News Releases

Expect to build on $860 million of 2019 awards, with strong pipeline of opportunities to support stable and growing backlog
Non-cash goodwill impairment impacts Q4 net earnings
Amended the revolving credit facility to allow for additional financial flexibility
Project dispute settled for proceeds of $22.0 million impacts financial results

CALGARY, March 24, 2020 /CNW/ - Stuart Olson Inc. (TSX: SOX) ("Stuart Olson" or the "Company") today announced financial results for the fourth quarter and full-year of 2019.

Stuart Olson remains focused on managing through the unprecedented global challenges of the COVID-19 pandemic and historic decline in oil prices. As the duration and magnitude of the financial impact of these two events on the Company continue to evolve, plans and mitigation strategies have been put in place that prioritize the safety of people and stakeholders first, and ensure the Company maintains a resilient business. Given the speed at which developments are occurring in Canadian markets and communities, the Company will defer commentary on its 2020 outlook until its results release for the first quarter of 2020.

"2019 was a year in which we took decisive actions to address challenging markets that were driven in part by a capital spending slowdown by our oil sands customers and impacts of working through the early stage development phases of infrastructure projects. These actions included restructuring into a leaner, more vertically integrated organization, the refinancing of our convertible debentures, and the amending of our credit facility," said David LeMay, President and CEO of Stuart Olson.

 "As we transition into 2020, we are excited to have been recently awarded the seven-year, $400 million MRO contract for increased scopes with an existing customer, which will build our backlog in the first quarter. We also continue to see significant project opportunities that include several large-scale contracts for our Industrial Group's top tier MRO business and, combined with expected public infrastructure spending by both Federal and Provincial governments, a line of sight to a stable and growing backlog in 2020.. These opportunities, along with the decisive actions being taken and our continued focus on strengthening our balance sheet, set the foundation for us to deliver growth in revenue, earnings and adjusted EBITDA in 2020 and beyond," commented Mr. LeMay.     

FINANCIAL HIGHLIGHTS 

Stuart Olson's fourth quarter and fiscal year ended December 31, 2019 financial results were impacted by significant one-time factors:

• During the fourth quarter of 2019, the Company recognized non-cash asset impairments of $142.2 million, primarily in respect of the write-down of goodwill. Stuart Olson does not expect these non-cash write-downs to have an impact on future operations, liquidity, cash flows from operating activities or its ability to meet financial covenants.
• In order to improve liquidity in the near-term, subsequent to year-end the Company reached an agreement to settle a project dispute that was ordinary in nature for the construction industry, but much larger in scale than usual for the Company.
• This settlement was made to enable the Company to collect approximately $22.0 million of cash proceeds in late March 2020. 
• The change in approach to resolving this larger than usual dispute resulted in a $14.3 million reduction of contract assets in the fourth quarter of 2019 related to a change in estimate, as the Company determined that it was preferable to collect the immediately available proceeds rather than deferring collection of proceeds to fund the claim through to its ultimate resolution, which could have been as late as the fourth quarter of 2021. Industrial Group adjusted EBITDA in the period was reduced by an equivalent amount.
• For the purposes of calculating revolving credit facility ("Revolver") covenants, the impact of this settlement is considered to be an extraordinary and non-recurring loss and excluded from the Revolver EBITDA calculation.
• As at December 31, 2019, Stuart Olson had outstanding a performance letter of credit associated with this project in the amount of $9.2 million, which is to be released as part of the settlement, further improving operational liquidity once that occurs.

These financial results are presented in conformance with International Financial Reporting Standards ("IFRS"). All figures are in Canadian dollars unless otherwise noted. Certain financial and operational measures referred to in this press release, including "contract income margin", "adjusted EBITDA", "adjusted EBITDA margin", "backlog", "adjusted free cash flow", "adjusted free cash flow per share" and "net long-term indebtedness to adjusted EBITDA", are not prescribed measures under IFRS. For a description of these measures, see the "Non-IFRS Measures" section in Stuart Olson's December 31, 2019 Management's Discussion & Analysis ("MD&A").

FULL-YEAR 2019 OVERVIEW

• Stuart Olson ended the year with a backlog of $1.5 billion, which includes a mix of public, private and industrial projects from Ontario to British Columbia and is predominantly made up of low-risk contract arrangements. During 2019, the Company added approximately $860.0 million to its backlog comprising:
• $435.0 million from the Buildings Group, including a retail distribution warehouse in British Columbia, a fire hall in Ontario, multiple retirement residences in Alberta, the construction of a private sector light industrial facility, as well as a construction management award to build a new student residence at a post-secondary institution in Ontario.
• $225.0 million from the Industrial Group comprised of numerous projects, including a bundled services maintenance contract in the petrochemical sector that includes its acquired mechanical maintenance capabilities, a master services agreement ("MSA") in the power sector with a repeat customer in Ontario, a mine facility construction project for a new client in Saskatchewan, an infrastructure project in Ontario for a mining customer, a maintenance and turnaround MSA extension in Alberta and a food facility construction project in Manitoba. 
• $200.0 million from the Commercial Systems Group, including the addition of a number of infrastructure projects recently secured in British Columbia and Alberta, office and residential tower projects, a health care facility, a public school and an events centre in Alberta
• In January 2020, the Industrial Group was awarded a seven-year contract valued at an estimated $400.0 million to provide MRO services to an existing oil sands customer in Alberta. The contract, which will be added to backlog in Q1 2020, increased scope of services over those previously supplied to the customer and underscores the strategic value of the acquisition of Tartan in 2018.
• Subsequent to year end, Stuart Olson was recognized as one of Alberta's Top Employers in 2020 for the fourth consecutive year.
• In order to improve financial flexibility in response to both the slowdown in oil sands customers' capital spending, as well as the negative impacts of working through the development phase of infrastructure projects, the Company has taken, and is continuing to take, decisive actions as follows:
• The Board of Directors ("Board") suspended the quarterly dividend on November 6, 2019.
• Implemented a comprehensive organizational restructuring to create a leaner, more vertically integrated organization with direct lines of communication to operations and customers. The anticipated benefits of this restructuring are reflected in the 2020 Outlook included in this press release.
• In January 2020, Ian M. Reid elected to retire early from the Board to help reduce governance costs and support the Company's comprehensive restructuring initiatives. Mr. Reid joined the Board in 2007 and was the Chair of the Health, Safety & Environment Committee and member of the Corporate Governance & Nominating Committee and Human Resources & Compensation Committee. The Company does not expect to replace this Board position.
• Recent changes to the management team include the following:
• On October 18, 2019, Bob Myles left his position as Chief Operating Officer of the Industrial Group and David LeMay, Stuart Olson's President and Chief Executive Officer, assumed leadership duties for the Industrial Group.
• On January 24, 2020, Dean Beacon was appointed Executive Vice President and Chief Financial Officer. Mr. Beacon brings his extensive experience in treasury, finance and risk management to Stuart Olson, and previously held the position on an interim basis from September 2019 to January 2020.
• On December 31, 2019, Joette Decore retired from her position as Executive Vice President Strategy and Development. 
• Stuart Olson generated consolidated revenue of $929.2 million, compared to $966.4 million in 2018. The 3.8% year-over-year change primarily reflects the combination of its Industrial Group's completion of large construction projects in 2018, the settlement of the project dispute outlined above and a shift towards lower activity stages of completion for its Buildings Group.
• The combined effects of the goodwill impairment, Industrial Group project dispute settlement and an increase in restructuring and other one-time costs recognized in the year resulted in the recognition of a 2019 net loss of $163.1 million (diluted loss per share of $5.82). This compares to net earnings of $5.4 million (diluted earnings per share of $0.19) in 2018.
• As a result of the resolution of the previously identified project dispute that resulted in a $14.3 million reduction in contract income, adjusted EBITDA in 2019 was $21.6 million (adjusted EBITDA margin of 2.3%), compared to the $36.1 million (adjusted EBITDA margin of 3.7%) generated last year.  
• Adjusted free cash flow was an outflow of $21.3 million (outflow of $0.76 per share) in fiscal 2019, as compared to an adjusted free cash inflow of $19.5 million (inflow of $0.71 per share) in 2018. The change primarily reflects the change in accounting related to the settlement of the project dispute, a year-over-year increase in costs related to restructuring, investing and other one-time activities, combined with higher interest paid associated with a higher Revolver average balance, increased cash tax payments due to a large refund received in 2018, an increase in required investments in capital expenditures and a project stage of completion-driven change in provisions in 2019.
• Inclusive of the $14.3 million negative impact to adjusted EBITDA of the project dispute settlement that the Company expects to improve near-term liquidity, as at December 31, 2019 the Company's net long-term indebtedness to adjusted EBITDA ratio was 5.8x. This compares to 2.8x, or 2.6x on a pro forma basis inclusive of Tartan's last twelve month ("LTM") adjusted EBITDA, as at December 31, 2018. This change primarily reflects the project dispute settlement, as well as a draw on its Revolver to fund adjusted free cash flow and a part of the proceeds used to settle the 2014 Convertible Debentures in 2019.
• During 2019 and subsequent to year-end, the Company worked collaboratively with its banking partners to secure a series of amendments that provided for sufficient and continued access to liquidity. The amended agreements have been filed under Stuart Olson's profile on SEDAR, with the net effect of material changes to December 31, 2019 and future periods including:
• A required interest coverage ratio for the period ending December 31, 2019 to shall be not less than 2.00:1.00, decreasing at March 31, 2020 to shall be not less than 1.50:1.00, returning to shall be not less than 2.00:1.00 beginning June 30, 2020, increasing to shall be not less than 2.25:1.00 at March 31, 2021, and increasing to shall be not less than 2.50:1.00 for each quarter thereafter.
• Improved access to liquidity via a change to the required debt to EBITDA covenant to be not greater than 4.25:1.00 as at December 31, 2019, increasing to not greater than 5.10:1.00 as at March 31, 2020, returning to not greater than 4.25:1.00 at June 30, 2020, and decreasing to not greater than 3.25:1.00 for each quarter thereafter.
• All lease liabilities are excluded from the definition of debt for covenant calculation purposes for the quarters ending June 30, 2020 through to December 31, 2020.
• A temporary increase in the ceiling on restructuring costs permitted to be added back in Revolver EBITDA to $10.0 million from December 31, 2019 through September 30, 2020, returning to $2.5 million for each quarter thereafter.
• The addition of a financial covenant in respect of cash flow variance tests.
• On September 20, 2019, Stuart Olson closed its investment agreement with Canso Investment Counsel Ltd. ("Canso"), pursuant to which Canso purchased $70.0 million aggregate principal amount of convertible unsecured subordinated debentures, with an interest rate of 7.0% per annum, conversion price of $4.87 per common share and a maturity date of September 20, 2024.
• The conversion price per common share was established at 140% of the 30-day volume weighted average trading price calculated after the close of trading on August 1, 2019.
• On October 23, 2019, the Company used the proceeds, together with available cash and a draw on its Revolver, to redeem and repay the previously outstanding $80.5 million convertible debentures originally issued in 2014.

FOURTH QUARTER ("Q4") 2019 OVERVIEW

• The Company reported fourth quarter consolidated contract revenue of $225.8 million, similar to the $227.6 million generated in the same period of 2018.
• The $14.3 million negative accounting impact of the settlement of the Industrial Group project dispute resulted in a fourth quarter adjusted EBITDA loss of $4.6 million. This is $11.8 million lower than the $7.2 million reported in the fourth quarter of 2018.
• The cumulative effect of the fourth quarter non-cash impairment, accounting impact of the project dispute settlement and year-over-year increase in restructuring and other one-time costs resulted in a consolidated net loss of $156.3 million (diluted loss per share of $5.55) in the fourth quarter of 2019. This compares to a net loss of $1.3 million (diluted loss per share of $0.05) in the same period last year.
• Adjusted free cash flow was an outflow of $14.5 million (outflow of $0.51 per share) in the fourth quarter of 2019, as compared to an adjusted free cash outflow of $0.2 million (outflow of $0.01 per share) in the same period last year. The year-over-year change primarily reflects the decrease in adjusted EBITDA.

CONFERENCE CALL AND WEBCAST

Stuart Olson will hold a conference call and webcast to discuss its 2019 fourth quarter and full-year results on Wednesday, March 25, 2020 at 7:30 a.m. Mountain Time (9:30 a.m. Eastern Time). The webcast will be broadcast live and will also be available for replay in the Presentations & Events subsection under Investor Relations on the Company's website at www.stuartolson.com. For those unable to listen during the live webcast, a replay will be available on the website shortly after the conclusion of the conference call for a period of 90 days. Financial analysts and institutional investors who wish to ask questions during the conference call are invited to call 1-888-390-0546 (Canada and USA) or 1-587-880-2171 (outside Canada and USA). For those unable to participate on the live call, a replay will be made available until Wednesday, April 8, 2020 by dialing 1-888-390-0541 (Canada and USA) or 1-416-764-8677 (outside Canada and USA), pin 253340. The public is invited to listen to the live conference call, webcast or the replay.

ABOUT STUART OLSON INC.

Stuart Olson Inc. provides general contracting and electrical building systems contracting in the public and private construction markets as well as general contracting, electrical, mechanical and specialty trades, such as insulation, cladding and asbestos abatement, in the industrial construction and services market. The Company operates office locations and projects throughout Western Canada, Ontario and the territories. Stuart Olson was recognized as one of Alberta's Top Employers in 2020 for the fourth consecutive year. Stuart Olson's common shares are listed on the Toronto Stock Exchange under the symbol "SOX". www.stuartolson.com

FORWARD-LOOKING INFORMATION

This press release contains certain statements that may constitute forward-looking information within the meaning of applicable securities laws. This forward-looking information includes, without limitation, the statements made under the section titled "2020 Outlook" including, without limitation, those relating to expectations regarding changes in:

Often, but not always, forward-looking information can be identified by the use of such words as "may", "will", "expect", "believe", "plan", "intend", "estimate", "outlook", "forecast", "should", "anticipate", "seek", "continue", "see", "project", "predict", "propose", "targeting", "potential", "could", "might", "grow", "momentum" and other similar terminology, including statements concerning possible or assumed future results. Forward-looking information is based on management's reasonable assumptions, analysis and estimates in respect of its experience and perception of trends, current economic conditions, government policies and expected developments, as well as other material factors that it considers to be relevant at the time of making such statements.

The forward looking information in this press release does not include an assessment or reflection of the unprecedented impacts of the recent COVID-19 pandemic and the resulting indirect global and regional economic impacts. The forward-looking information in this press release is included solely for the purpose of assisting investors in understanding the Company's financial position and the results of its operations as at the date hereof. By its nature, forward-looking information involves known and unknown risks and uncertainties, which give rise to the possibility that management's assumptions, analysis and estimates will be incorrect and that the Company's anticipated results will not be achieved. Although the Company believes that the statements with respect to forward-looking information are reasonable and current, such statements should not be interpreted as a guarantee of future performance or results, and will not necessarily be an accurate indication of whether or not such results will be achieved. Forward-looking information is necessarily subject to a number of factors that may cause actual results to differ materially from those results implied by the expectations suggested by such information. Those factors include, without limitation, the risks and uncertainties described in the Company's Annual Information Form filed with the securities regulatory authorities in Canada under the Company's profile at www.sedar.com. Readers are encouraged to consider the foregoing risks and other factors carefully when evaluating the forward-looking information and are cautioned not to place undue reliance upon such information when making investment decisions.

The forward-looking information in this press release is current to the date hereof, and is subject to change following such date. While the Company may elect to do so, unless required by applicable law, it undertakes no obligation to update this information to reflect new information or circumstances at any particular time.

SOURCE Stuart Olson Inc.