Stella-Jones will continue to pursue its ongoing disciplined growth strategy
and focus on driving the Company forward by leveraging its high quality
products and continental network to deliver exceptional service to its valued
customers.
5-YEAR FINANCIAL HIGHLIGHTS
1
For the years ended December 31
(millions of dollars, except per share data and financial ratios)
2019
$
2018
$
2017
$
2016
$
2015
$
OPERATING RESULTS
Sales
EBITDA (1)
Operating income (1)
Net income
FINANCIAL POSITION
Working capital
Total assets
Long-term debt (2)
Shareholders’ equity
2,169.0
2,123.9
1,886.1
1,838.4
1,559.3
312.9
242.3
163.1
244.4
206.3
137.6
243.1
207.4
167.9
264.8
233.2
153.9
243.4
220.1
141.4
1,052.5
930.7
797.2
949.3
936.1
2,281.1
2,062.2
1,786.0
1,960.9
1,778.9
604.9
513.5
455.6
694.0
1,288.3
1.281.4
1,115.5
1,026.4
669.9
913.5
PER SHARE DATA
Basic earnings per common share
Diluted earnings per common share
2.37
2.37
1.98
1.98
2.42
2.42
2.22
2.22
2.05
2.04
Book value
19.10
18.50
16.09
14.81
13.21
FINANCIAL RATIOS
Operating margin (1)
EBITDA margin (1)
Return on average equity (1)
11.2%
14.4%
12.7%
9.7%
11.5%
11.5%
11.0%
12.9%
15.7%
Long-term debt (2) to total capitalization (1)
0.32:1
0.29:1
0.29:1
Long-term debt (2) to EBITDA (1)
Working capital
1.93x
8.56
2.10x
7.76
1.87x
8.17
12.7%
14.4%
15.9%
0.40:1
2.62x
10.39
14.1%
15.6%
17.6%
0.42:1
2.75x
13.04
Note: On January 1, 2019, the Company retrospectively adopted IFRS 16, Leases, (“IFRS 16”), but has not restated comparatives for previous reporting periods, as
permitted under the specific transitional provisions in the standard. The application of this new standard resulted in the addition of right-of-use assets and lease liabilities to
the consolidated statement of financial position. Starting on January 1, 2019, instead of lease expenses, right-of-use asset depreciation and financing costs are recorded
to the consolidated statement of income. Please refer to the impact of new accounting pronouncements and interpretation section of the management’s discussion and
analysis for further details on the adoption of IFRS 16.
(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 described in the management’s discussion and analysis.
(2) Including the current portion of long-term debt.
2019 Annual Report
2
2
Stella-Jones Inc.
STELLA-JONES AT A GLANCE
35.9%
UTILITY POLES
31.3%
RAILWAY TIES
SALES
$2.2B
5.2%
LOGS & LUMBER
21.7%
RESIDENTIAL LUMBER
5.9%
INDUSTRIAL PRODUCTS
$2.2B
2019
SALES
2,190
EMPLOYEES
40
WOOD TREATING
FACILITIES
70%
SALES IN
THE U.S.
Stella-Jones Inc. (TSX: SJ) 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 for construction and marine applications. The Company’s common shares are listed on the Toronto Stock
Exchange.
Stella-Jones Inc. 2019 HIGHLIGHTS
SALES
(in millions of $)
2019 Annual Report
3
3
Stella-Jones posted solid financial results in 2019. The
Company used its strong cash flow to invest in its network,
as well as provide a return to shareholders in the form
of increased dividends and share buybacks. Its healthy
financial position provides the Company flexibility to pursue
its ongoing disciplined growth strategy.
NEW LEADERSHIP
• Eric Vachon was promoted to President and Chief Executive Officer
• Silvana Travaglini was appointed Senior Vice-President and Chief
Financial Officer
MARKET CONDITIONS
• Sustained demand for the Company’s products
• Tight untreated railway tie inventory levels in the first half of the year
• Lower lumber prices compared to 2018
SOLID RESULTS
• Sales increased 2.1% to $2.2 billion
• EBITDA(1) increased to $312.9 million, driven by higher sales and
the adoption of IFRS 16, Leases
• Net income increased 18.5% to $163.1 million
BALANCED CAPITAL ALLOCATION
• $70.6 million for share buybacks
• $65.8 million for capital expenditures
• $38.5 million for dividends
STRONG BALANCE SHEET
• Total long-term debt to EBITDA(1) ratio of 1.93x
• Strong financial position to pursue acquisitions
• Healthy inventory levels to meet anticipated sales growth
NETWORK EXPANSION
• Finalized the plant expansion in Cameron, Wisconsin
• Acquired substantially all the assets of Shelburne Wood Protection Ltd.
• Invested in its network to maintain facilities, improve efficiencies
and expand capacity
(1) This is a non-IFRS financial measure. Please refer to the non-IFRS financial measures
described in the management’s discussion and analysis.
1,838.4
1,886.1
1,559.3
2,123.9
2,169.0
2015
2016
2017
2018
2019
EBITDA
(in millions of $)
264.8
243.4
243.1
244.4
312.9
2015
2016
2017
2018
2019
NET INCOME
(in millions of $)
141.4
153.9
167.9
163.1
137.6
2015
2016
2017
2018
2019
2019 Annual Report
4
STRATEGY DRIVEN
SHAREHOLDER FOCUSED
NEW LEADERSHIP. UNIFIED STRATEGY
The year 2019 saw notable changes in Stella-Jones’
leadership, with the promotion of Eric Vachon to President and
Chief Executive Officer in October and the announcement of
Silvana Travaglini as Senior Vice-President and Chief Financial
Officer in December.
Serving as Senior Vice-President and CFO since 2012, Eric is
a veteran of Stella-Jones and the wood treating business. He is
a proven leader, having earned the respect and full confidence
of our Board and the executive team. He brings established
business insight, extensive knowledge of operations, finance,
capital markets and mergers and acquisitions and sound
continuity to this important position. On behalf of the entire
Board, I wish to congratulate Eric on his appointment.
With the President’s succession coming from within our ranks,
the appointment of a new CFO with excellent credentials
and our veteran operational leaders, we have a talented team
to continue to execute our proven strategy of optimizing
operations across our North American network, seeking
acquisitions to further deepen our presence in our core
markets, while using a prudent capital allocation approach.
Eric succeeds Brian McManus, who stepped down in October
as President and CEO after eighteen years at the helm.
Brian was instrumental in assembling a strong and talented
management team and in helping to drive Stella-Jones’
exceptional growth and value creation. On behalf of the Board,
I thank Brian for his outstanding contribution to the success of
our Company.
NEW POLICIES. ENHANCED GOVERNANCE
In 2019, the Board introduced additional policies to strengthen
its commitment to ensuring sound corporate governance
practices.
Stella-Jones Inc. 5
We have a talented team to continue to
execute our proven strategy.
SOLID RESULTS. PROMISING FUTURE
Stella-Jones had another strong year in 2019. Sales were
up to $2.2 billion and net income increased 18.5%. During
the year, we acquired a key residential lumber production
facility, continued to invest in our network to better serve our
customers, increased our dividend for the fifteenth consecutive
year and repurchased shares under a Normal Course Issuer
Bid. The Company has a solid financial position, quality
products, an extensive distribution network and the leadership
in place to pursue our growth in 2020 and beyond.
On behalf of the Board, I would like to thank all of our
employees for their efforts and dedication throughout 2019
and our shareholders, customers and suppliers for their
continued support.
Katherine A. Lehman
Chair of the Board
Director Share Ownership Guidelines were adopted to further
align the interests of the Board with our shareholders. We
bolstered our company-wide Code of Business Conduct and
Ethics by incorporating anti-hedging and bribery prohibitions,
and the Board passed an Executive Officer Clawback
compensation policy.
The Board’s Remuneration committee also led a full review
of compensation policies with the assistance of an external
consultant and several enhancements were made to the 2020
long-term incentive plans. This year’s management proxy
circular will include a more thorough Compensation Discussion
and Analysis and our first advisory Say-on-Pay vote for the
May 2020 Annual and Special Meeting of Shareholders.
This initiative will allow shareholders access to additional
information and the opportunity to provide feedback on our
approach to executive compensation.
BOARD CHANGES. NEW PERSPECTIVES
As part of our commitment to Board refreshment, we have
added additional capabilities and perspectives to the Board
as we welcomed two new independent members in recent
months. Douglas Muzyka, who joined in December 2019,
brings a broad management background and technical skillset,
as well as an in-depth understanding of health and safety
management systems. In January 2020, Robert Coallier joined
our Board of Directors. His executive and financial background
across various industries, and his extensive understanding of
governance will further augment the Board.
Sadly, in January we lost longstanding Board member
George J. Bunze. George served on the Board for over
18 years and was Chair of the Audit Committee since 2002.
His wisdom and dedication were valued qualities and his
exceptional contributions will be missed.
These latest changes bring the total number of Board members
to eight, of which seven are independent and three are women.
2019 Annual Report 6
PERFORMANCE DRIVEN
TEAM FOCUSED
Last October, I was appointed President and Chief Executive Officer and was honoured to accept
this role with a renewed sense of duty and enthusiasm. Stella-Jones has a strong management
team in place which has been instrumental in building our historical track record of growth. I look
forward to collaborating with them further, along with our newly appointed Senior Vice-President
and Chief Financial Officer, Silvana Travaglini, to pursue the many opportunities that lay ahead for
Stella-Jones.
Stella-Jones Inc. 7
facilities in Canada. At year end, Stella-Jones operated forty
wood treating plants and twelve pole peeling facilities – an
unrivalled network that spans North America.
In 2019, we increased our dividend for a fifteenth consecutive
year to $0.56 per share, returning $38.5 million to shareholders.
We also repurchased shares for $70.6 million. Stella-Jones
finished the year in a strong financial position, well positioned
to pursue growth with a long-term debt to EBITDA(1) ratio of
1.9x.
DISCIPLINED STRATEGY. FUTURE GROWTH
The growth strategy of Stella-Jones remains disciplined and
highly focused. As we enter 2020, markets indicate robust
ongoing demand for our core products. We expect higher year-
over-year overall sales, mainly driven by increased market reach
in the utility pole, railway tie and residential lumber product
categories. Profitability is also expected to improve year-over-
year, driven by pricing improvements, operational efficiencies
and product mix. Our focus in 2020 will be to seek strategic
acquisitions, and optimize long-term preservative supply for our
utility pole treatment business.
I wish to add a personal note of thanks to my predecessor,
Brian McManus, for his many contributions to Stella-Jones. For
nearly two decades, he led our Company with wisdom, integrity
and tireless determination. We cannot thank him enough for his
accomplishments and we wish him well in his future endeavours.
As I transition to my new role, I want to take this opportunity
to thank all the members of the Stella-Jones team for their
continued support and the Board of Directors for their trust
in my leadership. Our enviable track record is a value I inherit
with immense pride and strong resolve. Together with the
superb team at Stella-Jones, I look forward to driving the
Company towards even greater accomplishments, maximizing
the long-term value of the Company and further rewarding
shareholders.
Éric Vachon
President and Chief Executive Officer
IMPROVED SALES. HIGHER MARGINS
The revenues generated during the year point to continued
strong ongoing demand for our products. Sales increased
for the nineteenth consecutive year to reach $2.2 billion. The
resilient, disciplined team at Stella-Jones attained this level of
success despite the challenges of lower lumber prices and a
tight untreated railway tie supply market.
Revenues increased in two core product categories. Utility pole
sales amounted to $779.2 million, an improvement of 7.5%,
driven by both healthy replacement demand and increased
sales prices. Railway tie sales of $678.2 million showed a
slight improvement over last year as higher selling prices were
partially offset by lower volume. Residential lumber sales were
relatively stable at $471.6 million.
Year-over-year profitability increased, both in absolute dollars
and as a percentage of sales, despite higher production
costs for railway ties related to the tight supply market. This
achievement was driven by improved pricing for railway
ties and utility poles, a healthier product mix and improved
operational efficiencies. We saw the implementation of
best practices impact results most meaningfully in our U.S.
Southeast operations, where our team focused substantial
efforts to gain efficiencies.
During 2019, we developed innovative ways to better serve our
customers. We launched an automated tie plating process and
introduced fire-retardant wrapped utility poles. Our dedicated
distribution centres for residential lumber customers continue
to provide superior service to further enhance the Company’s
industry-wide reputation for exceptional product quality and
consistent, reliable supply.
CASH GENERATION. BALANCED ALLOCATION
As always, we continue to be mindful of capital allocation. Our
focus is on fostering an optimal balance between maintaining a
prudent use of leverage, growing the business and providing a
return to shareholders. In 2019 we generated $305.0 million of
cash flow from operations before changes in non-cash working
capital components and interest and income taxes paid. We
deployed capital to purchase property, plant and equipment,
including the acquisition of a key residential lumber production
facility. We also provided a return to shareholders in the form of
dividends and share buybacks.
The year saw us invest $65.8 million in our network to maintain
our facilities, improve efficiencies and expand capacity.
During the year, we finalized our plant expansion in Cameron,
Wisconsin. We also completed the asset acquisition of
Shelburne Wood Protection Ltd. and upgraded this facility,
further expanding our network of residential lumber treating
(1) This is a non-IFRS financial measure. Please refer to the non-IFRS financial measures described in the management’s discussion and analysis.
2019 Annual Report 8
8
Stella-Jones Inc.
UTILITY POLES
Stella-Jones provides over one million pressure-treated poles per year to replace, upgrade and develop new
electrical utility and telecommunications lines across Canada and the United States. Wood poles are the backbone
of these North American networks and are a renewable resource, providing equal or superior strength, resiliency and
service life when compared to any wood pole substitute structure manufactured from alternative materials such as
steel, concrete and composite. Stella-Jones’ quality poles are made from a variety of premium wood species to suit
a range of climates. Our custom manufacturing services meet the demands of our customers’ unique specifications
across the continent.
2019 SALES
$779M
35.9%
5-YEAR SALES
(in millions of $)
779
725
654
528
579
2015
2016
2017
2018
2019
Stella-Jones Inc. 2019 Annual Report
9
9
GROWTH DRIVEN
QUALITY FOCUSED
In 2019, utility pole sales increased 7.5%, driven by increased sales prices,
overall healthy demand in the United States as well as the positive currency
conversion effect. During the year, Stella-Jones introduced fire-retardant
wrapped utility poles which have been positively received by customers. In
addition, the Company expanded its Cameron, Wisconsin facility by adding an
additional treating cylinder which doubled the plant’s capacity.
OUTLOOK
Demand for regular maintenance projects has historically been relatively steady
and is expected to remain solid. The North American market for utility poles has
further potential for consolidation, which corresponds to the Company’s strategic
vision of continental expansion. Stella-Jones expects to leverage the upcoming
growth in replacement demand stemming from the increasing average age of
utility poles in service. In general, the Company anticipates organic growth over
the next several years. For 2020, sales and margins are expected to increase year-
over-year, driven by better pricing, greater market reach and healthy demand for
replacement programs.
UTILITY POLES QUICK FACTS
CUSTOMERS
• Electrical utility companies
• Telecommunication companies
CONTRACTS
• Majority of business under multi-year agreements (3 to 7 years)
SERVICES
• Incising
• Radial drilling
• Through boring
• Framing
• Laminated wood pole design
COMPETITIVE ADVANTAGES
• Extensive distribution network
• Continuous supply
• Emergency response
• Fire-retardant wrap
2019 Annual Report 10
10
Stella-Jones Inc.
RAILWAY TIES
Stella-Jones plays a key role in the development, upgrade and maintenance of North America’s railroad infrastructure,
supplying the continent’s demand for railway ties and timbers with over 10 million pressure-treated wooden crossties
per year. As an industry leader in the production of quality treated railroad ties and timbers, Stella-Jones has the
treating capacity, sources of supply and purchasing power to meet the needs of Class 1, short line railroads and
commercial operators from coast to coast. Its extensive supplier network of over 1,200 hardwood sawmills allows it
to offer crossties and switch ties in a variety of sizes.
31.3%
5-YEAR SALES
(in millions of $)
710
716
652
662
678
2019 SALES
$678M
2015
2016
2017
2018
2019
Stella-Jones Inc. 2019 Annual Report
11
11
SUPPLY DRIVEN
CLIENT FOCUSED
In 2019, sales in the railway ties product category were up 2.4% as higher
selling prices and the positive currency conversion effect more than offset the
lower sales volume. While demand for railway ties remained strong, the tight
supply market for untreated railway ties required the Company to treat railway ties
that were not air-seasoned, resulting in longer cycle times. During the year, Stella-
Jones introduced an automated tie plating process to better respond to customer
requirements.
OUTLOOK
The North American market for railway ties is fairly consolidated. North American
railroads will continue to maintain their continental rail network as operators
constantly seek optimal line efficiency. Stella-Jones expects to grow at a rate in
line with gross domestic product growth, driven by regular maintenance programs
and increased market reach. For 2020, sales and margins are expected to
increase year-over-year. Improved untreated railway tie inventory availability should
lead to opportunistic sales to Class 1 and non-Class 1 customers and allow for
shorter treating cycle times. A stronger mix of non-Class 1 sales should result in
improved margins.
RAILWAY TIES QUICK FACTS
CUSTOMERS
• Class 1 railroads
• Short and regional rail lines and contractors
CONTRACTS
• Long-term contracts with Class 1 railroads
• Spot market bids for short and regional rail lines and contractors
SERVICES
• Pre-plating
• Pre-boring
• Crossing panels
• End-plating
COMPETITIVE ADVANTAGES
• Extensive distribution network
• Steady supply
• Short delivery times
2019 Annual Report 12
12
Stella-Jones Inc.
RESIDENTIAL LUMBER
Stella-Jones provides seamless, end-to-end service to key North American retailers, supplying annually, hundreds
of millions of board feet of treated residential lumber across Canada and the United States. 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.
2019 SALES
21.7%
5-YEAR SALES
(in millions of $)
475
472
346
366
$472M
183
2015
2016
2017
2018
2019
Stella-Jones Inc. VOLUME DRIVEN
SERVICE FOCUSED
2019 Annual Report
13
13
Sale prices to customers in the residential lumber product category are
generally tied to lumber market prices. Management closely monitors
variations in these commodity prices and adjusts its procurement
practices accordingly, in order to maintain dollar margins on similar volumes.
In 2019, sales in the residential lumber product category were relatively stable.
Lower lumber prices, compared to the prior year, as well as the impact of
unfavourable weather conditions in Eastern Canada at the beginning
of the year, were mostly offset by higher sales volume during the remainder of
the year, the contribution from 2018 acquisitions and the positive currency
conversion effect.
OUTLOOK
Stella-Jones expects to further benefit from continued demand for new
construction and outdoor renovation projects in the North American residential
and commercial markets. The Company plans on leveraging its premium
residential lumber program and accessing distribution agreements to service big
box stores, achieve growth and further its reach in the dealer network. For 2020,
sales are expected to increase year-over-year, driven by increased volume and
market reach. While absolute dollar margins are expected to rise due to increased
volume, margins as a percentage of sales are expected to remain at levels similar
to those of 2019.
RESIDENTIAL LUMBER QUICK FACTS
CUSTOMERS
• Big box retailers
• Dealer network
CONTRACTS
• Renewed annually
SERVICES
• Distribution of complementary accessories
COMPETITIVE ADVANTAGES
• Low transportation costs
• Ample supply
• Quick delivery times
• Dedicated distribution centres
2019 Annual Report 14
14
Stella-Jones Inc.
2019 SALES
5.9%
$128M
INDUSTRIAL PRODUCTS
Stella-Jones supplies pressure treated wood products to the industrial, marine and civic sectors for outdoor applications, producing
wharf timbers, bridge timbers, crane mats, railway crossings and laminated poles, offered in a variety of select wood species and
preservatives. In 2019, sales increased 17.4%, driven by stronger rail-related and piling product sales and the contribution from
acquisitions completed in the prior year. For 2020, sales are expected to be slightly lower as railway related maintenance will require
less bridge and crossing components.
2019 SALES
$112M
5.2%
LOGS & LUMBER
The logs and lumber product category is used to optimize procurement, does not generate margin, and sales fluctuations are tied to
the market 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. In 2019, sales decreased significantly, mainly as a result of reduced selling
prices, driven by lower lumber market costs. Sales were also impacted by a decrease in lumber transaction volumes and lower log
sales due to the timing of harvesting activities. For 2020, sales are expected to be stronger, driven mainly by higher lumber volumes.
Stella-Jones Inc. NETWORK DRIVEN
DISTRIBUTION FOCUSED
2019 Annual Report
15
15
2
3
4
5
1
16
18
17
19
20
21
12
11
10
14
13
6
9
8
7
15
29
28
40
41
38
39
33
34
35
32
30
31
37
36
23
24
25
26
27
22
Treating Facilities
Coal Tar Distillery
1 New Westminster, BC
15 Truro, NS
2 Prince George, BC
16 Arlington, WA
3 Galloway, BC
4 Carseland, AB
5 Neepawa, MB
17 Tacoma, WA
18 Sheridan, OR
19 Eugene, OR
29 Cameron, WI
30 Memphis, TN
31 Scooba, MS
32 Fulton, KY
33 Winslow, IN
6 South River, ON
20 Silver Springs, NV
34 Montevallo, AL
7 Guelph, ON
8 Shelburne, ON*
9 Stouffville, ON
21 Eloy, AZ
22 Lufkin, TX
23 Russellville, AR
10 Peterborough, ON
24 Rison, AR
11 Gatineau, QC
12 Rivière-Rouge, QC
13 Delson, QC
14 Sorel-Tracy, QC
25 Converse, LA
26 Pineville, LA
27 Alexandria, LA
28 Bangor, WI
35 Clanton, AL
36 Cordele, GA
37 Whitmire, SC
38 Goshen, VA
39 Warsaw, VA
40 Dubois, PA
41 McAllisterville, PA
* Acquired in 2019.
2019 Annual Report
16
16
Stella-Jones Inc.
RESULTS DRIVEN
GROWTH FOCUSED
SALES
(in millions of $)
1,838
1,886
2,124
2,169
Sales increased for the nineteenth consecutive year to reach
$2.2 billion in 2019.
1,559
1,517
1,738
1,766
1,971
2,057
42
101
120
153
112
2015
2016
2017
2018
2019
Pressure-treated wood sales
Logs and lumber sales
Total
EBITDA, OPERATING INCOME & EBITDA%
(in millions of $, except margin)
243
220
265
233
243
244
207
206
15.6%
14.4%
2015
2016
12.9%
2017
11.5%
2018
313
242
14.4%
2019
EBITDA (1)
Operating income (1)
EBITDA % (1)
CASH FLOW FROM OPERATING ACTIVITIES
(in millions of $)
252
249
243
301
305
258
182
7
128
90
2015
2016
2017
2018
2019
Cash flow from operating activities before certain items (1) (2)
Cash flow from operating activities
Excluding the currency impact and the contribution from 2018
acquisitions, pressure-treated wood sales increased by 1.7%,
explained by stronger utility pole and industrial product sales.
Sales of logs and lumber dropped by $42.1 million, excluding the
currency impact, due to the lower market prices of lumber and a
decrease in volumes.
EBITDA(1) for 2019 was $312.9 million, up 28.0% from
$244.4 million last year. This increase is largely attributable to
overall stronger pricing and the favourable impact of the adoption
of IFRS 16. Excluding the effect of IFRS 16, EBITDA rose by
$36.5 million or 14.9%.
EBITDA margin(1) for 2019 increased to 14.4%, or 12.9%
excluding the IFRS 16 impact, up from 11.5% last year.
The increase in operating income of $36.0 million or 17.5% in
2019 was almost entirely driven by higher pricing.
In 2019, Stella-Jones generated $305.0 million(1) of cash
flow from operating activities before non-cash working capital
components and interest and income taxes paid compared
to $258.0 million last year. Given the improved market supply
availability for untreated ties and the projected sales growth in
2020, the Company increased its inventories by $162.2 million.
As a result, cash flow from operating activities decreased to
$89.9 million in 2019, versus $128.1 million last year.
(1) This is a non-IFRS financial measure. Please refer to the non-IFRS financial
measures described in the management’s discussion and analysis.
(2) Non-cash working capital components, and interest and income taxes paid.
Comparative figures have been adjusted to conform to the current year’s presentation.
Stella-Jones Inc.
17
CAPITAL DEPLOYMENT
(in millions of $)
198
175
143
122
87
2015
2016
2017
2018
2019
Acquisitions
CAPEX
Dividends
Share buybacks
DIVIDENDS PER SHARE
(in dollars)
$0.44
$0.48
$0.56
$0.40
$0.32
2015
2016
2017
2018
2019
EBITDA & LONG-TERM DEBT TO EBITDA
(in millions of $, except per ratio)
265
243
243
244
313
2.75x
2.62x
1.87x
2.10x
1.93x
2015
2016
2017
2018
2019
EBITDA (1)
Long-term debt to EBITDA (1)
Stella-Jones’ capital allocation approach remains focused on
balancing growth and returns. In 2019, the Company invested
$65.8 million for capital expenditures, which included a
$9.2 acquisition of a key residential lumber production facility,
and returned capital to shareholders by paying dividends of
$38.5 million and buying back shares for $70.6 million under a
Normal Course Issuer Bid.
Stella-Jones has increased its dividend for the past fifteen years.
In 2019, the dividend increased 16.7% to $0.56 per share. In
2019, the dividend yield was 1.5%. On March 10, 2020, the
Company continued this trend and announced an increase of
its quarterly dividend by 7.1% to $0.15 per share. The Board of
Directors considers a dividend on a quarterly basis, based on the
Company’s balanced capital allocation strategy.
Stella-Jones concluded 2019 with a long-term debt of
$604.9 million and EBITDA(1) of $312.9 million. The long-term
debt to EBITDA(1) ratio remains low at 1.93x. The Company’s
strong financial position provides it flexibility to pursue its ongoing
disciplined growth strategy.
(1) This is a non-IFRS financial measure. Please refer to the non-IFRS financial
measures described in the management’s discussion and analysis.
2019 Annual Report 18
SHARE INFORMATION
For the years ended December 31
(unaudited)
TRADING DATA ON COMMON SHARES
52-week high ($)
52-week low ($)
Closing ($)
Total volume
2019
$
48.28
36.00
37.52
2018
$
2017
$
2016
$
52.22
37.40
39.61
51.41
38.30
50.50
51.95
40.37
43.58
2015
$
53.46
32.16
52.51
73,030,074
53,908,544
49,339,093
46,609,923
34,802,385
Average daily volume
290,956
214,775
196,570
185,697
138,655
OTHER STATISTICS
Dividends on common shares (in millions $)
Dividends per share ($)
Dividend yield (%)
38.5
0.56
33.3
0.48
30.5
0.44
27.7
0.40
22.1
0.32
1.5%
1.2%
0.9%
0.9%
0.6%
Average number of shares outstanding (000’s)
68,761
69,352
69,324
69,215
69,018
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 $)
68,768
67,467
52,659
2,531
3,136
69,360
69,268
61,718
2,744
3,257
69,333
69,342
47,769
3,502
3,957
69,231
69,303
42,730
3,020
3,715
69,153
69,137
42,564
3,630
4,300
(1) Enterprise value is defined as market capitalization plus long-term debt, including the current portion.
CLOSING SHARE PRICE AND VOLUME
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
$60
$50
$40
$30
$20
$10
$0
Feb
15
Apr
15
Jun
15
Aug
15
Oct
15
Dec
15
Feb
16
Apr
16
Jun
16
Aug
16
Oct
16
Dec
16
Feb
17
Apr
17
Jun
17
Aug
17
Oct
17
Dec
17
Feb
18
Apr
18
Jun
18
Aug
18
Oct
18
Dec
18
Feb
19
Apr
19
Jun
19
Aug
19
Oct
19
Dec
19
Volume
Price
Stella-Jones Inc.
19
MANAGEMENT’S DISCUSSION AND ANALYSIS
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2019 AND 2018
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 20
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. with its subsidiaries, either individually or collectively.
This MD&A and the Company’s audited consolidated financial statements were approved by the Audit Committee and the Board of Directors
on March 10, 2020. The MD&A provides a review of the significant developments, results of operations, financial position and cashflows of the
Company during the fiscal year ended December 31, 2019 compared with the fiscal year ended December 31, 2018. The MD&A should be read
in conjunction with the Company’s audited consolidated financial statements for the years ended December 31, 2019 and 2018 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, availability and cost of raw materials, 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.
This MD&A also 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, depreciation of right-of-use assets 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 margin: Operating income divided by sales for the corresponding period
• Cash flow 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 average shareholders’ equity
• Working capital ratio: Total current assets divided by total current liabilities (excluding the current portion of non-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 understand the Company’s operating
results, financial condition and cash flows as they provide additional measures about its performance.
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.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
21
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 December 31, 2019, the Company operated forty 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, 2019, the Company’s workforce numbered approximately 2,190 employees.
Stella-Jones possesses a number of key attributes which should continue to 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.
HIGHLIGHTS
Overview of 2019
Sales in 2019 were up 2.1% to $2.2 billion, compared to 2018, primarily explained by overall improved pricing, including the positive effect of
currency conversion and the contribution from acquisitions completed last year, partially offset by lower volumes. The improvement in sales was
almost entirely attributable to higher utility pole sales driven by an increase in selling prices. Despite lower volumes, railway tie sales were also
up as price increases more than offset lower shipments. While industrial products sales benefitted from higher volumes, lower prices for lumber
unfavorably impacted residential lumber and logs and lumber sales.
Year-over-year operating income increased driven by improved pricing and positive product mix. In 2019, Stella-Jones used its liquidity to support
working capital requirements, invest in its property, plant and equipment, acquire a group of assets, and return capital to shareholders through
dividends and share buybacks. As at December 31, 2019, the Company maintained a strong financial position to pursue further growth with a
long-term debt to EBITDA ratio of 1.9x.
2019 Financial Highlights
On January 1, 2019, the Company retrospectively adopted IFRS 16, Leases, (“IFRS 16”), but has not restated comparative periods, as permitted
under the specific transitional provisions in the standard. The application of this new standard resulted in the addition of right-of-use assets and
lease liabilities to the consolidated statement of financial position. Starting on January 1, 2019, instead of lease expenses, right-of-use asset
depreciation and financing costs related to lease liabilities are recorded to the consolidated statements of income. Please refer to the impact of
new accounting pronouncements and interpretation section on page 41 for further details on the adoption of IFRS 16.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 22
Selected Key Indicators
(in millions of dollars, except earnings per share (“EPS”) and key performance indicators)
Operating Results
Sales
Gross profit (1)(2)
EBITDA (1)
Operating income (1)
Net income
EPS – basic & diluted
Cash Flows
Operating activities
Financing activities
Investing activities
Financial Position
Current assets
Inventories
Total assets
Long-term debt (3)
Lease liabilities (4)
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 (3) to total capitalization (1)
Long-term debt (3) to EBITDA (1)
Dividend per share
2019
2018
2017
2,169.0
2,123.9
1,886.1
358.5
312.9
242.3
163.1
2.37
89.9
(24.2)
(65.7)
1,191.7
970.6
2,281.1
604.9
118.1
992.8
1,288.3
14.4%
11.2%
12.7%
8.56
0.32:1
1.93
0.56
328.0
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%
7.76
0.29:1
2.10
0.48
315.2
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%
8.17
0.29:1
1.87
0.44
(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.
(2) Comparative figures have been adjusted to conform to the current year’s presentation.
(3) Including current portion of long-term debt.
(4) Including current portion of lease liabilities.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
23
RECONCILIATION OF NON-IFRS FINANCIAL MEASURES
The following table presents the reconciliations of non-IFRS financial measures to their most comparable IFRS measures.
Reconciliation of net income to
operating income and EBITDA
Three-month periods ended
December 31,
Years ended
December 31,
(in millions of dollars)
Net income for the period
Plus:
Provision for income taxes
Financial expenses
Operating income
Depreciation and amortization
EBITDA
2019(1)
$
27.7
8.0
5.7
41.4
17.4
58.8
2018
$
20.6
6.4
4.8
31.8
10.0
41.8
2019(1)
$
163.1
55.6
23.6
242.3
70.6
312.9
2018
$
137.6
49.6
19.1
206.3
38.1
244.4
(1) For the three-month period ended December 31, 2019, the adoption of IFRS 16 increased operating income and EBITDA by $0.3 million and $8.4 million respectively. For the
year ended December 31, 2019, the adoption of IFRS 16 decreased operating income by $0.4 million and increased EBITDA by $32.0 million.
FOREIGN EXCHANGE
The table below shows average and closing exchange rates applicable to Stella-Jones’ quarters for the years 2018 and 2017. Average rates
are used to translate sales and expenses for the periods mentioned, while closing rates translate assets and liabilities of foreign operations and
monetary assets and liabilities of the Canadian operations denominated in U.S. dollars.
US$/Cdn$ rate
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year
2019
2018
Average
Closing
Average
Closing
1.3318
1.3438
1.3177
1.3231
1.3291
1.3363
1.3087
1.3243
1.2988
1.2988
1.2549
1.2893
1.3080
1.3129
1.2913
1.2894
1.3168
1.2945
1.3642
1.3642
• Average rate: The appreciation of the U.S. dollar relative to the Canadian dollar during 2019 compared to 2018 resulted in a positive impact on
sales and an unfavourable impact on cost of sales.
• Closing rate: The depreciation of the U.S. dollar relative to the Canadian dollar as at December 31, 2019, compared to December 31, 2018
resulted in a lower value of assets and liabilities denominated in U.S. dollars, when expressed in Canadian dollars.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
24
RAILWAY TIE INDUSTRY OVERVIEW
As reported by the Railway Tie Association (“RTA”), purchases for 2019 were 18.5 million ties, versus 21.2 million ties for 2018. The RTA calculates
purchases based on the difference between monthly production and the change in inventory, as reported by its members. Inventory levels remained
fairly stable at 14.6 million as at December 31, 2019. As a result, the inventory-to-sales ratio was 0.77:1 as at December 31, 2019, in line with
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. In recent
years, total traffic on North American railroads has remained relatively stable.
ANNUALIZED RAILWAY TIE PURCHASES AND INVENTORY
(in millions of ties)
FREIGHT HAULED ON NORTH AMERICAN RAILROADS
(in millions of units)
30
20
10
0
25
20
15
10
5
0
1994
1999
2004
2009
2014
2019
2014
2015
2016
2017
2018
2019
Intermodal
Carloads
Source: Railway Tie Association
Purchases
Inventory
Source: Association of American Railroads
OPERATING RESULTS
Sales
Sales for the year ended December 31, 2019 increased to $2,169.0 million, up $45.1 million, compared to last year’s sales of $2,123.9 million.
Excluding the contribution from 2018 acquisitions of $11.6 million and the positive impact of the currency conversion of $41.9 million, sales
decreased by $8.4 million, or 0.4%, in 2019. Higher pricing for utility poles and railway ties, and the increase in volumes for industrial products
were more than offset by lower residential lumber and logs and lumber sales, as well as lower shipments for railway ties.
Sales
(in millions of dollars, except percentages)
2018
Acquisitions
FX impact
Organic growth
2019
Organic growth %
Utility
Poles
Railway
Ties
Residential
Lumber
Industrial
Products
Logs & Consolidated
Sales
Lumber
725.0
662.4
474.4
109.2
152.9
2,123.9
0.5
17.3
36.4
779.2
5.0%
—
16.2
(0.4)
678.2
(0.1%)
7.3
4.5
(14.6)
471.6
(3.1%)
3.8
2.9
12.3
128.2
11.3%
—
1.0
(42.1)
11.6
41.9
(8.4)
111.8
(27.5%)
2,169.0
(0.4%)
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
25
SALES BY PRODUCT CATEGORY
(% of sales)
UTILITY POLES
35.9%
RAILWAY TIES
31.3%
UTILITY POLES
34.1%
RAILWAY TIES
31.2%
2019
$2,169.0 M
2018
$2,123.9 M
LOGS AND
LUMBER
5.2%
INDUSTRIAL
PRODUCTS
5.9%
RESIDENTIAL
LUMBER
21.7%
LOGS AND
LUMBER
7.2%
INDUSTRIAL
PRODUCTS
5.1%
RESIDENTIAL
LUMBER
22.4%
Utility Poles
Utility pole sales reached $779.2 million in 2019, up 7.5% from sales of $725.0 million in
2018. Excluding the contribution from 2018 acquisitions of $0.5 million and the currency
conversion effect of $17.3 million, utility pole sales increased by $36.4 million, or 5.0%,
primarily driven by increased sales price. Volume increases in the U.S. Southeast and overall
healthy replacement demand, were largely offset by lower transmission pole volumes,
given more project demand in the same period last year. Utility pole sales accounted for
35.9% of the Company’s total sales in 2019.
Railway Ties
Railway tie sales reached $678.2 million in 2019, up 2.4% from sales of $662.4 million in
2018. Excluding the currency conversion effect of $16.2 million, railway tie sales remained
unchanged as higher selling prices compensated for the decrease in sales volumes. The
reduction in the 2019 maintenance program of a Class 1 customer, as well as longer
railway tie treating cycle times unfavourably impacted sales volumes. While demand for
railway ties remained strong, the tight supply market for untreated railway ties required
the Company to treat ties that were not air-seasoned which required longer cycle times.
Railway tie sales accounted for 31.3% of the Company’s total sales in 2019.
Residential Lumber
Sales in the residential lumber category totalled $471.6 million in 2019, down by 0.6%
from sales of $474.4 million in 2018. Excluding the contribution from 2018 acquisitions
of $7.3 million and the currency conversion effect of $4.5 million, residential lumber sales
decreased by $14.6 million, or 3.1%. This variance is primarily attributable to reduced
selling prices, due to lower lumber costs compared to the same period last year, offset in
part by higher volumes despite unfavourable weather conditions in Eastern Canada at the
beginning of the year. Residential lumber sales accounted for 21.7% of the Company’s
total sales in 2019.
UTILITY POLE SALES
UTILITY POLE SALES
(in millions of $)
(in millions of $)
779.2
779.2
725.0
725.0
2019
2019
2018
2018
RAILWAY TIE SALES
RAILWAY TIE SALES
(in millions of $)
(in millions of $)
678.2
678.2
662.4
662.4
2019
2019
2018
2018
RESIDENTIAL LUMBER SALES
RESIDENTIAL LUMBER SALES
(in millions of $)
(in millions of $)
471.6
471.6
474.4
474.4
2019
2019
2018
2018
INDUSTRIAL PRODUCT SALES
INDUSTRIAL PRODUCT SALES
(in millions of $)
(in millions of $)
128.2
128.2
109.2
109.2
2019
2019
2018
2018
LOGS AND LUMBER SALES
LOGS AND LUMBER SALES
(in millions of $)
(in millions of $)
152.9
152.9
111.8
111.8
2019
2019
2018
2018
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS UTILITY POLE SALES
(in millions of $)
779.2
725.0
2019
2018
RAILWAY TIE SALES
(in millions of $)
678.2
662.4
2019
2018
RESIDENTIAL LUMBER SALES
(in millions of $)
471.6
474.4
2019
2018
INDUSTRIAL PRODUCT SALES
(in millions of $)
128.2
109.2
2019
2018
LOGS AND LUMBER SALES
(in millions of $)
152.9
111.8
2019
2018
26
Industrial Products
Industrial product sales reached $128.2 million in 2019, compared with $109.2 million last
year. Excluding the contribution from 2018 acquisitions of $3.8 million and the currency
conversion effect of $2.9 million, sales increased $12.3 million, or 11.3%, primarily as a
result of stronger rail-related and piling product sales. Industrial product sales represented
5.9% of the Company’s total sales in 2019.
Logs and Lumber
Sales in the logs and lumber product category totalled $111.8 million in 2019, compared
with $152.9 million in 2018. Excluding the currency conversion effect of $1.0 million, sales
for this product category decreased by $42.1 million, or 27.5%, reflecting a decrease in
selling prices driven by lower lumber market costs as well as lower volumes due to the
timing of harvesting activities. Logs and lumber sales represented 5.2% of the Company’s
total sales in 2019.
SALES BY GEOGRAPHIC REGION
(% of sales)
2019
2018
69.8%
UNITED STATES
30.2%
CANADA
68.0%
UNITED STATES
32.0%
CANADA
$ 1,514.6 M $ 654.4 M
$ 1,444.3 M $ 679.6 M
Sales in the United States amounted to $1,514.6 million, or 69.8% of sales in 2019, representing an increase of $70.3 million, or 4.9%, over sales
of $1,444.3 million in 2018. This year-over-year increase is mainly attributable to increased sales prices and strong demand for utility poles, higher
sales for the industrial product category and the favourable effect of currency conversion.
Sales in Canada amounted to $654.4 million, or 30.2% of sales in 2019, representing a decrease of $25.2 million, or 3.7%, over sales of
$679.6 million in 2018. This year-over-year decrease primarily reflects lower sales in the logs and lumber category, partially offset by higher
railway sales.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS Cost of Sales
Cost of Sales Detail
(in millions of dollars)
Years ended December 31,
2019
$
2018
$
Cost of sales before depreciation and amortization
1,754.6
1,771.6
Depreciation of property, plant and equipment
Amortization of intangible assets
Depreciation of right-of-use assets
Cost of sales
23.8
2.3
29.8
21.1
3.2
–
1,810.5
1,795.9
27
Variance
$
(17.0)
2.7
(0.9)
29.8
14.6
Cost of sales, including depreciation of right-of-use assets, property, plant and equipment, as well as amortization of intangible assets, was
$1,810.5 million, or 83.5% of sales, in 2019. This compares with $1,795.9 million, or 84.6% of sales, in 2018.
Cost of sales before depreciation and amortization decreased $17.0 million, largely explained by lower sales volumes, the adoption of IFRS 16
under which operating lease expenses are no longer recognized as operating expenses and lower lumber costs compared to the previous year.
These factors were partially offset by higher production costs for railway ties given the longer treatment cycles, and the effect of U.S. dollar
fluctuations.
Total depreciation and amortization was $70.6 million in 2019, of which $55.9 million and $14.6 million were recorded under cost of sales and
selling and administrative expenses, respectively, in the consolidated statement of income. The depreciation and amortization recorded under cost
of sales was $31.6 million higher in 2019, largely reflecting the adoption of IFRS 16, whereby $29.8 million of depreciation for right-of-use assets
was recognized.
Gross profit reached $358.5 million, or 16.5% of sales, in 2019, compared with $328.0 million, or 15.4% of sales, in 2018. Despite overall lower
volumes and higher production costs from the increased cycle times for railway ties, gross profit improved due to higher selling prices for utility
poles and railway ties and the favourable impact of the appreciation of the U.S. dollar relative to the Canadian dollar during 2019.
Selling and Administrative
Selling and administrative expense for 2019 was $116.6 million, including depreciation and amortization of $14.6 million compared to
$112.8 million in 2018, including depreciation and amortization of $13.8 million. The increase is primarily explained by higher compensation
expense of $6.4 million, including a $2.5 million increase in profit-sharing expense, higher information technology expense of $2.7 million,
partially offset by lower stock-based compensation of $4.5 million. For 2019, customer relationships and non-compete agreements amortization
expense of $12.0 million and depreciation of right-of-use assets of $2.6 million were recorded under selling and administrative expense. In
2018, an amortization expense for customer relationships and non-compete agreements of $13.8 million was recognized under cost of sales and
reclassified to selling and administrative expense for comparative purposes in 2019. As a percentage of sales, selling and administrative expense,
excluding depreciation and amortization, represented 4.7% of sales in 2019 and in 2018.
Other Losses and Gains, Net
Other net gains of $0.4 million in 2019 included a $6.1 million reduction in the unrealized mark-to-market loss related to the diesel and petroleum
derivative commodity contracts, partially offset by a $2.3 million realized loss on these derivative commodity contracts and a $3.1 million loss
related to asset disposals and impairments. In 2018, other net losses of $8.9 million mainly consisted of an unrealized mark-to-market loss related
to diesel and petroleum derivative commodity contracts.
Financial Expenses
Financial expenses for 2019 amounted to $23.7 million, up from $19.1 million in 2018. The increase is mainly due to the adoption of IFRS 16
whereby interest expenses of $4.0 million were recognized, as well as additional borrowings to finance capital expenditures and share repurchases.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
28
Income Before Income Taxes and Income Tax Expense
Income before income taxes was $218.7 million, or 10.1% of sales, in 2019, versus $187.2 million, or 8.8% of sales, in 2018.
The provision for income taxes totalled $55.6 million in 2019, representing an effective tax rate of 25.4%. In 2018, the income tax expense was
$49.6 million, equivalent to an effective tax rate of 26.5%.
The lower effective tax rate for 2019 is in large part attributable to a more favourable mix of taxable income within the Company’s different tax
jurisdictions.
Net Income
Net income for 2019 reached $163.1 million, or $2.37 per diluted share, versus net income of $137.6 million, or $1.98 per share, in
2018.
ACQUISITION OF A GROUP OF ASSETS
Shelburne Wood Protection Ltd.
On April 1, 2019, the Company completed the acquisition of substantially all of the assets of Shelburne Wood Protection Ltd. (“SWP”), located in
Shelburne, Ontario. The SWP plant is specialized in the treatment of residential lumber. The total consideration for the acquisition was $9.2 million
of which $8.5 million was financed through the Company’s syndicated credit facilities and $0.7 million was recorded as a balance of purchase
price. The balance of purchase price bears no interest and was recorded at fair value using an effective interest rate of 3.31%. It will be paid to the
seller in two equal amounts on the first and second anniversary of the transaction. The SWP acquisition has been accounted for as an acquisition
of a group of assets.
QUARTERLY RESULTS
The Company’s sales follow a seasonal pattern, with utility pole, railway tie, 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; as a result, 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:
2019
For the quarters ended
(in millions of dollars, except EPS)
Sales
EBITDA
Operating income
Net income for the period
EPS — basic and diluted
2018
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
$
440.7
661.8
626.6
439.9
2,169.0
63.8
45.7
29.5
0.43
94.2
76.7
52.3
0.76
96.1
78.6
53.7
0.78
58.8
41.4
27.7
0.41
March 31
June 30
Sept. 30
Dec. 31
$
$
$
$
312.9
242.3
163.1
2.37
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
Note: Due to rounding, the sum of results for the quarters may differ slightly from the total shown for the full year.
Comparative figures were not restated as permitted by IFRS 16.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
29
FOURTH QUARTER RESULTS
Highlights
Selected Key Indicators
(in millions of dollars, except margins and EPS)
$
%
Q4–2019
Q4–2018
Variation
Variation
Operating results
Sales
Gross profit (1)
EBITDA
EBITDA margin
Operating income
Net income
EPS – basic & diluted
439.9
70.2
58.8
13.4%
41.4
27.7
0.41
432.8
70.5
41.8
9.7%
31.8
20.6
0.30
7.1
(0.3)
17.0
n/a
9.6
7.1
0.11
1.6%
(0.4%)
40.7%
n/a
30.2%
34.5%
36.7%
(1) Adjusted to conform to the current year’s presentation.
Note: Comparative figures were not restated as permitted by IFRS 16.
Operating Results
Sales for the fourth quarter of 2019 amounted to $439.9 million, up 1.6% from sales of $432.8 million for the same period in 2018. Excluding
the $2.7 million conversion effect from the fluctuation in the value of the U.S. dollar, sales increased by $4.4 million, or 1.0%, as detailed below.
Sales
(in millions of dollars, except percentages)
Q4-2018
FX impact
Organic growth
Q4-2019
Organic growth %
Utility
Poles
Railway
Ties
Residential
Lumber
Industrial
Products
Logs & Consolidated
Sales
Lumber
192.0
1.8
(2.9)
190.9
(1.5%)
127.0
0.4
3.9
131.3
3.1%
60.3
0.1
0.7
61.1
1.2%
23.1
0.2
3.0
26.3
30.4
0.2
(0.3)
30.3
13.0%
(1.0%)
432.8
2.7
4.4
439.9
1.0%
Utility pole sales amounted to $190.9 million, down slightly by 0.6% from $192.0 million the same period last year. Excluding the currency
conversion effect, sales decreased 1.5% as higher pricing was more than offset by lower volumes, due to more transmission pole projects in the
same period last year. Sales of railway ties reached $131.3 million, up 3.4% versus $127.0 million last year. Excluding the currency conversion
effect, railway tie sales rose 3.1%, driven by price increases, partially offset by lower non-Class 1 volumes. Residential lumber sales reached
$61.1 million, up slightly from $60.3 million last year. Excluding the currency conversion effect, sales grew 1.2%, reflecting higher sales volumes,
largely offset by lower lumber prices when compared to the same period last year. Industrial product sales amounted to $26.3 million, up from
$23.1 million a year ago. Excluding the currency conversion effect, sales increased 13.0% as a result of stronger volumes from rail related
products. Logs and lumber sales of $30.3 million in the fourth quarter were relatively unchanged when compared to the same period last year.
Gross profit was $70.2 million, or 16.0% of sales, in the fourth quarter of 2019, versus $70.5 million, or 16.3% of sales, in the fourth quarter of
2018. While pricing improved compared to the same period last year, it was not sufficient to compensate for the lower utility pole volumes and
higher production costs, mainly for railway ties. Operating income totalled $41.4 million, or 9.4% of sales, in the fourth quarter of 2019, versus
$31.8 million, or 7.4% of sales, in 2018. The operating income for the fourth quarter of 2018 included other net losses of $9.6 million, mainly
comprised of a non-cash mark-to-market loss related to diesel and petroleum derivative commodity contracts.
Net income for the period reached $27.7 million, or $0.41 per diluted share, compared with $20.6 million, or $0.30 per diluted share, in the prior
year.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
30
STATEMENT OF FINANCIAL POSITION
As a majority of the Company’s assets and liabilities are denominated in U.S. dollars, exchange rate variations may significantly affect their value.
As such, the depreciation of the U.S. dollar relative to the Canadian dollar as at December 31, 2019, compared to December 31, 2018 (see
“Foreign Exchange” on page 23), results in a lower value of assets and liabilities denominated in U.S. dollars, when expressed in Canadian dollars.
Assets
As at December 31, 2019, total assets stood at $2,281.1 million versus $2,062.2 million as at December 31, 2018. The increase in total assets
largely reflects the addition of right-of-use assets and higher inventories, as detailed below. Note that the following table provides information on
assets using select line items from the consolidated statements of financial position.
Assets
As at December 31,
(in millions of dollars)
Accounts receivable
Inventories
Other current assets
Total current assets
Property, plant and equipment
Right-of-use assets
Intangible assets
Goodwill
Other non-current assets
Total non-current assets
2019
$
179.2
970.6
41.9
2018
$
192.4
838.6
37.4
1,191.7
1,068.4
567.8
116.8
114.7
284.9
5.2
1,089.4
551.8
-
131.7
298.3
12.0
993.8
Total assets
2,281.1
2,062.2
Note: Comparative figures were not restated as permitted by IFRS 16.
Variance
$
(13.2)
132.0
4.5
123.3
16.0
116.8
(17.0)
(13.4)
(6.8)
95.6
218.9
Accounts receivable, net of a credit loss allowance of $0.4 million, was $179.2 million as at December 31, 2019, compared with $192.4 million,
net of a credit loss allowance of $2.2 million, as at December 31, 2018. The decrease was mainly attributable to the reduction in days of sales
outstanding and the effect of currency translation of U.S. dollar denominated accounts receivable. In the normal course of business, the Company
has a facility to which it can sell, without credit recourse, eligible trade receivables. No receivables were outstanding under such facility as at
December 31, 2019 and 2018.
Inventories stood at $970.6 million as at December 31, 2019, up from $838.6 million as at December 31, 2018. The increase is explained by
higher levels of untreated railway ties due to improved availability, and higher inventory levels for utility poles in preparation for higher expected
deliveries in the first half of 2020. These factors were partially offset by the effect of currency translation of U.S. dollar denominated inventories.
Given 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 and the turnover is 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. The Company maintains solid relationships and enters into
long-term contracts with customers 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.
Property, plant and equipment stood at $567.8 million as at December 31, 2019, compared with $551.8 million as at December 31, 2018.
The increase mainly reflects the purchase of property, plant and equipment of $65.8 million during 2019, partially offset by depreciation of
$23.8 million for the period and the effect of currency translation of U.S.-denominated property, plant and equipment.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
31
The adoption of IFRS 16 resulted in the addition of right-of-use assets which totalled $116.8 million as at December 31, 2019. Please refer to
the impact of new accounting pronouncements and interpretation section on page 41 for further details on right-of-use assets.
Intangible assets and goodwill totalled $114.7 million and $284.9 million, respectively, as at December 31, 2019. Intangible assets include
customer relationships, non-compete agreements, a creosote registration, cutting rights, standing timber and software. As at December 31, 2018,
intangible assets and goodwill were $131.7 million and $298.3 million, respectively. The decrease in intangible assets is explained by amortization
of $14.3 million and the effect of currency translation on U.S.-based intangible assets. The decrease in goodwill is entirely due to the effect of
currency translation on U.S. dollar denominated goodwill.
Liabilities
As at December 31, 2019, Stella-Jones’ total liabilities stood at $992.8 million, up from $780.8 million as at December 31, 2018. The increase
in total liabilities mainly reflects the addition of lease liabilities and the increase in long-term debt, as detailed below. Note that the following table
provides information on liabilities using select line items from the consolidated statements of financial position.
Liabilities
(in millions of dollars)
Accounts payable and accrued liabilities
Current portion of long-term debt
Current portion of lease liabilities
Other current liabilities
Total current liabilities
Long-term debt
Lease liabilities
Other non-current liabilities
Total non-current liabilities
As at December 31,
2019
$
136.2
6.5
29.2
10.2
182.1
598.4
88.9
123.4
810.7
2018
$
133.3
9.7
–
16.4
159.4
503.8
–
117.6
621.4
Total liabilities
992.8
780.8
Note: Comparative figures were not restated as permitted by IFRS 16.
Variance
$
2.9
(3.2)
29.2
(6.2)
22.7
94.6
88.9
5.8
189.3
212.0
The adoption of IFRS 16 resulted in the addition of lease liabilities totalling $118.1 million, of which $29.2 million is classified as current and
$88.9 million is classified as non-current. Please refer to the impact of new accounting pronouncements and interpretation section on page 41
for further details on lease liabilities.
The Company’s long-term debt, including the current portion, was $604.9 million as at December 31, 2019, versus $513.5 million as at
December 31, 2018. The increase mainly reflects borrowings made to support working capital requirements, partially offset by the effect of
currency translation on U.S. dollar denominated long-term debt.
On May 3, 2019, the Company amended and restated the fifth amended and restated credit agreement dated as of February 26, 2016, as
amended on May 18, 2016, March 15, 2018 and January 14, 2019 (as so amended, the “Existing Credit Agreement”), pursuant to a sixth
amended and restated credit agreement (the “Sixth ARCA”). Under the terms of the Sixth ARCA, the following syndicated credit facilities are made
available to Stella-Jones Inc., Stella-Jones Corporation and Stella-Jones U.S. Holding Corporation (collectively, the “Borrowers”) by a syndicate
of lenders: (i) an unsecured revolving facility in the amount of US$325.0 million made available to the Borrowers until February 27, 2024, (ii) an
unsecured non-revolving term facility in the amount of US$50.0 million made available to Stella-Jones Corporation until February 26, 2021 and
(iii) an unsecured non-revolving term facility in the amount of US$50.0 million made available to Stella-Jones Corporation until February 28, 2022.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
32
The Borrowers may increase the syndicated credit facilities by increasing the amount of one or more of the syndicated credit facilities or by adding
one or more new non-revolving single draw term loans, in each case, up to an aggregate amount of US$350.0 million, provided that no more than
five term loans in total may be outstanding at any time. The Borrowers may obtain new term loans upon written request and are subject to lenders’
approval.
All of the positive covenants, financial ratios, reporting requirements, negative covenants and events of default under the Sixth ARCA remain
substantially unchanged from the Existing Credit Agreement.
As at December 31, 2019, an amount of $150.8 million (US $116.1 million) was available against the Company’s syndicated credit facilities of
$552.0 million (US$425.0 million) and the Company was in full compliance with its debt covenants, reporting requirements and financial ratios.
Shareholders’ Equity
Shareholders’ equity stood at $1,288.3 million as at December 31, 2019, compared to $1,281.4 million as at December 31, 2018.
Shareholders’ Equity
As at December 31,
(in millions of dollars)
Capital Stock
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Note: Comparative figures were not restated as permitted by IFRS 16.
2019
$
217.0
0.4
967.8
103.1
2018
$
221.3
0.3
909.1
150.7
1,288.3
1,281.4
Variance
$
(4.3)
0.1
58.7
(47.6)
6.9
The increase in shareholders’ equity as at December 31, 2019 is attributable to net income of $163.1 million during 2019, partially offset by
other comprehensive loss of $50.1 million mainly resulting from the currency translation of foreign operations, dividends of $38.5 million and
share repurchases of $69.0 million. As at December 31, 2018, the Company had unsettled transactions to repurchase common shares for cash
consideration of $1.6 million.
In the three-month period ended December 31, 2019, as part of its Normal Course Issuer Bid, the Company repurchased 924,212 common shares
for cancellation in consideration of $34.9 million. In 2019, the Company repurchased 1,836,250 common shares for cancellation in consideration
of $70.6 million. Since the launch of the Normal Course Issuer Bid on December 20, 2018, the Company has repurchased 1,942,093 common
shares for cancellation in consideration of $74.7 million.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth summarized cash flow components for the periods indicated:
Summary of Cash Flows
Years ended December 31,
(in millions of dollars)
Operating activities
Financing activities
Investing activities
Net change in cash and cash equivalents during the period
Cash and cash equivalents - beginning
Cash and cash equivalents - end
Note: Comparative figures were not restated as permitted by IFRS 16.
2019
$
89.9
(24.2)
(65.7)
—
—
—
2018
$
128.1
(26.0)
(108.5)
(6.4)
6.4
—
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
33
The Company believes that its cash flow from operations and available syndicated credit facilities are adequate to finance its business plans, meet
its working capital requirements and maintain its assets for the foreseeable future.
Cash Flows From Operating Activities
Cash flows provided by operating activities generated $89.9 million in 2019, versus $128.1 million in 2018. The decrease mainly reflects an
increase in non-cash working capital components, offset in part by increased profitability. Cash flows from operating activities before changes in
non-cash working capital components and interest and income taxes paid was $305.0 million in 2019, compared to $258.0 million in 2018. This
increase mostly reflects higher profitability. Changes in non-cash working capital components decreased liquidity by $146.4 million in 2019. This
was mainly due to an increase in inventory levels. The following table provides information on cash flows provided by operating activities using
select line items from the consolidated statements of cash flows.
Cash Flows From Operating Activities
Years ended December 31,
(in millions of dollars)
Net income
Loss (gain) on derivative financial instruments
Depreciation of right-of-use assets
Others
Cash flows from operating activities before changes in non-cash
working capital components and interest and income taxes paid
Inventories
Accounts receivable
Accounts payable and accrued liabilities
Other current assets
Changes in non-cash working capital components
Interest paid
Income taxes paid
Cash flows from operating activities
Note: Comparative figures were not restated as permitted by IFRS 16.
2019
$
163.1
(6.1)
32.4
115.6
305.0
(162.2)
6.2
11.4
(1.7)
(146.4)
(24.2)
(44.6)
89.9
2018
$
137.6
8.6
–
111.8
258.0
(56.7)
(13.2)
13.4
(15.3)
(71.8)
(18.7)
(39.4)
128.1
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
34
Cash Flows From Financing Activities
Financing activities for 2019 reduced liquidity by $24.2 million. In 2019, the Company borrowed $126.0 million under its syndicated credit
facilities, repurchased common shares for $70.6 million, paid dividends of $38.5 million and repaid lease liabilities for $31.1 million. In 2018,
financing activities reduced liquidity by $26.0 million, primarily due to dividend payments of $33.3 million.
The following table provides information on cash flows provided by financing activities using select line items from the consolidated statements
of cash flows.
Cash Flows From Financing Activities
Years ended December 31,
(in millions of dollars)
Net change in syndicated credit facilities
Repayment of long-term debt
Repayment of lease liabilities
Repurchase of common shares
Dividends
Other
Cash flows from financing activities
Note: Comparative figures were not restated as permitted by IFRS 16.
2019
$
126.0
(10.2)
(31.1)
(70.6)
(38.5)
0.2
(24.2)
2018
$
18.7
(6.7)
–
(4.0)
(33.3)
(0.7)
(26.0)
Cash Flows From Investing Activities
Investing activities used liquidity of $65.7 million in 2019, primarily due to the purchase of property, plant and equipment. The SWP acquisition
concluded on April 1, 2019 for $9.2 million was accounted for as an acquisition of a group of assets and is included in purchase of property, plant
and equipment. In 2018, investing activities reduced liquidity by $108.5 million as acquisitions required an investment of $54.5 million, while the
purchase of property, plant and equipment required $51.6 million in liquidity, as detailed below. The following table provides information on cash
flows provided by investing activities using select line items from the consolidated statements of cash flows.
Cash Flows From Investing Activities
Years ended December 31,
(in millions of dollars)
Business acquisitions
Purchase of property, plant and equipment
Other
Cash flows from investing activities
2019
$
–
(65.8)
0.1
(65.7)
2018
$
(54.5)
(51.6)
(2.4)
(108.5)
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
35
Financial Obligations
The following table details the maturities of the financial obligations as at December 31, 2019:
Financial obligations
(in million of dollars)
Accounts payable and accrued liabilities
Long-term debt obligations (1)
Minimum payments under lease liabilities
Derivative commodity contracts
Non-compete agreements
Financial obligations
Carrying Contractual
Amount Cash flows
Less than
1 year
Years
2-3
Years More than
5 years
4-5
$
136.2
604.9
118.1
2.0
2.7
$
136.2
696.1
131.5
2.0
2.8
$
136.2
25.8
32.5
1.8
1.5
$
—
51.8
51.7
0.2
1.3
$
—
510.4
24.8
—
—
$
—
108.1
22.5
—
—
863.9
968.6
197.8
105.0
535.2
130.6
(1) Includes interest payments. Interest on variable interest debt is assumed to remain unchanged from the rates in effect as at December 31, 2019.
SHARE AND STOCK OPTION INFORMATION
As at December 31, 2019, the capital stock issued and outstanding of the Company consisted of 67,466,709 common shares (69,267,732 as at
December 31, 2018). The following table presents the outstanding capital stock activity for the year ended December 31, 2019:
Number of shares
(in thousands)
Balance – Beginning of year
Employee share purchase plans
Repurchase of common shares
Balance – End of year
Year Ended December 31, 2019
69,268
35
(1,836)
67,467
As at March 10, 2020, the capital stock issued and outstanding consisted of 67,466,709 common shares.
As at December 31, 2019, the number of outstanding options to acquire common shares issued under the Company’s Stock Option Plan was
45,000 (December 31, 2018 – 45,000) of which 45,000 (December 31, 2018 – 39,000) were exercisable. As at March 10, 2020, the number
of outstanding options was 45,000, of which 45,000 were exercisable.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
36
DIVIDENDS
In 2019, the Company’s Board of Directors declared the following quarterly dividends:
Declared
Record Date
Payable Date
Dividend
March 14, 2019
May 1, 2019
August 6, 2019
November 6, 2019
April 5, 2019
June 6, 2019
April 26, 2019
June 27, 2019
September 2, 2019
September 20, 2019
December 2, 2019
December 19, 2019
$
0.14
0.14
0.14
0.14
Subsequent to year end, on March 10, 2020, the Board of Directors declared a quarterly dividend of $0.15 per common share payable on April 24,
2020 to shareholders of record at the close of business on April 3, 2020. 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 on the
Company’s balanced capital allocation strategy. There can be no assurance as to the amount or timing of such dividends in the future.
COMMITMENTS AND CONTINGENCIES
The Company is, from time to time, involved in various claims and legal proceedings arising in the ordinary course of business. The Company
believes that a final determination of these proceedings cannot be made at this time but should not materially affect the Company’s cash flows,
financial position or results of operations.
The Company has issued guarantees amounting to $27.5 million in 2019 (2018 – $29.7 million) under letters of credit and various bid and
performance bonds. The Company 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 the markets the Company serves, impacting costs, selling prices and demand for
its products and adversely affecting its financial position and 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 substantial reduction in its results. For the year ended December 31, 2019, the Company’s top ten customers accounted for approximately
45.1% of its sales. During this same period, the Company’s largest customer accounted for approximately 15.8%, of its total sales and is
associated with the residential lumber product category while the second largest customer accounted for approximately 8.0% of total sales and
is associated with the railway tie product category.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
37
Availability and Cost of Raw Materials
Management considers that the Company may be affected by potential fluctuations in wood prices and supply. 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 sufficient timber to the Company.
The effects of regional weather conditions could also reduce the availability of wood supply and adversely impact the Company’s results.
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. Moreover, certain suppliers may elect to cease
production of specific preservatives altogether, creating availability challenges and requiring the Company to evaluate the reasonableness of
producing such preservatives internally versus sourcing safe and reliable substitute products that are reasonably priced, effective and acceptable
to the Company’s customers. While the Company is mitigating this risk by researching and identifying alternate suppliers and preservatives
outside of its traditional sources of supply, there can be no assurance that it will be able to secure the sufficient supply of all materials required to
manufacture its products.
Environmental Risk
The Company is subject to a variety of environmental laws and regulations, including those relating to emissions to the air, discharges into
water, releases of hazardous and toxic substances, and remediation of contaminated sites. These environmental laws and regulations require the
Company to obtain various environmental registrations, licenses, permits and other approvals, as well as carry out inspections, compliance testing
and meet timely reporting requirements in order to operate its manufacturing and operating facilities.
Compliance with these environmental laws and regulations will continue to affect the Company’s operations by imposing operating and maintenance
costs and capital expenditures. Failure to comply could result in civil or criminal enforcement actions, which could result, among others, in the
payment of substantial fines, often calculated on a daily basis, or in extreme cases, the disruption or suspension of operations at the affected
facility.
Under various federal, provincial, state and local laws and regulations, the Company could, as the owner, lessor or operator, be liable for the costs of
removal or remediation of contamination at its sites. The remediation costs and other costs required to clean up or treat contaminated sites could
be substantial. However, in certain cases, the Company benefits from indemnities from the former owners of its sites. Contamination on and from
the Company’s sites may subject it to liability to third parties or governmental authorities for injuries to persons, property or the environment and
could adversely affect the Company’s ability to sell or rent its properties or to borrow money using such properties as collateral.
The possibility of major changes in environmental laws and regulations is another risk faced by the Company. While it is not possible to predict the
outcome and nature of these changes, they could substantially increase the Company’s capital expenditures and compliance costs at the facilities
affected or could change the availability or pricing of certain products such as preservatives purchased and used by the Company.
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.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 38
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 adversely impact the Company’s business, financial position and operating results. 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
adversely impact the Company’s financial position, operating results, and cash flows.
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. Although
the final outcome cannot be predicted with any degree of certainty, the Company regularly assesses the status of these matters and establishes
provisions based on the assessment of the probable outcome. If the assessment is not correct, the Company may not have recorded adequate
provision for such losses and the Company’s financial position, operating results and cash flows could be adversely impacted. Regardless of
outcome, litigation could result in substantial costs to the Company and divert Management’s attention and resources away from the day-to-day
operations of the Company’s business.
Insurance Coverage Risk
The Company maintains property, casualty, general liability and workers’ compensation insurance that are in accordance with customary industry
practice, 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, 2019, 76.2% 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 an adverse effect on the Company’s profitability, cash flows and financial position.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS 39
Availability of Credit Risk
The agreements governing the syndicated credit facilities and senior notes contain certain restrictive covenants that impose operating and
financial restrictions and could limit the Company’s ability to engage in activities that might be in its long-term best interests. In addition, a breach
of the covenants under the Company’s syndicated credit facilities and senior notes could result in an event of default, which could allow lenders to
accelerate the repayment of the debt. In this event, the Company may seek to refinance its indebtedness, but be unable to do so on commercially
reasonable terms. As a result, the Company could be limited in how it conducts its business, be unable to compete effectively or to take advantage
of new business opportunities.
There is currently uncertainty around whether LIBOR will continue to exist after 2021. If LIBOR ceases to exist, the Company may need to
amend certain agreements and it cannot predict what alternative index would be negotiated with its counterparties. As a result, interest expense
could increase and liquidity may be adversely affected. In the future, the Company may need to renegotiate its variable rate debt or incur other
indebtedness, and the phase-out of LIBOR may negatively impact the terms of such indebtedness.
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 or an impact to customers or suppliers. 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.
Enterprise Resource Planning (“ERP”) Implementation Risk
The Company is in the process of implementing a new ERP system. Such a change involves detailed planning, transformation of current business
and financial processes, as well as substantial testing and employee training. The Company expects to complete the development phase in
2020 and be fully operational across the organization by the end of 2021. During the implementation process, the Company could experience
disruptions to business information systems and operations. Any disruptions could adversely affect the Company’s ability to process transactions,
provide accurate, timely and reliable reports on financial and operating results as well as assess the effectiveness of internal controls over financial
reporting and disclosure controls and procedures. In addition, it is possible that the implementation process may exceed the expected time frame
and budget and there can be no assurance that the system will be beneficial to the extent anticipated. The Company has adopted a phased-in
approach and believes it is taking the necessary steps, including deploying both internal and external resources, to mitigate the implementation
risk.
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
accepted 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 the Company 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 the Company may ultimately recognize. Such determinations may become final and binding on the
Company. Any of the above factors could have an adverse effect on net income or cash flows.
Coronavirus (COVID-19 virus) Risk
The Company is monitoring the outbreak of the COVID-19 virus. While the potential impact of the outbreak remains unknown, the spread of
the COVID-19 virus could directly or indirectly disrupt the Company’s operations and those of its suppliers and customers, which in turn could
adversely impact the business, financial position, results of operations and cash flows of the Company.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 40
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, 2019, the Company had two interest rate swap
agreements hedging $240.3 million in debts and having April 2021 and December 2021 as maturity dates. These instruments are presented at
fair value and designated as cash flow hedges. The ratio as at December 31, 2019, of fixed and floating debt was 76.2% and 23.8%, respectively,
including the effects of interest rate swap positions (96.0% and 4.0%, respectively, as at December 31, 2018).
Foreign Exchange Risk Management
The Company’s financial results are reported in Canadian dollars, while a portion of its 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, 2019, 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, 2019, the Company had commodity hedges for 6.0 million gallons (12.0 million in 2018) of diesel and petroleum covering
requirements for 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, 2019 and 2018 audited consolidated financial
statements as well as in the impact of new accounting pronouncements and interpretation section in the MD&A.
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 consolidated 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
estimated useful life of assets, recoverability of long-lived assets and goodwill and determination of the fair value of the assets acquired and
liabilities assumed in the context of an acquisition. 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 41
Impact of new accounting pronouncements and interpretation
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 Company retrospectively adopted IFRS 16, Leases, on January 1, 2019 but has not restated comparatives for the 2018 reporting period, as
permitted under the specific transitional provisions in the standard. The adjustments arising from the new leasing rules are therefore recognized
in the opening balance of the statement of financial position on January 1, 2019.
On adoption of IFRS 16, the Company recognized lease liabilities in relation to leases which had previously been classified as operating leases
under the principles of IAS 17, Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using
the lessee’s incremental borrowing rate as of January 1, 2019. The weighted average incremental borrowing rate applied to the lease liabilities
on January 1, 2019 was 3.30%.
The associated right-of-use assets were measured at the amount equal to the lease liabilities, adjusted by the amount of any prepaid or accrued
lease payments relating to that lease recognized in the consolidated statements of financial position as at December 31, 2018.
In applying IFRS 16 for the first time, the Company has used the following practical expedients permitted by the standard:
• the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
• the accounting for operating leases with a remaining lease term of less than 12 months as at January 1, 2019 as short-term leases;
• the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
• the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
As at January 1, 2019, the following right-of-use assets and lease liabilities by type of assets were recorded in the consolidated statements of
financial position:
Right-of-use assets
(in millions of dollars)
Rolling stock: mobile equipment, road vehicles and rail cars
Land
Other assets
Total
January 1, 2019
$
79.6
33.3
7.8
120.7
As at December 31, 2018, the Company reported future minimum payments under operating leases of $132.8 million which corresponds to the
present value of lease payments, discounted using the Company’s incremental borrowing rate as of January 1, 2019 of $120.7 million.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS
42
The allocation between current lease liabilities and non-current lease liabilities is as follows:
Lease liability
(in millions of dollars)
Current lease liabilities
Non-current lease liabilities
Total
January 1, 2019
$
28.3
92.4
120.7
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. On January 1, 2019,
the Company early adopted, as permitted, the amendments prospectively to acquisitions that will occur from that date. The adoption of these
amendments had no significant impact on the Company’s consolidated financial statements.
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.
The Company applied IFRIC 23 beginning on January 1, 2019. The application of this new interpretation had no significant impact on the
consolidated financial statements.
IAS 39, IFRS 9 and IFRS 7 – Interest Rate Benchmark Reform
In September 2019, the IASB issued Exposure Draft, Interest Rate Benchmark Reform, Amendments to IFRS 9, Financial Instruments, IAS 39,
Financial Instruments Recognition and Measurement and IFRS 7, Financial Instruments Disclosure, enabling hedge accounting to continue during
the period of uncertainty before existing interest rate benchmarks are replaced with alternative risk-free interest rates. The amendments are
effective as of January 1, 2020, with early adoption permitted, and apply to hedge relationships that exist at the beginning of the reporting period
or are designated thereafter, and to the gains or losses that exist in other comprehensive income on adoption. Adopting these amendments will
allow the Company to maintain current hedge accounting relationships and to assume that the current benchmark rates will continue to exist, with
no consequential impact on the consolidated financial statements. During the fourth quarter, the Company early adopted this amended standard
and this change had no impact on the Company’s consolidated financial statements.
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS
43
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, 2019 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, 2019.
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, 2019 to December 31, 2019 that have materially affected or are
reasonably likely to materially affect the Company’s ICFR.
2019 Annual ReportMANAGEMENT’S DISCUSSION AND ANALYSIS 44
OUTLOOK
The Company’s utility pole and railway tie product categories are essential components of the North American utility infrastructure and basic
transportation. 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 telecommunication and
railway networks.
Based on the assumptions that current market and economic conditions stabilize and foreign exchange rates and raw material prices remain
comparable to those of the prior year, the Company expects higher year-over-year overall sales, driven by increased market reach in the utility
pole, railway tie and residential lumber product categories. Sales growth is expected to support an improvement in operating margins. As a result,
notwithstanding any additional acquisitions, EBITDA in 2020 is forecasted to be in the range of $320.0 million to $345.0 million, compared to
$312.9 million in 2019.
In the utility pole product category, demand for regular maintenance projects has historically been relatively steady. For 2020, sales and margins
are expected to improve, driven by better pricing, healthy demand for replacement programs and greater market penetration.
In the railway tie product category, North American railroads will continue to maintain their continental rail network, as operators constantly seek
optimal line efficiency. For 2020, sales and margins are forecasted to increase year-over-year. Improved untreated railway tie inventory availability
should lead to opportunistic sales to Class 1 and non-Class 1 customers and allow for shorter treating cycle times. A stronger mix of non-Class
1 sales should result in improved margins.
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. For 2020, sales are expected to increase year-over-year, mainly
driven by increased volume and market reach. Management closely monitors changes in the North American lumber markets and adjusts pricing
accordingly in order to maintain dollar margins on similar volumes. While absolute dollar margins are expected to increase due to higher sales
volume, margin as a percentage of sales is expected to remain at levels similar to those of 2019.
For 2020, in the industrial product category, sales are expected to be slightly lower as railway related maintenance should require less bridge and
crossing components.
In the logs and lumber product category, sales in 2020 are forecasted to increase mainly due to higher lumber volumes. It is important to highlight
that this product category enables the Company to optimize procurement and does not generate a margin. Logs and lumber pricing is closely tied
to the market price of lumber. As a result, an increase or decrease in the price of lumber will directly impact sales as the price of lumber is a pass
through to customers. In turn, overall margins as a percentage of sales, when taken as a whole with other product categories, will be impacted.
The Company plans to invest between $45.0 million and $55.0 million in capital asset expenditures during 2020. This includes an investment
for storm water control and the construction of a new distribution centre to improve the operating performance of the newly acquired Shelburne
facility, as well as expenditures to implement a new ERP system. In addition, the Company will continue to focus on improving operational
efficiency and optimizing long-term preservative supply for its utility pole business.
As one of the leading North American providers of industrial treated wood products, Stella-Jones will leverage the strength of its continental
network to capture more of its existing clients’ business in its core utility pole and railway tie business, while diligently seeking opportunities in all
product categories.
The Company’s strategic vision, focused on continental expansion, remains intact, as it 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,
both organically and through acquisitions and enhance shareholder value.
March 10, 2020
Stella-Jones Inc.MANAGEMENT’S DISCUSSION AND ANALYSIS CONSOLIDATED FINANCIAL STATEMENTS
45
December 31, 2019 and 2018
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 four independent directors. The Audit Committee meets
from time to time with Management and the Company’s independent auditors to review the consolidated 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.
Éric Vachon, CPA, CA
President and Chief Executive Officer
Silvana Travaglini, CPA, CA
Senior Vice-President and Chief Financial Officer
Saint-Laurent, Québec
March 10, 2020
2019 Annual Report
46
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, 2019 and 2018, 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, 2019 and 2018;
• 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 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
47
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.
2019 Annual Report
48
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 10, 2020
1 FCPA auditor, FCA, public accountancy permit No. A116853
Stella-Jones Inc. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
49
As at December 31, 2019 and 2018
(expressed in thousands of Canadian dollars)
Note
2019
$
2018
$
179,161
970,569
5,976
36,027
192,380
838,558
1,882
35,567
1,191,733
1,068,387
567,804
116,755
114,740
284,901
1,239
3,885
551,785
−
131,658
298,270
7,545
4,559
2,281,057
2,062,204
136,237
133,259
1,046
1,998
6,540
29,232
7,075
182,128
598,371
88,910
100,520
11,663
11,035
128
992,755
216,958
386
967,823
103,135
1,288,302
2,281,057
−
4,381
9,714
−
12,016
159,370
503,767
−
92,557
13,959
7,393
3,748
780,794
221,328
348
909,060
150,674
1,281,410
2,062,204
5
6
7
9
8
8
19
10
19
11
9
12
11
9
16
12
17
19
14
18
23
ASSETS
Current assets
Accounts receivable
Inventories
Income taxes receivable
Other current assets
Non-current assets
Property, plant and equipment
Right-of-use assets
Intangible assets
Goodwill
Derivative financial instruments
Other non-current assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Derivative financial instruments
Current portion of long-term debt
Current portion of lease liabilities
Current portion of provisions and other long-term liabilities
Non-current liabilities
Long-term debt
Lease liabilities
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
Karen Laflamme, FCPA, FCA, ASC
Director
2019 Annual Report
50
CONSOLIDATED STATEMENTS OF CHANGE IN SHAREHOLDERS’ EQUITY
For the years ended December 31, 2019 and 2018
(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, 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 14)
(469)
Share-based compensation (note 14)
—
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
Balance – January 1, 2019
221,328
348 909,060
252,149
(107,023)
5,548
150,674 1,281,410
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
1,387
Repurchase of common shares (note 14)
(5,757)
— 163,078
—
—
—
— 163,078
—
(2,581)
(60,824)
18,012
(4,727)
(47,539)
(50,120)
— 160,497
(60,824)
18,012
(4,727)
(47,539) 112,958
—
—
—
(38,469)
—
(63,265)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(38,469)
1,387
(69,022)
38
— (106,066)
Share-based compensation (note 14)
—
38
—
(4,370)
38
(101,734)
Balance – December 31, 2019
216,958
386
967,823
191,325
(89,011)
821
103,135 1,288,302
The accompanying notes are an integral part of these consolidated financial statements.
Stella-Jones Inc.
CONSOLIDATED STATEMENTS OF INCOME
51
For the years ended December 31, 2019 and 2018
(expressed in thousands of Canadian dollars, except earnings per common share)
Note
2019
$
2018
$
2,169,023
2,123,893
Sales
Expenses
Cost of sales (including depreciation and amortization of $55,927 (2018 - $24,298))
24
1,810,504
1,795,928
Selling and administrative (including depreciation and amortization
of $14,596 (2018 - $13,804))
Other losses (gains), net
Operating income
Financial expenses
Income before income taxes
Provision for income taxes
Current
Deferred
24
116,598
112,800
(416)
8,864
15
1,926,686
1,917,592
15
16
16
242,337
23,655
218,682
41,335
14,269
55,604
206,301
19,102
187,199
39,018
10,584
49,602
Net income for the year
163,078
137,597
Basic and diluted earnings per common share
14
2.37
1.98
The accompanying notes are an integral part of these consolidated financial statements.
2019 Annual Report
52
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2019 and 2018
(expressed in thousands of Canadian dollars)
Net income for the year
Other comprehensive income (loss)
Items that may subsequently be reclassified to net income
2019
$
2018
$
163,078
137,597
Net change in gains (losses) on translation of financial statements of foreign operations
(60,824)
101,529
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 (losses) on fair value of derivatives designated as cash flow hedges
Income taxes on change in gains (losses) 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.
18,012
(34,332)
—
(6,434)
(3,270)
1,372
1,707
(383)
(3,428)
847
(50,120)
112,958
1,209
(282)
65,843
203,440
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
Depreciation of right-of-use assets
Loss (gain) on derivative financial instruments
Financial expenses
Current income taxes expense
Deferred income taxes
Provisions and other long-term liabilities
Other
Changes in non-cash working capital components
Accounts receivable
Inventories
Accounts payable and accrued 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 lease liabilities
Repayment of non-competes payable
Dividends on common shares
Repurchase of common shares
Proceeds from issuance of common shares
Investing activities
Decrease (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
53
For the years ended December 31, 2019 and 2018
(expressed in thousands of Canadian dollars)
Note
2019
$
2018
$
7
8
9
16
16
13
13
13
13
13
4
163,078
137,597
23,831
14,331
32,361
(6,131)
23,655
41,335
14,269
(5,153)
3,454
21,086
17,016
−
8,601
19,102
39,018
10,584
2,917
2,060
305,030
257,981
6,162
(162,231)
11,438
(1,743)
(146,374)
(24,216)
(44,522)
89,918
(259)
125,974
667
(10,183)
(31,094)
(1,560)
(38,469)
(70,649)
1,387
(24,186)
995
−
(1,884)
(65,840)
997
(13,230)
(56,716)
13,428
(15,335)
(71,853)
(18,693)
(39,371)
128,064
(255)
18,742
−
(6,705)
−
(1,745)
(33,290)
(4,038)
1,330
(25,961)
(836)
(54,491)
(4,028)
(51,568)
2,390
(65,732)
(108,533)
—
—
—
(6,430)
6,430
—
2019 Annual Report
54
1 DESCRIPTION OF THE BUSINESS
Stella-Jones Inc. (with its subsidiaries, either individually or collectively, referred to as 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 10, 2020.
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 Stella-Jones Inc. and its controlled subsidiaries. Intercompany transactions and
balances between these companies have been eliminated. All consolidated subsidiaries are wholly owned. 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
Cascade Pole and Lumber Company
McFarland Cascade Pole & Lumber Company
Kisatchie Midnight Express, L.L.C.
Stella-Jones Corporation
Stella-Jones Corporation
Stella-Jones Corporation
Country of
incorporation
United States
United States
United States
United States
United States
On December 31, 2019, Stella-Jones CDN Finance Inc., a wholly owned subsidiary, was liquidated into Stella-Jones Inc. On the same date,
Stella-Jones U.S. Finance II Corporation, Stella-Jones U.S. Finance III Corporation, Stella-Jones U.S. II LLC and Stella-Jones U.S. III LLC, all
wholly owned subsidiaries, were liquidated into SJ Holding.
On December 31, 2019, Lufkin Creosoting Co., Inc. merged into McFarland Cascade Holding, Inc. Shortly after, on the same date, the
surviving entity, McFarland Cascade Holding, Inc., merged into Stella-Jones Corporation.
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, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
55
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 Company. 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 Company’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 consolidated 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 operations that have a functional currency different from that of the Company are translated using the rate
in effect at the consolidated 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, within other losses (gains).
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, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
56
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition
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 Products.
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.
The Company’s significant 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.
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 twelve months or less. Accounts receivable are recognized
initially at fair value and subsequently measured at amortized cost, less credit loss allowance.
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.
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. The depreciation
expense is included in cost of sales in the consolidated statement of income.
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
57
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
5 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 and selling and administrative expense 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.
Goodwill
Goodwill is not amortized and tested annually for impairment, or more frequently, whenever indicators of potential impairment exist. 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 (being the present value of the expected future cash flows of the relevant
asset or CGU).
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. 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 when events or changes in circumstances warrant such
consideration.
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
58
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leases
IFRS 16, Leases, sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a lease
agreement. The new standard replaces the provisions of IAS 17, Leases, and the related interpretations on leases.
The adoption of IFRS 16, Leases, from January 1, 2019 resulted in a change in accounting policies applied retrospectively, without restatement
of comparative amounts as permitted under the specific transitional provisions.
The Company leases certain property, plant and equipment.
Lease accounting policy prior to the adoption of IFRS 16 on January 1, 2019:
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 cost 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.
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.
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
59
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes
The income tax expense or credit for the period is the tax payable on the current year’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.
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. 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. 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.
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.
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
60
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 recognized in the
consolidated statement of income 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 liability-based awards, restricted stock units (“RSUs”) and deferred share units (“DSUs”), which are initially measured at fair
value at the grant date using the Black-Scholes valuation model. 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. The compensation expenses are recognized
in the consolidated statements of income over the vesting periods, based on the fair value of the awards at the end of each reporting period.
Financial Instruments
The Company recognizes a financial asset or a financial liability in its consolidated 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.
If 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.
A financial asset is derecognized when the Company has transferred its rights to receive cash flows from the asset and has transferred
substantially all the risks and rewards of the asset.
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
61
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial instruments (continued)
When the transfer of a customer receivable results in the derecognition of the asset, the corresponding cash proceeds are classified as cash
flows from operating activities.
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 financial assets carried at amortized
cost. 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, Financial Instruments, which requires expected lifetime losses to be
recognized from initial recognition of the receivables.
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. 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 losses (gains).
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 the common shareholders 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.
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
62
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2019. These
changes were made in accordance with the applicable transitional provisions.
IFRS 16 – Lease
In January 2016, the IASB released IFRS 16, Leases, (“IFRS 16”) 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 Company retrospectively adopted IFRS 16, on January 1, 2019, but has not restated comparatives for the 2018 reporting period,
as permitted under the specific transitional provisions in the standard. The adjustments arising from the new leasing rules are therefore
recognized in the opening balance of the consolidated statement of financial position on January 1, 2019.
On adoption of IFRS 16, the Company recognized lease liabilities in relation to leases which had previously been classified as operating
leases under the principles of IAS 17, Leases. These liabilities were measured at the present value of the remaining lease payments,
discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The weighted average incremental borrowing rate applied
to the lease liabilities on January 1, 2019 was 3.30%.
The associated right-of-use assets were measured at the amount equal to the lease liabilities, adjusted by the amount of any prepaid or
accrued lease payments relating to that lease recognized in the consolidated statements of financial position as at December 31, 2018.
In applying IFRS 16 for the first time, the Company has used the following practical expedients permitted by the standard:
•
•
•
•
the use of a single discount rate to a portfolio of leases with reasonably similar characteristics;
the accounting for operating leases with a remaining lease term of less than 12 months as at January 1, 2019 as short-term leases;
the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and
the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.
As at January 1, 2019, the following right-of-use assets and lease liabilities by type of assets were recorded in the consolidated statements
of financial position:
Right-of-use assets
Rolling stock (mobile equipment, road vehicles and rail cars)
Land
Other assets
Total
January 1, 2019
$
79,588
33,334
7,809
120,731
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
63
2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IFRS 16 – Lease (continued)
As at December 31, 2018, the Company reported future minimum payments under operating leases of $132,775 which corresponds to the
present value of lease payments, discounted using the Company’s incremental borrowing rate as of January 1, 2019 of $120,731.
The allocation between current lease liabilities and non-current lease liabilities is as follows:
Lease liabilities
Current lease liabilities
Non-current lease liabilities
Total
January 1, 2019
$
28,263
92,468
120,731
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.
On January 1, 2019, the Company early adopted, as permitted, the amendments prospectively to acquisitions occurring from that date. The
adoption of these amendments had no significant impact on the Company’s consolidated financial statements.
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.
The Company applied IFRIC 23 beginning on January 1, 2019. The application of this new interpretation had no significant impact on the
Company’s consolidated financial statements.
IAS 39, IFRS 9 and IFRS 7 – Interest Rate Benchmark Reform
In September 2019, the IASB issued Exposure Draft, Interest Rate Benchmark Reform, Amendments to IFRS 9, Financial Instruments,
IAS 39, Financial Instruments Recognition and Measurement and IFRS 7, Financial Instruments Disclosure, enabling hedge accounting to
continue during the period of uncertainty before existing interest rate benchmarks are replaced with alternative risk-free interest rates. The
amendments are effective as of January 1, 2020, with early adoption permitted, and apply to hedge relationships that exist at the beginning of
the reporting period or are designated thereafter, and to the gains or losses that exist in other comprehensive income on adoption. Adopting
these amendments will allow the Company to maintain current hedge accounting relationships and to assume that the current benchmark
rates will continue to exist, with no consequential impact on the consolidated financial statements. During the fourth quarter, the Company
early adopted this amended standard and this change had no impact on the Company’s consolidated financial statements.
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
64
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of consolidated 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, recoverability of long-lived assets and goodwill and determination of the fair value of the assets
acquired and liabilities assumed in the context of an acquisition. Management also makes estimates and assumptions in the context of
business combination mainly with sales forecast, margin forecast 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, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
65
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%.
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.
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%.
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, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
66
5 ACCOUNTS RECEIVABLE
Trade receivables
Less: Credit loss allowance
Trade receivables – net
Amounts receivable from related parties
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
2019
$
174,199
(412)
173,787
—
5,374
179,161
2019
$
118,900
36,580
10,385
8,334
174,199
2018
$
184,376
(2,209)
182,167
454
9,759
192,380
2018
$
113,783
51,214
11,251
8,128
184,376
In the normal course of business, the Company has a facility, to which it can sell without credit recourse, eligible trade receivables. No
receivables were outstanding under such facility as at December 31, 2019 and 2018. During the year 2019, trade receivables of $25,991
(nil in 2018) were sold to this facility.
6
INVENTORIES
Raw materials
Finished goods
2019
$
655,074
315,495
970,569
2018
$
516,742
321,816
838,558
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
7 PROPERTY, PLANT AND EQUIPMENT
As at January 1, 2018
Cost
Accumulated depreciation
Net book amount
Year ended December 31, 2018
Opening net book amount
Business acquisitions
Additions
Disposals / impairments
Depreciation
Exchange differences
67
Land
Buildings
Production
equipment
$
$
$
Rolling
stock
$
Others
$
Total
$
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)
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
Year ended December 31, 2019
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
Opening net book amount
52,199
108,598
369,772
13,406
7,810
551,785
Additions
Disposals / impairments
Depreciation
Exchange differences
7,760
5,671
48,940
1,293
1,020
64,684
(1,708)
(690)
(1,280)
(400)
—
(4,078)
—
(3,680)
(15,036)
(3,894)
(1,221)
(23,831)
(1,474)
(4,510)
(14,027)
(499)
(246)
(20,756)
Closing net book amount
56,777
105,389
388,369
9,906
7,363
567,804
As at December 31, 2019
Cost
Accumulated depreciation
Net book amount
56,777
131,460
487,791
31,239
17,546
724,813
—
(26,071)
(99,422)
(21,333)
(10,183)
(157,009)
56,777
105,389
388,369
9,906
7,363
567,804
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
68
8
INTANGIBLE ASSETS AND GOODWILL
The intangible assets include customer relationships, non-compete agreements, cutting rights, standing timber, 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 non-compete agreements were 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 covering a five-year period that are based on the latest financial 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
2019
$
138,547
146,354
284,901
2018
$
144,546
153,724
298,270
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 sell 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.
The recoverable amount of the creosote registration is determined based on value-in-use calculations. Value-in-use calculations use cash
flow projections covering a five-year period that are based on the latest financial budgets 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, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
69
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, 2018
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
Year ended December 31, 2019
Opening net book balance
4,934
72,010
3,128
Additions
Amortization
—
—
—
220
(199)
(10,763)
(1,219)
(900)
(1,250)
—
—
1,884
(14,331)
—
—
2,959
42,604
131,658
298,270
6,023
1,664
Exchange differences
—
(2,254)
(122)
—
(53)
(2,042)
(4,471)
(13,369)
Closing net book amount
4,735
58,993
1,787
6,787
1,876
40,562
114,740
284,901
As at December 31, 2019
Cost
6,821
159,330
16,844
11,276
11,724
40,562
246,557
284,901
Accumulated amortization
(2,086) (100,337)
(15,057)
(4,489)
(9,848)
—
(131,817)
—
Net book amount
4,735
58,993
1,787
6,787
1,876
40,562
114,740
284,901
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
70
9
LEASES
The consolidated statement of financial position shows the following amounts relating to leases:
Right-of-use assets
Rolling stock
Land
Other assets
Lease liabilities
Current lease liabilities
Non-current lease liabilities
December 31, 2019
January 1, 2019
$
$
82,140
28,735
5,880
116,755
29,232
88,910
118,142
79,588
33,334
7,809
120,731
28,263
92,468
120,731
The following table provides a reconciliation of the right-of-use assets, presented in the consolidated statements of financial position for the
period ended December 31, 2019:
Right-of-use
Rolling stock
Land
Other assets
As at January 1, 2019
Additions
Disposals
Depreciation
Remeasurement
Exchange differences
As at December 31, 2019
$
79,588
28,864
(1,520)
(26,027)
4,675
(3,440)
82,140
$
33,334
523
—
(3,819)
78
(1,381)
28,735
$
7,809
161
—
(2,515)
565
(140)
5,880
Total
$
120,731
29,548
(1,520)
(32,361)
5,318
(4,961)
116,755
The following table provides a reconciliation of the lease liabilities, presented in the consolidated statements of financial position for the
period ended December 31, 2019:
Lease liabilities
Rolling stock
Land
Other assets
As at January 1, 2019
Payments under lease agreements
Finance costs
Additions
Lease termination payments
Remeasurement
Exchange differences
As at December 31, 2019
$
79,588
(28,555)
2,690
28,864
(1,346)
4,675
(3,468)
82,448
$
33,334
(3,906)
1,065
523
-
78
(1,405)
29,689
$
7,809
(2,620)
232
161
-
565
(142)
6,005
Total
$
120,731
(35,081)
3,987
29,548
(1,346)
5,318
(5,015)
118,142
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
71
9
LEASES (CONTINUED)
The Company leases various rolling stock (mobile equipment, road vehicles and rail cars), land and other assets. Leases are typically made
for fixed periods of 1 to 10 years and may have extension options that are considered when it is reasonably certain that the option will be
exercised.
Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not
impose any covenants, but leased assets may not be used as security for borrowing purposes.
Extension and termination options are included in a number of leases across the Company. These terms are used to maximize operational
flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Company and
not by the respective lessor.
Prior to January 1, 2019, the Company’s leases were mainly composed of operating leases for which a significant portion of the risks and
rewards of ownership were not transferred to the Company as lessee. From January 1, 2019, leases are recognized as a right-of-use with a
corresponding liability at the date the leased asset is available for use by the Company.
Assets and liabilities arising from a lease are initially measured on a present value basis. A lease liability includes the net present value of the
following lease payments:
•
•
•
fixed payments (including in-substance fixed payments);
the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and
payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
The weighted average incremental borrowing rate applied to the lease liabilities on January 1, 2019 was 3.30%.
Payments associated with short-term leases and leases of low-value assets are recognized on a straight-line basis as an expense in
the consolidated statement of income. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise
information technology equipment and small items of office furniture.
10 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Trade payables
Amounts due to related parties
Accrued expenses
Other payables
2019
$
65,314
—
54,265
16,658
136,237
2018
$
53,021
54
60,815
19,369
133,259
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
72
11 LONG-TERM DEBT
Unsecured syndicated credit facilities
Unsecured senior notes
Unsecured promissory notes
Secured promissory note
Other
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
11(a)
11(b)
11(c)
11(d)
11(e)
2019
$
384,552
194,820
14,480
6,256
5,311
605,419
(508)
604,911
6,628
(88)
6,540
598,371
2018
$
273,055
204,630
17,930
7,321
11,150
514,086
(605)
513,481
9,810
(96)
9,714
503,767
a) On May 3, 2019, the Company amended and restated the fifth amended and restated credit agreement dated as of February 26, 2016,
as amended on May 18, 2016, on March 15, 2018 and on January 14, 2019 (as so amended, the “Existing Credit Agreement”), pursuant
to a sixth amended and restated credit agreement (the “Syndicated Credit Agreement”). Under the terms of the Syndicated Credit
Agreement, the following syndicated credit facilities are made available to Stella-Jones Inc., Stella-Jones Corporation and SJ Holding
(collectively, the “Borrowers”), by a syndicate of lenders: (i) an unsecured revolving facility in the amount of US$325,000 made available
to the Borrowers until February 27, 2024, (ii) an unsecured non-revolving term facility in the amount of US$50,000 made available
to Stella-Jones Corporation until February 26, 2021 and (iii) an unsecured non-revolving term facility in the amount of US$50,000 made
available to Stella-Jones Corporation until February 28, 2022. As at December 31, 2019 the syndicated credit facilities provided
financing up to US$425,000 of which US$116,127 was available. Additionally, the Syndicated Credit Agreement makes available an
accordion option whereas upon request, the Borrowers may increase the syndicated credit facilities by increasing the amount of one or
more of the syndicated credit facilities or by adding one or more new non-revolving single draw term loans, in each case, up to an
aggregate amount of US$350,000, provided that no more than five term loans in total may be outstanding at any time. The Borrowers
may obtain such new term loans upon written request and are subject to lenders’ approval.
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 will range from 0.00% to 1.25%
with respect to Canadian prime rate loans and U.S. base rate loans and from 1.00% to 2.25% with respect to BAs, LIBOR loans and
fees for letters of credit, in each case based on a leverage ratio.
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, 2019 are provided in Note 19, Financial instruments.
As at December 31, 2019, borrowings by Canadian entities denominated in U.S. dollars represented $153,258 (US$118,000) 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$75,000 under terms and conditions similar to those under the Syndicated 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, 2019 no amounts were drawn under the demand loan facilities.
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
73
11 LONG-TERM DEBT (CONTINUED)
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. The Company is required to maintain a net funded debt to
EBITDA ratio, which includes the impact of IFRS 16, Leases, of no more than 3.50:1 and an interest coverage ratio equal to or greater
than 3.00:1. As at December 31, 2019, the Company was in full compliance with these covenants, requirements and ratios.
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
then outstanding. The notes were designated as hedges of net investment in foreign operations.
In order to maintain the senior notes in place, the Company is required to comply with affirmative covenants, negative covenants,
reporting requirements and financial ratios comprised of the net funded debt to EBITDA ratio, which includes the impact of IFRS 16,
Leases, 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, 2019, the Company was in full compliance with these covenants, requirements and ratios.
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 several business acquisitions, the Company issued promissory notes and recorded a balance of purchase price totalling
$14,989.
f)
The repayment requirements on the long-term debt during the next five years and thereafter are as follows:
2020
2021
2022
2023
2024
Thereafter
Fair value adjustment
Principal
$
7,069
13,065
1,236
1,270
483,269
100,238
606,147
(728)
605,419
g) The aggregate fair value of the Company’s long-term debt was estimated at $598,736 as at December 31, 2019 (2018 – $501,950)
based on discounted future cash flows, using interest rates available to the Company for issues with similar terms and average maturities.
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
74
12 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, 2018
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
2,211
735
2,946
(2,067)
(1,705)
(3,772)
(2,486)
6,306
5,080
4,279
10,585
25,975
—
—
5,080
8,026
(2,486)
(6,258)
(2,730)
(579)
(3,309)
(3,612)
(1,560)
(5,172)
(8,481)
Additions
Provision reversal
Payments
Interest accretion
Exchange differences
(409)
(57)
(466)
—
—
—
—
—
116
(174)
116
116
(174)
(640)
Balance as at December 31, 2019
9,101
1,688
10,789
5,288
2,661
7,949
18,738
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
2019
$
5,614
1,461
7,075
5,175
6,488
11,663
18,738
2018
$
9,294
2,722
12,016
6,095
7,864
13,959
25,975
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
75
12 PROVISIONS AND OTHER LONG-TERM LIABILITIES (CONTINUED)
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 a pre-tax rate of
3.10% that reflect current market assessment of the time value of money and the risk specific to the obligation.
As of December 31, 2019, a total site remediation provision of $9,101 (2018 - $12,096) 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 21, 2016 reached their third-year anniversary on March 21, 2019 and were fully paid.
On March 19, 2018 and March 19, 2019, the Company granted a total of 62,606 RSUs to certain executives and key employees as part of
the long-term incentive plan.
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, the Company granted Mr. Brian McManus, the Company’s former President and Chief Executive Officer, 200,000 RSUs,
with an effective grant date of May 7, 2018. Scheduled vesting dates were 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. On May 7, 2019, the first 60,000 RSUs were paid. Mr. McManus stepped down as President and Chief Executive
Officer, effective October 11, 2019 and forfeited all remaining RSUs. Therefore, the related provision of $2,486 was reversed.
Deferred share units
On May 1, 2019, the Company’s Board of Directors approved a Deferred Share Unit Plan for non-executive directors of Stella-Jones Inc.
(“DSU Plan”) having the purpose of providing DSU Plan participants with a supplemental form of compensation while promoting greater
alignment of the interests of the participants and the shareholders of the Company in creating long-term shareholder value.
Under the DSU Plan, on or about July 1st of each year (“DSU Award Date”), participants who are non-executive Board members as well as
the Chair of the Board, receive a minimum participation amount of $15 and $25 respectively, or such other amount as shall be determined
by the Board of Directors in any given year, and to which they may add a portion of their Board fees (“Deferred Remuneration”), which is then
divided by the average closing price of the Company’s common shares on the Toronto Stock Exchange during the 5 trading days immediately
preceding the DSU Award Date (“DSU Value”). Each participant receives such number of DSUs as is obtained by dividing the Deferred
Remuneration by the DSU Value on the DSU Award Date.
On July 3, 2019, a total of 2,126 DSUs were awarded.
All DSUs vest and are settled for cash on the Settlement Date, which is triggered when a participant ceases to be a Board member. On
the Settlement Date, total vested DSUs are multiplied by the average closing price of the Company’s common shares on the Toronto Stock
Exchange during the 5 trading days immediately preceding the Settlement Date.
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
76
13 CASH FLOW INFORMATION
The following table presents the movements in the liabilities from financing activities for the years ended December 31, 2019 and 2018:
Liabilities from financing activities
Long-term
debt
Syndicated
credit
facilities
$
$
Balance as at January 1, 2018
(223,557)
(232,083)
Cash flows
Foreign exchange adjustments
Other non-cash movements
6,705
(18,742)
(22,740)
(22,230)
(833)
—
Balance as at December 31, 2018
(240,425)
(273,055)
Lease Non-competes
payable
liabilities
$
—
—
—
—
—
Total
$
$
(5,508)
(461,148)
1,745
(10,292)
(392)
(45,362)
(124)
(957)
(4,279)
(517,759)
Recognized on adoption of IFRS 16 (note 9)
—
—
(120,731)
—
(120,731)
Cash flows
Foreign exchange adjustments
Lease additions
Other non-cash movements
9,516
(125,974)
11,197
14,477
—
(647)
—
—
31,094
5,015
(27,849)
(5,671)
1,560
(83,804)
174
—
30,863
(27,849)
(116)
(6,434)
Balance as at December 31, 2019
(220,359)
(384,552)
(118,142)
(2,661)
(725,714)
14 CAPITAL STOCK
Number of common shares outstanding – Beginning of year*
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
2019
69,268
35
(1,836)
67,467
2018
69,342
32
(106)
69,268
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
77
14 CAPITAL STOCK (CONTINUED)
b) Earnings per share
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 and 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.
2019
$ 163,078
68,761
7
68,768
$ 2.37
2018
$ 137,597
69,352
8
69,360
$ 1.98
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. During the twelve-month period ended December 31, 2019, the Company
repurchased 1,794,588 common shares for cancellation in consideration of $69,022 representing an average price of $38.46 per
common share. As at December 31, 2018, the Company had unsettled transactions to repurchase 41,662 common shares for a cash
consideration of $1,627 representing an average price of $39.05 per common share. At that date, the Company had 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, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
78
14 CAPITAL STOCK (CONTINUED)
Changes in the number of options outstanding under the Plan were as follows:
2019
Weighted
average
exercise
price**
$
40.05
40.05
2018
Weighted
average
exercise
price**
$
40.05
38.67
Number
of options*
45
39
Number
of options*
45
45
Outstanding – End of year
Options exercisable – End of year
The following options were outstanding under the Plan as at December 31, 2019:
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
30
45
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 2019. The 2019 expense recorded for share-based compensation amortized to earnings was $38 (2018 – $50).
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 2019, 20,482 common shares (2018 – 17,591) were issued to
Canadian resident employees at an average price of $34.58 per share (2018 – $37.02).
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 2019, 14,745 common shares (2018 – 13,889) were issued to U.S. resident employees at an
average price of $37.55 per share (2018 – $40.11).
g) Related party transactions
As of January 1, 2018, 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.
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
15 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
2019
$
1,512,171
148,014
70,523
45,680
109,128
41,170
1,926,686
2019
$
136,566
38
2,594
2,252
6,564
148,014
Employee benefit expenses are included in cost of sales and selling and administrative expenses.
Financial expenses
Interest on syndicated credit facilities
Interest on promissory notes and non-compete agreements
Interest on unsecured senior notes
Interest on lease liabilities
2019
$
10,994
1,382
7,292
3,987
23,655
79
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
2018
$
10,168
1,797
7,137
—
19,102
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
80
16
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
2019
$
41,191
144
41,335
16,420
(795)
(1,356)
14,269
55,604
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 26.39% (2018 – 26.46%)
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’ tax expense
Recognition of prior years’ tax credits
Other
Income tax expense
2019
$
218,682
57,710
521
(5,029)
4,362
(795)
(706)
(506)
47
55,604
2018
$
187,199
49,533
454
(5,368)
5,062
(191)
118
-
(6)
49,602
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
16
INCOME TAXES (CONTINUED)
The analysis of deferred tax assets and deferred tax liabilities is as follows:
Deferred tax assets
To be recovered after 12 months
To be recovered within 12 months
Deferred tax liabilities
To be reversed after 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 consolidated statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31
2019
$
3,187
9,150
(112,857)
(100,520)
2019
$
(92,557)
(14,269)
2,554
—
3,752
(100,520)
81
2018
$
2,894
11,454
(106,905)
(92,557)
2018
$
(72,408)
(10,584)
(3,935)
(2)
(5,628)
(92,557)
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
82
16
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
$
3,381
(17)
(3,270)
—
(94)
—
—
—
—
—
Deferred
pension
benefits
$
1,951
165
(282)
—
68
1,902
72
847
(27)
2,794
Reserves
$
8,465
120
—
1,094
615
10,294
(1,330)
—
(335)
8,629
Property,
plant and
equipment
$
(59,869)
(13,158)
—
(1,096)
(4,610)
(78,733)
(11,504)
—
3,124
(87,113)
Intangible
assets
$
(24,435)
35
—
—
(1,607)
(26,007)
(299)
—
997
(25,309)
Other
$
—
2,152
—
—
—
2,152
(1,231)
—
(7)
914
Total
$
13,797
2,420
(3,552)
1,094
589
14,348
(2,489)
847
(369)
12,337
Other
$
(1,901)
119
(383)
—
—
(2,165)
23
1,707
—
(435)
Total
$
(86,205)
(13,004)
(383)
(1,096)
(6,217)
(106,905)
(11,780)
1,707
4,121
(112,857)
Deferred tax assets
As at January 1, 2018
Recognized in the consolidated statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2018
Recognized in the consolidated statement of income
Recognized in other comprehensive income
Exchange differences
As at December 31, 2019
Deferred tax liabilities
As at January 1, 2018
Recognized in the consolidated statement of income
Recognized in other comprehensive income
Business acquisitions
Exchange differences
As at December 31, 2018
Recognized in the consolidated statement of income
Recognized in other comprehensive income
Exchange differences
As at December 31, 2019
As of December 31, 2019, the Company did not recognize deferred income tax assets of $2,069 (2018 – $1,925) in respect of capital
losses amounting to $15,598 (2018 – $14,579) 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 $527,956 as at December 31, 2019
(2018 – $461,407).
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
83
17 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, Stella-Jones Corporation, contributes to two defined benefit pension plans.
The defined benefit pension plans, other than the multi-employer plan, are closed to new participants.
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 are as follows:
Contributions to group registered retirement savings plans
Defined benefit pension plans
Contributions to multi-employer plan
Other post-retirement benefits
2019
$
6,564
1,420
697
135
The net amount recognized on the consolidated statement of financial position is detailed as follows:
Employee future benefits
Non-current liabilities:
Net defined benefit pension liability
Other post-retirement benefits liability
2019
$
(8,515)
(2,520)
(11,035)
2018
$
6,388
1,467
625
167
2018
$
(5,185)
(2,208)
(7,393)
The Company’s Canadian defined benefit pension plans benefits are based on years of service and final average earnings. The Stella-Jones
Corporation defined benefit pension plans benefits are based on years of service and flat dollar amounts payable monthly. The other post-
retirement benefits plan is not funded and, since June 1, 2011, this plan is closed to new participants.
The Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as at December 31 of each
year.
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
84
17 EMPLOYEE FUTURE BENEFITS (CONTINUED)
The following table presents financial information related to the Company’s defined benefit pension plans, other than the multi-employer
defined benefit plan, and other post-retirement benefits plan:
Accrued benefit obligation
Balance – Beginning of year
Current service cost
Employees’ contributions
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
Employees’ contributions
Effect of asset ceiling
Benefits paid
Exchange difference
Fair value – End of year
Net benefit liability
Defined benefit
pension plans
2019
$
2018
$
29,213
936
33
1,171
(1,220)
285
201
4,053
(480)
29,402
1,002
36
1,055
(1,406)
20
(31)
(1,726)
861
34,192
29,213
24,028
24,228
687
1,156
1,139
33
201
(1,220)
(347)
25,677
(8,515)
590
(738)
933
36
(193)
(1,406)
578
24,028
(5,185)
Other post-retirement
plan
2019
$
2018
$
2,208
2,501
49
−
86
(76)
−
−
253
−
2,520
−
−
−
76
−
−
(76)
−
−
80
−
87
(71)
(237)
−
(152)
−
2,208
−
−
−
71
−
−
(71)
−
−
(2,520)
(2,208)
Expected contributions to the defined benefit pension plans for the year ending December 31, 2020 are $997.
The pension benefit deficit of plans that are not fully funded is $8,515 as at December 31, 2019 ($7,756 as at December 31, 2018).
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
85
17 EMPLOYEE FUTURE BENEFITS (CONTINUED)
The items of the Company’s defined benefit plans and other post-retirement benefit plan costs recognized during the year are as follows:
Defined benefit
pension plans
Other post-retirement
plan
2019
$
936
1,171
(687)
1,420
(3,175)
(3,175)
2018
$
1,002
1,055
(590)
1,467
820
820
2019
$
49
86
−
135
(253)
(253)
2018
$
80
87
−
167
389
389
Consolidated statement of income
Current service cost
Interest cost
Interest income on plan assets
Total cost recognized
Consolidated statement of comprehensive income
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
(3,371)
(4,012)
(66)
(352)
Net actuarial (losses) gains recognized in the year,
net of tax
Balance of actuarial losses as at December 31
(2,394)
(5,765)
641
(3,371)
(187)
(253)
286
(66)
The significant weighted average assumptions used are as follows:
Defined benefit
pension plans
Other post-retirement
plan
2019
%
3.10
3.25
2018
%
3.90
3.25
2019
%
3.10
n/a
2018
%
3.90
n/a
Accrued benefit obligation as at December 31
Discount rate
Rate of compensation increase
Benefit costs for the year ended December 31
Discount rate
3.90
3.50
3.90
3.40
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
86
17 EMPLOYEE FUTURE BENEFITS (CONTINUED)
To determine the benefit obligation for the other post-retirement benefit plan, a 5.50% annual rate of increase in the per capita cost of
covered health care benefits was assumed starting in 2020. This rate is assumed to decrease gradually, on a straight-line basis, to reach
5.00% in 2023. An increase or decrease of 1.00% in this rate would have the following impact:
Increase of 1%
Decrease of 1%
Impact on accrued benefit obligation
Impact on benefit costs
$
31
1
The percentage of plan assets held by the defined benefit plans consists of the following as at December 31:
Listed equity securities
Listed debt securities
Guaranteed insurance contracts
Short-term investments and cash
2019
%
29.00
43.00
27.00
1.00
100.00
$
(27)
(1)
2018
%
27.00
42.00
30.00
1.00
100.00
Accumulated actuarial gains (losses) recognized in other
18 COMMITMENTS AND CONTINGENCIES
a) The Company has issued guarantees amounting to $27,456 (2018 – $29,716) 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) 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, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
87
19 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 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:
Non-current assets
Interest rate swap agreements
Current liabilities
Derivative commodity contracts
Non-current liabilities
Interest rate swap agreements
Derivative commodity contracts
2019
$
1,239
1,239
1,998
1,998
128
−
128
2018
$
7,545
7,545
4,381
4,381
—
3,748
3,748
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, 2019, 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 Class 1 railroad operators, large retailers and large-
scale utility providers 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.
Note 5 provides details on the receivable aging as well as on the credit loss allowance for the years ended December 31, 2019 and 2018.
The Company’s largest customer had sales representing 15.84% of the total sales for the twelve-month period ending December 31, 2019
(2018 – 16.60%) and an account receivable balance of $6,970 as at December 31, 2019 (2018 – $5,678). The sales for this customer are
included in the residential lumber product category.
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
88
19 FINANCIAL INSTRUMENTS (CONTINUED)
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 (gains), net. The following table summarizes
the derivative commodity contracts as at December 31, 2019 and 2018:
Hedged item
Diesel and petroleum
Gallons
Effective date
Maturity date
6,000,000*
January 2020
December 2020
2019
Fixed rate
US$2.23
2018
Hedged item
Diesel and petroleum
Diesel and petroleum
Gallons
Effective date
Maturity date
Fixed rate
6,000,000*
January 2019
December 2019
6,000,000*
January 2020
December 2020
US$2.23
US$2.23
* 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, 2019 is a current
liability of $1,998 (2018 – a current liability of $4,381 and a non-current liability of $3,748) 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, 2019 and 2018
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 become 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, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
89
19 FINANCIAL INSTRUMENTS (CONTINUED)
Liquidity risk (continued)
The operating activities of the Company are the primary source of cash flows. The Company also has syndicated credit facilities (Note 11(a))
made available by a syndicate of lenders which can be used for working capital and general corporate requirements. As at December 31,
2019, an amount of $150,826 (US$116,127) (2018 - $291,569 (US$213,729)) 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
Years
2 and 3
Years More than
5 years
4 and 5
2019
Accounts payable and accrued liabilities
136,237
136,237
136,237
$
$
$
$
—
$
—
$
—
Long-term debt obligations*
604,911
696,101
25,773
51,828
510,363
108,137
Minimum payment under lease liabilities
118,142
131,532
32,546
51,621
24,830
22,535
Derivative commodity contracts
Non-competes payable
1,998
2,661
2,019
2,825
1,833
1,526
186
1,299
—
—
—
—
863,949
968,714
197,915
104,934
535,193
130,672
Carrying Contractual
amount cash flows
Less than
1 year
Years
2 and 3
Years More than
5 years
4 and 5
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
*Includes interest payments. Interest on variable interest debt is assumed to remain unchanged from the rates in effect as at December 31, 2019.
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, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
90
19 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
and other comprehensive income for the years ended December 31, 2019 and 2018. 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 and other comprehensive income.
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 totalling $5,458 ($1,720 as at December 31, 2018) and
$6,697 ($5,566 as at December 31, 2018), respectively. The foreign exchange impact for the U.S. dollar-denominated long-term debt, in
the Canadian entities, has been included in the sensitivity analysis for other comprehensive income, as the long-term debt is designated as a
hedge of net investment in foreign operations (Note 11).
Decrease of net income
Decrease of other comprehensive income
2019
$
124
34,813
2018
$
385
37,510
Interest rate risk
As at December 31, 2019, the Company has mitigated its exposure to interest rate risk on long-term debt after giving effect to its interest
rate swap agreements; 76.20% (2018 – 96.00%) 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 11(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 $487 for
the year ended December 31, 2019 (2018 – $370).
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
91
19 FINANCIAL INSTRUMENTS (CONTINUED)
Interest rate risk (continued)
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$100,000
Syndicated credit facilities
Syndicated credit facilities
Fixed
rate
%
1.68*
1.06*
Fixed
rate
%
1.68*
1.06*
Effective date
Maturity date
2019
Notional
equivalent
CA$
December 2015
April 2021
110,398
December 2017
December 2021
129,880
Effective date
Maturity date
2018
Notional
equivalent
CA$
December 2015
April 2021
115,957
December 2017
December 2021
136,420
* 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, 2019, 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, 2019 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, 2019 is a non-current asset
of $1,239 and a non-current liability of $128 recorded in the consolidated statement of financial position (2018 – a non-current asset of
$7,545). A 10.00% decrease in interest rates as at December 31, 2019 would have reduced the net gain recognized in other comprehensive
income by approximately $111 (2018 – $755). For a 10.00% increase in the interest rates, there would be an equal and opposite impact on
the net gain.
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
92
20 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
2019
$
604,911
1,288,302
1,893,213
0.32:1
2018
$
513,481
1,281,410
1,794,891
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, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
93
21 RELATED PARTY TRANSACTIONS
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 compensation
22 SEGMENT INFORMATION
2019
$
3,808
459
4,267
2018
$
5,010
5,293
10,303
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 utility poles, railway ties, 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
Utility poles
Railway ties
Residential lumber
Industrial products
Logs and lumber
2019
$
654,466
1,514,557
2,169,023
2019
$
779,199
678,187
471,665
128,210
111,762
2018
$
679,642
1,444,251
2,123,893
2018
$
725,009
662,392
474,399
109,195
152,898
2,169,023
2,123,893
December 31, 2019 and 2018(amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2019 Annual Report
94
22 SEGMENT INFORMATION (CONTINUED)
Property, plant and equipment, intangible assets, goodwill and right-of-use assets 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.
Right-of-use assets
Canada
U.S.
23 SUBSEQUENT EVENTS
2019
$
149,083
418,721
567,804
30,892
83,848
114,740
19,403
265,498
284,901
17,810
98,945
116,755
2018
$
124,246
427,539
551,785
33,977
97,681
131,658
19,403
278,867
298,270
—
—
—
a) On February 24, 2020, the Company obtained a one-year extension of its unsecured revolving facility to February 27, 2025. This
extension was granted through an amendment to the sixth amended and restated credit agreement dated as of May 3, 2019.
b) On March 10, 2020, the Board of Directors declared a quarterly dividend of $0.15 per common share payable on April 24, 2020 to
shareholders of record at the close of business on April 3, 2020.
24 COMPARATIVE FIGURES
Certain comparative figures have been adjusted to conform to the current year’s presentation. For the twelve-month period ended
December 31, 2018, an amortization expense for customer relationships and non-compete agreements of $13,804 has been reclassified
from cost of sales to selling and administrative expenses.
December 31, 2019 and 2018 (amounts expressed in thousands of Canadian dollars, except as otherwise indicated)NOTES TO CONSOLIDATED FINANCIAL STATEMENTSStella-Jones Inc.
DIRECTORS AND OFFICERS
95
95
BOARD OF DIRECTORS
Katherine A. Lehman (1) (3)
Chair of the Board,
Stella-Jones Inc.
Managing Partner, Hilltop
Private Capital LLC
(Private equity firm)
New York, NY, USA
Director since October 2016
Robert Coallier (1) (3)
Corporate Director
Montréal, Québec
Director since January 2020
OFFICERS
Katherine A. Lehman
Chair of the Board
Éric Vachon, CPA, CA
President and
Chief Executive Officer
SENIOR MANAGEMENT
Jeff Brandt
Vice-President,
Transportation and Logistics
Stella-Jones Corporation
George Caric
Vice-President,
Railway Tie Marketing
Stella-Jones Corporation
Kevin Comerford
Vice-President,
Utility Poles and
Residential Lumber Sales
Stella-Jones Corporation
Sylvain Couture
Vice-President, Operations
Central Region
Stella-Jones Inc.
W.G. Downey, Jr.
Vice-President,
U.S. Railway Tie Procurement
Stella-Jones Corporation
Karen Laflamme,
FCPA, FCA, ASC (1) (3)
Corporate Director
Boucherville, Québec
Director since December 2018
James A. Manzi, Jr. (2) (3)
Corporate Director
Tampa, FL, USA
Director since April 2015
Douglas Muzyka (2) (4)
Corporate Director
Philadelphia, PA, USA
Director since December 2019
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
Éric Vachon, CPA, CA
President and
Chief Executive Officer,
Stella-Jones Inc.
Montréal, Québec
Director since October 2019
Mary Webster (2) (4)
Corporate Director
Wayzata, MN, USA
Director since May 2007
(1) Member of the Audit Committee
(2) Member of the Environmental,
Health and Safety 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 7, 2020 Annual and Special Meeting
of Shareholders.
Silvana Travaglini, CPA, CA
Senior Vice-President and
Chief Financial Officer
Ian Jones
Senior Vice-President
André Daigle
Vice-President,
Central Region
Marla Eichenbaum
Vice-President,
General Counsel and
Secretary
Gordon Murray
Vice-President, Environment and
Technology and General Manager,
Atlantic Region
Jon Younce
Vice-President, Utility Pole
and Lumber Procurement
Stella-Jones Corporation
Ron Zeegers
Vice-President,
Operations, Western Canada
Stella-Jones Inc.
Marcell Driessen
Vice-President,
Human Resources
Stella-Jones Corporation
Ian Jones
Senior Vice-President,
Utility Poles and
Residential Lumber
Stella-Jones Corporation
James Kenner
Vice-President and
General Counsel, U.S. Operations
Stella-Jones Corporation
Patrick Kirkham
Vice-President,
Railway Tie Operations
Stella-Jones Corporation
Wayne Kusmierczyk
Vice-President,
Utility Pole Operations
(Southern Yellow Pine)
Stella-Jones Corporation
Andy Morgan
Vice-President, Utility Pole
Operations (Western Species)
Stella-Jones Corporation
Jim Raines
Vice-President,
Railway Tie Sales
Stella-Jones Corporation
Patrick Stark
Vice-President, Environmental,
Health and Safety
U.S. Operations
Stella-Jones Corporation
Michael Sylvester
Senior Vice-President,
Railway Ties
Stella-Jones Corporation
David Whitted
Vice-President,
Railway Tie Sales Operations
Stella-Jones Corporation
2019 Annual Report
96
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
QUÉBEC
Plant and Sales Office
41 Rodier Street
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
ONTARIO
Plant
11045 Hwy. 124
South River, Ontario
P0A 1X0
T: (705) 386-2371
F: (705) 386-2335
QUÉBEC
Plant
2210 chemin St-Roch
Sorel-Tracy, Québec
J3R 3L2
T: (450) 742-5977
F: (450) 742-8832
Plant
309 Main Street West
Shelburne, Ontario
L9V 2X8
T: (519) 925-5915
F: (519) 925-3061
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
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
2019 Annual Report
98
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
Stock Information
Shares listed: Toronto Stock Exchange
Ticker symbol: SJ
Initial public offering: 1994
52-week high/low (Jan. 1 – Dec. 31, 2019): $48.28 / $36.00
Share price at March 10, 2020: $32.31
Common shares outstanding as at December 31, 2019: 67.47 million
Dividend Policy
The Board of Directors considers a dividend on a quarterly basis, based
on the Company’s balanced capital allocation strategy.
On March 10, 2020, the Board of Directors declared a quarterly
dividend of $0.15 per common share.
Transfer Agent and Registrar
Computershare Investor Services Inc.
Auditors
PricewaterhouseCoopers LLP
Legal Counsel
Fasken Martineau Dumoulin LLP
Cohen & Grigsby, P.C.
Foley & Lardner LLP
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WWW.STELLA-JONES.COM