit.
11
2018 Annual report BUILDING
ON SOLID PERFORMANCE
2,500
2,000
1,500
1,000
500
0
300
250
200
150
100
50
0
350
300
250
200
150
100
50
0
SALES & ORGANIC GROWTH
(in millions of $, except percentage)
10.1%
1,250
1,559
6.4%
1,838
1,886
2,124
12%
10.1%
10%
4.4%
1.1%
8%
6%
4%
2%
0%
2014
2015
2016
2017
2018
Sales
Organic growth
EBITDA(1), OPERATING INCOME(1) & EBITDA %(1)
(in millions of $, except margin)
Sales have steadily increased over the past five years,
reaching past the two billion-dollar mark in 2018, an
important milestone in the Company’s history.
Stella-Jones has generated positive organic growth in
each of the last five years, spiking to 10.1% in 2018,
driven primarily by higher lumber prices passed through
to customers, coupled with a rise in railway tie selling
prices and increased volume in the utility pole product
category.
243
220
15.6%
265
233
14.4%
14.1%
176
156
20%
EBITDA(1) for 2018 was $244.4 million, in line with last
243
244
207
206
15%
12.9%
11.5%
10%
year, as it was negatively impacted by a $7.9 million loss
on derivative commodity contracts in the fourth quarter.
Excluding this non-operational item, EBITDA(1) would
have been up approximately 4%.
5%
0%
EBITDA margin(1) for 2018 was 11.5%, down from
12.9% last year, primarily due to higher lumber prices,
which are a pass through to customers, as well as
the negative impact from the derivative instruments
mentioned above.
2014
2015
2016
2017
2018
EBITDA
Operating income
EBITDA %
CASH FLOW FROM OPERATING ACTIVITIES
(in millions of $)
254
269
301
248
262
182
In 2018, Stella-Jones generated $262.3 million of cash
flow from operating activities before non-cash working
capital components and interest and income taxes
128
paid (1) as compared to $248.2 million last year. However,
181
77
it generated $128.1 million of cash flow from operating
activities, versus $301.1 million last year. This variance
was primarily explained by increased inventories.
7
2014
2015
2016
2017
2018
Cash flow from operating activities before certain items (1) (2)
Cash flow from operating activities
(1) This is a non-IFRS financial measure. Please refer to the Non-IFRS financial measures section in the management’s discussion and analysis.
(2) Non-cash working capital components and interest and income taxes paid
12
Stella-Jones Inc. CAPITAL DEPLOYMENT
(in millions of $)
198
122
105
87
Stella-Jones has a disciplined approach to capital
allocation. In 2018, the Company invested $54.5 million
for business acquisitions and $51.6 million for capital
143
expenditures. It also provided a return to shareholders
250
200
150
100
50
0
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
$0.00
300
250
200
150
100
50
0
2014
2015
2016
2017
2018
Acquisition
CAPEX
Dividends
Share buybacks
DIVIDENDS PER SHARE
(in dollars)
$0.44
$0.40
$0.48
$0.32
$0.28
2014
2015
2016
2017
2018
EBITDA(1) & TOTAL DEBT TO EBITDA(1)
(in millions of $ except ratio)
2.52x
176
2.75x
243
265
2.62x
243
244
2.10x
1.87x
2014
2015
2016
2017
2018
EBITDA
Total debt to EBITDA
3.00x
2.50x
2.00x
1.50x
1.00x
0.50x
0.00x
by paying dividends of $33.3 million and buying back
shares for $4.0 million under a Normal Course Issuer
Bid, instituted at the end of 2018, which it believes
represents an attractive and responsible investment and
is a complementary way to return value to shareholders.
Stella-Jones has increased its dividend for the past
fourteen years. In 2018, the dividend increased 9.1%
to $0.48 per share. At year end, the dividend yield was
1.2%. On March 14, 2019, the Company continued
this trend and announced an increase of its quarterly
dividend by 16.7% to $0.14 per share. 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.
Stella-Jones concluded 2018 with a total debt of
$513.5 million and an EBITDA(1) of $244.4 million. This
translated into a total debt to EBITDA(1) ratio of 2.1:1.
The Company is therefore in a healthy financial position
to pursue its development and acquisition strategy.
(1) This is a non-IFRS financial measure. Please refer to the Non-IFRS financial measures section in the management’s discussion and analysis.
13
2018 Annual report SHARE
INFORMATION
For the years ended December 31
(unaudited)
2018
$
2017
$
2016
$
2015
$
2014
$
TRADING DATA ON COMMON SHARES
52-week high ($)
52-week low ($)
Closing ($)
Total volume
Average daily volume
OTHER STATISTICS
52.22
37.40
39.61
51.41
38.30
50.50
51.95
40.37
43.58
53.46
32.16
52.51
36.00
25.43
32.74
53,908,544 49,339,093 46,609,923 34,802,385
17,441,546
214,775
196,570
185,697
138,655
69,488
Dividends on common shares (in millions $)
Dividend per share ($)
Dividend yield (%)
Average number of shares outstanding (000’s)
Average number of diluted shares outstanding (000’s)
Shares outstanding at year end (000’s)
Public float (000’s)
Market capitalization (in millions $)
Enterprise value (1) (in millions $)
33.3
0.48
30.5
0.44
27.7
0.40
22.1
0.32
19.3
0.28
1.2%
0.9%
0.9%
0.6%
0.9%
69,352
69,360
69,268
61,718
2,744
3,257
69,324
69,333
69,342
47,769
3,502
3,957
69,215
69,231
69,303
42,730
3,020
3,715
69,018
69,153
69,137
42,564
3,630
4,300
68,802
69,027
68,949
42,376
2,257
2,702
(1) Enterprise value is defined as market capitalization plus total debt, including the current portion of long-term debt.
CLOSING SHARE PRICE AND VOLUME
6,000
5,000
4,000
3,000
2,000
1,000
0
$60
$50
$40
$30
$20
$10
$0
Jan
14
Mar
14
May
14
Jul
14
Sep
14
Nov
14
Jan
15
Mar
15
May
15
Jul
15
Sep
15
Nov
15
Jan
16
Mar
16
May
16
Jul
16
Sep
16
Nov
16
Jan
17
Mar
17
May
17
Jul
17
Sep
17
Nov
17
Jan
18
Mar
18
May
18
Jul
18
Sep
18
Nov
18
Volume
Price
14
Stella-Jones Inc.
15
MANAGEMENT’S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2018 AND 2017
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 16
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.
This MD&A and the Company’s audited consolidated financial statements were approved by the Board of Directors on March 14, 2019. The MD&A
provides a review of the significant developments and results of operations of the Company during the fiscal year ended December 31, 2018
compared with the fiscal year ended December 31, 2017. The MD&A should be read in conjunction with the Company’s audited consolidated
financial statements for the years ended December 31, 2018 and 2017 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
Accountants (“CPA Canada”) Handbook Part I — Accounting. 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 Relations 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 14, 2019, the Company operated thirty-nine wood treating plants, twelve pole peeling facilities and a coal tar distillery. These facilities
are located in six Canadian provinces and nineteen American states and are complemented by an extensive distribution network across North
America. As at December 31, 2018, the Company’s workforce numbered approximately 2,110 employees.
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.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS 2018 HIGHLIGHTS
Selected Key Indicators
(in millions of dollars, except earnings per share (“EPS”) and key performance indicators)
Operating Results
Sales
Gross profit (1)
EBITDA (1)
Operating income (1)
Net income
EPS – basic & diluted
Cash Flows
Cash flows from operating activities
Cash flows from financing activities
Cash flows from investing activities
Financial Position
Current assets
Inventories
Total assets
Long-term debt (2)
Total liabilities
Shareholders’ equity
Key Performance Indicators
EBITDA margin (1)
Operating margin (1)
Return on average equity (1)
Working capital ratio (1)
Long-term debt (2) to total capitalization (1)
Long-term debt (2) to EBITDA (1)
Dividend per share
17
2018
2017
2016
2,123.9
1,886.1
1,838.4
314.2
244.4
206.3
137.6
1.98
128.1
(26.0)
(108.5)
1,068.4
838.6
2,062.2
513.5
780.8
1,281.4
11.5%
9.7%
11.5%
6.70
0.29:1
2.10
0.48
299.9
243.1
207.4
167.9
2.42
301.1
(239.9)
(58.5)
908.4
718.5
1,786.0
455.6
670.4
1,115.5
12.9%
11.0%
15.7%
7.04
0.29:1
1.87
0.44
333.7
264.8
233.2
153.9
2.22
181.8
(9.5)
(175.6)
1,050.4
854.6
1,960.9
694.0
934.5
1,026.4
14.4%
12.7%
15.9%
8.58
0.40:1
2.62
0.40
(1) This is a non-IFRS financial measure which does not have a standardized meaning prescribed by IFRS and may therefore not be comparable to similar measures presented by
other issuers. Refer to the Non-IFRS financial measures section of this MD&A.
(2) Including current portion of long-term debt.
Note: Numbers are rounded.
• On December 18, 2018, Stella-Jones announced that the Toronto Stock Exchange had accepted its Notice of Intention to Make a Normal
Course Issuer Bid. Shareholders may obtain a copy of the Notice of Intention upon request to the Company. Pursuant to the Notice,
Stella-Jones may, during the twelve-month period commencing December 20, 2018 and ending December 19, 2019, purchase for cancellation,
up to 3,000,000 common shares, representing approximately 4.3% of its outstanding common shares.
• On November 19, 2018, Stella-Jones announced the appointment of Ms. Karen Laflamme to its Board of Directors. Ms. Laflamme is Executive
Vice-President and Chief Financial Officer, Retail, of Ivanhoé Cambridge, an investor and developer of superior quality real estate properties,
projects and companies around the world. Ms. Laflamme’s appointment was effective December 1, 2018.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
18
• On September 25, 2018, Stella-Jones announced the appointment of Ms. Katherine A. Lehman as Chair of the Board, the establishment of a
Governance and Nomination Committee and the implementation of additional governance initiatives.
• On August 14, 2018, Stella Jones International S.A. sold its remaining share ownership in Stella-Jones Inc. through a bought deal public
offering of 8,445,911 common shares and a concurrent private placement of an aggregate of 13,126,925 common shares.
• On April 9, 2018, the Company completed the acquisition of substantially all of the operating assets employed in the business of Wood
Preservers Incorporated (“WP”), located at its wood treating facility in Warsaw, Virginia. WP manufactures, sells and distributes marine and
foundation pilings and treated wood utility poles.
• On February 9, 2018, the Company completed the acquisition of substantially all of 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 treated wood utility poles as well as treated residential lumber.
NON-IFRS FINANCIAL MEASURES
This MD&A contains financial measures which are not prescribed by IFRS and are not likely to be comparable to similar measures presented by
other issuers. These measures are as follows:
• Gross profit: Sales less cost of sales
• EBITDA: 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 margin: EBITDA divided by sales for the corresponding period
• Operating income
• Operating margins: Operating income divided by sales for the corresponding period
• Cash flows from operating activities before changes in non-cash working capital components and interest and income taxes paid
• Long-term debt to EBITDA: Long-term debt (including the current portion) divided by EBITDA
• Return on average equity: Net income divided by the mathematical average of the current and prior year’s shareholders’ equity
• Working capital ratio: Total current assets divided by total current liabilities
• Long-term 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)
Management considers these non-IFRS measures to be useful information to assist knowledgeable investors regarding the Company’s financial
condition and operating results as they provide additional measures about its performance.
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
Note: Numbers may not add exactly due to rounding.
Three-month periods ended
Fiscal years ended
December 31,
2018
December 31,
2017
December 31,
2018
December 31,
2017
$
20.6
6.4
4.8
31.8
10.0
41.8
$
51.1
(26.0)
3.9
29.0
9.0
38.0
$
137.6
49.6
19.1
206.3
38.1
244.4
$
167.9
20.5
19.0
207.4
35.7
243.1
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
19
FOREIGN EXCHANGE
The table below shows average and closing exchange rates applicable to Stella-Jones’ quarters for the years 2018 and 2017. 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 denominated in U.S. dollars.
Cdn$/US$ rate
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year
2018
2017
Average
Closing
Average
Closing
1.2549
1.2893
1.3080
1.3129
1.2913
1.2894
1.3168
1.2945
1.3642
1.3642
1.3240
1.3491
1.2664
1.2754
1.3038
1.3310
1.2977
1.2480
1.2545
1.2545
• Average rate: The depreciation of the U.S. dollar relative to the Canadian dollar during 2018 compared to 2017 resulted in a negative impact
on sales while benefitting cost of sales.
• Closing rate: The appreciation of the U.S. dollar relative to the Canadian dollar as at December 31, 2018, compared to December 31, 2017
resulted in a higher value of assets and liabilities denominated in U.S. dollars, when expressed in Canadian dollars.
RAILWAY TIE INDUSTRY OVERVIEW
ANNUALIZED RAILWAY TIE PURCHASES AND INVENTORY
(in millions of ties)
As reported by the Railway Tie Association (“RTA”), purchases for
2018 were 21.2 million ties, versus 23.4 million ties for 2017. The
RTA calculates purchases based on the difference between monthly
production and the change in inventory, as reported by its members.
Inventory levels are lower at 14.4 million as at December 31, 2018, as
purchases are outpacing production. As a result, the inventory-to-sales
ratio was 0.68:1 as at December 31, 2018, beneath the previous ten-
year average ratio of 0.78:1.
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.
Total traffic on North American railroads increased 3.4% in 2018,
according to data released by the Association of American Railroads.
Carload volume grew by 2.0%, mainly due to increased shipments of
petroleum and petroleum products, chemicals and metallic ores and
metals, whereas the volume of intermodal trailers and containers rose
4.8% from 2017 levels.
30
20
10
0
25
20
15
10
5
0
1993
1998
2003
2008
2013
2018
Source: Railway Tie Association
Purchases
Inventory
FREIGHT HAULED ON NORTH AMERICAN RAILROADS
(in millions of units)
2013
2014
2015
2016
2017
2018
Source: Association of American Railroads
Intermodal
Carloads
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
20
OPERATING RESULTS
Sales
Sales for the year ended December 31, 2018 reached $2,123.9 million, up 12.6% versus last year’s sales of $1,886.1 million. Acquisitions
contributed sales of approximately $60.5 million, while the conversion effect from fluctuations in the value of the Canadian dollar, Stella-Jones’
reporting currency, versus the U.S. dollar, had a negative impact of $12.9 million on the value of U.S. dollar denominated sales when compared with
the previous year. Excluding these factors, sales increased approximately $190.2 million, or 10.1%, as detailed below.
Railway
Ties
Utility
Poles
Residential
Lumber
Industrial
Products
Logs & Consolidated
Sales
Lumber
651.5
654.0
366.2
—
(6.9)
17.8
662.4
2.7%
1.4
(3.4)
73.0
725.0
11.2%
43.9
(1.7)
66.3
474.7
18.1%
94.5
14.4
(0.9)
1.0
109.0
1.1%
119.9
1,886.1
0.8
—
32.1
152.8
26.8%
60.5
(12.9)
190.2
2,123.9
10.1%
Sales
(in millions of dollars, except percentages)
2017
Acquisitions
FX impact
Organic growth
2018
Organic growth %
Note: Numbers may not add exactly due to rounding.
SALES BY PRODUCT CATEGORY
(% of sales)
RAILWAY TIES
31.2%
UTILITY POLES
34.1%
RAILWAY TIES
34.5%
UTILITY POLES
34.7%
2018
$2,123.9 M
LOGS AND
LUMBER
7.2%
INDUSTRIAL
PRODUCTS
5.1%
RESIDENTIAL
LUMBER
22.4%
2017
$1,886.1 M
LOGS AND
LUMBER
6.4%
INDUSTRIAL
PRODUCTS
5.0%
RESIDENTIAL
LUMBER
19.4%
Railway Ties
Railway tie sales for 2018 amounted to $662.4 million, representing an increase of
1.7%, from sales of $651.5 in 2017. The currency conversion effect decreased the
value of U.S. dollar denominated sales by about $6.9 million. Excluding the currency
conversion effect, railway tie sales increased approximately $17.8 million, or 2.7%,
primarily as a result of price increases in the second half of the year, partially offset by
the Company supporting the transition of a Class 1 railroad customer from a “treating
services only” program to a full service “black-tie” program in the first half of the year.
Railway tie sales accounted for 31.2% of the Company’s total sales in 2018.
RAILWAY TIE SALES
(in millions of $)
662.4
651.5
2018
2017
UTILITY POLE SALES
(in millions of $)
725.0
654.0
RESIDENTIAL LUMBER SALES
2018
2017
(in millions of $)
474.7
366.2
2018
2017
INDUSTRIAL PRODUCT SALES
(in millions of $)
109.0
94.5
2018
2017
LOGS AND LUMBER SALES
(in millions of $)
152.8
119.9
2018
2017
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
21
RAILWAY TIE SALES
(in millions of $)
662.4
651.5
2018
2017
UTILITY POLE SALES
(in millions of $)
725.0
654.0
2018
2017
RESIDENTIAL LUMBER SALES
(in millions of $)
474.7
366.2
2018
2017
INDUSTRIAL PRODUCT SALES
(in millions of $)
109.0
94.5
2018
2017
LOGS AND LUMBER SALES
(in millions of $)
152.8
119.9
2018
2017
Utility Poles
Utility pole sales reached $725.0 million in 2018, up 10.9% from sales of $654.0 million in
2017. Acquisitions contributed sales of $1.4 million, while the currency conversion effect
decreased the value of U.S. dollar denominated sales by about $3.4 million. Excluding
the contribution from acquisitions and the currency conversion effect, utility pole sales
increased approximately $73.0 million, or 11.2%, primarily driven by increased sales in
the U.S. Southeast, increased projects related to transmission poles, healthy demand for
replacement programs and increased sales prices. Utility pole sales accounted for 34.1%
of the Company’s total sales in 2018.
Residential Lumber
Sales in the residential lumber category totalled $474.7 million in 2018, up 29.6% from sales
of $366.2 million in 2017. Acquisitions contributed sales of approximately $43.9 million,
while the currency conversion effect decreased the value of U.S. dollar denominated sales
by about $1.7 million when compared with 2017. Excluding these factors, residential
lumber sales increased approximately $66.3 million, or 18.1%. This favourable variance
is primarily explained by higher selling prices as a result of higher lumber costs passed
through to customers and to increased volume due to the Company’s expanding market
presence. Residential lumber accounted for 22.4% of the Company’s total sales in 2018.
Industrial Products
Industrial product sales reached $109.0 million in 2018, compared with $94.5 million last
year. Acquisitions contributed sales of approximately $14.4 million, while the currency
conversion effect decreased the value of U.S. dollar denominated sales by about
$0.9 million when compared with 2017. Excluding the contribution from acquisitions and
the currency conversion effect, sales increased 1.1%, explained in most part by demand
for rail-related products and projects requiring laminated products, partially offset by lower
demand for bridges and timbers. Industrial products represented 5.1% of the Company’s
total sales in 2018.
Logs and Lumber
Sales in the logs and lumber product category totalled $152.8 million in 2018, compared
with $119.9 million in 2017. Excluding the contribution from acquisitions, sales for this
product category increased 26.8%. This significant variance reflects higher selling prices
due to higher lumber costs coupled with increased harvesting activities to procure raw
material to support strong pole sales. Logs and lumber sales represented 7.2% of the
Company’s total sales in 2018.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 22
SALES BY GEOGRAPHIC REGION
(% of sales)
2018
2017
68.0%
UNITED STATES
32.0%
CANADA
70.2%
UNITED STATES
29.8%
CANADA
$ 1,444.3 M $ 679.6 M
$ 1,324.2 M $ 561.9 M
Sales in the United States amounted to $1,444.3 million, or 68.0% of sales in 2018, representing an increase of $120.0 million, or 9.1%, over
sales of $1,324.2 million in 2017. This year-over-year increase is mainly attributable to higher sales across all product categories, coupled with the
contribution of the WP acquisition, partially offset by the negative effect of local currency translation on U.S.-dollar denominated sales.
Sales in Canada amounted to $679.6 million, or 32.0% of sales in 2018, representing an increase of $117.7 million, or 20.9%, over sales of
$561.9 million in 2017. This year-over-year increase primarily reflects higher sales in the residential lumber product category driven by volume as
well as increased selling prices due to higher lumber costs and the contribution of the PFP acquisition. Moreover, the increase was also impacted
by higher sales in the utility pole and logs and lumber product categories.
Cost of Sales
Cost of sales, including depreciation of property, plant and equipment, as well as amortization of intangible assets, was $1,809.7 million, or 85.2%
of sales, in 2018. This compares with $1,586.3 million, or 84.1% of sales, in 2017.
The cost of sales increase is explained by the Company supporting the transition of a Class 1 railroad customer from a “treating services only”
program to a full service “black-tie” program in the first half of the year. To accelerate this transition, the Company acquired untreated railway ties
from the Class 1 railroad customer which increased cost of sales once these ties were treated and sold. Moreover, cost of sales was also impacted
by the increasing cost of untreated railway ties and certain untreated species of poles. In addition, the higher lumber costs for the year, which were
passed through to the customers via higher selling prices, have contributed to increased cost of sales in the residential product category but have
also put downward pressure on margins as a percentage of sales. These cost increases were partially offset by the effect of currency translation.
Depreciation and amortization charges reached $38.1 million in 2018, up from $35.7 million in 2017. As a result, gross profit reached
$314.2 million, or 14.8% of sales, in 2018, compared with $299.9 million, or 15.9% of sales, in 2017.
Selling and Administrative
Selling and administrative expenses for 2018 were $99.0 million, compared with expenses of $93.8 million in 2017. This variation is primarily
explained by higher taxable tax credits of $2.6 million recognized in 2017, coupled with higher salaries and benefits as well as greater stock-based
compensation expenses in 2018, partially offset by the effect of currency translation. As a percentage of sales, selling and administrative expenses
represented 4.7% of sales in 2018, slightly down from 5.0% in 2017.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS 23
Other Losses (Gains), Net
Stella-Jones’ other net losses of $8.9 million for 2018, included a $7.9 million non-cash loss related to the mark-to-market effect of diesel and
petroleum derivative commodity contracts. In 2017, other net gains of $1.3 million 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.
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.
Financial Expenses
Financial expenses reached $19.1 million in 2018, in line with $19.0 million in 2017, as higher year-over-year borrowings, resulting mainly
from financing for the acquisitions, were 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 Expense
Stella-Jones generated income before income taxes of $187.2 million, or 8.8% of sales, in 2018, in line with income before income taxes of
$188.4 million, or 10.0% of sales, in 2017.
Stella-Jones’ income tax expense totalled $49.6 million in 2018, representing an effective tax rate of 26.5%. In 2017, the income tax expense
stood at $20.5 million, equivalent to an effective tax rate of 10.9%. The lower effective tax rate in 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 favourably affected
the Company’s U.S. subsidiaries, specifically by reducing the top federal corporate income tax rate from 35.0% to 21.0%, starting January 1, 2018.
Although the Act only came 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.
Net Income
Net income for 2018 reached $137.6 million, or $1.98 per diluted share, versus net income of $167.9 million, or $2.42 per diluted share,
in 2017. This decrease is primarily explained by the lower income tax expense in 2017.
BUSINESS ACQUISITIONS
Wood Preservers Incorporated
On April 9, 2018, the Company completed the acquisition of substantially all of the operating assets employed in the business of WP, located at
its wood treating facility in Warsaw, Virginia. WP manufactures, sells and distributes marine and foundation pilings and treated wood utility poles.
Total cash outlay associated with the acquisition was approximately $27.5 million (US$21.6 million), excluding acquisition costs of approximately
$423,000 recognized in the consolidated statement of income under selling and administrative expenses. The Company financed the acquisition
through its existing syndicated credit facilities. The consideration transferred is also comprised of an unsecured promissory note bearing no
interest and payable annually on the anniversary of the transaction in six instalments of US$500,000. This unsecured promissory note was
recorded at a fair value of $3.3 million (US$2.6 million), using an effective interest rate of 4.17%.
The following table 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.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 24
(Tabular information presented in millions of dollars)
Assets acquired
Accounts receivable
Inventories
Property, plant and equipment
Customer relationships
Goodwill
Total assets acquired
Liabilities assumed
Deferred income tax liabilities
Total net assets acquired and liabilities assumed
Consideration transferred
Cash
Consideration payable
Unsecured promissory note
Consideration transferred
$
3.9
8.5
18.2
0.2
1.1
31.9
0.4
31.5
27.5
0.7
3.3
31.5
Prairie Forest Products
On February 9, 2018, the Company completed the acquisition of substantially all of the operating assets employed in the business of 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 treated wood utility poles as well as treated residential lumber.
Total cash outlay associated with the acquisition was approximately $27.0 million excluding acquisition costs of approximately $425,000 of which
$159,000 and $266,000 were recognized respectively in the 2017 and 2018 consolidated statements of income under selling and administrative
expenses. The Company financed the acquisition through its existing syndicated credit facilities.
The following table 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.
(Tabular information presented in millions of dollars)
Assets acquired
Inventories
Property, plant and equipment
Customer relationships
Goodwill
Deferred income tax assets
Total assets acquired
Liabilities assumed
Site remediation provision
Total net assets acquired and liabilities assumed
Consideration transferred
Cash
Consideration transferred
$
10.5
7.8
5.9
4.0
0.2
28.4
1.4
27.0
27.0
27.0
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
25
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. The table below sets forth selected financial information for the Company’s last eight quarters, ending with the most recently completed
financial year:
2018
For the quarters ended
(in millions of dollars, except EPS)
Sales
EBITDA
Operating income
Net income for the period
EPS — basic and diluted
2017
For the quarters ended
(in millions of dollars, except EPS)
Sales
EBITDA
Operating income
Net income for the period
EPS — basic and diluted
March 31
June 30
Sept. 30
Dec. 31
Total
$
$
$
$
$
398.8
662.3
630.0
432.8
2,123.9
44.0
35.5
23.1
0.33
80.1
71.0
48.1
0.69
78.5
67.9
45.8
0.66
41.8
31.8
20.6
0.30
244.4
206.3
137.6
1.98
March 31
June 30
Sept. 30
Dec. 31
Total
$
$
$
$
$
396.9
594.2
517.6
377.4
1,886.1
49.7
40.8
25.9
0.37
83.6
74.5
48.9
0.71
71.8
63.1
42.0
0.61
38.0
29.0
51.1
0.74
243.1
207.4
167.9
2.42
Note: Due to rounding, the sum of results for the quarters may differ slightly from the total shown for the full year.
FOURTH QUARTER RESULTS
Highlights
Selected Key Indicators
(in millions of dollars, except margins and EPS)
$
%
Q4–2018
Q4–2017
Variation
Variation
Operating results
Sales
Gross profit
EBITDA
EBITDA margin
Operating income
Net income
EPS – basic & diluted
Note: Numbers are rounded.
432.8
67.0
41.8
9.7%
31.8
20.6
0.30
377.4
53.5
38.0
10.1%
29.0
51.1
0.74
55.4
13.5
3.8
n/a
2.8
(30.5)
(0.44)
14.7%
25.2%
10.0%
n/a
9.7%
(59.7%)
(59.5%)
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
26
Operating Results
Sales for the fourth quarter of 2018 amounted to $432.8 million, up 14.7% from sales of $377.4 million for the same period in 2017. Acquisitions
contributed sales of approximately $11.4 million, while the conversion effect from fluctuations in the value of the Canadian dollar, Stella-Jones’
reporting currency, versus the U.S. dollar, had a positive impact of $9.0 million on the value of U.S. dollar denominated sales when compared with
the corresponding period last year. Excluding these factors, sales increased approximately $35.0 million, or 9.3%, as detailed below.
Sales
(in millions of dollars, except percentages)
Q4-2017
Acquisitions
FX impact
Organic growth
Q4-2018
Organic growth %
Note: Numbers may not add exactly due to rounding.
Railway
Ties
Utility
Poles
Residential
Lumber
Industrial
Products
Logs & Consolidated
Sales
Lumber
118.0
162.9
—
3.3
5.7
127.0
4.8%
0.3
4.4
24.4
192.0
15.0%
48.6
7.2
0.6
3.9
60.3
8.0%
20.0
3.9
0.4
(1.2)
23.1
(6.0%)
27.9
—
0.3
2.2
30.4
7.9%
377.4
11.4
9.0
35.0
432.8
9.3%
Sales of railway ties reached $127.0 million, versus $118.0 million last year. Excluding the currency conversion effect, railway tie sales rose 4.8%,
driven by price increases. Utility pole sales amounted to $192.0 million, up 17.9% from $162.9 million last year. Excluding the contribution from
acquisitions and the currency conversion effect, sales grew 15.0% as a result of greater market reach in the U.S. Southeast, increased project
activity requiring transmission poles, healthy demand for replacement programs and requirements following the California wildfires in late 2018.
Residential lumber sales reached $60.3 million, up from $48.6 million last year. Excluding the contribution from acquisitions and the currency
conversion effect, sales grew 8.0%, reflecting stronger volume in Canada, partially offset by lower selling prices in the U.S. Industrial product sales
amounted to $23.1 million, up from $20.0 million a year ago. Excluding acquisitions and the currency conversion effect, sales decreased 6.0%
as a result of lower bridge and timber demand. Finally, logs and lumber sales stood at $30.4 million, versus $27.9 million last year. Excluding the
currency conversion effect, sales grew 7.9%, driven, in most part, by heightened pole procurement efforts which resulted in more log sales, partially
offset by lower selling prices on lumber.
Gross profit amounted to $67.0 million, or 15.5% of sales, in the fourth quarter of 2018, versus $53.5 million, or 14.2% of sales, in the fourth
quarter of 2017. The increase as a percentage of sales mainly reflects better year-over-year overhead absorption driven by greater production
activity while product margins were comparable to the previous year. Operating income totalled $31.8 million, or 7.4% of sales, in the fourth quarter
of 2018, versus $29.0 million, or 7.7% of sales, last year.
Net income for the period reached $20.6 million, or $0.30 per diluted share, compared with $51.1 million, or $0.74 per diluted share, in the prior
year. The year-over-year decrease is attributable to a one-off non-cash tax benefit of $30.0 million recognized in the fourth quarter of 2017,
stemming from the remeasurement of deferred tax liabilities following a reduction in the U.S. top federal corporate income tax rate. Fourth quarter
results were also impacted by a non-cash loss of $7.9 million related to the mark-to-market fair value of diesel and petroleum derivative commodity
contracts.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
27
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 appreciation of the U.S. dollar relative to the Canadian dollar as at December 31, 2018, compared to December 31, 2017
(see “Foreign Exchange” on page 19), results in a higher value of assets and liabilities denominated in U.S. dollars, when expressed in Canadian
dollars.
Assets
As at December 31, 2018, total assets reached $2.06 billion, versus $1.79 billion as at December 31, 2017. The higher balance of total assets
mostly reflects an increase in current assets, as detailed below.
As at
December 31, 2018
As at
December 31, 2017
Variance
Assets
(in millions of dollars)
Accounts receivable
Inventories
Other current assets
Total current assets
Property, plant and equipment
Intangible assets
Goodwill
Other non-current assets
Total non-current assets
$
192.4
838.6
37.4
1,068.4
551.8
131.7
298.3
12.1
993.9
$
163.5
718.5
26.4
908.4
466.1
130.3
270.3
10.9
877.6
$
28.9
120.1
11.0
160.0
85.7
1.4
28.0
1.2
116.3
276.2
Total assets
2,062.2
1,786.0
Note: Numbers may not add exactly due to rounding.
The value of accounts receivable, which is net of a credit loss provision of $2.2 million, was $192.4 million as at December 31, 2018, compared
with $163.5 million as at December 31, 2017. The increase is attributable to higher sales in the fourth quarter of 2018, when compared to the
fourth quarter of 2017, coupled with the effect of local currency translation on U.S.-based accounts receivable. Management considers that all
recorded receivables in the statement of financial position are 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 stood at $838.6 million as at December 31, 2018, up from $718.5 million as at December 31, 2017. This increase reflects the effect
of local currency translation on U.S. dollar denominated inventories and the inventories pertaining to the PFP and WP acquisitions as well as higher
inventory levels in preparation for deliveries in the first half of 2019.
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. As such, inventory turnover has historically been relatively low. 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 customers enable the Company to better ascertain inventory requirements. Management continuously monitors
the levels of inventory and market demand for its products. Production is adjusted accordingly to optimize efficiency and capacity utilization.
The Company believes that its cash flows from operations and available syndicated credit facilities are adequate to meet its working capital
requirements for the foreseeable future.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
28
The value of property, plant and equipment stood at $551.8 million as at December 31, 2018, compared with $466.1 million as at December 31,
2017. This increase is mainly related to the purchase of property, plant and equipment of $51.6 million during 2018, the additional property, plant
and equipment from the PFP and WP acquisitions totalling $26.0 million and the effect of local currency translation on U.S-based property, plant
and equipment, partially offset by depreciation of $21.1 million for the period.
The value of intangible assets and goodwill reached $131.7 million and $298.3 million, respectively, as at December 31, 2018. Intangible assets
include customer relationships, the discounted value of non-compete agreements, a creosote registration, cutting rights, standing timber, software
and a favourable lease agreement. As at December 31, 2017, intangible assets and goodwill were $130.3 million and $270.3 million, respectively.
The slight increase in the value of intangible assets stems primarily from customer relationships from acquisitions and the effect of local currency
translation on U.S.-based intangible assets, partially offset by an amortization charge of $17.0 million in 2018. The increase in goodwill is primarily
explained by acquisitions and the effect of local currency translation on U.S. dollar denominated goodwill.
Liabilities
As at December 31, 2018, Stella-Jones’ total liabilities stood at $780.8 million, up from $670.4 million as at December 31, 2017. This variation
reflects an increase in non-current liabilities as well as current liabilities, as detailed below.
Liabilities
(in millions of dollars)
Accounts payable and accrued liabilities
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt
Other non-current liabilities
Total non-current liabilities
Total liabilities
Note: Numbers may not add exactly due to rounding.
As at
December 31, 2018
As at
December 31, 2017
Variance
$
133.3
9.7
16.4
159.4
503.8
117.6
621.4
780.8
$
111.2
5.7
12.1
129.0
449.9
91.5
541.4
670.4
$
22.1
4.0
4.3
30.4
53.9
26.1
80.0
110.4
The value of current liabilities was $159.4 million as at December 31, 2018, versus $129.0 million as at December 31, 2017. This variation is
primarily attributable to a $22.1 million increase in accounts payable and accrued liabilities related to higher business activity in the fourth quarter
of 2018, compared to the same period last year. It is also explained by the effect of local currency translation on U.S. dollar denominated accounts
payable and accrued liabilities.
The Company’s long-term debt, including the current portion, was $513.5 million as at December 31, 2018, versus $455.6 million as at December
31, 2017. The increase mainly reflects higher working capital requirements, financing required for the acquisitions of PFP and WP, as well as
the effect of local currency translation on U.S. dollar denominated long-term debt. As at December 31, 2018, an amount of $291.6 million was
available against the Company’s syndicated credit facilities of $579.8 million (US$425.0 million). The Company’s syndicated credit facilities are
made available for a five-year term until February 2024 and thus considered long-term debt.
As at December 31, 2018, the Company was in full compliance with its debt covenants and contractual obligations.
On January 14, 2019, the Company obtained a one-year extension of its unsecured revolving facility to February 27, 2024. This extension was
granted through an amendment to the fifth amended and restated credit agreement dated as of February 26, 2016, as amended on May 18, 2016
and March 15, 2018.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
29
Shareholders’ Equity
Shareholders’ equity reached $1.28 billion as at December 31, 2018 compared with $1.12 billion as at December 31, 2017. This variation reflects
an increase in retained earnings and accumulated other comprehensive income, as detailed below.
Shareholders’ equity
(in millions of dollars)
Capital Stock
Contributed surplus
Retained earnings
Accumulated other comprehensive income
As at
December 31, 2018
As at
December 31, 2017
$
221.3
0.3
909.1
150.7
$
220.4
0.3
809.0
85.8
Total shareholders’ equity
1,281.4
1,115.5
Note: Numbers may not add exactly due to rounding.
Variance
$
0.9
—
100.1
64.9
165.9
The increase is attributable to net income of $137.6 million during 2018 and a $64.9 million favourable variation in the value of accumulated other
comprehensive gain resulting from the effect of currency fluctuations, partially offset by dividends of $33.3 million.
As part of its Normal Course Issuer Bid, the Company repurchase, as at December 31, 2018, 105,000 common shares for cancellation in
consideration of $4.0 million. As at December 31, 2018, the Company had unsettled transactions to repurchase 42,000 common shares for a
cash consideration of $1.6 million. The settlement of these transactions occurred in early January 2019 and the cancellation of the corresponding
common shares was done at the same time.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth summarized cash flow components for the periods indicated:
Summary of cash flows
December 31, 2018
December 31, 2017
(in millions of dollars)
Operating activities
Financing activities
Investing activities
Net change in cash and cash equivalents during the year
Cash and cash equivalents - beginning
Cash and cash equivalents - end
Note: Numbers may not add exactly due to rounding.
$
128.1
(26.0)
(108.5)
(6.4)
6.4
—
$
301.1
(239.9)
(58.5)
2.7
3.7
6.4
The Company’s activities, acquisitions and purchases of property, plant and equipment are primarily financed by cash flows from operating activities,
available cash and long-term debt. The Company plans a similar level of capital expenditures in 2019 as compared to 2018 ($51.6 million in
2018), which will include a plant expansion in Cameron, Wisconsin.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
30
Cash Flows From Operating Activities
Cash flows provided by operating activities in 2018 were $128.1 million, versus $301.1 million for the corresponding period last year. This variation
mainly reflects changes in non-cash working capital components, as detailed below.
Cash flows from operating activities
December 31, 2018
December 31, 2017
(in millions of dollars)
Net income
Loss on derivative financial instruments
Deferred income taxes
Others
Cash flows from operating activities before changes in non-cash
working capital components and interest and income taxes paid
Inventories
Other current assets
Other
Changes in non-cash working capital components
Interest paid
Income taxes paid
Cash flows from operating activities
Note: Numbers may not add exactly due to rounding.
$
137.6
8.6
10.6
105.5
262.3
(56.7)
(15.3)
(4.1)
(76.1)
(18.7)
(39.4)
128.1
$
167.9
0.8
(21.1)
100.6
248.2
100.7
4.4
(2.0)
103.1
(15.8)
(34.5)
301.1
Cash flows from operating activities before changes in non-cash working capital components and interest and income taxes paid was $262.3
million in 2018, compared with $248.2 million in 2017. This increase mostly reflects higher deferred income taxes and a loss on derivative financial
instruments, partially offset by lower net income.
Changes in non-cash working capital components decreased liquidity by $76.1 million in 2018. This was mainly due to an increase in inventory
levels and cost. In 2017, changes in non-cash working capital components had increased liquidity by $103.1 million, driven by lower inventory cost
and volume of railway ties.
Interest and income taxes paid reduced liquidity by $18.7 million and $39.4 million, respectively, in 2018. This compares with interest paid of $15.8
million and income taxes paid of $34.5 million in 2017.
As a result, cash flows from operating activities generated $128.1 million in 2018, versus $301.1 million in 2017.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
31
Cash Flows From Financing Activities
Financing activities for 2018 reduced liquidity by $26.0 million, primarily related to dividend payments of $33.3 million and the repurchase of
common shares totalling $4.0 million. In 2017, financing activities reduced liquidity by $239.9 million explained by a $207.4 million net decrease
in debt financing.
Cash flows from financing activities
December 31, 2018
December 31, 2017
(in millions of dollars)
Net change in syndicated credit facilities
Increase in long-term debt
Repayment of long-term debt
Dividends on common shares
Repurchase of common shares
Other
Cash flows from financing activities
Note: Numbers may not add exactly due to rounding.
$
18.7
—
(6.7)
(33.3)
(4.0)
(0.7)
(26.0)
$
(391.8)
195.9
(11.5)
(30.5)
—
(2.0)
(239.9)
Cash Flows From Investing Activities
Investing activities used $108.5 million in liquidity in 2018, as compared to $58.5 million in 2017. The PFP and WP acquisitions required an
investment of $54.5 million, while the purchase of property, plant and equipment required $51.6 million of liquidity, as detailed below.
Cash flows from investing activities
December 31, 2018
December 31, 2017
(in millions of dollars)
Business acquisitions
Purchase of property, plant and equipment
Other
Cash flows from investing activities
Note: Numbers may not add exactly due to rounding.
$
(54.5)
(51.6)
(2.4)
(108.5)
$
(5.8)
(50.6)
(2.1)
(58.5)
Financial Obligations
The following table details the maturities of the financial obligations as at December 31, 2018:
Financial obligations
(in million of dollars)
Accounts payable and accrued liabilities
Long-term debt obligations
Minimum payments under operating lease obligations
Derivative commodity agreements
Non-compete agreements
Financial obligations
Carrying Contractual
Amount Cash flows
Less than
1 year
1 – 3
years
4 – 5
years
After
5 years
$
133.3
513.5
—
8.1
4.3
$
133.3
601.8
132.8
8.3
4.6
$
133.3
25.5
30.2
4.1
1.6
$
—
51.7
46.9
4.2
3.0
$
—
303.1
26.2
—
—
$
—
221.5
29.5
—
—
659.2
880.8
194.7
105.8
329.3
251.0
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
32
SHARE AND STOCK OPTION INFORMATION
As at December 31, 2018, the capital stock issued and outstanding of the Company consisted of 69,267,732 common shares (69,342,095 as at
December 31, 2017). The following table presents the outstanding capital stock activity for the year ended December 31, 2018:
Number of shares
(in thousands)
Balance – Beginning of year
Repurchase of common shares
Employee share purchase plans
Balance – End of year
Year Ended December 31, 2018
69,342
(105)
31
69,268
As at March 14, 2019, the capital stock issued and outstanding consisted of 69,125,146 common shares.
As at December 31, 2018, the number of outstanding options to acquire common shares issued under the Company’s Stock Option Plan was
45,000 (December 31, 2017 – 45,000) of which 39,000 (December 31, 2017 – 33,000) were exercisable. As at March 14, 2019, the number
of outstanding options was 45,000, of which 39,000 were exercisable.
DIVIDENDS
In 2018, the Board of Directors of Stella-Jones declared the following quarterly dividends:
Declared
Record Date
Payable Date
Dividend
March 13, 2018
May 2, 2018
August 7, 2018
November 1, 2018
April 6, 2018
June 6, 2018
April 27, 2018
June 27, 2018
September 3, 2018
September 21, 2018
December 3, 2018
December 20, 2018
$
0.12
0.12
0.12
0.12
Subsequent to year end, on March 14, 2019, the Board of Directors declared a quarterly dividend of $0.14 per common share payable on April 26,
2019 to shareholders of record at the close of business on April 5, 2019. This dividend is designated to be an eligible dividend.
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
33
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 $29.7 million in 2018 (2017 – $19.0 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.
RISKS AND UNCERTAINTIES
Economic Conditions
A negative change in economic conditions may affect most or all of the markets the Company serves, 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, 2018, the Company’s top ten customers accounted for
approximately 44.2% of its sales. During this same period, the Company’s largest customer accounted for approximately 16.6%, of its total sales
and is associated to the residential lumber product category while the second largest customer accounted for approximately 9.3% of total sales
and is associated to the railway tie product category.
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. The Company may also enter into certain commodity hedges, where
available, for a percentage of forecasted needs in order to help ensure stable production costs.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 34
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 which has 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 irresponsible practices by regulatory authorities, communities
or customers could harm the reputation of the Company. Adverse publicity resulting from actual or perceived violations of environmental laws,
regulations or industry practices 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 materialize even if the allegations are not valid and the Company is
not found liable.
Risk 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 35
Insurance Coverage Risk
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 coverage 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.
Currency Risk
The Company is exposed to currency risks due to its export of certain goods manufactured in Canada. The Company strives to mitigate such risks
by purchases of raw materials denominated in U.S. dollars for use in its Canadian manufacturing process. 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 Fluctuation Risk
As at December 31, 2018, 96.0% 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 subject to floating interest rates. 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 railroad operators, large retailers and large-scale utility providers, there
can be no assurance that outstanding accounts receivable will be paid on a timely basis or at all.
Cyber and Information Technology 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. In addition, the Company
relies on information technology systems to operate, and any disruption to such systems could cause a disruption to daily operations while the
systems are being repaired or updated.
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 flows.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 36
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
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, 2018, the Company had two interest rate
swap agreements hedging $252.4 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, 2018, of fixed and floating debt was 96.0% and 4.0%,
respectively, including the effects of interest rate swap positions (100.0% and 0.0%, respectively, as at December 31, 2017).
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,
2018, the Company had no foreign exchange forward contract agreements in place.
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, 2018, the Company had commodity hedges for 12.0 million gallons (1.2 million in 2017) of diesel and petroleum covering
requirements for 2019 and 2020. These instruments are presented at fair value and were not designated for hedge accounting purposes.
SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described in Note 2 to the December 31, 2018 and 2017 audited consolidated financial
statements as well as in the impact of new accounting pronouncements MD&A section that follows with regards to accounting policy changes for
revenue recognition and financial instruments.
The Company prepares its consolidated financial statements in accordance with IFRS as issued by the IASB and CPA Canada Handbook
Part I — Accounting.
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.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS 37
Impact of New Accounting Pronouncements
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. The retrospective adoption of this new standard had no significant impact on the Company’s consolidated
financial statements and the new accounting policy was defined as follows:
The Company sells treated and untreated wood products (the “Products”), as well as treating services. Revenue from the sale of Products is
recognized when the Company satisfies a performance obligation by transferring a promised Product to a customer. Products are considered to
be transferred once the customer takes control of them, being either at the Company’s manufacturing site or at the customer’s location. Control
of the Products refers to the ability to direct its use and obtain substantially all of the remaining benefits from the Product.
The Company offers to treat wood products owned by third parties. Revenue from these treating services is recognized using the point in time
criteria since there is a short manufacturing timeframe to treat wood products.
Product sales can be subject to retrospective volume discounts based on aggregate sales over a twelve-month period per certain contractual
conditions. Revenue from these sales is recognized based on the price specified in the contract, net of the estimated volume discounts. Accumulated
experience is used to estimate and provide for the discounts, using the expected value method, and revenue is only recognized to the extent that it
is highly probable that a significant reversal will not occur. A liability is recognized for expected volume discounts payable to customers in relation
to sales made until the end of the reporting period.
Products sales may also be subject to retrospective price discounts based on aggregate sales over a twelve-month period, according to certain
contractual conditions. Revenue from these sales is recognized based on the expected average sales price over the specified period. Accumulated
experience is used to estimate and provide for the price discounts, using the expected value method, and revenue is only recognized to the extent
that it is highly probable that specified contractual conditions will be met. The customer is invoiced at the contract price and a liability is recognized
to adjust to the average price.
A receivable is recognized when control of the Product is transferred to the customer because it is at this point in time that the consideration
becomes unconditional since only the passage of time remains before payment is due.
IFRS 9 — Financial Instruments
The final version of IFRS 9, Financial instruments, was issued by the IASB in July 2014 and replaces 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. The retrospective adoption of this new standard had no
significant impact on the Company’s consolidated financial statements and the new accounting policy was defined as follows:
The Company recognizes a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual
provisions of the instrument. At initial recognition, the Company measures a financial asset or a financial liability at its fair value plus or minus, in the
case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition
or issue of the financial asset or the financial liability.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 38
Financial Assets
The Company will classify financial assets as subsequently measured at amortized cost, fair value through other comprehensive income or
fair value through profit or loss, based on its business model for managing the financial asset and the financial asset’s contractual cash flow
characteristics. The three categories are defined as follows:
a) Amortized cost — a financial asset is measured at amortized cost if both of the following conditions are met:
— the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
— the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on
the principal amount outstanding.
b) Fair value through other comprehensive income — financial assets are classified and measured at fair value through other comprehensive
income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
c) Fair value through profit or loss — any financial assets that are not held in one of the two business models mentioned in a) and b) are measured
at fair value through profit or loss.
When, and only when, the Company changes its business model for managing financial assets it must reclassify all affected financial assets.
The Company’s financial assets are comprised of cash, cash equivalents, accounts receivable and derivative financial instruments. Cash, cash
equivalents and accounts receivable are measured at amortized cost. Derivative financial instruments that are not designated as hedging
instruments are measured at fair value through profit or loss. Derivative financial instruments that are designated as hedging instruments are
measured at fair value through other comprehensive income.
Financial Liabilities
The Company’s liabilities include accounts payable and accrued liabilities, bank indebtedness, long-term debt and derivative financial instruments.
Accounts payable and accrued liabilities, bank indebtedness and long-term debt are measured at amortized cost. Derivative financial instruments
that are not designated as hedging instruments are measured at fair value through profit or loss. Derivative financial instruments that are designated
as hedging instruments are measured at fair value through other comprehensive income. After initial recognition, an entity cannot reclassify any
financial liability.
Impairment
The Company assesses, on a forward-looking basis, the expected credit losses associated with its investment in debt securities carried at
amortized cost and fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a
significant increase in credit risk. For trade receivables, the Company applies the simplified approach permitted by IFRS 9, which requires expected
lifetime losses to be recognized from initial recognition of the receivables.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
39
Hedging Transactions
As part of its hedging strategy, the Company considers derivative financial instruments such as 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 derivative
financial instruments are treated as cash flow hedges for accounting purposes and are fair-valued through other comprehensive income.
The effective portion of changes in the fair value of derivative instruments that are designated and qualify as cash flow hedges is recognized in
the cash flow hedge reserve within equity. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss, within other
income (expenses).
When forward contracts are used to hedge forecast transactions, the Company generally designates only the change in fair value of the forward
contract related to the spot component as the hedging instrument. Gains or losses relating to the effective portion of the change in the spot
component of the forward contracts are recognized in the cash flow hedge reserve within equity. The change in the forward element of the contract
that relates to the hedged item is recognized within other comprehensive income in the costs of hedging reserve within equity. In some cases, the
Company may designate the full change in fair value of the forward contract (including forward points) as the hedging instrument. In such cases,
the gains or losses relating to the effective portion of the change in fair value of the entire forward contract are recognized in the cash flow hedge
reserve within equity. Amounts accumulated in equity are reclassified in the periods when the hedged item affects profit or loss.
When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative
deferred gain or loss and deferred costs of hedging in equity at that time remains in equity until the forecast transaction occurs. When the forecast
transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging that were reported in equity are immediately
reclassified to profit or loss.
Impact of New Accounting Pronouncements Not Yet Implemented
IFRS 16 — Leases
In January 2016, the IASB released IFRS 16, Leases, to set out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a lease agreement. The standard 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.
Under the new standard, the Company will recognize, in the statement of financial position, assets (right to use the leased assets) totalling
approximately $119.0 million, equivalent to the discounted cash flows of the future minimum payments, and corresponding financial liabilities. The
assets will be depreciated over the duration of the lease agreements which has a weighted average of 78 months. The liabilities will be depleted
upon contractual payment to the lessors and a corresponding financing expense will be recorded to the consolidated statements of income. The
Company is currently assessing the impact of the new standard on its net income.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 40
The following table outlines the key areas that will be impacted by the adoption of IFRS 16:
Impacted areas
of the business
Analysis
Conclusion
Financial
reporting
The analysis includes determining which contracts will be
in scope as well as the options available under the new
standard and whether to apply the new standard on a
full retrospective application in accordance with IAS 8 or
retrospectively without restatement of comparative amounts.
The Company will adopt IFRS 16 for its fiscal year
beginning January 1, 2019, retrospectively, without
restatement of comparative amounts and shall use the
exemptions for short-term leases and leases for which
the underlying asset is of low value.
Information
systems
The Company has analyzed the need to make changes
within its information systems environment to optimize the
management of close to 700 lease agreements that will fall
within the scope of the new standard.
The Company has implemented an information
technology solution to support recognition and
measurement of leases in scope. The implementation
was completed before the end of fiscal 2018.
Internal
controls
The Company has performed a review and analysis of
the changes to the control environment as a result of the
adoption of IFRS 16.
New controls were implemented to enable monthly
reconciliations of the assets and liabilities to detailed
subledgers as well as reconciliations of the related
financial and depreciation expenses. A roll forward
analysis of these assets and liabilities will also be
performed monthly. All lease agreements are approved
by Head Office Management to ensure they are all
captured for accounting purposes.
Stakeholders
The Company has performed an analysis of the impact on
the disclosure to its stakeholders as a result of the adoption
of IFRS 16.
The Company concluded that there will be no negative
impact or breaches of agreement covenant as a result of
the adoption of IFRS 16.
IFRIC 23 — Uncertainty over Income Tax Treatments
In June 2017, the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments. This interpretation specifies that if an entity concludes it is
probable that the taxation authority will accept an uncertain tax treatment, it shall determine the tax result consistently with the tax treatment used
or planned to be used in its income tax filing. If it is not probable, the entity shall reflect the effect of uncertainty for each uncertain tax treatment
by using either of the following methods, depending on which one the entity expects to better predict the resolution of the uncertainty:
• most likely amount: single most likely amount in a range of possible outcomes;
• expected value: sum of the probability-weighted amounts in a range of possible outcomes.
An entity shall apply IFRIC 23 for annual reporting periods beginning on or after January 1, 2019, with earlier application permitted. The Company
will not early adopt IFRIC 23 and does not expect a significant impact.
IFRS 3 — Business Combinations
In October 2018, the IASB issued amendments to the definition of a business in IFRS 3, Business Combinations. The objective of the amendments
is to assist entities in determining whether a transaction should be accounted for as a business combination or as an asset. The amendments apply
prospectively to acquisitions that occur in annual periods beginning on or after January 1, 2020, with earlier application permitted.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS 41
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.
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, 2018 and have concluded that such DC&P were designed
and operating effectively.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible 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, 2018.
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, 2018 to December 31, 2018 that have materially affected or are
reasonably likely to materially affect the Company’s ICFR.
2018 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 42
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.
For 2019, based on current market conditions and assuming stable currencies and the current level of lumber prices, Management expects
higher year-over-year sales for Stella-Jones, driven by stronger pricing for railway ties and utility poles as well as increased market reach for
the residential lumber and the utility pole product categories. Management also expects improved year-over-year margins across all product
categories. Higher margins will be primarily driven by increased pricing and volume for railway ties coupled with improved product mix for utility
poles. Furthermore, it is important to note that the 2019 EBITDA will be positively impacted by the implementation of IFRS 16 while net income will
be negatively impacted by higher financing expenses. The Company plans on spending a similar level of capital expenditures in 2019 as compared
to 2018 ($51.6 million in 2018), which will include a plant expansion in Cameron, Wisconsin.
In the railway tie product category, North American railroads will continue to maintain their continental rail network, as operators constantly seek
optimal line efficiency. Sales and margins for 2019 are expected to improve year-over-year, primarily driven by pricing. In fact, Management
believes that the increasing costs of untreated railway ties, combined with a tighter supply market, will lead to continued upward selling price
adjustments for the quarters ahead.
In the utility pole product category, demand for regular maintenance projects has historically been relatively steady. Sales and margins for 2019
are expected to increase year-over-year driven by both pricing and strong demand for replacement programs and increased project-based sales.
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 2019 are expected to be stable, year-over-year, as higher
market demand is expected to be offset by lower selling prices to customers, as a result of the lower lumber costs. Management closely monitors
variations in these commodity prices, and adjusts its procurement practices accordingly, in order to maintain dollar margins on similar volume.
It is important to highlight that sales for the logs and lumber product category, an activity used to optimize procurement and which does not
generate margin, is fairly tied to the price of lumber. Therefore, a decrease in the price of lumber will lead to lower sales but higher overall margins
when taken as a whole with other product categories and vice versa.
As one of the leading 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 optimizing operating capacity and minimizing costs throughout the organization. Cash generation and
maintaining a prudent use of leverage remain priorities for Management. The cash flows provided from operating activities will be used to reduce
debt, invest in working capital and in property, plant and equipment, buy back its own shares as well as maintain an optimal dividend policy to the
benefit of shareholders.
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 synergies, and add
value for shareholders.
March 14, 2019
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS CONSOLIDATED FINANCIAL STATEMENTS
43
December 31, 2018 and 2017
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 14, 2019
2018 Annual Report
44
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Stella-Jones Inc.
OUR OPINION
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Stella-Jones Inc.
and its subsidiaries (together, the Company) as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).
WHAT WE HAVE AUDITED
The Company’s consolidated financial statements comprise:
• the consolidated statements of financial position as at December 31, 2018 and 2017;
• the consolidated statements of changes in shareholders’ equity for the years then ended;
• the consolidated statements of income for the years then ended;
• the consolidated statements of comprehensive income for the years then ended;
• the consolidated statements of cash flows for the years then ended; and
• the notes to the consolidated financial statements, which include a summary of significant accounting policies.
BASIS FOR OPINION
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further
described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
INDEPENDENCE
We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial
statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.
OTHER INFORMATION
Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we
obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report
thereon, included in the annual report.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance
conclusion thereon.
Stella-Jones Inc. INDEPENDENT AUDITOR’S REPORT
45
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in
doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained
in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report
that fact. We have nothing to report in this regard.
RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED
FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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.
In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to
liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect
a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by
management.
2018 Annual Report
46
INDEPENDENT AUDITOR’S REPORT
• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a
going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related
disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to
continue as a going concern.
• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the
consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to
express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group
audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant
audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence,
and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where
applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Sonia Boisvert.
Montréal, Québec
March 14, 2019
1 FCPA auditor, FCA, public accountancy permit No. A116853
Stella-Jones Inc. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
47
As at December 31, 2018 and 2017
(expressed in thousands of Canadian dollars)
Note
2018
$
—
192,380
—
838,558
1,882
35,567
1,068,387
551,785
131,658
298,270
7,545
4,559
2017
$
6,430
163,458
473
718,462
1,122
18,435
908,380
466,056
130,349
270,261
6,173
4,761
2,062,204
1,785,980
133,259
4,381
9,714
12,016
159,370
111,206
—
5,695
12,114
129,015
503,767
449,945
92,557
13,959
7,393
3,748
72,408
11,392
7,675
—
780,794
670,435
221,328
348
909,060
150,674
1,281,410
2,062,204
220,467
298
809,022
85,758
1,115,545
1,785,980
ASSETS
Current assets
Cash
Accounts receivable
Derivative financial instruments
Inventories
Income taxes receivable
Other current assets
Non-current assets
Property, plant and equipment
Intangible assets
Goodwill
Derivative financial instruments
Other non-current assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities
Derivative financial instruments
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
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors,
Katherine A. Lehman
Director
George J. Bunze, CPA, CMA
Director
5
18
6
7
8
8
18
9
18
10
11
10
15
11
16
18
13
17
22
2018 Annual Report
48
CONSOLIDATED STATEMENTS OF CHANGE IN SHAREHOLDERS’ EQUITY
For the years ended December 31, 2018 and 2017
(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, 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
Share-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
Balance – January 1, 2018
220,467
298
809,022
150,620
(69,421)
4,559
85,758 1,115,545
Comprehensive income (loss)
Net income for the year
Other comprehensive income (loss)
Comprehensive income (loss)
for the year
Dividends on common shares
—
—
—
—
Employee share purchase plans
1,330
Repurchase of common shares (note 13)
(469)
Share-based compensation (note 13)
—
861
— 137,597
—
—
—
— 137,597
—
927
101,529
(37,602)
989
64,916
65,843
— 138,524
101,529
(37,602)
989
64,916
203,440
—
(33,290)
—
—
50
—
(5,196)
—
50
(38,486)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(33,290)
1,330
(5,665)
50
(37,575)
Balance – December 31, 2018
221,328
348 909,060
252,149
(107,023)
5,548
150,674 1,281,410
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
49
For the years ended December 31, 2018 and 2017
(expressed in thousands of Canadian dollars, except earnings per common share)
Note
2018
$
2017
$
2,123,893
1,886,142
1,809,733
1,586,263
98,995
8,864
93,828
(1,337)
14
1,917,592
1,678,754
14
15
15
13
13
206,301
19,102
187,199
207,388
19,009
188,379
39,018
10,584
49,602
137,597
1.98
1.98
41,566
(21,076)
20,490
167,889
2.42
2.42
The accompanying notes are an integral part of these consolidated financial statements.
2018 Annual Report
50
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2018 and 2017
(expressed in thousands of Canadian dollars)
Net income for the year
Other comprehensive income
Items that may subsequently be reclassified to net income
2018
$
2017
$
137,597
167,889
Net change in gains (losses) on translation of financial statements of foreign operations
101,529
(81,920)
Income taxes on change in gains (losses) on translation of financial statements
of foreign operations
Change in gains (losses) on translation of long-term debts designated
as hedges of net investment in foreign operations
Income taxes on change in gains (losses) 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
(34,332)
29,332
(3,270)
1,372
(6,221)
1,026
(383)
(296)
1,209
(282)
65,843
203,440
(737)
(246)
(49,646)
118,243
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
Loss on derivative financial instruments
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
Income taxes receivable
Accounts payable and accrued liabilities
Asset retirement obligations
Provisions and other long-term liabilities
Other current assets
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
Repayment of non-competes payable
Dividends on common shares
Repurchase of common shares
Proceeds from issuance of common shares
Investing activities
Increase in other assets
Business acquisitions
Addition of 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 FLOWS
51
For the years ended December 31, 2018 and 2017
(expressed in thousands of Canadian dollars)
Note
2018
$
2017
$
7
8
15
15
12
12
12
12
4
137,597
167,889
21,086
17,016
8,601
19,102
39,018
10,584
7,189
2,060
19,078
16,656
770
19,009
41,566
(21,076)
4,549
(199)
262,253
248,242
(13,230)
(56,716)
—
13,428
(2,304)
(1,968)
(15,335)
(76,125)
(18,693)
(39,371)
128,064
(255)
18,742
—
(6,705)
(1,745)
(33,290)
(4,038)
1,330
(11,026)
100,683
(2,746)
16,694
(3,369)
(1,494)
4,380
103,122
(15,797)
(34,454)
301,113
(1,132)
(391,796)
195,870
(11,507)
(2,156)
(30,504)
—
1,301
(25,961)
(239,924)
(836)
(54,491)
(4,028)
(51,568)
2,390
(108,533)
(6,430)
6,430
—
(710)
(5,792)
(2,080)
(50,572)
676
(58,478)
2,711
3,719
6,430
2018 Annual Report
52
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. The Company 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 –
Accounting.
These consolidated financial statements were approved by the Board of Directors on March 14, 2019.
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 LLC
Kisatchie Midnight Express, L.L.C.
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
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.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
53
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 assumed 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 functional and 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. Revenues 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, within other losses (gains), net, except for 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 are translated at historical exchange
rates.
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. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and
liabilities of the foreign operation and translated at the financial position rate.
d) Hedges of net investments in foreign operations
Foreign currency differences arising on the translation of financial liabilities 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.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
54
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition
The Company has adopted IFRS 15 Revenue from Contracts with Customers from January 1, 2018 which resulted in changes in accounting
policies.
In accordance with the transition provisions in IFRS 15, the Company has adopted the new rules retrospectively.
The Company sells treated and untreated wood products (the “Products”), as well as wood treating services. Revenue from the sale of
Products is recognized when the Company satisfies a performance obligation by transferring a promised Product to a customer. Products are
considered to be transferred once the customer takes control of them, being either at the Company’s manufacturing site or at the customer’s
location. Control of the Products refers to the ability to direct its use and obtain substantially all the remaining benefits from the Product.
The Company offers to treat wood products owned by third parties. Revenue from these treating services is recognized using the point in time
criteria since there is a short manufacturing timeframe to treat wood products.
Product sales can be subject to retrospective volume discounts based on aggregate sales over a twelve-month period, per certain contractual
conditions. Revenue from these sales is recognized based on the price specified in the contract, net of the estimated volume discounts.
Accumulated experience is used to estimate and provide for the discounts, using the expected value method, and revenue is only recognized
to the extent that it is highly probable that a significant reversal will not occur. A liability is recognized for expected volume discounts payable
to customers in relation to sales transacted to the end of the reporting period.
Product sales may also be subject to retrospective price discounts based on aggregate sales over a twelve-month period, according to
certain contractual conditions. Revenue from these sales is recognized based on the expected average sales price over the specified period.
Accumulated experience is used to estimate and provide for the price discounts, using the expected value method, and revenue is only
recognized to the extent that it is highly probable that specified contractual conditions will be met. The customer is invoiced at the contract
price and a liability is recognized to adjust to the average price.
A receivable is recognized when control of the Products is transferred to the customer because it is at this point in time that the consideration
becomes unconditional since only the passage of time remains before the payment is due.
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.
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 credit loss provision.
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 costs necessary to make the sale.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
55
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 and impairment. 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.
Software
Customer relationships
Customer relationships
Non-compete agreements
Creosote registration
Method
Straight-line
Straight-line
Declining balance
Straight-line
–
Useful life
10 years
3 to 12 years
4% to 20%
3 to 5 years
Indefinite
Standing timber costs are recorded at cost less accumulated amortization and impairment. Amortization 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 and impairment. Amortization 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.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
56
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.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
57
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 income tax expense or credit for the period is the tax payable on the current period’s taxable income based on the applicable income tax
rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax
losses.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in
the countries where the Company operates and generates taxable income. Management periodically evaluates positions taken in tax returns
with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the
basis of amounts expected to be paid to the tax authorities.
Deferred income tax is provided in full, 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. However, deferred tax liabilities are not recognized if they arise
from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability
in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting
period and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.
Deferred tax assets are recognized only if it is probable that future taxable amounts will be available to utilize those temporary differences
and losses.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
58
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.
Share-based compensation and other share-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 share-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.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
59
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Instruments
IFRS 9, Financial instruments replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial
assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting.
The adoption of IFRS 9 from January 1, 2018 resulted in changes in accounting policies applied retrospectively.
The Company recognizes a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual
provisions of the instrument. At initial recognition, the Company measures a financial asset or a financial liability at its fair value plus or minus,
in the case of a financial asset or a financial liability not at fair value through profit or loss, transaction costs that are directly attributable to
the acquisition or issue of the financial asset or the financial liability.
Financial assets
The Company will classify financial assets as subsequently measured at amortized cost, fair value through other comprehensive income or
fair value through profit or loss, based on its business model for managing the financial asset and the financial asset’s contractual cash flow
characteristics. The three categories are defined as follows:
a) Amortized cost — a financial asset is measured at amortized cost if both of the following conditions are met:
• the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
• the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding.
b) Fair value through other comprehensive income — financial assets are classified and measured at fair value through other comprehensive
income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial
assets.
c) Fair value through profit or loss — any financial assets that are not held in one of the two business models mentioned in a) and b) are
measured at fair value through profit or loss.
When, and only when, the Company changes its business model for managing financial assets it must reclassify all affected financial assets.
The Company’s financial assets are comprised of cash, cash equivalents, accounts receivable and derivative financial instruments. Cash, cash
equivalents and accounts receivable are measured at amortized cost. Derivative financial instruments that are not designated as hedging
instruments are measured at fair value through profit or loss. Derivative financial instruments that are designated as hedging instruments are
measured at fair value through other comprehensive income.
Financial liabilities
The Company’s liabilities include accounts payable and accrued liabilities, bank indebtedness, long-term debt and derivative financial
instruments. Accounts payable and accrued liabilities, bank indebtedness and long-term debt are measured at amortized cost. Derivative
financial instruments that are not designated as hedging instruments are measured at fair value through profit or loss. Derivative financial
instruments that are designated as hedging instruments are measured at fair value through other comprehensive income. After initial
recognition, an entity cannot reclassify any financial liability.
Impairment
The Company assesses, on a forward-looking basis, the expected credit losses associated with its investment in debt securities carried at
amortized cost and fair value through other comprehensive income. The impairment methodology applied depends on whether there has been
a significant increase in credit risk. For trade receivables, the Company applies the simplified approach permitted by IFRS 9, which requires
expected lifetime losses to be recognized from initial recognition of the receivables.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
60
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial instruments (continued)
Hedging transactions
As part of its hedging strategy, the Company considers derivative financial instruments such as 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 derivative financial instruments are treated as cash flow hedges for accounting purposes and are fair-valued through other
comprehensive income.
The effective portion of changes in the fair value of derivative instruments that are designated and qualify as cash flow hedges is recognized
in the cash flow hedge reserve within equity. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss,
within other income (expenses).
When forward contracts are used to hedge forecast transactions, the Company generally designates only the change in fair value of the
forward contract related to the spot component as the hedging instrument. Gains or losses relating to the effective portion of the change in
the spot component of the forward contracts are recognized in the cash flow hedge reserve within equity. The change in the forward element
of the contract that relates to the hedged item is recognized within other comprehensive income in the costs of hedging reserve within equity.
In some cases, the Company may designate the full change in fair value of the forward contract (including forward points) as the hedging
instrument. In such cases, the gains or losses relating to the effective portion of the change in fair value of the entire forward contract are
recognized in the cash flow hedge reserve within equity. Amounts accumulated in equity are reclassified in the periods when the hedged item
affects profit or loss.
When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any
cumulative deferred gain or loss and deferred costs of hedging in equity at that time remains in equity until the forecast transaction occurs.
When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging that were reported
in equity are immediately reclassified to profit or loss.
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 new standards, along with any consequential amendments, effective January 1, 2018. These
changes were made in accordance with the applicable transitional provisions.
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. Note 2 provides a summary of the new revenue recognition accounting policy that was
implemented retrospectively on January 1, 2018. The adoption of this new standard had no significant impact on the Company’s consolidated
financial statements.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
61
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IFRS 9 – Financial Instruments
The final version of IFRS 9, Financial instruments, was issued by the IASB in July 2014 and replaces 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. Note 2 provides a summary of
the new financial instruments accounting policy that was implemented retrospectively on January 1, 2018. The adoption of this new standard
had no significant impact on the Company’s consolidated financial statements.
Impact of accounting pronouncements not yet implemented
IFRS 16 – Leases
In January 2016, the IASB released IFRS 16, Leases, to set out the principles for the recognition, measurement, presentation and disclosure
of leases for both parties to a lease agreement. The standard 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.
Under the new standard, the Company will recognize, in the statement of financial position, assets (right to use the leased assets) totalling
approximately $119,000, equivalent to the discounted cash flows of the future minimum payments, and corresponding financial liabilities.
The assets will be depreciated over the duration of the lease agreements, which has a weighted average of 78 months. The liabilities will be
depleted upon contractual payment to the lessors and a corresponding financing expense will be recorded to the consolidated statement of
income. The Company is currently assessing the impact of the new standard on its net income.
The Company will adopt IFRS 16 for its fiscal year beginning January 1, 2019 retrospectively without restatement of comparative amounts
and will use the exemptions for short-term leases and leases for which the underlying asset is of low value.
IFRIC 23 – Uncertainty over Income Tax Treatments
In June 2017, the IASB issued IFRIC 23, Uncertainty over Income Tax Treatments. This interpretation specifies that if an entity concludes it is
probable that the taxation authority will accept an uncertain tax treatment, it shall determine the tax result consistently with the tax treatment
used or planned to be used in its income tax filing. If it is not probable, the entity shall reflect the effect of uncertainty for each uncertain
tax treatment by using either of the following methods, depending on which one the entity expects to better predict the resolution of the
uncertainty:
•
•
An entity shall apply IFRIC 23 for annual reporting periods beginning on or after January 1, 2019, with earlier application permitted. The
Company will not early adopt IFRIC 23 and does not expect a significant impact.
most likely amount: single most likely amount in a range of possible outcomes;
expected value: sum of the probability-weighted amounts in a range of possible outcomes.
IFRS 3 – Business Combinations
In October 2018, the IASB issued amendments to the definition of a business in IFRS 3, Business Combinations. The objective of the
amendments is to assist entities in determining whether a transaction should be accounted for as a business combination or as an asset. The
amendments apply prospectively to acquisitions that occur in annual periods beginning on or after January 1, 2020, with earlier application
permitted.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
62
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 April 9, 2018, the Company completed the acquisition of substantially all of the operating assets employed in the business of Wood
Preservers Incorporated (“WP”), located at its wood treating facility in Warsaw, Virginia. WP manufactures, sells and distributes marine
and foundation pilings and treated wood utility poles.
Total cash outlay associated with the acquisition was approximately $27,506 (US$21,609), excluding acquisition costs of approximately
$423 recognized in the consolidated statement of income under selling and administrative expenses. The Company financed the
acquisition through its existing syndicated credit facilities. The consideration transferred is also comprised of an unsecured promissory
note bearing no interest and payable annually on the anniversary of the transaction in six instalments of US$500. This unsecured
promissory note was recorded at a fair value of $3,339 (US$2,623), using an effective interest rate of 4.17%.
The following table 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
Accounts receivable
Inventories
Property, plant and equipment
Customer relationships
Goodwill
Liabilities assumed
Deferred income tax liabilities
Total net assets acquired and liabilities assumed
Consideration transferred
Cash
Consideration payable
Unsecured promissory note
Consideration transferred
$
3,923
8,485
18,212
242
1,061
31,923
424
31,499
27,506
654
3,339
31,499
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
63
4 BUSINESS ACQUISITIONS (CONTINUED)
The Company’s valuation of intangible assets has identified customer relationships which are amortized at a declining rate of 4.00%.
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 is 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.
In the period from April 9, 2018 to December 31, 2018, sales and net income for the Warsaw plant amounted to $28,760 and $1,859,
respectively. Pro forma information for the twelve-month period ended December 31, 2018, had the WP acquisition occurred as of
January 1, 2018, cannot be estimated as Management does not have all the required discrete financial information for the first three
months of the year.
b) On February 9, 2018, the Company completed the acquisition of substantially all of 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 treated wood utility poles as well as treated residential lumber.
Total cash outlay associated with the acquisition was approximately $26,985 excluding acquisition costs of approximately $425 of which
$159 and $266 were recognized respectively in the 2017 and 2018 consolidated statements of income under selling and administrative
expenses. The Company financed the acquisition through its existing syndicated credit facilities.
The following table 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
Site remediation provision
Total net assets acquired and liabilities assumed
Consideration transferred
Cash
Consideration transferred
$
10,536
7,763
5,880
3,995
229
28,403
1,418
26,985
26,985
26,985
The Company’s valuation of intangible assets has identified customer relationships which are amortized at a declining rate of 10.00%.
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 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.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
64
4 BUSINESS ACQUISITIONS (CONTINUED)
In the period from February 9, 2018 to December 31, 2018, sales and net income for the Neepawa plant amounted to $31,657 and
$890, respectively. Pro forma information for the twelve-month period ended December 31, 2018, had the PFP acquisition occurred as
of January 1, 2018, cannot be estimated as Management does not have all the required discrete financial information for the first month
of the year.
5 ACCOUNTS RECEIVABLE
Trade receivables
Less: Credit loss provision
Trade receivables – net
Note
Amounts receivable from related parties
20
Other receivables
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
2018
$
184,376
(2,209)
182,167
454
9,759
192,380
2018
$
113,783
51,214
11,251
8,128
184,376
2018
$
516,742
321,816
838,558
2017
$
159,964
(991)
158,973
—
4,485
163,458
2017
$
98,355
43,416
9,230
8,963
159,964
2017
$
423,312
295,150
718,462
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
65
7 PROPERTY, PLANT AND EQUIPMENT
As at January 1, 2017
Cost
Accumulated depreciation
Net book amount
Year ended December 31, 2017
Opening net book amount
Business acquisitions
Additions
Disposals
Depreciation
Land
Buildings
Production
equipment
$
$
$
Rolling
stock
$
Others
$
Total
$
45,981
113,768
356,892
29,815
12,584
559,040
—
(16,542)
(64,602)
(12,901)
(6,404)
(100,449)
45,981
97,226
292,290
16,914
6,180
458,591
45,981
97,226
292,290
16,914
6,180
458,591
204
941
3,353
301
9
4,384
4,250
35,337
1,130
2,663
4,808
47,764
(143)
(235)
(998)
(629)
(4)
(2,009)
—
(3,066)
(10,231)
(4,276)
(1,505)
(19,078)
Exchange differences
(1,974)
(5,516)
(15,343)
(884)
(303)
(24,020)
Closing net book amount
48,452
93,600
304,408
12,556
7,040
466,056
As at December 31, 2017
Cost
Accumulated depreciation
Net book amount
Year ended December 31, 2018
Opening net book amount
Business acquisitions
Additions
Disposals
Depreciation
48,452
112,272
376,203
27,944
14,762
579,633
—
(18,672)
(71,795)
(15,388)
(7,722)
(113,577)
48,452
93,600
304,408
12,556
7,040
466,056
48,452
93,600
304,408
12,556
7,040
466,056
1,121
1,630
7,823
12,797
4,117
117
25,975
3,165
43,919
(1,622)
—
(478)
669
(853)
1,031
50,414
(3)
(2,956)
—
(3,406)
(12,260)
(4,272)
(1,148)
(21,086)
Exchange differences
2,618
7,416
21,386
1,189
773
33,382
Closing net book amount
52,199
108,598
369,772
13,406
7,810
551,785
As at December 31, 2018
Cost
Accumulated depreciation
Net book amount
52,199
131,933
457,904
32,998
16,959
691,993
—
(23,335)
(88,132)
(19,592)
(9,149)
(140,208)
52,199
108,598
369,772
13,406
7,810
551,785
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
66
8
INTANGIBLE ASSETS AND GOODWILL
The intangible assets include customer relationships, non-compete agreements, cutting rights, standing timber, a favourable land lease
agreement, software 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 of 2.95%.
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
2018
$
144,546
153,724
298,270
2017
$
128,898
141,363
270,261
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
10.10%. 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).
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
67
8
INTANGIBLE ASSETS AND GOODWILL (CONTINUED)
The net book amount of these intangible assets and goodwill was as follows:
Intangible assets
Cutting
rights relationships
Customer Non-compete
agreements
Software
Others
Creosote
registration
Total
Goodwill
$
$
$
$
$
$
$
$
As at January 1, 2017
Cost
6,821
157,626
17,413
7,140
7,903
41,933
238,836
287,367
Accumulated amortization
(1,455)
(66,208)
(10,764)
(2,081)
(5,955)
—
(86,463)
—
Net book amount
5,366
91,418
6,649
5,059
1,948
41,933
152,373
287,367
Year ended December 31, 2017
Opening net book balance
5,366
91,418
6,649
5,059
1,948
41,933
152,373
287,367
Business acquisitions
Additions
Amortization
—
—
—
—
—
—
—
1,603
—
477
(176)
(13,445)
(1,839)
(677)
(519)
—
—
—
—
844
2,080
(16,656)
—
—
Exchange differences
—
(4,255)
(368)
—
(70)
(2,755)
(7,448)
(17,950)
Closing net book amount
5,190
73,718
4,442
5,985
1,836
39,178
130,349
270,261
As at December 31, 2017
Cost
6,821
148,740
16,270
8,743
8,310
39,178
228,062
270,261
Accumulated amortization
(1,631)
(75,022)
(11,828)
(2,758)
(6,474)
—
(97,713)
—
Net book amount
5,190
73,718
4,442
5,985
1,836
39,178
130,349
270,261
Year ended December 31, 2018
Opening net book balance
5,190
73,718
4,442
5,985
1,836
39,178
130,349
270,261
Business acquisitions
Additions
Amortization
—
—
6,122
—
—
—
—
—
869
3,159
(256)
(12,193)
(1,612)
(831)
(2,124)
—
—
—
6,122
4,028
(17,016)
5,599
—
—
Exchange differences
—
4,363
298
—
88
3,426
8,175
22,410
Closing net book amount
4,934
72,010
3,128
6,023
2,959
42,604
131,658
298,270
As at December 31, 2018
Cost
6,821
165,931
17,692
9,612
11,557
42,604
254,217
298,270
Accumulated amortization
(1,887)
(93,921)
(14,564)
(3,589)
(8,598)
—
(122,559)
—
Net book amount
4,934
72,010
3,128
6,023
2,959
42,604
131,658
298,270
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
68
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 notes
Secured promissory note
Unsecured promissory note
Unsecured promissory note
Secured promissory note
Unsecured promissory note
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)
2018
$
53,021
54
60,815
19,369
133,259
2018
$
273,055
204,630
17,930
7,321
3,936
3,596
1,540
1,506
572
—
514,086
(605)
513,481
9,810
(96)
9,714
503,767
2017
$
41,373
380
51,761
17,692
111,206
2017
$
232,083
188,176
15,944
7,422
7,000
—
2,278
2,008
844
586
456,341
(701)
455,640
5,791
(96)
5,695
449,945
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
69
10 LONG-TERM DEBT (CONTINUED)
a) The Company’s syndicated credit facilities consist of (i) an unsecured revolving facility in the amount of US$325,000 made available
to the Company and SJ Holding (the “Borrowers”), a wholly-owned subsidiary of the Company until February 27, 2023 and (ii) an
unsecured term facility in the amount of US$100,000 made available to the Company until February 26, 2019. The syndicated credit
facilities are made available to the Borrowers by a syndicate of lenders under a fifth amended and restated credit agreement
(the “Credit Agreement”) dated as of February 26, 2016, as amended on May 18, 2016 and March 15, 2018. As at December 31, 2018
the syndicated credit facilities provided financing up to US$425,000 of which US$213,729 was available. Additionally, the Credit
Agreement makes available an accordion option whereas upon request, the Company could increase the revolving facility by US$350,000.
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, 2018 are provided in Note 18, Financial instruments.
As at December 31, 2018, borrowings by Canadian entities denominated in U.S. dollars represented $170,525 (US$125,000) 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, 2018 no amounts were drawn under the demand loan facilities.
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 net funded 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, 2018, 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
net funded debt to EBITDA ratio is greater than 3.25:1. In the case where the net funded 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 the
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 net funded 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 15.00%. As at December 31, 2018, the Company was
in full compliance with these covenants, requirements and ratios.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
70
10 LONG-TERM DEBT (CONTINUED)
c) Pursuant to two business acquisitions dated June 3, 2016, the Company issued two unsecured promissory notes totalling $18,256
(US$14,104) bearing interest at 1.41%. The notes are payable in three instalments, including interest, totalling US$3,000 in June 2019
and 2020 and US$9,000 in June 2021. The notes were initially recorded at a fair value totalling $15,676 (US$12,112) using an
effective interest rate of 5.00%. The difference between the face value and the fair value of the notes is being accreted on an effective
yield basis over its term.
d) As part of a business acquisition dated June 3, 2016, the Company assumed a promissory note bearing interest at 5.76%, secured by
the land of the Pineville facility and having a balance of US$5,685. 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.
e) Pursuant to a business acquisition dated 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.
f) As part of WP acquisition completed on April 9, 2018, the Company recorded an unsecured promissory note of $3,596 (US$3,000)
bearing no interest. The unsecured promissory note is payable annually on the anniversary of the transaction in six instalments of
US$500, until April 2024 and was recorded at a fair value of $3,339 (US$2,623) using an effective interest rate of 4.17%. 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 completed on October 1, 2015, the Company recorded a secured promissory note of $5,800 bearing
no interest. The secured promissory note 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 secured promissory note 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 note is being accreted on an effective yield
basis over its term.
The secured promissory note is guaranteed by irrevocable letters of credit in the same amount and with the same maturity date as the
future payments.
h) Pursuant to a business acquisition dated 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) As part of the WPI acquisition completed on December 19, 2017, the Company recorded an unsecured promissory note of $900
bearing no interest. The unsecured promissory note is payable in quarterly installments of $75 in March, June, September and December
of each year, up to December 2020. The unsecured promissory note 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 note is being accreted on an effective yield basis
over its term.
j)
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 was 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 was being accreted on an effective yield basis over its term. This debt
was reimbursed in 2018 in accordance with the agreement.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
10 LONG-TERM DEBT (CONTINUED)
k) The repayment requirements on the long-term debt during the next five years and thereafter are as follows:
2019
2020
2021
2022
2023
Thereafter
Fair value adjustment
71
Principal
$
10,433
7,002
13,355
1,298
274,390
208,975
515,453
(1,367)
514,086
l)
The aggregate fair value of the Company’s long-term debt was estimated at $501,950 as at December 31, 2018 (2017 – $453,478)
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, 2017
16,487
3,664
20,151
2,956
7,963
10,919
31,070
Additions
Business acquisitions
Provision reversal
Payments
Interest accretion
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
Additions
Business acquisitions
Provision reversal
Payments
Interest accretion
Exchange differences
1,519
1,418
506
—
2,025
1,418
(830)
(523)
(1,353)
5,597
—
—
—
—
—
5,597
—
—
7,622
1,418
(1,353)
(2,867)
(537)
(3,404)
(1,539)
(1,745)
(3,284)
(6,688)
—
812
—
142
—
954
—
—
124
392
124
392
124
1,346
Balance as at December 31, 2018
12,096
3,294
15,390
6,306
4,279
10,585
25,975
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
72
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
2018
$
9,294
2,722
12,016
6,095
7,864
13,959
25,975
2017
$
9,141
2,973
12,114
6,609
4,783
11,392
23,506
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 flows have been estimated using pre-tax rates
between 3.24% and 3.45% that reflect current market assessment of the time value of money and the risk specific to the obligation.
As of December 31, 2018, a total site remediation provision of $12,096 (2017 — $12,044) 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 16, 2015 reached their third year anniversary on March 16, 2018 and were fully paid.
On March 21, 2016 and March 19, 2018, the Company granted a total of 47,667 RSUs to certain executives and key employees as part of
the long-term incentive plan. No RSUs were granted in 2017.
On March 13, 2018, the Remuneration Committee and Board of Directors departed from the RSU award calculation and granted a special
long-term incentive to senior management totalling 200,000 RSUs. Subsequently, on May 7, 2018, a special long-term incentive award of
7,632 RSUs was given to a newly added member of the senior management team.
On May 2, 2018, as an incentive to continue on as President and Chief Executive Officer (“President and CEO”) of the Company, the
Company granted 200,000 RSUs to the President and CEO, with an effective grant date of May 7, 2018. Vesting dates are May 7, 2019 (for
the first 60,000 RSUs); May 7, 2020 (for the second 60,000 RSUs) and May 7, 2021 (for the final 80,000 RSUs), subject to additional terms
and conditions relating to resignation, disability, death and others. No further RSUs will be granted to the President and CEO prior and up to
May 7, 2021, the final vesting date.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
73
11 PROVISIONS AND OTHER LONG-TERM LIABILITIES (CONTINUED)
Other long-term liabilities (continued)
Restricted stock units (continued)
On May 6, 2013, as part of a five-year incentive agreement and pursuant to its long-term incentive plan, the Company granted 400,000 RSUs
to the President and CEO, with a vesting date of May 6, 2016. The compensation expense related to the five-year agreement was 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 amortized over the remaining two-year period. As of December 31, 2018, the prepaid balance was nil (2017 — $1,592).
12 CASH FLOW INFORMATION
The following table presents the movements in the liabilities from financing activities for the years ended December 31, 2017 and 2018:
Liabilities from financing activities
Long-term
debt
Syndicated
credit
facilities
Non-competes
payable
Balance as at January 1, 2017
(47,898)
(646,487)
Cash flows
Foreign exchange adjustments
Other non-cash movements
(184,363)
8,704
—
391,796
22,608
—
$
$
$
(7,963)
2,156
454
(155)
Total
$
(702,348)
209,589
31,766
(155)
Balance as at December 31, 2017
(223,557)
(232,083)
(5,508)
(461,148)
Cash flows
Foreign exchange adjustments
Other non-cash movements
6,705
(22,740)
(833)
(18,742)
(22,230)
—
1,745
(392)
(124)
(10,292)
(45,362)
(957)
Balance as at December 31, 2018
(240,425)
(273,055)
(4,279)
(517,759)
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
74
13 CAPITAL STOCK
Number of common shares outstanding – Beginning of year*
Stock option plan*
Employee share purchase plans*
Repurchase of common shares*
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
2018
69,342
—
31
(105)
69,268
2017
69,303
10
29
—
69,342
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.
2018
$ 137,597
69,352
8
69,360
$ 1.98
$ 1.98
2017
$ 167,889
69,324
9
69,333
$ 2.42
$ 2.42
c) Normal Course Issuer Bid
On December 18, 2018 the TSX accepted the Company’s Notice of Intention to Make a Normal Course Issuer Bid. The Normal
Course Issuer Bid was initiated for a twelve-month period starting on December 20, 2018. During this period, the Company may
purchase for cancellation up to 3,000,000 common shares. As at December 31, 2018, the Company repurchased 105,000 common
shares for cancellation in consideration of $4,038 representing an average price of $38.15 per common share. As at December 31,
2018, the Company had unsettled transactions to repurchase 42,000 common shares for a cash consideration of $1,627 representing
an average price of $39.05 per common share. As of December 31, 2018, the Company recorded a financial liability with an offset
amount in equity in the amount of $1,627. The settlement of these transactions occurred in early January 2019 and the cancellation of
the corresponding common share was done at the same time.
d) 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.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
75
13 CAPITAL STOCK (CONTINUED)
Changes in the number of options outstanding under the Plan were as follows:
2018
Weighted
average
exercise
price**
$
40.05
—
—
40.05
38.67
Number
of options*
45
—
—
45
39
2017
Weighted
average
exercise
price**
$
34.57
9.90
—
40.05
36.79
Number
of options*
55
(10)
—
45
33
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, 2018:
Date granted
May 2013
November 2015
Options outstanding
Number
of options*
Exercise
price**
Options exercisable
Number
of options*
Exercise
price**
Expiration
date
$
22.13
49.01
15
30
45
$
22.13
49.01
15
24
39
May 2023
November 2025
* Number of options is presented in thousands.
** Exercise price is presented in dollars per option.
e) Share-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 2018. The 2018 expense recorded for share-based compensation amortized to earnings was $50 (2017 – $87).
f) 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 2018, 17,591 common shares (2017 – 15,621) were issued to
Canadian resident employees at an average price of $37.02 per share (2017 – $39.52).
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 2018, 13,889 common shares (2017 – 13,167) were issued to U.S. resident employees at an
average price of $40.11 per share (2017 – $41.65).
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
76
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
2018
$
1,537,542
143,473
38,102
43,746
105,513
49,216
1,917,592
2018
$
127,587
50
7,189
2,259
6,388
143,473
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
2018
$
10,168
1,797
7,137
19,102
2017
$
1,324,289
135,302
35,734
54,148
91,430
37,851
1,678,754
2017
$
123,355
87
4,549
1,990
5,321
135,302
2017
$
9,596
2,613
6,800
19,009
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
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
77
2017
$
40,450
1,116
41,566
12,379
(30,094)
(3,361)
(21,076)
20,490
2018
$
38,710
308
39,018
10,965
(191)
(190)
10,584
49,602
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 26.46% (2017 – 26.24%)
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
2018
$
187,199
49,533
454
(5,368)
5,062
(191)
118
(6)
—
49,602
2017
$
188,379
49,431
12,930
(7,759)
409
(30,094)
(2,245)
(462)
(1,720)
20,490
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
78
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
2018
$
2,894
11,454
(106,905)
—
(92,557)
2018
$
(72,408)
(10,584)
(3,935)
(2)
(5,628)
(92,557)
2017
$
5,554
8,243
(86,081)
(124)
(72,408)
2017
$
(101,171)
21,076
2,697
140
4,850
(72,408)
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
79
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
$
$
2,232
(2,232)
—
—
—
—
—
—
—
—
—
—
2,231
1,150
—
—
3,381
(17)
(3,270)
—
(94)
—
Deferred
pension
benefits
$
2,165
112
(246)
—
(80)
1,951
165
(282)
—
68
1,902
Reserves
$
12,480
(3,606)
—
180
(589)
8,465
120
—
1,094
615
10,294
Unrealized
foreign
exchange on
debts and
translation
of foreign
operations
$
(2,049)
—
2,049
—
—
—
—
—
—
—
—
Property,
plant and
equipment
$
(79,785)
15,684
—
(40)
4,272
(59,869)
(13,158)
—
(1,096)
(4,610)
(78,733)
Intangible
assets
$
(34,330)
8,371
—
—
1,524
(24,435)
35
—
—
(1,607)
(26,007)
Others
$
96
(96)
—
—
—
—
2,152
—
—
—
2,152
Total
$
16,973
(3,591)
904
180
(669)
13,797
2,420
(3,552)
1,094
589
14,348
Others
$
(1,982)
612
(256)
—
(275)
(1,901)
119
(383)
—
—
(2,165)
Total
$
(118,146)
24,667
1,793
(40)
5,521
(86,205)
(13,004)
(383)
(1,096)
(6,217)
(106,905)
Deferred tax assets
As at January 1, 2017
Recognized in the statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2017
Recognized in the statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2018
Deferred tax liabilities
As at January 1, 2017
Recognized in the statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2017
Recognized in the statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2018
As of December 31, 2018, the Company did not recognize deferred income tax assets of $1,925 (2017 – nil) in respect of capital losses
amounting to $14,579 (2017 – nil) that can be carried forward indefinitely against future taxable capital gains.
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 $461,407 as at December 31, 2018
(2017 – $398,767).
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
80
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
2018
$
167
1,467
625
6,388
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
2018
$
(5,185)
(2,208)
(7,393)
2017
$
156
1,411
423
5,321
2017
$
(5,174)
(2,501)
(7,675)
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 December 1, 2018, and the next required valuation will be as at December 1, 2021.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
16 EMPLOYEE FUTURE BENEFITS (CONTINUED)
The following information as established by independent actuaries pertains to the Company’s post-retirement benefits program:
81
Accrued benefit obligation
Balance – Beginning of year
Current service cost
Interest cost
Benefits payments
Remeasurement adjustments
Plan experience
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
2018
$
2,501
80
87
(71)
(237)
(152)
2,208
71
(71)
—
2,208
2018
%
3.90
3.40
2017
$
2,219
68
88
(62)
—
188
2,501
62
(62)
—
2,501
2017
%
3.40
3.90
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%
$
27
3
$
(24)
(2)
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
82
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 gains (losses) 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
2018
$
80
87
167
2018
$
389
389
2018
$
(352)
286
(66)
2017
$
68
88
156
2017
$
(188)
(188)
2017
$
(228)
(124)
(352)
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 American pension plan - Closed to new participants
Plan 5 American pension plan
Date of last
actuarial valuation
December 31, 2016
December 31, 2017
December 31, 2018
December 31, 2018
December 31, 2018
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
83
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
2018
$
29,402
1,038
1,055
(1,406)
20
(31)
(1,726)
861
29,213
24,228
590
(738)
933
36
(193)
(1,406)
578
24,028
(5,185)
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)
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
2018
$
(29,140)
21,384
(7,756)
2017
$
(13,309)
7,652
(5,657)
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
84
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
2018
%
27.00
42.00
30.00
1.00
100.00
2018
%
3.90
3.25
3.50
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
2018
$
1,002
1,055
(590)
1,467
Expected contributions to the defined benefit pension plans for the year ending December 31, 2019 are $1,081.
2017
%
31.00
42.00
26.00
1.00
100.00
2017
%
3.50
3.25
3.90
2017
$
1,000
1,076
(665)
1,411
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
16 EMPLOYEE FUTURE BENEFITS (CONTINUED)
Consolidated statement of comprehensive income
Year ended December 31
Actuarial gains (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 gain (losses) recognized in the year, net of tax
Balance of actuarial losses as at December 31
2018
$
820
820
2018
$
(4,012)
641
(3,371)
85
2017
$
(549)
(549)
2017
$
(3,153)
(859)
(4,012)
17 COMMITMENTS AND CONTINGENCIES
a) The Company has issued guarantees amounting to $29,716 (2017 – $19,036) 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:
2019
2020
2021
2022
2023
Thereafter
$
30,236
25,572
21,366
16,059
10,091
29,451
132,775
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.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
86
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 contracts 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
Derivative commodity contracts
Non-current assets
Interest rate swap agreements
Current liabilities
Derivative commodity contracts
Non-current liabilities
Derivative commodity contracts
2018
$
—
—
7,545
7,545
4,381
4,381
3,748
3,748
2017
$
473
473
6,173
6,173
—
—
—
—
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, 2018, 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.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
87
18 FINANCIAL INSTRUMENTS (CONTINUED)
Credit risk (continued)
Note 5 provides details on the receivable aging as well as on the credit loss provision for the years ended December 31, 2018 and 2017.
The Company’s largest customer had sales representing 16.60% of the total sales for the twelve-month period ending December 31, 2018
(2017 – 15.60%) and an account receivable balance of $5,678 as at December 31, 2018 (2017 – $6,152). The sales for this customer are
included in the residential lumber product category.
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, 2018 and 2017:
Hedged item
Diesel and petroleum
Diesel and petroleum
Hedged item
Diesel and petroleum
Diesel and petroleum
Gallons
Effective date
Maturity date
Fixed rate
2018
6,000,000*
January 2019
December 2019
6,000,000*
January 2020
December 2020
US$2.23
US$2.23
2017
Gallons
Effective date
Maturity date
Fixed rate
600,000*
January 2018
December 2018
600,000*
January 2018
December 2018
US$1.72
US$1.61
* 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, 2018 is a total liability
of $8,129 of which $4,381 is recorded under current liabilities and $3,748 recorded under non-current liabilities (2017 – a current asset of
$473) in the consolidated statement of financial position. The fair value of these hedge agreements was determined by obtaining mark-to-
market values as at December 31, 2018 and 2017 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.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
88
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, 2018, an amount of
$291,569 (US$213,729) (2017 - $354,489 (US$282,574)) 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
2018
Accounts payable and accrued liabilities
133,259
133,259
133,259
$
$
$
$
—
$
—
$
—
Long-term debt obligations
513,481
601,849
25,507
51,683
303,142
221,517
Derivative commodity contracts
Non-competes payable
8,129
4,279
8,354
4,570
4,108
1,603
4,246
2,967
—
—
—
—
659,148
748,032
164,477
58,896
303,142
221,517
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
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.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
89
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 when required 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.
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,
comprehensive income and equity for the years ended December 31, 2018 and 2017. 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
2018
$
385
37,895
2017
$
(806)
37,352
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
Inventories
Liabilities
Accounts payable and accrued liabilities
2018
$
—
900
820
1,720
5,566
5,566
2017
$
11,484
2,545
—
14,029
5,968
5,968
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).
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
90
18 FINANCIAL INSTRUMENTS (CONTINUED)
Interest rate risk
As at December 31, 2018, the Company has mitigated its exposure to interest rate risk on long-term debt after giving effect to its interest
rate swap agreements; 96.00% (2017 – 100.00%) 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 $370 for
the year ended December 31, 2018 (2017 – $146).
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
US$85,000
US$100,000
Syndicated credit facilities
Syndicated credit facilities
Fixed
rate
%
1.68*
1.06*
Fixed
rate
%
1.68*
1.06*
Effective date
Maturity date
2018
Notional
equivalent
CA$
December 2015
April 2021
115,957
December 2017
December 2021
136,420
Effective date
Maturity date
2017
Notional
equivalent
CA$
December 2015
April 2021
106,633
December 2017
December 2021
125,450
* Plus applicable spread of 1.00% to 2.25% based on pricing grid included in the Credit Agreement.
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, 2018, 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, 2018 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, 2018 is a non-current asset
of $7,545 recorded in the consolidated statement of financial position (2017 – a non-current asset of $6,173). A 10.00% decrease in
interest rates as at December 31, 2018 would have reduced the net gain recognized in other comprehensive income by approximately $755
(2017 – $617). For a 10.00% increase in the interest rates, there would be an equal and opposite impact on the net gain.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
91
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
2018
$
513,481
1,281,410
1,794,891
0.29:1
2017
$
455,640
1,115,545
1,571,185
0.29:1
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.
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
92
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
2018
$
—
62
Legal fees charged by a firm in which a director of the Company is a partner
499
2017
$
200
100
838
* As of December 31, 2017, Stella Jones International S.A. held, directly or indirectly, approximately 38.30% of the outstanding common shares of the Company.
Pursuant to a secondary offering closed on February 21, 2018, the percentage of outstanding common shares held by Stella International S.A. was reduced to 31.10%.
On August 14, 2018, Stella Jones International S.A. sold its remaining share ownership in the Company through a bought public offering and concurrent private
placement.
** 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 receivable from Stella Jones International S.A.
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
2018
$
454
—
—
(54)
400
2017
$
—
(25)
(50)
(305)
(380)
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:
Salaries, compensation and benefits
Share-based payments
2018
$
5,010
5,293
10,303
2017
$
4,728
4,063
8,791
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
93
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 six 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
2018
$
679,642
1,444,251
2,123,893
2018
$
662,414
724,950
474,680
109,035
152,814
2017
$
561,905
1,324,237
1,886,142
2017
$
651,549
653,946
366,225
94,516
119,906
2,123,893
1,886,142
December 31, 2018 and 2017(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2018 Annual Report
94
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
2018
$
124,246
427,539
551,785
33,977
97,681
131,658
19,403
278,867
298,270
2017
$
114,819
351,237
466,056
29,974
100,375
130,349
14,864
255,397
270,261
a) On January 14, 2019, the Company obtained a one-year extension of its unsecured revolving facility to February 27, 2024. This
extension was granted through an amendment to the fifth amended and restated credit agreement dated as of February 26, 2016, as
amended on May 18, 2016 and March 15, 2018.
b) On March 14, 2019, the Board of Directors declared a quarterly dividend of $0.14 per common share payable on April 26, 2019 to
shareholders of record at the close of business on April 5, 2019.
December 31, 2018 and 2017 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
DIRECTORS AND OFFICERS
95
BOARD OF DIRECTORS
Katherine A. Lehman
Chair of the Board,
Stella-Jones Inc.
Managing Partner, Hilltop
Private Capital LLC
(Private equity firm)
New York, NY, USA
Director since October 2016
George J. Bunze, CPA, CMA (2) (3) (4)
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
OFFICERS
Katherine A. Lehman
Chair of the Board
Brian McManus
President and
Chief Executive Officer
Brian McManus
President and
Chief Executive Officer,
Stella-Jones Inc.
Montréal, Québec
Director since June 2001
Nycol Pageau-Goyette (1) (2) (3) (4)
President, Pageau Goyette
et associés limitée
(Management services firm)
Montréal, Québec
Director since July 1993
Karen Laflamme
FCPA, FCA, ASC (2)
Executive Vice-President and
Chief Financial Officer,
Retail, Ivanhoé Cambridge
(investor and developer of superior
quality real estate properties,
projects and companies)
Director since December 2018
James A. Manzi, Jr. (2) (3)
Corporate Director
Tampa, FL, USA
Director since April 2015
Simon Pelletier (1) (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) Member of the Governance and
Nomination Committee
A full report of Stella-Jones’ corporate
governance practices is set out in the
Management Proxy Circular for the May 2,
2019 Annual Meeting of Shareholders.
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
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
Wayne Kusmierczyk
Vice-President, Operations
(Southern Yellow Pine)
McFarland Cascade
Holdings, Inc.
Andy Morgan
Vice-President, Operations
(Western Species)
McFarland Cascade
Holdings, Inc.
Jim Raines
Vice-President, Sales
Stella-Jones Corporation
Patrick Stark
Vice-President,
Environment, Health and Safety
U.S. Operations
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.
2018 Annual Report
96
OPERATING LOCATIONS – 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
BRITISH COLUMBIA
Plant
7400 Galloway Mill Road
Galloway
British Columbia
V0B 1T2
T: (250) 429-3493
F: (250) 429-3931
Plant
39 miles SE of Calgary
Hwy. 24
Carseland, Alberta
T0J 0M0
T: (403) 934-4600
F: (403) 934-5880
Plant and Sales Office
25 Braid Street
New Westminster
British Columbia
V3L 3P2
T: (604) 521-4385
F: (604) 526-8597
Plant and Sales Office
7177 Pacific Street
Prince George
British Columbia
V2N 5S4
T: (250) 561-1161
F: (250) 561-0903
Fibre & Woodlands Dept.
4661 60th Street SE
Salmon Arm
British Columbia
V1E 1X2
T: (250) 832-1180
F: (250) 832-7933
MANITOBA
Plant
205 Hwy. 16 West
Neepawa, Manitoba
R0J 1H0
T: (204) 476-7700
F: (204) 476-2212
NOVA SCOTIA
ONTARIO
Plant and Sales Office
278 Park Street
Truro, Nova Scotia
B2N 5C1
T: (902) 893-9456
F: (902) 893-3874
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
Plant and Sales Office
1 Ram Forest Road
Stouffville, Ontario
L4A 2G7
T: (905) 727-1164
F: (905) 727-7758
Plant and Sales Office
321 Lansdowne Street East
Peterborough, Ontario
K9J 7X6
T: (705) 745-3223
F: (705) 745-3793
ONTARIO
QUÉBEC
Plant
11045 Hwy. 124
South River, Ontario
P0A 1X0
T: (705) 386-2371
F: (705) 386-2335
Plant and Sales Office
41 rue Rodier
Delson, Québec
J5B 2H8
T: (450) 632-2011
T: 1 (800) 387-5027
F: (450) 632-3211
Plant and Sales Office
426 chemin de
Montréal East
Gatineau, Québec
J8M 1V6
T: (819) 986-8998
F: (819) 986-9875
Plant
2210 chemin St-Roch
Sorel-Tracy, Québec
J3R 3L2
T: (450) 742-5977
F: (450) 742-8832
QUÉBEC
Plant
2549 Chemin Francisco
Rivière-Rouge, Québec
J0T 1T0
T: (819) 275-3353
F: (819) 275-1002
Stella-Jones Inc.
OPERATING LOCATIONS – UNITED STATES
97
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
Stella-Jones Corporation
15700 College Blvd.,
Suite 300
Lenexa, KS
66219 U.S.A.
T: (913) 948-9478
F: (913) 538-2226
Plant
Stella-Jones Corporation
100 McKinney Drive
Clanton, AL
35045 U.S.A.
T: (205) 280-3950
F: (205) 665-2545
Plant
Stella-Jones Corporation
1051 Highway 25 South
Montevallo, AL
35115 U.S.A.
T: (205) 679-4005
F: (205) 665-2545
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
Plant
Stella-Jones Corporation
4260 South
Arkansas Ave.
Russellville, AR
72802 U.S.A.
T: (479) 968-5085
F: (479) 968-4636
Plant
McFarland Cascade
6040 Highway 79N
Rison, AR
71665 U.S.A.
T: (870) 325-7070
F: (870) 325-7050
Plant
Stella-Jones Corporation
3500 Pateville Road
Cordele, GA
31015 U.S.A.
T: (229) 273-8012
F: (229) 273-8220
Plant
Stella-Jones Corporation
3818 S. County Road
50 E
Winslow, IN
47598 U.S.A.
T: (812) 789-5331
F: (812) 789-5335
KENTUCKY
LOUISIANA
Plant
Stella-Jones Corporation
3855 Highway 51 North
Fulton, KY
42041 U.S.A.
T: (270) 472-5557
F: (270) 472-5559
Plant
Stella-Jones Corporation
3600 Koppers Road
Alexandria, LA
71302 U.S.A.
T: (318) 442-5733
F: (318) 473-4378
Plant
McFarland Cascade
10020 Highway 483
Converse, LA
71419 U.S.A.
T: (318) 645-7525
F: (318) 645-7530
Plant
McFarland Cascade
74 Wadley Street
Pineville, LA
71360 U.S.A.
T: (318) 442-4414
F: (318) 445-9144
MISSISSIPPI
Plant
McFarland Cascade
13539 Highway 45
Scooba, MS
39358-7611 U.S.A.
T: (662) 476-8000
F: (601) 476-8005
NEVADA
OREGON
Plant
McFarland Cascade
1680 E Spruce Avenue
Silver Springs, NV
89429 U.S.A.
T: (775) 577-2000
F: (775) 577-9045
Plant and Office
McFarland Cascade
90049 Highway 99N
Eugene, OR
97402 U.S.A.
T: (541) 689-1278
F: (541) 689-6027
Plant
McFarland Cascade
22125 SW
Rock Creek Road
Sheridan, OR
97378 U.S.A.
T: (503) 843-2122
F: (503) 843-7058
PENNSYLVANIA
Plant
Stella-Jones Corporation
5865 Route 235
McAlisterville, PA
17049 U.S.A.
T: (717) 463-2131
F: (717) 463-3998
Plant
Stella-Jones Corporation
392 Larkeytown Road
Dubois, PA
15801 U.S.A.
T: (814) 371-7331
F: (814) 375-0946
2018 Annual Report
98
OPERATING LOCATIONS – UNITED STATES
SOUTH CAROLINA
TENNESSEE
TEXAS
VIRGINIA
Plant
McFarland Cascade
1121 Delta Road
Whitmire, SC
29178 U.S.A.
T: (803) 694-3668
F: (803) 694-3976
Coal Tar Distillation
Facility
Stella-Jones Corporation
1471 Channel Avenue
Memphis, TN
38109 U.S.A.
T: (901) 942-3326
F: (901) 942-3128
Plant
McFarland Cascade
5865 US Highway 69
Lufkin, TX
75901 U.S.A.
T: (936) 824-2297
F: (936) 634-2100
Plant
Stella-Jones Corporation
9223 Maury River Road
Goshen, VA
24439 U.S.A.
T: (540) 997-9251
F: (540) 997-0047
Plant
McFarland Cascade
15939 Historyland
Highway
Warsaw, VA
22572 U.S.A.
T: (804) 333-8490
F: (804) 333-9269
WASHINGTON
Plant and Corporate
Office
McFarland Cascade
1640 East Marc St.
Tacoma, WA
98421 U.S.A.
T: (253) 572-3033
F: (253) 382-3000
Plant
McFarland Cascade
6520 - 188th NE
Arlington, WA
98223 U.S.A.
T: (360) 435-2146
F: (360) 435-3035
WISCONSIN
Plant
Stella-Jones Corporation
W1038 County Road U
Bangor, WI
54614 U.S.A.
T: (608) 486-2700
F: (608) 486-4538
Plant
McFarland Cascade
1014 S. 1st Street
Cameron, WI
54822 U.S.A.
T: (715) 458-2018
F: (715) 458-2024
Stella-Jones Inc.
CORPORATE
INFORMATION
Annual Meeting of Shareholders
May 2, 2019
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, 2018): $52.22 / $37.40
Share price at March 14, 2019: $41.35
Common shares outstanding as at December 31, 2018: 69.27 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 14, 2019, the Board of Directors declared a quarterly
dividend of $0.14 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
S
T
E
L
L
A
-
J
O
N
E
S
I
N
C
.
2
0
1
8
A
N
N
U
A
L
R
E
P
O
R
T
Visit our New Website at
WWW.STELLA-JONES.COM