strongco corporation . 2011 annual report

Transcription

STRONGCO CORPORATION . 2011 ANNUAL REPORT
CORPORATE PROFILE
Strongco Corporation is one of Canada’s largest
multiline mobile equipment dealers and operates in the northeastern United States through
Chadwick-BaRoss, Inc. Strongco sells, rents and services equipment used in sectors such as
construction, infrastructure, mining, oil and gas, utilities, municipalities, waste management
and forestry. Strongco has approximately 640 employees serving customers from 26 branches
in Canada and five in the United States. Strongco represents leading equipment manufacturers
with globally recognized brands, including Volvo Construction Equipment, Case Construction,
Manitowoc Crane, National, Grove, Terex Cedarapids, Terex Finlay, Ponsse, Fassi, Allied
Construction, Taylor, ESCO, Dressta, Sennebogen, Jekko, Takeuchi, Doppstadt, Link-Belt and
Kawasaki. Strongco is listed on the Toronto Stock Exchange under the symbol SQP.
OPERATING HIGHLIGHTS
CONTENTS
1
2
4
6
8
9
12
75
76
Operating Highlights
Strongco Represents Leading Manufacturers
Strongco’s Distribution Network Continues to Grow
Growth Strategy
Financial Highlights
Letter to Shareholders
Financial Reporting for 2011
Five-Year Review
Corporate and Shareholder Information
1
2
3
ESTABLISHED
PROFITABILITY
INCREASED
REVENUES
CONTROLLED
EXPENSES
2011 net income
$9.9 million, compared
to 2010 net loss of
$0.9 million
Grew total sales 44% to
$423.2 million. Excluding
Chadwick-BaRoss
acquisition, same-store
sales improved 28%,
with gains in all three
revenue streams
Improved ratio of
overhead costs
to revenues to 15.3%
from 18.2% in 2010
4
5
6
7
8
GREW EBITDA
STRENGTHENED
BALANCE SHEET
IMPROVED
MARKET SHARE
COMPLETED
ACQUISITION
IMPROVED
MARKET PRESENCE
Completed $7.8 million
rights offering to support
growth strategy
Increased national
market share for second
consecutive year
Acquired ChadwickBaRoss, Inc., a
five-branch dealer
in the northeastern
United States
Initiated program of
construction of new
branches and upgrades
of existing facilities in
Alberta, Quebec and
Ontario
Increased EBITDA
to $43.1 million from
$24.2 million in 2010
STRONGCO 2011 ANNUAL REPORT
1
REVENUE BY SEGMENT
EQUIPMENT SALES
PRODUCT SUPPORT
EQUIPMENT RENTAL
$275.9M
$117.7M
$29.6M
Sales of heavy equipment increased
significantly in 2011 as customers gained
confidence in the economy and prepared
for more business activity by making
capital investments and renewing fleets.
Product support revenues rose during
2011 as Strongco’s machine
population increased and usage levels
moved higher from 2010.
Many customers remained cautious as
the economy recovered. Strongco’s
increased commitment to a program of
rental purchase options as an attractive
alternative for customers to acquire
new equipment without an immediate
capital outlay, and generally leads to
the sale of the machine.
STRONGCO REPRESENTS LEADING
MANUFACTURERS
Strongco is one of Canada’s largest multiline mobile equipment
dealers and also operates in the northeastern United States through
Chadwick-BaRoss, Inc. Strongco represents leading equipment
manufacturers with globally recognized brands, including Volvo
Construction Equipment, Case Construction, Manitowoc Crane,
National Crane, Grove Crane, Terex Cedarapids, Terex Finlay, Ponsse,
Fassi, Allied Construction, Taylor, ESCO, Dressta, Sennebogen, Jekko,
Takeuchi, Doppstadt, Link-Belt and Kawasaki.
EXPANSION IN ONTARIO
During 2011, Strongco added to its facilities in Ontario with a
new 10,500-square-foot outlet near Orillia. The branch opened in
November to offer local support to Strongco’s customers in the
quarry and aggregate business. The facility is strategically located
near aggregate industries. The new branch is branded as Volvo and
will also carry other complementary brands in support of end user
markets in the area.
THUNDER BAY
SUDBURY
OTTAWA
ORILLIA
BRAMPTON
KITCHENER
LONDON
BURLINGTON
2
PICKERING
MISSISSAUGA
GRIMSBY
Thomas Sockett, Field Technician
Orillia, Ontario
STRONGER MARKETS IN CONSTRUCTION,
INFRASTRUCTURE AND OIL AND GAS
FUELLED A 50% INCREASE IN
EQUIPMENT SALES DURING 2011.
3
REVENUE BY GEOGRAPHIC AREA
EASTERN CANADA
CENTRAL CANADA
WESTERN CANADA
NEW ENGLAND
$143.7M $128.6M $104.3M $ 46.6M
Sales in eastern Canada,
Quebec and the Atlantic
provinces, improved with
construction of large
infrastructure projects and
hydro installations in Quebec.
The construction market in
central Canada (Ontario)
stengthened with rising
commercial construction
as well as government
infrastructure projects.
STRONGCO’S DISTRIBUTION NETWORK
CONTINUES TO GROW
Strongco has approximately 640 employees providing service
to customers across Canada and in the northeastern United States.
The Company operates 26 Canadian branches in Alberta, Ontario,
Quebec, Newfoundland and Labrador, New Brunswick, Nova Scotia
and Prince Edward Island. In New England, Strongco serves customers from five branches—three in Maine and one each in Massachusetts and New Hampshire—all operated by Chadwick-BaRoss, Inc.
Strongco’s market in western
Canada is focused on the oil
and gas industry in northern
Alberta, where rising petroleum
prices spurred higher activity
in 2011.
While market conditions in the
northeastern United States
were weak during 2011,
Chadwick-BaRoss realized
modest growth and contributed positively to Strongco’s
overall results.
EXPANSION INTO THE UNITED STATES
In February 2011, Strongco acquired Chadwick-BaRoss, a heavy equipment
dealer headquartered in Westbrook, Maine, with five branches in New
England. This Company has been in business for more than 80 years and
is a highly regarded Volvo Construction Equipment dealer.
MOUNT PEARL
BAIE-COMEAU
CHICOUTIMI
VAL-D’OR
SAINTE-FOY
MONCTON
CARIBOU
LAVAL
BANGOR
BOUCHERVILLE
CONCORD
WESTBROOK
CHELMSFORD
4
DARTMOUTH
Patricia Pickreign, Shop Technician
Westbrook, Maine
THE ACQUISITION OF CHADWICK-BAROSS
HAS BEEN A SOUND ADDITION TO CURRENT
OPERATIONS AND PROVIDES A PLATFORM FOR
FURTHER GROWTH IN THE UNITED STATES.
5
REVENUE BY BUSINESS UNIT
EQUIPMENT SALES BY BRAND
Manitowoc
Crane
19 %
6%
Case 6 %
Manitowoc
19 %
Multiline
Volvo
63%
Case
7%
Used
9%
53%
Case
Chadwick-BaRoss
PARTS REVENUE BY BRAND
7%
11%
Volvo
Other
30 %
56%
Other
12 %
Used
2%
Brodie Mertz, Shop Technician
Edmonton, Alberta
GROWTH STRATEGY
Fundamental to Strongco’s ongoing efforts to increase shareholder value is its
two-part growth strategy.
1
ORGANIC GROWTH builds current
business by increasing market
penetration of the brands
Strongco represents. This is achieved
by enhancing the Company’s market
presence and continuously improving
operations. Strongco also strategically
adds complementary brands to
increase the throughput of its facilities.
6
2
ACQUISITION of other dealerships
provides immediate expansion
of market footprint and new
contributions to financial results.
Acquisition criteria include coverage of
brands that Strongco already represents and location in regions that are
geographically close to the Company’s
existing markets.
SERVING THE OIL SECTOR
In Alberta, construction began in mid-2011 on a new Volvo
branded branch in Edmonton, which was completed in
March 2012, with the existing Edmonton branch dedicated
to cranes. A new Strongco facility is to be built in Fort
McMurray in 2013 to more effectively serve customers in
the oil sands.
FORT MCMURRAY
GRANDE PRAIRIE
EDMONTON
RED DEER
CALGARY
STRONGCO’S NATIONAL FACILITY
IMPROVEMENT PROGRAM IS DRIVING
IMPROVED CUSTOMER SERVICE AND
EXPANDING THE COMPANY’S
CAPACITY FOR FURTHER GROWTH.
7
FINANCIAL HIGHLIGHTS
($ millions, except per share amounts)
2011
2010
2009
(note 1)
Revenues
Net income (loss)
$
$
423.2
9.9
$
$
294.7
(0.9)
$
$
291.8
–
Basic and diluted earnings (loss) per share
EBITDA
$
0.76
43.1
$
(0.08)
24.2
$
–
18.0
Total assets
Total liabilities
Shareholders’ equity
$
304.6
248.0
56.6
$
215.2
170.2
45.0
$
190.8
145.3
45.5
Note 1 – 2009 income statement figures reflect Canadian Generally Accepted Accounting Principles
(“GAAP”) before the adoption of International Financial Reporting Standards (“IFRS”); 2009 balance sheet
figures include the impact of changes related to the adoption of IFRS.
REVENUES
GROSS MARGIN
EBITDA
EBITDA MARGIN
($ millions)
(% of revenues)
($ millions)
(% of revenues)
291.8
294.7
423.2
20.5
19.2
19.0
18.0
24.2
43.1
6.2
8.2
10.2
2009
2010
2011
2009
2010
2011
2009
2010
2011
2009
2010
2011
2011 and 2010 data reflect IFRS rules; 2009 data reflect Canadian GAAP.
8
TO OUR SHAREHOLDERS
REVIEW OF
2011
Dear Fellow Shareholder: Last year, in this space, I noted that Strongco had turned around
in 2010, improving results with each successive quarter. Our job for 2011 was to improve
results and grow. We have done that. For 2011, the Company posted substantially increased
revenues, margins, EBITDA, earnings and earnings per share.
As well as improving on execution, during 2011 we
strengthened the Company’s foundation on which we will
build that growth in the longer term. We completed an equity
financing, undertook an important acquisition and began
the expansion and upgrade of our branches to increase our
market presence and better serve our customers.
Strongco’s growth, combined with improved operating
performance and stronger financial position, earned some
recognition from investors during 2011. Even after issuing
2.6 million shares under a rights offering, the Company’s
share price on the Toronto Stock Exchange increased by
45%, during a year in which the S&P/TSX Composite Index
declined by 11%. As a result, Strongco’s market capitalization increased from $38 million at the outset of 2011 to
$69 million at year end.
Growth Strategy: Laying the Groundwork
Fundamental to Strongco’s ongoing efforts to increase
shareholder value is our two-part growth strategy. The first
leg is to build our current business by increasing market
penetration of the brands Strongco represents and increasing the throughput of our facilities. This is achieved
by improving our internal operations and productivity and
by executing more effectively on behalf of our customers. We also judiciously add new complementary brands
and expand the geographies in which we represent these
brands. The second leg of our growth strategy is the acquisition of other dealerships, primarily in the brands we
already represent, in regions that are close to our existing
markets and within a reasonable control distance.
The rights offering, completed in January 2011, raised
gross proceeds of $7.8 million. This was an expeditious
and inexpensive way of raising funds to strengthen our
balance sheet in anticipation of our growth plans for 2011.
Internal Growth: Investing in Facilities
Our internal growth strategy seeks to grow the business
by continuously improving how we take care of our customers, from the sale of the machine through delivery
and, importantly, through product support and service.
To achieve this improvement, we must have modern, efficient and strategically located branches to support our
customers and to increase our market presence.
In 2011, we moved forward with four important branch
expansions and upgrades. Our new Orillia branch opened
in November 2011 to provide much improved local support
to Strongco’s customers in the quarry and aggregate business in that region. In Edmonton, we began construction of
a new Volvo-designated branch in mid-2011, which began
operation in March 2012. We will shortly begin the upgrade
of the existing Edmonton building, which is now dedicated
to our crane operations in Alberta. This move is designed
to remove constraints on the product support side of both
the crane business and the construction equipment business. Also in Alberta, the decision was made to build a new
facility in Fort McMurray to more directly serve customers
in the oil sands. Our plan is to move into that new branch
in the spring of 2013. And finally, in Quebec, a new and
larger branch in Baie-Comeau will support the growth in
the region of both our construction equipment and crane
businesses.
External Growth: Acquisition
of Chadwick-BaRoss
In February 2011, Strongco acquired Chadwick-BaRoss,
Inc., a heavy equipment dealer headquartered in Westbrook, Maine, with three branches in Maine and one each
in New Hampshire and Massachusetts. This operation has
been in business in New England for more than 80 years
9
From left to right: Michel Rhéaume, General Manager, Case; Anna C. Sgro, Vice President, Multiline;
William J. Ostrander, Vice President, Crane; Stuart Welch, President, Chadwick-BaRoss, Inc.
and is a highly regarded Volvo Construction Equipment
dealer. As with Strongco, Volvo represents just over half of
Chadwick-BaRoss’ revenues.
This acquisition is in line with our strategy of building
scale, in part by acquiring dealerships associated with
Strongco’s major brands and located in regions that are
close to our current markets. Our 2011 results confirm that
Chadwick-BaRoss is a sound addition to current operations on its own merits, but we believe it also represents
a platform for further growth in the United States.
Financial Results: Strong Gains
in All Key Metrics
During 2011, the heavy equipment sector benefited from
improved end-use markets that were powered by a generally recovering economy, government infrastructure
spending and strong commodity prices, particularly oil
and gas, gold and base metals.
For the year, Strongco’s unit sales of heavy equipment,
other than cranes, for which we do not have accurate statistics, increased by 40%, outperforming a 35% increase
in the markets we serve. 2011 was the second consecutive
year that saw Strongco sales volumes growing faster than
the heavy equipment market as a whole. In the crane segment, Strongco’s sales in 2011 more than doubled from
the previous year.
Expanding volumes, coupled with higher selling prices,
led to a revenue increase of 44% over 2010 to $423.1
million. Of the total, the newly acquired Chadwick-BaRoss
operation contributed $46.6 million. On a same-store
basis, our top line advanced 28%.
In 2011, we maintained good margins —19.0% as a
percentage of revenue in 2011, consistent with last year.
Administrative, distribution and selling expenses were
22% higher, primarily because of incremental costs associated with the newly acquired Chadwick-BaRoss. As
a percentage of revenue, expenses improved to 15.3%
from 18.2% due to continuing attention to cost control,
and also as a benefit from increased scale.
For the year, Strongco’s EBITDA increased to $43.1
million from $24.2 million, and net earnings improved to
10
$9.9 million, compared to a net loss of $0.9 million in 2010.
On a per-share basis, Strongco earned $0.76, up from a
loss of $0.08 in 2011.
Outlook: Solid Prospects
Strongco enters 2012 with solid prospects for further profitable expansion. At the outset of the year our order book
totals $70 million, compared to $50 million at the beginning
of 2011. Sales in the first quarter of 2012 increased that
backlog to over $90 million at March 31.
Going forward, major economic indicators are moving in our direction. Canada’s gross domestic product is
forecast to increase by 2.6% in 2012 from 2.3% in 2011.
The increase is expected to spur construction activity, particularly in central Canada. Meanwhile, robust commodity
prices and committed capital investment will continue to
drive Alberta’s oil sands and mining operations across
the country. A recovering U.S. economy should provide
additional stimulus to our operation in New England.
At the same time, Strongco’s national facility improvement program is enabling us to improve customer service
and expanding the Company’s capacity for further growth.
The satisfactory performance of Strongco in 2011 was
achieved though the hard work and commitment of our
team. I thank all of my fellow employees for their contribution to our success. We are grateful for the business
we have earned from our customers and for the ongoing
support of the brands we represent. I also appreciate the
wise counsel and support of our board members.
Strongco is positioned for further profitable growth.
Our job is to achieve it.
Robert H.R. Dryburgh
President and Chief Executive Officer
Jean-Francois Trottier, Technician
Boucherville, Quebec
DURING 2011 STRONGCO EXECUTED
ON THE STRATEGY OF BUILDING SCALE
THROUGH INTERNAL GROWTH AND
ACQUISITIONS IN ORDER TO GAIN THE
BENEFITS OF A LARGER ENTERPRISE.
11
Lyndon Jennings
Field Service Technican
Burlington, Ontario
FINANCIAL REPORTING FOR 2011
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL STATEMENTS
13
13
13
14
26
32
33
33
33
38
39
40
41
42
43
44
45
12
Company Overview
Conversion to a Corporation
Financial Results – Annual
Financial Results – Fourth Quarter
Summary of Quarterly Data
Contractual Obligations
Shareholder Capital
Outlook
34
34
35
37
37
Non-IFRS Measures
Critical Accounting Estimates
Risks and Uncertainties
Disclosure Controls and Internal
Controls Over Financial Reporting
Forward-Looking Statements
Management’s Responsibility for Financial Reporting
Independent Auditors’ Report
Consolidated Statement of Financial Position
Consolidated Statement of Income (Loss)
Consolidated Statement of Comprehensive Income (Loss)
Consolidated Statement of Changes in Shareholders’ Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following management’s discussion and analysis (“MD&A”) provides a review of the consolidated financial condition and results of operations
of Strongco Corporation, formerly Strongco Income Fund (“the Fund”), Strongco GP Inc. and Strongco Limited Partnership, collectively referred
to as “Strongco” or “the Company”, as at and for the year ended December 31, 2011. This discussion and analysis should be read in conjunction
with the accompanying audited consolidated financial statements as at and for the year ended December 31, 2011. For additional information and
details, readers are referred to the Company’s quarterly unaudited consolidated financial statements and quarterly MD&A for fiscal 2011 and fiscal
2010 as well as the Company’s Notice of Annual Meeting of Unitholders and Information Circular (“IC”) dated April 20, 2011, and the Company’s
Annual Information Form (“AIF”) dated March 30, 2011, all of which are published separately and are available on SEDAR at www.sedar.com.
Unless otherwise indicated, all financial information within this discussion and analysis is in millions of Canadian dollars except per share
amounts. The information in this MD&A is current to March 20, 2012.
Company Overview
•
•
•
•
•
•
Strongco is one of the largest multiline mobile equipment distributors
in Canada. In February 2011, Strongco acquired 100% of the shares of
Chadwick-BaRoss, Inc., a multiline distributor of mobile construction
equipment in the New England region of the United States (see
discussion below under the heading “Acquisition of Chadwick-BaRoss,
Inc.”). Strongco sells and rents new and used equipment and provides
after-sale product support (parts and service) to customers that operate
in infrastructure, construction, mining, oil and gas exploration, forestry
and industrial markets. This business distributes numerous equipment
lines in various geographic territories. The primary lines distributed
include those manufactured by:
i. Volvo Construction Equipment North America Inc. (“Volvo”), for
which Strongco has distribution agreements in each of Alberta,
Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward
Island and Newfoundland and Labrador in Canada and Maine and
New Hampshire in the United States;
ii. Case Corporation (“Case”), for which Strongco has a distribution
agreement for a substantial portion of Ontario; and
iii. Manitowoc Crane Group (“Manitowoc”), for which Strongco has
distribution agreements for the Manitowoc, Grove and National
brands covering much of Canada, excluding Nova Scotia, New
Brunswick and Prince Edward Island.
The distribution agreements with Volvo and Case provide exclusive
rights to distribute the products manufactured by these companies in
specific regions and/or provinces. In addition to the above-noted primary
lines, Strongco also distributes several other ancillary or complementary
equipment lines and attachments.
Revenue increased by 44% to $423.2 million
National market share improved year over year
Gross margin increased by 42% to $80.6 million
EBITDA increased to $43.1 million from $24.2 million
Net income totalled $9.9 million versus a net loss of $0.9 million
EPS increased to $0.76 from a net loss of $0.08 per share
Year ended December 31
2011
Income Statement Highlights
Revenues
$
Net income (loss)
$
Basic and diluted
earnings (loss) per share $
EBITDA (note 2)
Balance Sheet Highlights
Equipment inventory
Total assets
Debt (bank debt and
other notes payable)
Equipment notes payable
Total liabilities
$
2010
2009
(note 1)
423.2
9.9
$
$
294.7
(0.9)
$
$
291.8
–
0.76
43.1
$
(0.08)
24.2
$
–
18.0
185.3
304.6
$
142.1
215.2
$
124.5
190.8
30.8
160.4
248.0
13.6
118.2
170.2
12.3
104.8
145.3
Note 1 – 2009 income statement figures reflect Canadian Generally Accepted Accounting
Principles (“GAAP”) before the adoption of International Financial Reporting Standards
(“IFRS”); 2009 balance sheet figures include the impact of changes related to the adoption
of IFRS.
Note 2 – “EBITDA” refers to earnings before interest, income taxes, amortization of capital
assets, amortization of equipment inventory on rent and amortization of rental fleet. EBITDA
is presented as a measure used by many investors to compare issuers on the basis of ability
to generate cash flow from operations. EBITDA is not a measure of financial performance or
earnings recognized under IFRS and therefore has no standardized meaning prescribed by
IFRS and may not be comparable to similar terms and measures presented by other similar
issuers. The Company’s management believes that EBITDA is an important supplemental
measure in evaluating the Company’s performance and in determining whether to invest in
its shares. Readers of this information are cautioned that EBITDA should not be construed
as an alternative to net income or loss determined in accordance with IFRS as an indicator
of the Company’s performance or to cash flows from operating, investing and financing
activities as a measure of the Company’s liquidity and cash flows.
Conversion to a Corporation
The Fund was an unincorporated, open-ended, limited purpose trust
established under the laws of the Province of Ontario pursuant to a
declaration of trust dated March 21, 2005 as amended and restated on
April 28, 2005 and September 1, 2006.
Pursuant to a plan of arrangement approved by the unitholders at
the Fund’s Annual and Special Meeting on May 14, 2010, the Fund was
13
Management’s Discussion and Analysis
operations, balance sheet and cash flow figures presented in the
following MD&A for comparative periods prior to July 1, 2010 reflect
those of the Fund. References in this MD&A to shares and shareholders
of the Company are comparable to units and unitholders previously
under the Fund.
Details of the conversion are outlined in the Fund’s Management
Information Circular dated April 6, 2010, which contains the Plan of
Arrangement, available on SEDAR at www.sedar.com.
converted to a corporation effective July 1, 2010. The conversion involved
the incorporation of Strongco Corporation, which issued shares to the
unitholders in exchange for the units of the Fund on a one-for-one basis
so that the unitholders became shareholders in Strongco Corporation,
after which the Fund was wound up into Strongco Corporation.
Following the conversion on July 1, 2010, Strongco Corporation has
carried on the business of the Fund unchanged except that Strongco
Corporation is subject to taxation as a corporation. The results of
Financial Results – Annual
CONSOLIDATED RESULTS OF OPERATIONS
($ thousands, except per share amounts)
2011
Revenues
$ 423,153
Cost of sales
342,601
Gross margin
80,552
Administration, distribution
and selling expenses
64,742
Other income
(1,163)
Operating income
16,973
Interest expense
5,841
Earnings (loss) from continuing operations
before income taxes
11,132
Provision for income taxes
1,203
Earnings (loss) from continuing operations
9,929
Earnings (loss) from discontinued operations
–
Net income (loss)
$
9,929
from continuing operations
Weighted average number of shares
– Basic
– Diluted
Key financial measures:
Gross margin as a percentage of revenues
Administration, distribution and selling
expenses as percentage of revenues
Operating income
as a percentage of revenues
EBITDA (note 2)
$
0.76
0.76
2011/2010
2009
(note 1)
$ Change
% Change
$ 294,657
237,971
56,686
$ 291,795
231,847
59,948
$ 128,496
104,630
23,866
44%
44%
42%
53,535
(740)
3,891
4,816
55,822
(1,816)
5,942
4,433
11,207
(423)
13,082
1,025
21%
57%
336%
21%
(925)
–
(925)
–
(925)
1,509
775
734
(716)
18
$
12,057
1,203
10,854
–
10,854
$
(2,434)
(775)
(1,659)
716
(943)
$
0.84
$
(0.15)
$
18,878
$
6,172
$
$
(0.08)
(0.08)
$
$
0.07
–
13,049,126
13,088,968
11,053,608
11,053,608
10,508,719
10,508,719
19.0%
19.2%
20.5%
15.3%
18.2%
19.1%
$
4.0%
43,067
2010/2009
2010
$
1.3%
24,189
$
2.0%
18,017
78%
$
$ Change
% Change
2,862
6,124
(3,262)
1%
3%
-5%
(2,287)
1,076
(2,051)
383
-4%
-59%
-35%
9%
34%
Note 1 – 2009 income statement figures reflect Canadian GAAP before the adoption of IFRS; 2009 balance sheet figures include the impact of changes related to the adoption of IFRS.
Note 2 – “EBITDA” refers to earnings before interest, income taxes, amortization of capital assets, amortization of equipment inventory on rent and amortization of rental fleet. EBITDA is
presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance or
earnings recognized under IFRS and therefore has no standardized meaning prescribed by IFRS and may not be comparable to similar terms and measures presented by other similar
issuers. The Company’s management believes that EBITDA is an important supplemental measure in evaluating the Company’s performance and in determining whether to invest in its
shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with IFRS as an indicator of the
Company’s performance or to cash flows from operating, investing and financing activities as a measure of the Company’s liquidity and cash flows.
14
ACQUISITION OF CHADWICK-BAROSS, INC.
On February 17, 2011, the Company completed the acquisition of 100%
of the shares of Chadwick-BaRoss, Inc. (“Chadwick-BaRoss” or “CBR”)
for a purchase price of US$11.1 million. The transaction value was
satisfied with net cash of US$9.2 million and notes issued to the major
shareholders of Chadwick-BaRoss totalling US$1.9 million. ChadwickBaRoss is a heavy equipment dealer headquartered in Westbrook,
Maine, with three branches in Maine and one in each of New Hampshire
and Massachusetts. The acquisition was effective as of February 1,
2011 and the results of Chadwick-BaRoss have been included in the
consolidated results of Strongco from that date.
MARKET OVERVIEW
Strongco participates in a number of geographic regions and in a wide
range of end use markets that utilize heavy equipment and which may
have differing economic cycles. Construction markets generally follow
the cycles of the broader economy, but typically lag by periods ranging
up to 12 months. As construction markets recover following a recession, demand for heavy equipment normally improves as construction
activity and confidence in construction markets build. In addition, as
the financial resources of customers strengthen, they have historically
replenished and upgraded their equipment fleets after a period of restrained capital expenditures. Demand in oil and gas and mining markets
is affected by the economy but also tends to be driven by global demand and pricing of the relevant commodities. Recovery in equipment
markets is normally first evident in equipment used in earth moving
applications and followed by cranes, which are typically utilized in later
phases of construction. Cranes are also extensively utilized in the oil
and gas sector. Rental of heavy equipment is typically stronger following a recession until confidence is restored and the financial resources
of customers improve.
While the economic recession that persisted throughout most of 2009
officially ended in Canada in 2010, construction markets remained weak
in the first quarter of 2010. With the onset of warmer spring weather and
spurred by government stimulus spending for infrastructure projects,
construction activity began to show signs of improvement in the third
quarter of 2010. This improvement continued in the fourth quarter of 2010
as confidence in the economy increased. Correspondingly, demand for
new heavy equipment was soft in the first quarter of 2010 but started to
improve late in the second quarter and continued to strengthen in the third
and fourth quarters of 2010. While construction markets and demand for
heavy equipment were improving, many customers remained reluctant
or lacked the financial resources following the recession to commit to
purchase new construction equipment and instead rented to meet their
equipment needs in the first half of 2010. That trend continued in the
second half of 2010, but with confidence in the economy continuing
to rise, construction activity increasing and activity in the oil sector in
Alberta increasing, customers were more willing to purchase equipment
and exercise purchase options under rental purchase option contracts
(“RPOs”) in the fourth quarter of 2010. Recovery was first evident in the
markets for compact and lower-priced equipment while demand for larger,
higher-priced equipment was slower to recover. In particular, the market
for cranes remained weak in the first and second quarters of 2010 but
started to show improvement in the latter half of the year. Strongco’s sales
backlogs for all categories of equipment, including cranes, improved
steadily during the first and second quarters of 2010 and remained strong
through the balance of the year and into 2011.
With continuing strength in the Canadian economy, construction
activity and demand for heavy equipment remained strong in 2011.
Significant projects for hydroelectric facilities, road construction and
bridge repair and other infrastructure improvements initiated in 2010
and 2011 also increased demand for heavy equipment. In addition,
with continued strength in the oil sector, activity in and around Alberta’s
oil sands has been robust, resulting in increased demand for heavy
equipment. While customers have been more confident and willing to
purchase equipment in 2011, rental activity, especially under RPOs,
also remained strong. With the increasing demand for heavy equipment,
sales backlogs in Canada continued to show strength in 2011.
While the economy and demand for equipment have been improving in Canada, there has been little recovery in heavy equipment markets in the United States due to continued weak economic conditions.
Residential construction has been a major driver of the U.S. economy
and heavy equipment markets in the past. However, current housing
activity in most states remains depressed and this situation continues
to negatively affect demand for heavy equipment. Certain market segments, however, such as waste management and scrap handling, have
experienced continued activity and generated demand for heavy equipment in the northeastern United States. In addition, while sales of new
equipment have not shown significant growth, parts and service activity
in New England has remained fairly strong as customers repaired rather
than replaced their fleets.
In response to the weak global economic conditions and the recession in the United States in particular, original equipment manufacturers
(“OEMs”) scaled back production capacity starting in 2009. As demand in
Canada and certain other countries has been increasing, OEMs have been
challenged to bring production capacity and supply lines back on line at
the same pace. This resulted in longer delivery lead times and reduced
availability of equipment in 2011. OEM production levels are improving,
but delivery lead times for new equipment remained stretched in 2011.
This has benefited dealers carrying higher levels of older equipment in
their inventories. In addition, the scheduled transition from Tier 3 engines
to the new lower-emission Tier 4 technology has affected supply and
increased demand for equipment with Tier 3 engines.
The tsunami and nuclear disaster in Japan early in 2011 affected the
production and supply of certain brands and types of equipment manufactured in Japan. In addition, the supply of certain parts from Japan
for equipment manufactured in other parts of the world has also been
affected by the crisis. During 2011, Strongco was not severely impacted
by this disaster as the vast majority of the equipment it distributes is
manufactured outside of Japan. However, shortages of parts from Japan
have impacted production schedules and could affect equipment availability in the future.
15
REVENUES
A breakdown of revenue for the years ended December 31, 2011, 2010 and 2009 is as follows:
Years ended December 31
($ millions)
2011
Eastern Canada (Atlantic and Quebec)
Equipment sales
Equipment rentals
Product support
Total Eastern Canada
Central Canada (Ontario)
Equipment sales
Equipment rentals
Product support
Total Central Canada
Western Canada (Manitoba to B.C.)
Equipment sales
Equipment rentals
Product support
Total Western Canada
Northeastern United States
Equipment sales
Equipment rentals
Product support
Total Northeastern United States
Total Revenues
Equipment sales
Equipment rentals
Product support
Total
Equipment Sales
Strongco’s equipment sales for the year ended December 31, 2011 were
$275.9 million, which was up $92.2 million or 50% from $183.7 million in
2010. The acquisition of Chadwick-BaRoss in February 2011 accounted
for $26.9 million of the sales increase, while sales in Canada increased by
$65.3 million or 36% in the year. Sales were up in all regions of Canada,
with the largest increase in Western Canada.
While the Canadian economy fell into a recession in the early part
of 2009 that lasted for most of the year, sales in the first quarter of
2009 were partially sustained by the fairly robust backlogs that existed
at the end of 2008. However, as construction markets in Canada
declined significantly during the recession, Strongco’s equipment sales
concurrently fell in all regions of the country through the balance of 2009.
Total unit volumes in the markets Strongco serves were estimated to
be down on average approximately 50% in 2009, with some regions
experiencing declines of close to 80%. These conditions contributed
to a decline in Strongco’s equipment sales of 35% in 2009.
$
$
$
$
$
$
$
$
$
$
2010
90.1
11.2
42.4
143.7
$
89.2
5.1
34.3
128.6
$
69.7
9.7
24.9
104.3
$
$
$
$
71.2
8.3
36.6
116.1
$
70.7
6.0
32.0
108.7
$
$
$
41.8
7.9
20.2
69.9
$
183.7
22.2
88.8
294.7
$
$
2011/2010
2010/2009
2009
% Change
% Change
71.9
4.7
38.0
114.6
27%
35%
16%
24%
-1%
78%
-4%
1%
79.9
5.9
36.3
122.2
26%
-15%
7%
18%
-12%
1%
-12%
-11%
31.9
3.7
19.4
55.1
67%
23%
23%
49%
31%
112%
4%
27%
183.7
14.3
93.7
291.8
50%
33%
33%
44%
–
55%
-5%
1%
26.9
3.6
16.1
46.6
275.9
29.6
117.7
423.2
$
$
$
EQUIPMENT SALES BY QUARTER – FISCAL 2009 TO FISCAL 2011
($ millions)
$80
$70
$60
$50
$40
$30
$20
$10
$0
Fiscal 2009
16
Fiscal 2010
Fiscal 2011
In 2010, as the recession abated, construction markets in Canada
slowly began to recover. However, in the immediate post-recession
environment, order backlogs were low. Demand for heavy equipment
remained weak until late in the second quarter as many customers
remained reluctant or lacked the financial resources following the
recession to make significant equipment purchases. Recovery in
demand for compact equipment was much faster than for larger, more
expensive units. Strongco’s sales pattern in 2010 followed the same
recovery trend, with sales increasing in each quarter through the year
as construction markets and demand for heavy equipment recovered
following the recession. The traditional seasonality of equipment sales
normally results in sales in the third quarter, when contractors are
typically working on projects, being less than sales in the second quarter,
when customers tend to be buying in anticipation of summer work. This
trend was evident in the marketplace in 2010. While Strongco’s sales
in the first and second quarters fell short of 2009, sales in the latter
half of 2010 were well ahead of the prior year and increased despite
the seasonal downturn in the third quarter. For the full year, Strongco’s
equipment sales were flat compared to 2009 at $183.7 million.
Price competition was aggressive in the first and second quarters of
2010, as many equipment dealers were carrying excess levels of aging
inventory and large amounts of equipment coming off rent following the
recession. This contributed to a decline in Strongco’s market share in
the first half of the year. As market demand for equipment increased,
excess inventory was reduced and, with improved sales execution,
Strongco’s market share improved through the latter half of 2010 and
at year end had recovered to levels consistent with the prior year.
Average selling prices vary from period to period depending on sales
mix between product categories, model mix within product categories
and features and attachments included in equipment being sold. While
average selling prices in 2010 remained below pre-recession levels,
Strongco’s average selling prices increased during the year across
most product categories as customer confidence grew and willingness
increased to purchase larger, higher-priced equipment (such as cranes,
articulated trucks and large loaders). In addition, the ongoing strength
of the Canadian dollar and increased price competition also contributed
to lower average selling prices in 2010.
The recovery evident in the latter half of 2010 continued into 2011.
Improving economic conditions, continued recovery in construction
markets, higher infrastructure spending and increased activity in the oil
and gas and mining sectors in Canada all resulted in stronger demand
for heavy equipment. Demand for heavy equipment varied across
the country and between product categories. On a national basis the
markets for heavy equipment, other than cranes, that Strongco serves
in Canada were estimated to be an average of 35% higher in 2011.
Overall, Strongco outperformed the market in Canada, with total unit
volume up more than 40%, which resulted in a larger share of the total
market in 2011. Accurate market data for cranes is not available, but the
crane market in Canada improved in 2011 as many end users and large
crane rental companies that curtailed purchases during the recession
replenished and replaced aging fleets. Strongco’s crane sales in 2011
were more than double the level of 2010. The largest increase in demand
for heavy equipment was in Alberta, followed by Quebec and Ontario.
Average selling prices also continued to improve in 2011 due primarily
to a higher proportion of sales of larger, more expensive equipment and
slight increases in most product categories. While the ongoing strength
of the Canadian dollar and price competition continued to put pressure
on selling prices, increased demand, combined with product availability
and delivery issues, helped support stronger selling prices in 2011.
On a regional basis, equipment sales in Eastern Canada (Quebec
and Atlantic regions) totalled $90.1 million in 2011, which was up
$18.9 million, or 27%, from $71.2 million in 2010. The bulk of the increase
was in Quebec, where construction markets continued to benefit from a
high level of spending on infrastructure projects and large hydroelectric
projects in the northern region of the province. Most of Strongco’s
sales increase was in cranes, loaders, articulated trucks and larger
equipment. In addition, the Company’s sales of rock crushing equipment
in Quebec were strong in 2011. The markets for heavy equipment, other
than cranes, in which Strongco participates in Eastern Canada were
estimated to be up by approximately 20% in 2011 over 2010. For the
first three quarters of 2011, Strongco outperformed the market and
captured a larger market share. However, Strongco’s share of the market
showed a slight decline in the fourth quarter, as total market volumes
in the quarter included higher than normal increases by dealer-owned
rental fleets as well as replenishment of equipment fleets at several
independent rental companies, both segments of the market in which
Strongco does not participate. In addition, equipment sales at auction
were very high in the fourth quarter, which inflated the total market
numbers. Excluding the replenishment of rental fleets and auction sales,
Strongco’s market share in the fourth quarter in Eastern Canada for
heavy equipment, other than cranes, was consistent with the first three
quarters, and for the full year was up over 2010. Market statistics for
cranes sold to end use customers are not readily available, but the crane
market in Eastern Canada, which generally remained weak in 2010
following the recession, showed continued improvement throughout
2011. Some of this growth was the result of certain large crane rental
customers in Quebec upgrading and increasing their fleets. In addition,
a few large cranes that had been on RPO contracts were sold in 2011.
The Company’s sales of cranes in Eastern Canada were up 142% in
2011 compared to 2010.
Strongco’s equipment sales in Central Canada were $89.2 million,
which was up $18.5 million, or 26%, from 2010. After a slow start to the
year as a result of the cold, snowy winter and very wet spring weather
conditions that delayed many construction and infrastructure projects,
activity in Ontario picked up in the second, third and fourth quarters,
which increased demand and spending for heavy equipment. In the
markets that Strongco serves in Central Canada, total unit volumes of
heavy equipment, other than cranes, were approximately 20% higher
than in 2010. In most product categories, Strongco outperformed the
market, with unit volume increases greater than the market, which
resulted in higher market shares. However, product availability and
extended supplier delivery lead times, combined with aggressive price
17
competition from certain dealers, resulted in lower volumes and a loss
of market share in particular product categories and markets. This was
especially evident within the Company’s Case Construction Equipment
product lines. Accurate market data is not readily available for cranes,
but demand for cranes in Central Canada was stronger in 2011,
demonstrating continued recovery following the recession. Strongco’s
crane sales in Ontario in 2011 were up more than 77% from a year ago
as certain crane rental customers, who refrained from purchasing new
cranes during the recession, replenished their fleets.
Equipment sales in Western Canada during 2011 were $69.7 million, up
$27.9 million, or 67%, over 2010. Strongco’s product lines in Alberta serve
the oil sector, primarily in the site preparation phase, as well as natural gas
production, both of which were significantly impacted by weakness in the
energy sector during 2009. The construction and infrastructure segments
that Strongco serves in the region were also severely impacted by the
recession. With the upward trend and sustainability in oil prices through
2010 and into 2011, economic conditions in Alberta improved significantly.
Construction activity and demand for heavy equipment began to show
signs of recovery in 2010, particularly in Northern Alberta in the latter half
of that year, and the improvement continued in 2011. Total units sold in the
markets served by Strongco in Alberta, excluding cranes, were estimated
to be up approximately 80% relative to 2010 and Strongco’s unit sales
were up 53% in the region. For the first three quarters of 2011, Strongco
outperformed the market in Western Canada and captured a larger share
of the growing market. However, the Company’s market share showed
a decline in the fourth quarter due in part to lack of product availability
and delayed deliveries from the OEM suppliers. In addition, the market
in Western Canada spiked in the fourth quarter due to an unusually high
level of rental fleet replenishment at certain dealers as well as independent
rental companies. Excluding rental fleet replenishment, where Strongco
does not participate, the Company’s market share was down slightly in
the fourth quarter and full year. The largest portion of Strongco’s increase
in sales in Western Canada was in general purpose equipment (“GPE”)
and larger equipment, but compact and road equipment sales were also
up in 2011. While the sales increase in 2011 was substantial, volumes
in Northern Alberta were hampered by longer delivery lead times and
availability issues with certain products. The market for cranes in Alberta
has been recovering since the recession, but more slowly than for other
heavy equipment. Demand for cranes in Western Canada, particularly in
Northern Alberta, improved significantly in 2011. Strongco’s crane sales
in Alberta were somewhat constrained in the first half of the year due to
delivery delays from the manufacturer. Benefiting from continued recovery
in the market and a catch-up on OEM deliveries, Strongco’s crane sales
in Western Canada grew by 75% during 2010. The sales backlog of
cranes in Alberta remains strong and RPO activity has increased, which
are positive signs of continued recovery in the crane markets in Western
Canada.
Strongco’s equipment sales in the northeastern United States were
$26.9 million in the 11 months from February 1, 2011, the effective
date of the acquisition of Chadwick-BaRoss (see “Acquisition of
Chadwick-BaRoss, Inc.”), to December 31, 2011. The markets for heavy
18
equipment in New England remained soft in 2011 and were estimated to
be down approximately 40% from pre-recession levels. The traditional
heavy equipment markets for residential construction, forestry and
infrastructure in the region have remained flat year over year, but other
markets for scrap handling and waste management have experienced
some increase in activity. Chadwick-BaRoss’ equipment sales for the
11 months were slightly ahead of the same period in 2010, but market
share in this soft market declined slightly in 2011 due primarily to product
shortages and delivery delays from the manufacturer.
Equipment Rentals
It is common industry practice for certain customers to rent to meet
their heavy equipment needs rather than commit to a purchase. In some
cases this is in response to the seasonal demands of the customer, as
in the case of municipal snow removal contracts, or to meet customers’
needs for specific projects. In other cases, certain customers prefer to
enter into short-term rental contracts with an option to purchase after
a period of time or hours of machine usage. This type of contract is
referred to as a rental purchase option contract (“RPO”). Under an RPO,
a portion of the rental revenue is applied toward the purchase price
of the equipment should the customer exercise the purchase option.
This provides flexibility to the customer and results in a more affordable
purchase price after the rental period. Normally, the significant majority
of RPOs are converted to sales within a six-month period and this market
practice has proven to be an effective method of building sales revenues
and the field population of equipment.
Rental activity was strong during the recession in 2009, as customers
were more inclined to rent equipment rather than purchase in the
uncertain environment. In 2010, the recession in Canada officially ended,
but customers remained reluctant or lacked the financial resources to
purchase equipment, and while construction markets were recovering,
many customers opted to rent equipment under RPO contracts.
Consequently, Strongco decided to make a higher level of inventory
available for RPOs, which resulted in continued strong rental activity in
2010. Rentals under RPO contracts were particularly strong in Alberta in
2010 as the economy recovered and activity in the oil sands increased,
and in Quebec.
Rental activity, including rentals under RPO contracts, remained
strong in 2011. In addition, Strongco’s crane business, which has
traditionally not had a significant rental element, experienced an increase
in rental activity in 2011 as customers showed a preference to rent
following the recession and demand for cranes recovered. Strongco’s
rental revenue in 2011 was $29.6 million, which was up $7.4 million,
or 33%, from $22.2 million in 2010. Rental revenue from the acquisition
of Chadwick-BaRoss in February 2011 contributed $3.6 million of the
increase in the year, while rental revenue in Canada was up by $3.8 million,
or 18%, in 2011.
On a regional basis in Canada, rental activity was stronger in all regions of the country with the exception of Ontario, where rental revenues
declined slightly to $5.1 million from $6.0 million in 2010. In Eastern
Canada, which has traditionally not been a large rental market, equip-
ment rentals were $11.2 million in 2011, or 35% higher than 2010. Most
of the increase in Eastern Canada was the result of RPO contracts for
articulated trucks and loaders in Quebec. Rental activity was also strong
in Alberta in 2011, demonstrating further evidence of recovery in that
province following the significant decline in rental activity during the
recession. Rental revenues in Western Canada in 2011 were $9.7 million
compared to $7.9 million in 2010.
Product Support
Sales of new equipment usually carry a warranty from the manufacturer
for a defined term. Product support revenues from the sales of parts
and service are therefore not impacted until the warranty period expires.
Warranty periods vary from manufacturer to manufacturer and depend
on customer purchases of extended warranties. Product support
activities (sales of parts and service outside of warranty), therefore,
tend to increase at a slower rate and lag equipment sales by three to
five years. The increasing equipment population in the field leads to
increased product support activities over time.
Product support revenues declined in 2009 as a result of the
recession, but represented a larger proportion of total revenues as many
customers chose to repair and refurbish existing machines, rather than
buy new equipment. That was particularly true in Eastern and Central
Canada, while in Alberta, where significant amounts of equipment in
customers’ hands were sitting idle, product support revenues declined
further. Product support activity was anticipated to increase in 2010 as
the economy and construction activity increased, but the mild winter
and lack of snow in the first quarter of 2010, particularly in Eastern
and Central Canada, resulted in significantly reduced use of snow
removal equipment through the winter season, which in turn resulted
in reduced parts and service activity. In addition, in the first half of 2010,
many customers, particularly in Ontario, continued to make only those
critical repairs necessary to keep their equipment in service. Parts and
service activity began to increase through the second half of the year
as construction activity increased but for the full year product support
revenues in Eastern and Central Canada declined slightly in 2010. In
Alberta, as customers began using equipment that had sat idle through
the recession in 2009, product support revenues increased throughout
the year but not enough to offset the decline in Central and Eastern
Canada. As a result, product support revenues overall were down
slightly in 2010 to $88.8 million.
The recovery in construction and infrastructure markets evident in the
latter half of 2010 continued in 2011. In addition, the oil and gas sector
and other end use markets for heavy equipment in Canada also showed
further improvement in 2011. With the increase in activity, utilization
of heavy equipment increased, which resulted in continued growth in
product support activity in 2011. Strongco’s product support revenues
in 2011 totalled $117.7 million, including $16.1 million from the newly
acquired Chadwick-BaRoss, compared to $88.8 million in 2010. Product
support revenues were higher in all regions of Canada, especially in
Western and Eastern Canada. Product support was stronger in the first
quarter of 2011, in particular, due in part to increased snowfall and use
of snow removal equipment, especially in Western and Eastern Canada.
GROSS MARGIN
2011
Gross Margin
$ millions
Equipment sales
Equipment rentals
Product support
Total gross margin
$
$
26.8
5.6
48.1
80.6
GM %
9.7%
18.9%
40.9%
19.0%
2010
2009
$ millions
GM %
$ millions
$
$
17.7
3.3
35.7
56.7
9.6%
14.9%
40.2%
19.2%
With lower revenues in 2009, Strongco’s gross margin declined by
$5.9 million from 2008, to $59.9 million. However, as a percentage of
revenue, gross margin improved in 2009 to 20.5%, due primarily to the
higher proportion of product support revenues in 2009. Equipment sales
typically generate a lower gross margin percentage than rental revenues
and product support activities. During the recession in 2009, many
customers preferred to rent equipment to meet their equipment needs
or to repair/refurbish existing equipment, which resulted in rentals and
sales of parts and service being a higher proportion of total revenues
and contributed to an improvement in Strongco’s overall gross margin
percentage in 2009.
Gross margin in 2010 was $56.7 million, which was down $3.2 million
from 2009. The decline was due primarily to lower product support
revenues in 2010. As a percentage of revenues, gross margin declined
$
$
19.0
2.4
38.5
59.9
GM %
10.3%
16.8%
41.1%
20.5%
2011/2010
$ change
% change
2010/2009
$ change
% change
$
$
$
9.1
2.3
12.4
23.9
52%
69%
35%
42%
$
(1.3)
0.9
(2.8)
(3.2)
-7%
39%
-7%
-5%
to 19.2% compared to 20.5% in 2009, due primarily to revenue mix
as product support revenues represented a lower proportion of total
revenues in 2010 relative to equipment sales.
With the substantial increase in revenue in 2011, gross margins
increased by $23.9 million, or 42%, from 2010. The acquisition of
Chadwick-BaRoss contributed $10.2 million of the increase in gross
margins, while the gross margin in Canada was up by $13.5 million, or
24%, from 2010. Revenues from equipment sales, rentals and product
support were all higher in 2011, which led to an increase in the gross
margin from each revenue stream. As a percentage of sales, overall
gross margin was 19.0%, compared to 19.2% in 2010. The slight decline
was due to a higher proportion of equipment sales in 2011, which offer
lower margin percentages than product support or rentals.
The gross margin percentage on equipment sales in 2011 was 9.7%,
19
which was consistent with 9.6% in 2010. While the ongoing strength of
the Canadian dollar and price competition continued to put pressure on
margins in 2011, increased demand, combined with product availability
and delivery issues, helped support sales margins. Gross margins on
equipment sales were also supported by a higher proportion of sales
of larger, more expensive machines in 2011.
The gross margin percentage on rental contracts without purchase
options is typically higher than the margin percentage on equipment sales.
Gross margins on rentals under RPO contracts are recorded at margin
percentages consistent with the margins on the anticipated sale under
the purchase option, which are lower than margins on straight rental
contracts. Following the recession, rental activity under RPO contracts
increased significantly in 2010, particularly in Alberta and Quebec,
which resulted in a lower overall rental gross margin percentage in that
year. While RPO activity remained strong, rentals under RPO contracts
represented a lower proportion of total rentals in 2011, which contributed
to an increase in the overall rental gross margin percentage in 2011.
Gross margin percentage on product support activities was 40.9% in
2011, compared to 40.2% in 2010 and 41.1% in 2009. A slightly higher
proportion of service revenue contributed to the slight improvement in
overall product support margins in 2011.
ADMINISTRATIVE, DISTRIBUTION AND SELLING EXPENSES
In 2009, in response to the weak economic environment, Strongco
implemented cost controls and re-engineered its cost structure to
reduce overhead, which resulted in substantial savings in 2009 and
established a lower cost base from which to operate going forward.
Administrative, distribution and selling expenses in 2009 were down 9%
to $55.8 million, or 19.1% of revenue. While heavy equipment markets
were improving and revenues growing throughout 2010, expense
levels were generally held at the new operating level established in
2009. Realizing the full year impact of the cost reduction initiatives
implemented in the prior year, such expenses were down a further 4%
in 2010 to $53.5 million, or 18.2% of revenue. This was achieved in spite
of increased expenses for training programs and recruiting and onetime costs for the conversion from an income fund to a corporation and
implementation of International Financial Reporting Standards (“IFRS”).
Administrative, distribution and selling expenses in 2011 were
$64.7 million, or 15.3% of revenue. Most of the increase over 2010 relates
to administrative, distribution and selling expenses of newly acquired
Chadwick-BaRoss, which amounted to $8.0 million in the 11 months from
the date of acquisition in February 2011. Expenses in 2011 also include
one-time costs for the acquisition of Chadwick-BaRoss of $0.4 million.
In addition, with the stronger results, $3.9 million was accrued in 2011
for anticipated payments under the Company’s annual and long-term
incentive plans and other employee bonuses, while employee incentive
and bonus accruals in 2010 were minimal given the lower earnings.
While certain other variable expenses were higher in 2011 due to the
substantial increase in revenues, administrative, distribution and selling
expenses overall were down year over year by $1.2 million before the
incremental expenses of Chadwick-BaRoss and accrued bonuses.
20
OTHER INCOME
Other income and expense is primarily comprised of gains or losses on
disposition of fixed assets, foreign exchange gains or losses, service
fees received by Strongco as compensation for sales of new equipment
by other third parties into the regions where Strongco has distribution
rights for that equipment, commissions received from third-party
financing companies for customer purchase financing Strongco places
with such finance companies and royalty fees received on sales of parts
from certain OEMs.
Other income in 2011 amounted to $1.2 million, compared to $0.7
million in 2010 and $1.8 million in 2009. The decline in 2010 from 2009
was due primarily to the termination of a royalty fee on parts distribution
when the parts supplier changed to direct distribution. Other income in
2011 included a net unrealized foreign exchange gain of $0.3 million on
forward foreign exchange contracts purchased as a hedge to protect
the margin on specific future committed sales. The unrealized foreign
exchange gains arose from mark to market adjustments on forward
foreign exchange contracts as a result of changes in the Canadian/U.S.
dollar exchange rate during the year relative to the exchange rate in the
forward contracts.
INTEREST EXPENSE
Strongco’s interest expense was $5.8 million in 2011, compared to
$4.8 million in 2010 and $4.4 million in 2009.
Strongco’s interest-bearing debt comprises bank indebtedness, interest-bearing equipment notes, various term loans from the
Company’s bank and other notes payable. Strongco typically finances
equipment inventory under lines of credit available from various nonbank finance companies. Most equipment financing has interest-free
periods of up to 12 months from the date of financing, after which the
equipment notes become interest-bearing. The rate of interest on the
Company’s bank debt and interest-bearing equipment notes varies with
the Canadian chartered bank prime rate (“prime rate”) and Canadian
Bankers Acceptances Rates (“BA rates”) (see discussion under “Cash
Flow, Financial Resources and Liquidity”). Prime rates and BA rates
declined during the recession in 2009. Prime rates rose in 2010 but
remained fairly stable through 2011.
During 2009, in response to the recession, Strongco reduced
equipment inventories and correspondingly reduced equipment notes
payable. However, at the same time, in response to the credit crisis
in financial markets and the weak economy, Strongco’s equipment
note lenders increased the interest rates charged on the Company’s
equipment notes in 2009, which resulted in a slight increase in interest
expense in that year.
During 2010, Strongco increased inventory levels in support of
sales growth, as well as its commitment to inventory for RPOs. As
a consequence, the balance of equipment notes increased in 2010
and resulted in a higher level of interest-bearing equipment notes
outstanding in 2010 compared to 2009. Strongco’s average bank debt
levels were also higher in 2010 than in 2009. Prime lending rates and BA
rates also increased in 2010 following the recession, which resulted in
higher rates of interest being charged on the Company’s bank debt and
equipment notes in the year. The higher interest rates, combined with
the slightly higher average balance of interest-bearing equipment notes
and average bank debt levels, resulted in a higher interest expense in
2010 compared to 2009.
Average interest-bearing debt levels increased further in 2011. The
Company continued to build inventory to support sales growth, which
led to a higher level of interest-bearing equipment notes throughout the
year. The acquisition of Chadwick-BaRoss in February 2011 for $11.1
million was financed with debt from the Company’s operating line and
a new $5.0 million term loan from the Company’s bank, and US$1.9
million of interest-bearing notes issued to the previous shareholders of
Chadwick-BaRoss. In addition, the Company’s debt now includes the
bank debt, equipment notes and mortgage term loans of ChadwickBaRoss. Strongco also obtained a construction loan facility from its bank
during the year to finance the construction of a new branch facility in
Edmonton, Alberta, which added to the level of interest-bearing debt in
2011. Prime lending rates and BA rates rose through 2010 but remained
fairly consistent through 2011. However, the average prime and BA rates
were higher in 2011 compared to 2010, which resulted in higher rates
of interest being charged on the Company’s bank debt and equipment
notes in 2011. The higher interest-bearing debt levels, combined with
higher rates of interest, resulted in a higher interest expense in 2011.
EARNINGS (LOSS) BEFORE INCOME TAXES
Primarily as a result of the substantial increase in revenues during the
year, Strongco achieved earnings before income taxes of $11.1 million in
2011, which was up from a loss before taxes of $0.9 million in 2010 and
profit from continuing operations before taxes in 2009 of $1.5 million.
PROVISION FOR INCOME TAX
Following its conversion to a corporation on July 1, 2010, Strongco is
now subject to income tax at corporate tax rates. As a consequence,
Strongco was able to utilize tax losses, including those previously
unrecognized from the Fund. In addition, on the adoption of IFRS,
temporary or timing differences between tax and accounting values
arose, resulting in a net deferred income tax asset. However, given
the Company’s history of losses, there is no certainty of realization of
the benefit of either the temporary differences or the losses from the
Fund previously unrecognized, and a valuation allowance was recorded
for the full amount of the deferred income tax asset of $2.1 million as
at December 31, 2010. While Strongco generated taxable income in
Canada in 2011, the valuation allowance at December 31, 2010 was
drawn down in full to recognize the benefit of the tax loss carryforwards
and other temporary differences, which resulted in a provision for income
tax in Canada of only $0.7 million.
In addition, the tax provision related to Chadwick-BaRoss in the
United States amounted to $0.5 million in 2011.
NET INCOME (LOSS)
Strongco’s net income in 2011 was $9.9 million ($0.76 per share), which
was significantly improved from a net loss of $0.9 million (loss of $0.08
per share) in 2010 and earnings from continuing operations of $0.7
million ($0.07 per share) in 2009.
EBITDA
EBITDA (see note 2 below) in 2011 was $43.1 million, compared to $24.2 million in 2010 and $18.0 million in 2009. EBITDA was calculated as follows:
EBITDA ($ millions)
2011
2010
Change
2009
2011/2010
2010/2009
(note 1)
Net earnings (loss) from continuing operations
Add back:
Interest
Income taxes
Amortization of capital assets
Amortization of equipment inventory on rent
Amortization of rental fleet
EBITDA (note 2)
$
9.9
$
5.8
1.2
3.0
20.7
2.4
43.1
$
(0.9)
$
4.8
–
2.1
18.2
–
24.2
$
0.7
$
4.4
0.8
0.9
11.2
–
18.0
$
10.8
$
1.0
1.2
0.9
2.5
2.4
18.9
$
(1.6)
$
0.4
(0.8)
1.2
7.0
–
6.2
Note 1 – 2009 income statement figures reflect Canadian GAAP before the adoption of IFRS; 2009 balance sheet figures include the impact of changes related to the adoption of IFRS.
21
CASH FLOW, FINANCIAL RESOURCES AND LIQUIDITY
Cash Provided by Operating Activities
During 2011, Strongco’s operating activities provided $44.4 million of
cash before changes in working capital. However, $26.2 million of cash
was used to increase net working capital, $3.0 million to fund future
employee benefits, $5.8 million to pay interest and $0.2 million to pay
taxes, resulting in net cash from operating activities in 2011 of $9.2 million.
By comparison, in 2010, $25.9 million of cash was provided by operating
activities before changes in working capital, $19.3 million was used to
increase working capital, $1.4 million to fund future employee benefits and
$4.8 million to pay interest, resulting in net cash from operating activities
of $0.4 million.
The components of cash provided by operating activities were as
follows:
($ millions)
2011
Net earnings (loss)
Non-cash items:
Depreciation –
equipment inventory on rent
Depreciation – capital assets
Depreciation – rental fleet
Gain on sale of rental equipment
Share-based payment expense
Interest expense
Income tax expense (recovery)
Deferred income tax asset
Deferred income tax liability
Employee future benefit expense
Other
Changes in non-cash
working capital balances
Employee future benefit funding
Interest paid
Income taxes paid
Cash provided by operating activities
$
$
9.9
($ millions) (Increase)/Decrease
Trade and other receivables
Inventories
Prepaids
Other assets
2011
$
$
Trade and other payables
Deferred revenue and customer deposits
Income taxes payable
Net increase in non-cash working capital
$
$
(2.4)
(60.5)
0.1
–
(62.7)
2.8
(0.4)
(0.1)
34.2
36.5
(26.2)
2010
$
$
$
$
(8.8)
(33.7)
(0.2)
0.1
(42.6)
9.2
0.8
–
13.3
23.3
(19.3)
2010
$
(0.9)
20.7
3.0
2.4
(1.0)
0.2
5.8
1.2
(0.4)
(1.3)
3.9
(0.1)
44.4
18.2
2.1
–
–
0.3
4.8
(1.0)
–
1.0
1.4
–
25.9
(26.2)
(3.0)
(5.8)
(0.2)
9.2
(19.3)
(1.4)
(4.8)
–
0.4
$
Non-cash items in 2011 included amortization of equipment inventory
on rent of $20.7 million, compared to $18.2 million in 2010. Higher
volumes of equipment rentals in 2011 resulted in higher amortization
of equipment inventory on rent.
22
The components of the net change in non-cash working capital for
2011 and 2010 were as follows:
With continued recovery in the markets for heavy equipment in Canada,
Strongco’s revenues increased through 2011, and to support this growth,
Strongco made a net investment in working capital of $26.2 million
during the year. The largest investment was in inventory in response to
the increase in sales and service activity. The net increase in inventory in
2011 was $60.5 million, the majority of which was equipment inventory.
By comparison, inventories (mainly equipment) increased by $33.7 million
in 2010.
Following the recession, in 2010 and 2011, OEMs struggled to ramp
up production to meet the increase in demand. This led to product
shortages and significantly extended delivery lead times. In the fourth
quarter of 2011, Strongco received a large quantity of equipment
inventory from its major OEM suppliers that had been ordered for
delivery earlier in the year. This, in particular, contributed to a higher than
normal level of inventory at year end. The OEM suppliers have offered
extended interest-free financing on these late-delivered inventories and
with markets for heavy equipment continuing to be robust, management
is confident this higher level of inventory will be sold through the season
in 2012.
With the increase in equipment inventories, equipment notes also
increased. The net increase in equipment notes in 2011 was $34.2 million.
By comparison, equipment notes increased by $13.3 million in 2010.
Cash Used in Investing Activities
Investing activities in 2011 included the acquisition of ChadwickBaRoss, Inc. in February for $9.2 million, net of promissory notes issued
by the Company to the previous shareholders of CBR. CBR maintains a
fleet of rental equipment, and during the year it purchased $13.4 million
of new rental fleet assets and sold rental fleet assets for proceeds of
$8.3 million. Capital expenditures in 2011 totalled $9.0 million, the
majority of which was for the construction of a new branch in Edmonton,
Alberta.
The components of cash used in investing activities were as follows:
($ millions)
Acquisition of Chadwick-BaRoss, Inc.
Purchase of rental fleet assets
Proceeds from sale of rental fleet assets
Purchase of capital assets
Cash used in investing activities
2011
$
$
(9.2)
(13.4)
8.3
(9.0)
(23.3)
2010
$
$
–
–
–
(0.3)
(0.3)
Cash Provided by Financing Activities
In 2011, net cash of $14.0 million was provided by financing activities,
compared to net cash of $0.1 million provided in 2010.
The significant sources and uses of cash from financing activities in
2011 were as follows:
• The issue of shares under the rights offering completed in the
first quarter of 2011 provided $7.8 million (see discussion under
“Shareholder Capital” below).
• To help finance the purchase of CBR, the Company secured a $5.0
million term loan from its bank in April (see discussion under “Bank
Credit Facilities” below). Repayments of this term loan amounted to
$0.8 million in the year.
• The Company issued promissory notes to the previous shareholders
of CBR on the acquisition of their company in the first quarter totalling
$1.9 million (see discussion under “Acquisition of Chadwick-BaRoss,
Inc.” above). Payments against these vendor take-back notes were
$0.6 million in the year.
• To support the construction of its new Edmonton branch, the Company
secured a construction loan from its bank (see discussion under
“Bank Credit Facilities” below). Borrowing under this construction
loan amounted to $5.0 million in the year.
• To finance the increase in rental fleet assets in the United States,
the Company increased borrowing under its equipment note lines
of credit by $2.0 million in the year.
• Cash of $1.4 million was used to reduce bank indebtedness in 2011.
• Repayments under finance leases (primarily service vehicles and
computer equipment) amounted to $1.7 million in the year.
• In March of 2011, Strongco made the final scheduled repayment of
$1.3 million of the note issued to Volvo Construction Equipment on
the acquisition of Champion Road Machinery in 2008.
The components of cash provided by financing activities were as
follows:
($ millions)
2011
Proceeds from rights offering
Term loan – acquisition
of Chadwick-BaRoss Inc.
Repayment of term loan –
acquisition of Chadwick-BaRoss Inc.
Repayment of acquisition promissory note
Construction loan – new Edmonton branch
Increase in long-term equipment notes
Increase (decrease) in bank indebtedness
Repayment of finance lease obligations
Repayment of Champion note
Cash provided by financing activities
$
$
7.8
2010
$
–
5.0
–
(0.8)
(0.6)
5.0
2.0
(1.4)
(1.7)
(1.3)
14.0
–
–
–
–
2.4
(1.4)
(1.1)
(0.1)
$
Bank Credit Facilities
The Company has credit facilities with banks in Canada and the
United States that provide 364-day committed operating lines of credit
totalling approximately $22.5 million that are renewable annually on
or about May 31 of each year. Borrowings under the lines of credit are
limited by standard borrowing base calculations based on accounts
receivable and inventory, which are typical of such bank credit facilities.
As collateral, the Company has provided a $50 million debenture and
a security interest in accounts receivable, inventories (subordinated
to the collateral provided to the equipment inventory lenders), capital
assets (subordinated to collateral provided to lessors), real estate and
intangible and other assets. The operating lines bear interest at rates
that range between bank prime rate plus 0.50% and bank prime rate
plus 3.00%, and between the one-month Canadian BA rate plus 1.50%
and BA rate plus 4.00% in Canada and at LIBOR plus 2.60% in the
United States. Under its bank credit facilities, the Company is able to
issue letters of credit up to a maximum of $5 million. Outstanding letters
of credit reduce the Company’s availability under its operating lines
of credit. For certain customers, Strongco issues letters of credit as a
guarantee of Strongco’s performance on the sale of equipment to the
customer. As at December 31, 2011, there were outstanding letters of
credit of $0.1 million and $11.0 million drawn on the Company’s bank
operating lines of credit.
23
In addition to its operating lines of credit, Strongco has a $15 million
line for foreign exchange forward contracts as part of its bank credit
facilities (“FX Line”) available to hedge foreign currency exposure. Under
this FX Line, the Company can purchase foreign exchange forward
contracts up to a maximum of $15 million. As at December 31, 2011,
the Company had outstanding foreign exchange forward contracts
under this facility totalling US$6.2 million at an average exchange rate
of $1.0203 Canadian for each US$1.00, with settlement dates between
January 31, 2012 and May 31, 2012.
The Company’s bank credit facilities also include term loans secured
by real estate in the United States. At December 31, 2011 the outstanding
balance on these term loans was US$3.7 million. The term loans bear
interest at LIBOR plus 3.05% and require monthly principal payments of
US$13,300 plus accrued interest. The Company has interest rate swap
agreements in place that have converted the variable rate on the term
loans to a fixed rate of 5.17%. The term loan and swap agreements
expire in September 2012, at which point a balloon payment from the
balance of the loans is due. It is management’s intention to renew the
term loans and interest rate swap agreements prior to their expiry.
In connection with the acquisition of Chadwick-BaRoss, in April 2011,
Strongco secured an additional $5.0 million demand non-revolving term
loan from its bank secured against certain real estate assets in Canada
(“Term Loan – Canadian Real Estate”). This loan is for a term of 60
months to April 2016 and bears interest at the bank’s prime rate plus
2.0%. The Term Loan – Canadian Real Estate is subject to monthly
principal payments of $83,300 plus accrued interest. As at December
31, 2011, there was $4.3 million owing on the Term Loan – Canadian
Real Estate.
In April 2011, Strongco secured an additional construction loan
facility with its bank (“Construction Loan #1”) to finance the construction
of the Company’s new Edmonton, Alberta branch. Under Construction
Loan #1, the Company is able to borrow 70% of the cost of the land and
building construction costs to a maximum of $6.6 million. Construction
of the new branch commenced in June 2011 and is scheduled to
be completed before the end of March 2011. Upon completion,
Construction Loan #1 will be converted to a demand, non-revolving term
loan (“Mortgage Loan #1”). Mortgage Loan #1 will be for an amount of
$7.1 million and a term of 60 months. Construction Loan #1 (and
Mortgage Loan #1) bears interest at the bank’s prime lending rate
plus 2.0%. As at December 31, 2011, there was $5.0 million drawn on
Construction Loan #1.
24
In addition, in September 2011, Strongco secured an additional
construction loan facility with its bank (“Construction Loan #2”) to finance
the construction of a planned new Fort McMurray, Alberta branch. Under
Construction Loan #2, the Company is able to borrow 70% of the cost of
the land and building construction costs to a maximum of $7.9 million.
The Company anticipates construction of the new Fort McMurray
branch will commence in the third quarter of 2012 and will be completed
in the second quarter of 2013. Upon completion, Construction Loan
#2 will be converted to a demand, non-revolving term loan (“Mortgage
Loan #2”). Mortgage Loan #2 will be for an amount of $8.4 million and
a term of 60 months. Construction Loan #2 (and Mortgage Loan #2)
bears interest at the bank’s prime rate plus 2.0%. As at December 31,
2011, Construction Loan #2 was undrawn.
Strongco’s bank credit facilities contain financial covenants typical
of such credit facilities that require the Company to maintain certain
financial ratios and meet certain financial thresholds. In particular, the
credit facilities in Canada contain covenants that require the Company
to maintain a minimum ratio of total current assets to current liabilities
(“Current Ratio covenant”) of 1.1:1, a minimum tangible net worth (“TNW
covenant”) of $50 million, a maximum ratio of total debt to tangible net
worth (“Debt to TNW Ratio covenant”) of 4.0:1 and a minimum ratio of
EBITDA minus cash taxes paid and capital expenditures to total interest
(“Debt Service Coverage Ratio covenant”) of 1.3:1. For the purposes
of calculating covenants under the credit facility, debt is defined as
total liabilities less deferred income taxes, trade and other payables,
customer deposits and accrued employee future benefits obligations.
The Debt Service Coverage Ratio is measured at the end of each quarter
on a trailing 12-month basis. Other covenants are measured as at the
end of each quarter. The Company was in compliance with all covenants
under its bank credit facilities as at December 31, 2011.
Equipment Notes
In addition to its bank credit facilities, the Company has lines of credit
available totalling approximately $240 million from various non-bank
equipment lenders in Canada and the United States that are used to
finance equipment inventory and rental fleets. At December 31, 2011,
there was approximately $166 million borrowed on these equipment
finance lines.
Typically, these equipment notes are interest-free for periods up to
12 months from the date of financing, after which they bear interest at
rates ranging, in Canada, from 4.00% to 5.50% over the one-month BA
rate and 3.25% to 4.25% over the prime rate of a Canadian chartered
bank, and in the United States, from 2.5% to 5.5% over the one-month
LIBOR rate and between the U.S. bank prime rate and prime rate plus
4.00%. At December 31, 2011, approximately $72 million of these
equipment notes were interest-free and $94 million were interestbearing. As collateral for these equipment notes, the Company has
provided liens on the specific inventories financed and any related
accounts receivable. For the majority of the equipment notes, monthly
principal repayments equal to 3% of the original principal balance of the
note commence 12 months from the date of financing and the remaining
balance is due in full at the earlier of 24 months after financing or when
the financed equipment is sold. While financed equipment is out on rent,
monthly curtailments are required equal to the greater of 70% of the
rental revenue and 2.5% of the original value of the note. Any remaining
balance after 24 months is normally refinanced with the lender over an
additional period of up to 24 months. All of the Company’s equipment
note facilities are renewable annually.
As indicated above, the interest-bearing equipment notes in Canada
bear interest at floating BA rates plus a fixed component or premium
over BA rates. In September 2011, Strongco put interest rate swaps
in place that have effectively fixed the floating BA rate component on
$15.0 million of its interest-bearing equipment notes at 1.615% for five
years to September 2016 (see discussion under “Interest Rate Swaps”
below).
Certain of the Company’s equipment finance credit agreements
contain restrictive financial covenants, including requiring the Company
to remain in compliance with the financial covenants under all of its
other lending agreements (“cross-default provisions”). The Company
was in compliance with all covenants under its equipment finance credit
facilities as at December 31, 2011.
Interest Rate Swaps
In September of 2011, BA rates were at very low levels. However,
there was an expectation that interest rates would rise in the future. In
September, Strongco secured a Swap Facility with its bank that allows
the Company to swap the floating interest rate component (“BA rate”)
on up to $25.0 million of its floating interest rate debt to a five-year fixed
rate of interest. On September 8, 2011, the Company entered into an
interest rate swap agreement under this facility to fix the floating BA rate
on $15.0 million of interest-bearing debt at a fixed interest rate equal to
1.615% for a period of five years to September 8, 2016. The Company
has put these swaps in place to effectively fix the interest rate on $15.0
million of its interest-bearing equipment notes at 4.615%.
Summary of Outstanding Debt
The balance outstanding under Strongco’s debt facilities at December 31, 2011 and 2010 consisted of the following:
Debt Facilities
As at December 31
($ millions)
2011
Bank indebtedness
(including outstanding cheques)
$
– non-interest-bearing
Equipment notes payable – interest-bearing
Vendor take back note payable
– acquisition of Chadwick-BaRoss
Construction Loan #1
Term loan – Canadian real estate
Term loans – U.S. real estate
Other notes payable
$
11.0
2010
$
12.4
72.3
93.6
40.1
78.1
1.3
5.0
4.3
3.7
–
191.2
–
–
–
–
1.2
131.8
$
As at December 31, 2011, there was $11.5 million of unused credit available under the Company’s bank credit lines. While availability under the
bank lines fluctuates daily depending on the amount of cash received
and cheques and other disbursements clearing the bank, availability
generally ranges between $5.0 million and $15.0 million. Borrowing on
the Company’s bank lines is typically highest in the first quarter, when
cash flows from operations are at the lowest point of the year, and decreases through to the end of the year as cash flows increase.
The Company also had $74.2 million available under its equipment
finance facilities at December 31, 2011. Borrowing on these lines
typically increases in the first five months of the year, as equipment
inventory is purchased for the season, and declines to the end of the
year as equipment sales increase, particularly in the fourth quarter.
With the level of funds available under the Company’s bank credit
lines, the current availability under the equipment finance facilities and
anticipated improvement in cash flows from operations, management
believes the Company will have adequate financial resources to fund its
operations and make the necessary investment in equipment inventory
and fixed assets to support its operations in the future.
25
Financial Results – Fourth Quarter
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31
Three months ended December 31
($ thousands, except per share amounts)
2011
Revenues
Cost of sales
Gross margin
Administration, distribution and selling expenses
Other income
Operating income
Interest expense
Earnings (loss) before income taxes
Net income
$ 113,213
92,414
20,799
16,979
(650)
4,470
1,592
2,878
807
$
2,071
$
Basic and diluted earnings per share
Weighted average number of shares
– Basic
– Diluted
Key financial measures:
Gross margin as a percentage of revenues
Administration, distribution and selling expenses as a percentage of revenues
Operating income as a percentage of revenues
EBITDA (note 1)
$
0.15
$ Change
$
$
91,798
75,431
16,367
13,548
(273)
3,092
1,354
1,738
–
1,738
$
0.17
13,128,719
13,168,561
10,508,719
10,508,719
18.4%
15.0%
3.9%
12,505
17.8%
14.8%
3.4%
10,298
$
2011/2010
2010
$
% Change
23%
23%
27%
25%
138%
45%
18%
66%
$
21,415
16,983
4,432
3,431
(377)
1,378
238
1,140
807
333
$
(0.02)
-12%
$
2,207
21%
19%
26
Revenues
Strongco’s revenues for the quarter ended December 31, 2011 were
$113.2 million, which was up $21.4 million or 23% from $91.8 million
in the fourth quarter of 2010. The acquisition of Chadwick-BaRoss
accounted for $15.7 million of the increase while revenues in Canada
increased by $5.7 million or 6% in the quarter. Revenues were up in all
regions of Canada, with the largest increase in Western Canada. Overall
revenues increased in all categories (sales, rentals and product support)
in the quarter but varied from region to region.
A breakdown of revenue for the three months ended December 31,
2011 and 2010 is as follows:
Three months
ended December 31
($ millions)
Eastern Canada
(Atlantic and Quebec)
Equipment sales
Equipment rentals
Product support
Total Eastern Canada
Central Canada (Ontario)
Equipment sales
Equipment rentals
Product support
Total Central Canada
Western Canada
(Manitoba to B.C.)
Equipment sales
Equipment rentals
Product support
Total Western Canada
Northeastern United States
Equipment sales
Equipment rentals
Product support
Total Northeastern
United States
2011
$
$
$
$
$
$
22.0
3.5
10.3
35.8
$
27.0
1.5
8.5
37.0
$
15.4
2.6
6.7
24.7
$
10.1
1.3
4.3
$
15.7
Total Equipment Distribution
Equipment sales
$
Equipment rentals
Product support
Total Equipment Distribution $
74.5
8.9
29.8
113.2
$
$
$
$
$
$
2011/2010
2010
% Change
23.4
2.7
8.8
34.9
-6%
30%
17%
3%
23.6
1.7
8.5
33.8
14%
-12%
–
9%
15.1
2.9
5.1
23.1
2%
-11%
31%
7%
62.1
7.3
22.4
91.8
20%
22%
33%
23%
Equipment Sales
Strongco’s equipment sales increased by $12.4 million, or 20%, from
the fourth quarter of 2010. Chadwick-BaRoss contributed $10.1 million
of the gain and equipment sales were up in Canada overall, led by a
strong increase in Ontario in the quarter.
Demand for heavy equipment showed further improvement in the
fourth quarter as the Canadian economy, together with construction
and infrastructure markets, continued to recover. Total heavy equipment
units sold in the market were up significantly over the fourth quarter
of 2010, which included large increases in rental fleets at several
equipment dealers as well as replenishment of equipment fleets at
several independent rental companies.
On a regional basis, Strongco’s equipment sales in Eastern Canada
(Quebec and Atlantic regions) totalled $22.0 million in the fourth quarter,
which was down slightly from $23.4 million in the fourth quarter of 2010.
Sales of cranes in Eastern Canada were up significantly compared to
the fourth quarter of 2010, but sales of other heavy equipment fell short
of the prior year. Sales of cranes were particularly strong in the fourth
quarter due in part to increased spending on infrastructure projects
and large hydroelectric projects in Quebec, as well as to certain large
crane rental customers in Quebec upgrading and increasing their fleets
following the recession. In addition, a few large cranes that had been on
RPO contracts were sold in the fourth quarter of 2011. Sales of other
heavy equipment in Eastern Canada fell short of the prior year due in
part to the sales of several units on RPO contracts in Quebec that were
deferred to 2012. In contrast, sales were very strong in the fourth quarter
of 2010 as a result of a high level of RPO contracts in Quebec that were
converted to sales. The markets for heavy equipment, other than cranes,
in which Strongco participates in Eastern Canada were estimated to
increase by approximately 20% in 2011 over 2010. For the first three
quarters of 2011, Strongco outperformed the market and captured a
larger market share. However, Strongco’s share of the market showed
a slight decline in the fourth quarter. Total market volumes spiked in the
fourth quarter of 2011 due to increases in dealer-owned rental fleets as
well as replenishment of equipment fleets at several independent rental
companies. In addition, equipment sales at auction were very high in the
fourth quarter, which also inflated the total market numbers. Excluding
the replenishment of rental fleets and auction sales, Strongco’s market
share in the fourth quarter in Eastern Canada for heavy equipment, other
than cranes, was consistent with the first three quarters and for the full
year was up over 2010.
Strongco’s equipment sales in Central Canada were $27.0 million,
which was up $3.4 million, or 14%, from the fourth quarter of 2010.
Construction and infrastructure activity in Ontario remained strong
relative to the fourth quarter of 2010, which contributed to stronger
demand for heavy equipment. In the markets that Strongco serves
in Central Canada, total unit volumes of heavy equipment, other than
cranes, were approximately 20% higher than in the fourth quarter of 2010.
In most product categories, Strongco outperformed the market, with
unit volume increases greater than the market, which resulted in higher
market shares. However, product availability and extended supplier
27
delivery lead times, combined with aggressive price competition from
certain dealers, resulted in lower volumes and a loss of market share in
particular product categories and markets. This was especially evident
within the Company’s Case Construction Equipment product lines.
Accurate market data is not readily available for cranes, but demand
for cranes in Central Canada was stronger in 2011, demonstrating
continued recovery following the recession. Strongco’s crane sales in
Ontario in 2011 were up more than 70% from a year ago as certain crane
rental customers, who refrained from purchasing new cranes during the
recession, replenished their fleets.
Equipment sales in Western Canada during the fourth quarter of 2011
were $15.4 million, which was up from $15.1 million in the same quarter
of 2010. With the upward trend and sustainability in oil prices, economic
conditions in Alberta remained strong in the fourth quarter of 2011.
Construction activity and demand for heavy equipment, particularly
in Northern Alberta, remained robust in the fourth quarter. For the first
three quarters of 2011, Strongco outperformed the market in Western
Canada and captured a larger share of the growing market. However,
the Company’s market share showed a decline in the fourth quarter due
primarily to a lack of product availability and delayed deliveries from
the OEM suppliers. In addition, several RPO contracts were expected
to convert to sales in the fourth quarter but at the customers’ request
conversion was delayed to the first quarter of 2012. The market for
cranes in Alberta has been recovering since the recession but more
slowly than for other heavy equipment. Demand for cranes in Western
Canada, particularly in Northern Alberta, improved significantly in 2011.
Strongco’s crane sales in Western Canada in the fourth quarter of 2011
grew by 66% over the same period of 2010 and could have been higher
were it not for delivery delays from the OEM. The sales backlog of cranes
in Alberta remains strong and RPO activity has increased, which are
positive signs of continued recovery in the crane markets in Western
Canada.
Strongco’s equipment sales in the northeastern United States
were $10.1 million in the fourth quarter of 2011. The markets for heavy
equipment in New England remained soft in 2011 and well below prerecession levels. The traditional heavy equipment markets for residential
construction, road construction and other infrastructure improvements
in the region have remained weak. However, other markets for scrap
handling and waste management have experienced some increase in
activity and Chadwick-BaRoss’ sales in these less traditional markets
have risen. Equipment sales for the fourth quarter were slightly ahead of
the same period in 2010, but market share in this soft market declined
slightly in 2011 due primarily to product shortages and delivery delays
from the manufacturer.
28
Equipment Rentals
As heavy equipment markets continued to recover, rental activity,
including rentals under RPO contracts, remained strong in 2011. In
addition, Strongco’s crane business, which has traditionally not had a
significant rental element, experienced an increase in rental activity in
2011 as customers showed a preference to rent following the recession
and demand for cranes recovered. This trend continued in the fourth
quarter of the year. Strongco’s rental revenue in the fourth quarter of
2011 was $8.9 million, which was up from $7.3 million in 2010. Rental
revenue from the acquisition of Chadwick-BaRoss in February 2011
contributed $1.3 million of the increase in the quarter, while rental
revenue in Canada was up slightly by $0.3 million.
On a regional basis in Canada, rental revenue was up overall by
$0.3 million but activity varied from region to region. In Eastern Canada,
which has traditionally not been a major rental market, rental revenues
were $3.5 million in the quarter, which was up from $2.7 million a year
earlier. Most of the increase in Eastern Canada was the result of RPO
contracts for articulated trucks and loaders in Quebec. Rental revenues
were also strong in Alberta at $2.6 million, down slightly from $2.9 million
in the fourth quarter of 2010, demonstrating further evidence of recovery
in that province following the significant decline in rental activity during
the recession. Rental revenues in Ontario were $1.5 million, compared
to $1.7 million in 2010.
Product Support
The ongoing recovery in construction and infrastructure markets, the oil
and gas sector and other end use markets for heavy equipment in Canada
resulted in increased utilization of equipment, which in turn resulted in
continued growth in product support activity in 2011. Strongco’s product
support revenues in the fourth quarter of 2011 totalled $29.8 million,
including $4.3 million from the newly acquired Chadwick-BaRoss,
compared to $22.4 million in the fourth quarter of 2010.
Product support revenues were strong in all regions of Canada.
Strongco’s operations in Alberta, which experienced a significant drop
in product support revenues during the recession, experienced a steady
increase in product support activities in 2011 as customers continued
using their equipment. Parts and service revenues were $6.7 million in
Western Canada, which was up 31% from the fourth quarter of 2010.
In Eastern Canada (Quebec and Atlantic), which was least affected
by the recession, product support revenues in the fourth quarter were
$10.3 million, compared to $8.8 million last year. Recovery in construction
markets was slowest in Ontario. As a consequence, customers in that
province continued to curtail servicing their equipment, only making
critical repairs when necessary. Product support revenues in Ontario
were $8.5 million in the quarter, unchanged from a year earlier.
GROSS MARGIN
2011
Gross Margin
Equipment sales
Equipment rentals
Product support
Total gross margin
$
$
2010
$ millions
GM %
6.9
1.6
12.2
20.8
9.3%
18.5%
41.0%
18.4%
As a result of higher revenues, Strongco’s gross margin in the fourth
quarter of 2011 increased by $4.4 million, or 27%, over the fourth quarter
of 2010. As a percentage of revenue, total gross margin in the fourth
quarter of 2011 was 18.4%, which was up from 17.8% in the fourth
quarter of 2010, due mainly to sales mix, which included a greater
proportion of product support revenues in the fourth quarter of 2011.
The gross margin on equipment sales was $6.9 million, compared to
$6.3 million in the fourth quarter of 2010. As a percentage of sales, gross
margin on equipment sales was 9.3%, down from 10.1% in 2010. This
was due primarily to aggressive price competition and sales of older
equipment that, as a result of the weaker Canadian dollar at the time of
purchase, had higher costs.
The gross margin on rentals in the fourth quarter of 2011 was
$1.6 million, up from $1.1 million a year ago. The gross margin percentage
on rentals improved in the fourth quarter of 2011 to 18.5%, compared
to 15.1% in the same period in 2010.
The gross margin on product support activities improved to
$12.2 million from $9.0 million in the fourth quarter of 2010. As a
percentage of revenue, the gross margin on product support activities
was 41.0%, which was slightly higher than 40.1% in the fourth quarter
of 2010 due to a higher proportion of service revenue, which commands
higher margins than parts sales, and a slightly higher gross margin
percentage earned on service in 2011.
ADMINISTRATIVE, DISTRIBUTION AND SELLING EXPENSES
Administrative, distribution and selling expenses in the fourth quarter of
2011 were $17.0 million, or 15.0% of revenue, compared to $13.5 million
or 14.8% of revenues in the fourth quarter of 2010. Most of the increase
over 2010 relates to administration, distribution and selling expenses
of newly acquired Chadwick-BaRoss, which amounted to $2.2 million
in the quarter. In addition, with the stronger results, $1.6 million was
accrued in the fourth quarter of 2011 for anticipated payments under the
Company’s annual and long-term incentive plans and other employee
bonuses. With lower earnings in 2010, the accruals for employee
incentives and bonuses were much lower in the fourth quarter of 2010.
While certain other variable expenses were higher due to the increase in
revenues in the fourth quarter of 2011, administrative, distribution and
selling expenses for the quarter overall were flat year over year before
the incremental expenses of Chadwick-BaRoss and accrued bonuses.
$
$
2011/2010
$ millions
GM %
6.3
1.1
9.0
16.4
10.1%
15.1%
40.1%
17.8%
$
$
$ millions
% Change
0.6
0.5
3.2
4.4
10%
49%
36%
27%
OTHER INCOME
Other income and expense is primarily comprised of gains or losses on
disposition of fixed assets, foreign exchange gains or losses, service
fees received by Strongco as compensation for sales of new equipment
by other third parties into the regions where Strongco has distribution
rights for that equipment, and commissions received from third-party
financing companies for customer purchase financing Strongco places
with such finance companies.
Other income in the fourth quarter of 2011 was $0.7 million, compared
to income of $0.3 million in the fourth quarter of 2010. Other income in
2011 included a net unrealized foreign exchange gain of $0.3 million on
forward foreign exchange contracts purchased as a hedge to protect the
margin on specific future committed sales. In the fourth quarter of 2010,
Strongco incurred an unrealized net foreign exchange loss of $0.2 million
on forward foreign currency contracts. The unrealized foreign exchange
gains and losses arose from mark to market adjustments on forward
foreign exchange contracts as a result of changes in the Canadian/U.S.
dollar exchange rate during the year relative to the exchange rate in the
forward contracts.
INTEREST EXPENSE
Strongco’s interest expense was $1.6 million in the fourth quarter
of 2011, compared to $1.4 million in the fourth quarter of 2010. The
increase is due mainly to a higher average balance of interest-bearing
debt in the fourth quarter of 2011 compared to the fourth quarter of 2010.
Strongco’s interest-bearing debt comprises bank indebtedness,
interest-bearing equipment notes, various term loans from the Company’s
bank, and other notes payable. Strongco typically finances equipment
inventory under lines of credit available from various non-bank finance
companies. Most equipment financing has interest-free periods of up to
12 months from the date of financing, after which the equipment notes
become interest-bearing. The rate of interest on the Company’s bank
debt and interest-bearing equipment notes varies with prime rates and
BA rates (see discussion under “Cash Flow, Financial Resources and
Liquidity”). Prime rates and BA rates declined during the recession in
2009 but rose in 2010 and remained fairly stable through 2011.
29
During 2011, Strongco increased inventory levels in support of sales
growth, as well as its commitment to inventory for RPOs, which led to
a higher level of interest-bearing equipment notes throughout the year.
The acquisition of Chadwick-BaRoss in February 2011 for $11.1 million
was financed with debt from the Company’s operating line and a new
$5.0 million term loan from the Company’s bank, and US$1.9 million of
interest-bearing promissory notes issued to the previous shareholders
of Chadwick-BaRoss. In addition, the Company’s debt now includes
the bank debt, equipment notes and mortgage term loans of ChadwickBaRoss. Strongco also obtained a construction loan facility from its bank
during the year to finance the construction of a new branch facility in
Edmonton, Alberta, which added to the level of interest-bearing debt
in 2011.
PROVISION FOR INCOME TAX
Following its conversion to a corporation on July 1, 2010, Strongco is
now subject to income tax at corporate tax rates. As a consequence,
Strongco was able to utilize tax losses, including those previously
unrecognized from the Fund. In addition, on the adoption of IFRS,
temporary or timing differences between tax and accounting values
arose, resulting in a net deferred income tax asset. However, given the
Company’s history of losses, there is no certainty of realization of the
benefit of either the temporary differences or the losses from the Fund
previously unrecognized, and a valuation allowance was recorded for the
full amount of the deferred income tax asset. While Strongco generated
taxable income in Canada in the fourth quarter of 2011, the valuation
allowance was drawn down by $0.2 million in the quarter to recognize the
benefit of the tax loss carryforwards and other temporary differences,
which resulted in a provision for income tax in Canada of $0.7 million.
In addition, the tax provision related to Chadwick-BaRoss in the
United States amounted to $0.1 million in the fourth quarter of 2011.
NET INCOME (LOSS)
Strongco’s net income in the fourth quarter of 2011 was $2.1 million
($0.15 per share), which was in line with net income of $1.7 million ($0.17
per share) in the fourth quarter of 2010. The difference in EPS is largely
accounted for by an increase in outstanding equity to 13.1 million shares
at December 31, 2011, from 10.5 million at the same date in 2010.
30
EBITDA
EBITDA in the fourth quarter of 2011 was $12.5 million, which compares
to $10.3 million in the fourth quarter of 2010. EBITDA was calculated
as follows:
Three months
ended December 31
EBITDA ($ millions)
Net earnings (loss)
from continuing operations $
Add back:
Interest
Income taxes
Amortization of capital assets
Amortization of equipment
inventory on rent
Amortization of rental fleet
EBITDA (note 1)
$
2011
2.1
2010
$
1.7
Change
2011/2010
$
0.4
1.6
0.8
1.0
1.4
–
1.3
0.2
0.8
(0.3)
6.1
0.9
12.5
5.9
–
10.3
0.2
0.9
2.2
$
$
Note 1 – “EBITDA” refers to earnings before interest, income taxes, amortization of capital
assets, amortization of equipment inventory on rent and amortization of rental fleet. EBITDA
is presented as a measure used by many investors to compare issuers on the basis of ability
to generate cash flow from operations. EBITDA is not a measure of financial performance or
earnings recognized under IFRS and therefore has no standardized meaning prescribed by
IFRS and may not be comparable to similar terms and measures presented by other similar
issuers. The Company’s management believes that EBITDA is an important supplemental
measure in evaluating the Company’s performance and in determining whether to invest in
its shares. Readers of this information are cautioned that EBITDA should not be construed
as an alternative to net income or loss determined in accordance with IFRS as an indicator
of the Company’s performance or to cash flows from operating, investing and financing
activities as a measure of the Company’s liquidity and cash flows.
CASH FLOW, FINANCIAL RESOURCES AND LIQUIDITY
Cash Provided by Operating Activities
During the fourth quarter of 2011, Strongco’s operating activities provided
$13.5 million of cash before changes in working capital. However,
$7.1 million of cash was used to increase net working capital, $1.3
million to fund future employee benefits, $1.6 million to pay interest and
$0.1 million to pay taxes, resulting in net cash from operations in the
quarter of $3.4 million. By comparison, in the fourth quarter of 2010,
$11.7 million of cash was provided by operating activities before
changes in working capital, $7.9 million was used to increase working
capital, $1.5 million to fund future employee benefits and $1.4 million to
pay interest, resulting in net cash from operating activities of $0.9 million.
The components of cash provided by operating activities were as
follows:
($ millions)
Net earnings (loss)
Non-cash items:
Depreciation – equipment
inventory on rent
Depreciation – capital assets
Gain on sale of rental equipment
Interest expense
Other
Changes in non-cash
working capital balances
Employee future benefit funding
Interest paid
Income taxes paid
Cash provided by operating activities
2011
$
$
2.1
2010
$
1.8
6.1
1.1
0.9
(0.7)
1.6
0.8
(0.4)
(1.0)
3.2
(0.1)
13.5
5.9
1.3
–
–
1.3
(1.0)
–
1.0
1.4
–
11.7
(7.1)
(1.3)
(1.6)
(0.1)
3.4
(7.9)
(1.5)
(1.4)
–
0.9
$
Non-cash items include amortization of equipment inventory on rent of
$6.1 million, compared to $5.9 million in the fourth quarter of 2010. Higher
volumes of equipment rentals in 2011 resulted in higher amortization of
equipment inventory on rent.
The components of the net change in non-cash working capital for
the three-month period ended December 31, 2011 and 2010 were as
follows:
($ millions) (Increase)/Decrease
Inventories
Prepaids
Other assets
2011
$
$
$
$
(3.4)
5.9
0.7
0.1
3.3
(4.3)
0.4
(7.3)
(11.2)
$
(7.1)
$
(7.9)
$
Net (increase) decrease
in non-cash working capital
2010
0.4
(3.7)
0.3
0.1
(2.9)
(4.8)
0.2
0.4
(4.2)
$
Strongco’s revenues increased through 2011, and to support this
growth, Strongco made a net investment in working capital of
$7.1 million during the fourth quarter. The largest investment was in
inventory in response to the increase in sales and service activity.
In addition, as OEMs struggled to ramp up production to meet the
increase in demand, their delivery performance deteriorated, which
led to product shortages and significantly extended delivery lead
times. In the fourth quarter of 2011, Strongco received a large quantity
of equipment inventory from its major OEM suppliers that had been
ordered for delivery earlier in the year. This, in particular, contributed
to a higher than normal investment in inventory in the fourth quarter.
The OEM suppliers have offered extended interest-free financing on
these late-delivered inventories and with markets for heavy equipment
continuing to be robust, management is confident this higher level of
inventory will be sold through the summer season in 2012. The net
increase in inventory in the fourth quarter of 2011 was $3.7 million, the
majority of which was equipment inventory. By comparison, inventories
(mainly equipment) decreased by $5.9 million in 2010.
Cash Provided by (Used in) Investing Activities
Cash used in investing activities in the fourth quarter of 2011 totalled
$5.3 million. Chadwick-BaRoss maintains a fleet of rental equipment, and
during the quarter it purchased $4.3 million of new rental fleet assets and
sold rental fleet assets for proceeds of $3.0 million. Capital expenditures
in the fourth quarter of 2011 totalled $4.0 million, the majority of which
was for the construction of a new branch in Edmonton, Alberta.
The components of cash provided by (used in) investing activities
were as follows:
($ millions)
2011
Purchase of rental fleet assets
Proceeds from sale of rental fleet assets
Purchase of capital assets
Cash provided by (used in)
investing activities
2010
$
(4.3)
3.0
(4.0)
$
–
–
0.2
$
(5.3)
$
0.2
Cash Provided by (Used in) Financing Activities
In the fourth quarter of 2011, net cash of $1.9 million was provided
by financing activities, compared to net cash of $1.1 million used in
financing activities in the fourth quarter of 2010.
The significant sources and uses of cash in financing activities in the
fourth quarter of 2011 were as follows:
• To help finance the purchase of Chadwick-BaRoss, the Company
secured a $5.0 million term loan from its bank in April (see discussion
under “Bank Credit Facilities” above). Repayments of this term loan
amounted to $0.2 million in the quarter.
• The Company issued promissory notes to the previous shareholders
of Chadwick-BaRoss on the acquisition of their company in the first
31
•
•
•
•
quarter totalling $1.9 million (see discussion under “Acquisition of
Chadwick-BaRoss” above). Payments against these vendor takeback notes were $0.2 million in the quarter.
To support the construction of its new Edmonton branch, the
Company secured a construction loan from its bank (see discussion under “Bank Credit Facilities” above). Borrowing under this
construction loan amounted to $2.1 million in the quarter.
To finance the increase in rental fleet assets in the United States,
the Company increased borrowing under its equipment note lines
of credit by $0.8 million in the quarter.
Cash of $0.2 million was provided by increasing the Company’s bank
indebtedness in the quarter.
Repayments under finance leases (primarily service vehicles and
computer equipment) amounted to $0.8 million in the quarter.
The components of cash provided by (used in) financing activities
in the fourth quarter were as follows:
($ millions)
2011
Repayment of term loan
– acquisition of Chadwick-BaRoss, Inc. $
Repayment of acquisition promissory notes
Construction loan – new Edmonton branch
Increase in long-term equipment notes
Cash provided by (used in)
financing activities
$
2010
(0.2)
(0.2)
2.1
0.8
0.2
(0.8)
$
–
–
–
–
0.2
(1.3)
1.9
$
(1.1)
Summary of Quarterly Data
In general, business activity follows a weather-related pattern of seasonality. Typically, the first quarter is the weakest of the year as construction
and infrastructure activity is constrained in the winter months. This is followed by a strong gain in the second quarter, as construction and other
contracts begin to be tendered and companies begin to prepare for summer activity. The third quarter generally tends to be slightly slower from an
equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter
activity generally strengthens as customers make year-end capital spending decisions and exercise purchase options on equipment which has
previously gone out on RPOs. In addition, purchases of snow removal equipment are typically made in the fourth quarter. However, as a result of
depressed economic conditions and significantly reduced construction activity in Canada, the markets for heavy equipment in 2009 were extremely
weak throughout the year. Construction markets and demand for heavy equipment began to recover in 2010 and continued to improve in 2011.
A summary of quarterly results for the current and previous two years is as follows:
2011
Q4
Q3
Q2
Q1
Revenue
Earnings from continuing operations before income taxes
Net income
$
113.2
2.9
2.1
$
108.4
3.8
3.6
$
114.1
3.8
3.6
$
87.5
0.7
0.6
Basic and diluted earnings per share
$
0.15
$
0.28
$
0.28
$
0.05
2010
($ millions, except per unit/share amounts)
Q4
Q3
Q2
Q1
Revenue
Earnings (loss) from continuing operations before income taxes
Net income (loss)
$
91.8
1.7
1.7
$
79.6
(0.3)
(0.3)
$
69.6
(0.3)
(0.3)
$
53.7
(2.1)
(2.1)
Basic and diluted earnings (loss) per unit/share
$
0.17
$
(0.03)
$
(0.03)
$
(0.19)
2009 (note 1)
($ millions, except per unit amounts)
Q4
Q3
Q2
Q1
Revenue
Earnings (loss) from continuing operations before income taxes
Net income (loss)
$
67.5
(1.8)
(2.1)
$
74.6
0.1
(0.5)
$
76.7
2.0
1.4
$
73.0
1.2
1.2
Basic and diluted earnings (loss) per unit
$
(0.20)
$
(0.05)
$
0.14
$
0.11
Note 1 – 2009 figures do not reflect adjustments necessary to comply with IFRS.
32
A discussion of the Company’s previous quarterly results can be found
in the quarterly Management’s Discussion and Analysis reports available
on SEDAR at www.sedar.com.
Contractual Obligations
The Company has contractual obligations for operating lease commitments totalling $20.4 million. In addition, the Company has contingent
contractual obligations where it has agreed to buy back equipment from
customers at the option of the customer for a specified price at future
dates (“buy-back contracts”). These buy-back contracts are subject to
certain conditions being met by the customer and range in term from
three to 10 years. The Company’s maximum potential losses pursuant to
the majority of these buy-back contracts are limited, under an agreement
with the original equipment manufacturer, to 10% of the original sale
amounts. In addition, this agreement provides a financing arrangement
in order to facilitate the buy back of equipment. As at December 31,
2011, outstanding buy-back contracts totalled $13.5 million, compared
to $10.3 million at December 31, 2010. A reserve of $1.1 million has
been accrued in the Company’s accounts as at December 31, 2011
with respect to these commitments, compared to a reserve of $0.9
million a year ago.
The Company has provided a guarantee of lease payments under
the assignment of a property lease which expires January 31, 2014.
Total lease payments from January 1, 2012 to January 31, 2014 are
$0.3 million.
Contractual obligations are set out in the following tables. Management believes that the Company will generate sufficient cash flow from
operations to meet its contractual obligations.
Payment due by period
($ millions)
Operating leases
Less Than
Total
1 Year
$ 20.4
$ 4.8
1 to 3
years
$ 7.8
$
4 to 5
years
After 5
years
4.9
$ 2.9
Contingent obligation by period
($ millions)
Buy-back contracts
Less Than
Total
1 Year
$ 13.5
$ 1.9
1 to 3
years
$ 4.6
4 to 5
years
$
7.0
After 5
years
$
–
Shareholder Capital
The Company is authorized to issue an unlimited number of shares. All
shares are of the same class of common shares with equal rights and
privileges. Effective July 1, 2010, Strongco converted from a trust to a
corporation and all outstanding trust units of the Fund were exchanged
for shares of Strongco Corporation on a one-for-one basis, after which
the Fund was wound up into Strongco Corporation (see discussion
under “Conversion to a Corporation” above).
On January 17, 2011, the Company completed a rights offering
under which 2.62 million additional shares were issued pursuant to the
rights issued to existing shareholders for gross proceeds of $7.8 million
(refer to the Company’s Rights Offering Circular filed on SEDAR for
details). The total number of shares outstanding following completion
of the rights offering was 13,128,719.
Common Shares Issued and Outstanding Shares
Common shares outstanding as at December 31, 2010
Common shares issued under rights offering
Common shares outstanding as at December 31, 2011
Number of Shares
10,508,719
2,620,000
13,128,719
Outlook
The Canadian economy in general and construction markets across
Canada are expected to continue to improve throughout 2012, which
should result in strong demand for heavy equipment.
Mild weather conditions have affected equipment usage in much
of the country and significantly curtailed oilfield activities in Northern
Alberta. In addition, the Ontario government has announced a slowdown
in infrastructure activity. These factors have tempered demand for heavy
equipment and product support in the first quarter of 2012. As a result,
revenue growth in the first quarter of 2012 may also be moderated, but
backlogs in the early part of the year remain strong and growing.
An important contribution to anticipated growth in 2012 is expected
from Alberta. Oil prices have continued to show strength and stability,
powering an ongoing economic upturn in the province. In particular, the
outlook for Northern Alberta and the oil sands is for continued significant
investment over the next several years, which bodes well for heavy
equipment demand in the region.
Equipment suppliers are expected to improve product availability and
delivery lead times in 2012. Inventory levels at Strongco were allowed
to run slightly higher than normal at year end to ensure availability of
product as the Company enters the prime selling season. Consequently,
product availability is not expected to affect the Company’s sales in
2012. Strongco’s significant position with its equipment suppliers should
allow the Company to optimize equipment deliveries.
Management remains cautiously optimistic that the improvement
in the Canadian economy in 2011 will continue in 2012, which is
expected to increase revenues. In addition, while market conditions in
the northeastern United States were weak, Chadwick-BaRoss realized
modest growth in 2011 and contributed positively to Strongco’s overall
results. Chadwick-BaRoss services a broad range of market sectors in
Maine, New Hampshire and Massachusetts. Demand for equipment in
these regions is expected to show a modest increase in 2012, which
should contribute to improved revenue and profitability in 2012.
33
Non-IFRS Measures
“EBITDA” refers to earnings before interest, income taxes, amortization
of capital assets, amortization of equipment inventory on rent and
amortization of rental fleet. EBITDA is presented as a measure used by
many investors to compare issuers on the basis of ability to generate cash
flow from operations. EBITDA is not a measure of financial performance or
earnings recognized under International Financial Reporting Standards
(“IFRS”) and therefore has no standardized meaning prescribed by IFRS
and may not be comparable to similar terms and measures presented by
other similar issuers. The Company’s management believes that EBITDA
is an important supplemental measure in evaluating the Company’s
performance and in determining whether to invest in its shares. Readers
of this information are cautioned that EBITDA should not be construed
as an alternative to net income or loss determined in accordance with
IFRS as an indicator of the Company’s performance or to cash flows
from operating, investing and financing activities as a measure of the
Company’s liquidity and cash flows.
Critical Accounting Estimates
The preparation of financial statements in conformity with IFRS requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities in the financial statements.
The Company bases its estimates and assumptions on past experience
and various other assumptions that are believed to be reasonable in
the circumstances. This involves varying degrees of judgment and
uncertainty, which may result in a difference in actual results from these
estimates. The more significant estimates are as follows:
INVENTORY VALUATION
The value of the Company’s new and used equipment is evaluated by
management throughout each year. Where appropriate, a provision
is recorded against the book value of specific pieces of equipment to
ensure that inventory values reflect the lower of cost and estimated net
realizable value. The Company identifies slow-moving or obsolete parts
inventory and estimates appropriate obsolescence provisions by aging
the inventory. The Company takes advantage of supplier programs
that allow for the return of eligible parts for credit within specified time
periods. The inventory provision as at December 31, 2011, with changes
from December 31, 2010, is as follows:
Provision for Inventory Obsolescence
($ millions)
Provision for inventory obsolescence as at December 31, 2010 $
Provision related to business acquisition
Provision related to inventory disposed of during the year
Additional provisions made during the year
Provision for inventory obsolescence as at December 31, 2011 $
34
3.0
1.3
(0.5)
1.5
5.3
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs credit evaluations of customers and limits the
amount of credit extended to customers as appropriate. The Company
is, however, exposed to credit risk with respect to accounts receivable
and maintains provisions for possible credit losses based upon historical
experience and known circumstances. The allowance for doubtful
accounts as at December 31, 2011, with changes from December 31,
2010, is as follows:
Allowance for Doubtful Accounts
($ millions)
Allowance for doubtful accounts as at December 31, 2010
Accounts written off during the year
Additional provisions made during the year
Allowance for doubtful accounts as at December 31, 2011
$
$
1.2
0.3
(0.2)
0.5
1.8
POST-RETIREMENT OBLIGATIONS
Strongco performs a valuation at least every three years to determine the
actuarial present value of the accrued pension and other non-pension
post-retirement obligations. Pension costs are accounted for and
disclosed in the notes to the financial statements on an accrual basis.
Strongco records employee future benefit costs other than pensions
on an accrual basis. The accrual costs are determined by independent
actuaries using the projected benefit method prorated on service and
based on assumptions that reflect management’s best estimates.
The assumptions were determined by management, recognizing the
recommendations of Strongco’s actuaries. These key assumptions
include the rate used to discount obligations, the expected rate of return
on plan assets, the rate of compensation increase and the growth rate
of per capita health care costs.
The discount rate is used to determine the present value of future
cash flows that the Company expects will be required to pay employee
benefit obligations. Management’s assumptions of the discount rate
are based on current interest rates on long-term debt of high-quality
corporate issuers.
The assumed return on pension plan assets of 6.5% per annum is
based on expectations of long-term rates of return at the beginning
of the fiscal year and reflects a pension asset mix consistent with the
Company’s investment policy.
The costs of employee future benefits other than pensions are
determined at the beginning of the year and are based on assumptions
for expected claims experience and future health care cost inflation.
Changes in assumptions will affect the accrued benefit obligation
of Strongco’s employee future benefits and the future years’ amounts
that will be charged to results of operations.
FUTURE INCOME TAXES
At each quarter end the Company evaluates the value and timing of
the Company’s temporary differences. Future income tax assets and
liabilities, measured at substantively enacted tax rates, are recognized
for all temporary differences caused when the tax bases of assets
and liabilities differ from those reported in the consolidated financial
statements.
Changes or differences in these estimates or assumptions may result
in changes to the current or future tax balances on the consolidated
balance sheet, a charge or credit to income tax expense in the consolidated statements of earnings and may result in cash payments or
receipts. Where appropriate, the provision for future income taxes and
future income taxes payable are adjusted to reflect management’s best
estimate of the Company’s future income tax accounts.
Risks and Uncertainties
Strongco’s financial performance is subject to certain risk factors which
may affect any or all of its business sectors. The following is a summary of risk factors which are felt to be the most relevant. These risks
and uncertainties are not the only ones facing the Company. Additional
risks and uncertainties not currently known to the Company, or which
it currently considers immaterial, may also impair the operations of the
Company. If any such risks actually occur, the business, financial condition or liquidity and results of operations of the Company, its ability to
pay dividends to shareholders and the trading price of the Company’s
shares could be adversely affected.
BUSINESS AND ECONOMIC CYCLES
Strongco operates in a capital intensive environment. Strongco’s
customer base consists of companies operating in the construction
and urban infrastructure, aggregates, forestry, mining, municipal, utility,
industrial and resource sectors, which are all affected by trends in
general economic conditions within their respective markets. Changes
in interest rates, commodity prices, exchange rates, availability of capital
and general economic prospects may all impact their businesses by
affecting levels of consumer, corporate and government spending.
Strongco’s business and financial performance is largely affected by
the impact of such business cycle factors on its customer base. The
Company has endeavoured to minimize this risk by: (i) operating in
various geographic territories across Canada, with the belief that not
all regions are subject to the same economic factors at the same time;
(ii) serving a variety of industries which respond differently at different
points in time to business cycles; and (iii) seeking to increase the
Company’s focus on customer support (parts and service) activities,
which are less subject to changes in the economic cycle.
COMPETITION
Strongco faces strong competition from various distributors of products
which compete with the products it sells. The Company competes with
regional and local distributors of competing product lines. Strongco
competes on the basis of: (i) relationships maintained with customers
over many years of service; (ii) prompt customer service through
a network of sales and service facilities in key locations; (iii) access
to products; and (iv) the quality and price of those products. In most
product lines in most geographic areas in which Strongco operates,
its main competitors are distributors of products manufactured by
Caterpillar, John Deere, Komatsu and Hitachi, and other smaller brands.
MANUFACTURER RISK
Most of Strongco’s equipment distribution business consists of selling
and servicing mobile equipment products manufactured by others.
As such, Strongco’s financial results may be directly impacted by: (i)
the ability of the manufacturers it represents to provide high-quality,
innovative and widely accepted products on a timely and cost-effective
basis; and (ii) the continued independence and financial viability of such
manufacturers.
Most of Strongco’s equipment distribution business is governed
by distribution agreements with the original equipment manufacturers,
including Volvo, Case and Manitowoc. These agreements grant the
right to distribute the manufacturers’ products within defined territories,
which typically cover an entire province. It is an industry practice that,
within a defined territory, a manufacturer grants distribution rights to only
one distributor. This is true of all the distribution arrangements entered
into by Strongco. Most distribution agreements are cancellable upon
60 to 90 days notice by either party.
Some of Strongco’s equipment suppliers provide floor plan financing to assist with the purchase of equipment inventory. In some cases
this is done by the manufacturer, and in other cases the manufacturer
engages a third-party lender to provide the financing. Most floor plan
arrangements include an interest-free period of up to seven months.
The termination of one or more of Strongco’s distribution agreements
with its original equipment manufacturers, as a result of a change in
control of the manufacturer or otherwise, may have a negative impact
on the operations of Strongco.
In addition, availability of products for sale is dependent upon the
absence of significant constraints on the supply of products from original
equipment manufacturers. During times of intense demand or during
any disruption of the production of such equipment, Strongco’s
equipment manufacturers may find it necessary to allocate their limited
supply of particular products among their distributors.
The ability of Strongco to maintain and expand its customer base
is dependent upon the ability of Strongco’s suppliers to continuously
improve and sustain the high quality of their products at a reasonable
cost. The quality and reputation of their products is not within Strongco’s
control and there can be no assurance that Strongco’s suppliers will
be successful in improving and sustaining the quality of their products.
35
The failure of Strongco’s suppliers to maintain a market presence could
have a material impact upon the earnings of the Company.
The Company believes that this element of risk has been
mitigated through the representation of its equipment manufacturers
with demonstrated ability to produce a competitive, well accepted,
high-quality product range and by distributing products of multiple
manufacturers.
In addition, distribution agreements with these manufacturers are
cancellable by either party within a relatively short notice period, as
specified in the relevant distribution agreement. However, Strongco
believes that it has established strong relationships with its key
manufacturers and maintains significant market share for their products,
and as a result is at little risk of distribution agreements being cancelled.
CONTINGENCIES
In the ordinary course of business, the Company may be exposed to
contingent liabilities in varying amounts for which provisions have been
made in the consolidated financial statements as appropriate. These
liabilities could arise from litigation, environmental matters or other
sources.
A statement of claim has been filed naming a division of the Company
as one of several defendants in proceedings under the Superior Court
of Quebec. The action claims errors and omissions in the contractual
execution of work entrusted to the defendants, and names the Company
as jointly and severally liable for damages of approximately $5.9 million.
The Company’s counsel has filed a statement of defence and discoveries
are underway. A trial date has not yet been set. Although it is impossible
to predict the outcome at this time, based on the opinion of external legal
counsel, the Company believes that it has a strong defence against the
claim and that it is without merit.
A statement of claim has been filed naming a former division of the
Company as one of several defendants in proceedings under the Court
of Queen’s Bench of Manitoba. The action claims errors and omissions
in the contractual execution of work entrusted to the defendants, and
names the Company as jointly and severally liable for damages of
approximately $4.9 million. Although the outcome is indeterminable
at this early stage of the proceedings, the Company believes that it
has a strong defence against the claim and that it is without merit. The
Company’s insurer has provided conditional coverage for this claim.
DEPENDENCE ON KEY PERSONNEL
The expertise and experience of its senior management is an important
factor in Strongco’s success. Strongco’s continued success is thus
dependent on its ability to attract and retain experienced management.
INFORMATION SYSTEMS
The Company utilizes a legacy business system that has been successfully
in operation for over 15 years. As with any business system, it is necessary
to evaluate its adequacy and support for current and future business
demands. The system was written and supported by the Company’s
former Information Systems Manager, who retired on December 31, 2006.
36
The Company is utilizing an outside consultant to support its current
system and is currently evaluating alternative systems as potential
replacements for its current system.
FOREIGN EXCHANGE
While the majority of the Company’s sales are in Canadian dollars,
significant portions of its purchases are in U.S. dollars. While the
Company believes that it can maintain margins over the long term, short,
sharp fluctuations in exchange rates may have a short-term impact on
earnings. In order to minimize the exposure to fluctuations in exchange
rates, the Company enters into foreign exchange forward contracts on
a transaction-specific basis.
INTEREST RATE
Interest rate risk arises from potential changes in interest rates that
impact the cost of borrowing. The majority of the Company’s debt
is floating rate debt, which exposes the Company to fluctuations in
short-term interest rates (see discussion under “Cash Flow, Financial
Resources and Liquidity” above).
RISKS RELATING TO THE SHARES
Unpredictability and Volatility of Share Price
A publicly-traded company will not necessarily trade at values determined
by reference to the underlying value of its business. The prices at which
the shares will trade cannot be predicted. The market price of the shares
could be subject to significant fluctuations in response to variations in
quarterly operating results and other factors. The annual yield on the
shares as compared to the annual yield on other financial instruments
may also influence the price of shares in the public trading markets. In
addition, the securities markets have experienced significant price and
volume fluctuations from time to time in recent years that often have
been unrelated or disproportionate to the operating performance of
particular issuers. These broad fluctuations may adversely affect the
market price of the shares.
LEVERAGE AND RESTRICTIVE COVENANTS
The existing credit facilities contain restrictive covenants that limit the
discretion of Strongco’s management with respect to certain business
matters and may, in certain circumstances, restrict the Company’s ability
to pay dividends, which could adversely impact cash dividends on the
shares. These covenants place restrictions on, among other things,
the ability of the Company to incur additional indebtedness, to create
other security interests, to complete amalgamations and acquisitions,
to make capital expenditures, to pay dividends or make certain other
payments and guarantees, and to sell or otherwise dispose of assets.
The existing credit facilities also contain financial covenants requiring
the Company to satisfy financial ratios and tests (see discussion under
“Cash Flow, Financial Resources and Liquidity” above). A failure of
the Company to comply with its obligations under the existing credit
facilities could result in an event of default which, if not cured or waived,
could permit the acceleration of the relevant indebtedness. The existing
credit facilities are secured by customary security for transactions of this
type, including first ranking security over all present and future personal
property of the Company, a mortgage over the Company’s central real
property and an assignment of insurance. If the Company is not able
to meet its debt service obligations, it risks the loss of some or all of its
assets to foreclosure or sale. There can be no assurance that, at any
particular time, if the indebtedness under the existing credit facilities
were to be accelerated, the Company’s assets would be sufficient to
repay in full that indebtedness.
The existing credit facilities are payable on demand following
an event of default and are renewable annually. If the existing credit
facilities are replaced by new debt that has less favourable terms or if
the Company cannot refinance its debt, funds available for operations
may be adversely impacted.
RESTRICTIONS ON POTENTIAL GROWTH
The payout by the Company of a significant portion of its operating cash
flow will make additional capital and operating expenditures dependent
on increased cash flow or additional financing in the future. Lack of those
funds could limit the future growth of the Company and its cash flow.
Disclosure Controls and Internal Controls
Over Financial Reporting
DISCLOSURE CONTROLS
Management is responsible for establishing and maintaining disclosure
controls and procedures in order to provide reasonable assurance that
material information relating to the Company is made known to them in a
timely manner and that information required to be disclosed is reported
within time periods prescribed by applicable securities legislation. There
are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error
and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can
only provide reasonable assurance of achieving their control objectives.
Based on management’s evaluation of the design and effectiveness of
the Company’s disclosure controls and procedures, the Company’s
Chief Executive Officer and Chief Financial Officer have concluded that
these controls and procedures have been designed and are operating
effectively as of December 31, 2011 to provide reasonable assurance
that the information being disclosed is recorded, summarized and
reported as required.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal controls over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS.
Internal control systems, no matter how well designed, have inherent
limitations and therefore can only provide reasonable assurance as to
the effectiveness of internal controls over financial reporting, including
the possibility of human error and the circumvention or overriding of
the controls and procedures. Management used the Internal Control
– Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) as the control
framework in designing its internal controls over financial reporting.
Based on management’s design and testing of the effectiveness of the
Company’s internal controls over financial reporting, the Company’s
Chief Executive Officer and Chief Financial Officer have concluded
that these controls and procedures have been designed and are
operating effectively as of December 31, 2011 to provide reasonable
assurance that the financial information being reported is materially
accurate. During the fourth quarter ended December 31, 2011, there
have been no changes in the design of the Company’s internal controls
over financial reporting that have materially affected, or are reasonably
likely to materially affect, its internal controls over financial reporting.
Forward-Looking Statements
This Management’s Discussion and Analysis contains forward-looking
statements that involve assumptions and estimates that may not be
realized, and other risks and uncertainties. These statements relate
to future events or future performance and reflect management’s
current expectations and assumptions, which are based on information
currently available to the Company’s management. The forwardlooking statements include but are not limited to: (i) the ability of the
Company to meet contractual obligations through cash flow generated
from operations; (ii) the expectation that customer support revenues
will grow following the warranty period on new machine sales; and
(iii) the outlook for 2012. There is significant risk that forward-looking
statements will not prove to be accurate. These statements are based
on a number of assumptions including, but not limited to, continued
demand for Strongco’s products and services. A number of factors
could cause actual events, performance or results to differ materially
from the events, performance and results discussed in the forwardlooking statements. The inclusion of this information should not be
regarded as a representation of the Company or any other person that
the anticipated results will be achieved, and investors are cautioned
not to place undue reliance on such information. These forward-looking
statements are made as of the date of this MD&A, or as otherwise stated,
and the Company does not assume any obligation to update or revise
them to reflect new events or circumstances.
Additional information, including the Company’s Annual Information
Form, may be found on SEDAR at www.sedar.com.
37
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying audited consolidated financial statements of Strongco Corporation (“Strongco” or “the Company”) were prepared by management
in accordance with International Financial Reporting Standards. Management acknowledges responsibility for the preparation and presentation
of the audited consolidated financial statements, including responsibility for significant accounting judgments and estimates and the choice of
accounting principles and methods that are appropriate to the Company’s circumstances. The significant accounting policies of the Company are
summarized in note 2 to the audited consolidated financial statements.
Management has established processes which are in place to provide them with sufficient knowledge to support management representations
that they have exercised reasonable diligence that: (i) the audited consolidated financial statements do not contain any untrue statement of material
fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under
which it is made, as of the date of and for the years presented by the audited consolidated financial statements; and (ii) the audited consolidated
financial statements present fairly in all material respects the financial position, financial performance and cash flows of the Company, as of the
date of and for the years presented in the audited consolidated financial statements.
The Board of Directors is responsible for reviewing and approving the audited consolidated financial statements together with other financial
information of the Company and for ensuring that management fulfills its financial reporting responsibilities. An Audit Committee assists the Board
of Directors in fulfilling this responsibility. The Audit Committee meets with management to review the financial reporting process and the audited
consolidated financial statements together with other financial information of the Company. The Audit Committee reports its findings to the Board of
Directors for its consideration in approving the audited consolidated financial statements together with other financial information of the Company
for issuance to the shareholders.
Management recognizes its responsibility for conducting the Company’s affairs in compliance with established financial standards, applicable
laws and regulations, and for maintaining proper standards of conduct for its activities.
March 21, 2012
38
J. David Wood
Chief Financial Officer
INDEPENDENT AUDITORS’ REPORT
TO THE SHAREHOLDERS OF STRONGCO CORPORATION:
We have audited the accompanying consolidated financial statements of Strongco Corporation, which comprise the consolidated statement of
financial position as at December 31, 2011 and 2010, and January 1, 2010, and the consolidated statements of income (loss), comprehensive
income (loss), changes in shareholders’ equity and cash flows for the years ended December 31, 2011 and 2010, and a summary of significant
accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Strongco Corporation as at
December 31, 2011 and 2010, and January 1, 2010, and its financial performance and its cash flows for the years ended December 31, 2011 and
2010 in accordance with International Financial Reporting Standards.
Toronto, Canada
March 21, 2012
Ernst & Young, LLP
Chartered Accountants
Licensed Public Accountants
39
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(in thousands of Canadian dollars, unless otherwise indicated)
December 31, 2011
ASSETS
Current assets
Trade and other receivables (note 6)
Inventories (note 7)
Prepaid expenses and other deposits
$
Non-current assets
Property and equipment (note 8)
Rental fleet (note 8)
Deferred income tax asset (note 14)
Intangible asset (note 9)
Other assets
Total assets
$
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank indebtedness (note 13 (a))
Trade and other payables (note 11)
Provision for other liabilities (note 15)
– non-interest-bearing (note 12)
– interest-bearing (note 12)
Current portion of finance lease obligations (note 13 (b))
Current portion of notes payable (note 13 (c))
$
Shareholders’ capital (note 16)
Accumulated other comprehensive income
Contributed surplus
Deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
Approved by the Board of Directors
Robert J. Beutel
Director
40
Ian Sutherland
Director
31,278
15,564
1,541
1,800
146
50,329
304,636
10,951
34,986
1,198
971
$
$
$
35,884
159,988
1,452
197,324
15,849
–
–
1,800
188
17,837
215,161
12,370
28,829
1,436
1,321
January 1, 2010
$
$
$
27,088
144,461
1,255
172,804
15,949
–
–
1,800
243
17,992
190,796
10,014
19,648
1,366
515
72,262
88,151
2,110
6,242
216,871
40,097
78,063
959
1,233
164,308
28,671
76,172
954
1,094
138,434
$
2,565
3,291
13,558
11,760
31,174
248,045
$
–
1,502
–
4,374
5,876
170,184
$
–
1,154
1,218
4,455
6,827
145,261
$
64,898
205
498
(9,010)
56,591
304,636
$
57,089
–
315
(12,427)
44,977
215,161
$
57,089
–
–
(11,554)
45,535
190,796
Non-current liabilities
Deferred income tax liability (note 14)
Finance lease obligations (note 13 (b))
Notes payable (note 13 (c))
Employee future benefit obligations (note 10)
Total liabilities
Contingencies, commitments and guarantees (note 23)
42,759
210,128
1,420
254,307
December 31, 2010
CONSOLIDATED STATEMENT OF INCOME (LOSS)
(in thousands of Canadian dollars, unless otherwise indicated, except share and per share amounts)
For the years ended December 31
Revenue (note 17)
Cost of sales (note 19)
Gross profit
2011
$
Expenses
Administration (notes 6, 10 and 19)
Distribution (note 19)
Selling (note 19)
Other income (note 18)
Operating income
Interest expense (note 20)
Income (loss) before income taxes
423,153
342,601
80,552
2010
$
294,657
237,971
56,686
31,383
20,057
13,302
(1,163)
16,973
26,760
16,879
9,896
(740)
3,891
5,841
4,816
11,132
(925)
Provision for income taxes (note 14)
Net income (loss) attributable to shareholders for the period
$
1,203
9,929
$
–
(925)
Earnings (loss) per share (note 21)
Basic and diluted
$
0.76
$
(0.08)
Weighted average number of shares (note 21)
– basic
– diluted
13,049,126
13,088,968
11,053,608
11,053,608
41
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Net income (loss) attributable to shareholders for the year
Other comprehensive income (loss)
Actuarial gain (loss) on post-employment benefit obligations (net of tax of $2,244)
Currency translation adjustment
Comprehensive income (loss) attributable to shareholders for the year
42
2011
$
9,929
$
(6,512)
205
3,622
2010
$
(925)
$
52
–
(873)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
Shareholders’
capital
Number of units
Balance – January 1, 2010
10,508,719
$
Net (loss) for the period
Other comprehensive loss
Post-employment benefit
obligations (net of tax)
Contributed surplus
Balance – December 31, 2010
10,508,719
$
Net income for the period
Other comprehensive loss
Post-employment benefit
obligations (net of tax)
Currency translation adjustment
Issuance of shares (note 16)
Contributed surplus
10,508,719
$
2,620,000
13,128,719
$
$
–
Contributed
surplus
$
–
Deficit
$
(11,554)
Total
$
45,535
–
–
–
(925)
(925)
–
–
–
–
–
315
52
–
52
315
57,089
Shareholders’
capital
Number of units
57,089
Accumulated other
comprehensive loss
57,089
$
–
$
Accumulated other
comprehensive loss
$
–
315
$
Contributed
surplus
$
315
(12,427)
$
Deficit
$
(12,427)
44,977
Total
$
44,977
–
–
–
9,929
9,929
–
–
7,809
–
–
205
–
–
–
–
–
183
(6,512)
–
–
–
(6,512)
205
7,809
183
64,898
$
205
$
498
$
(9,010)
$
56,591
43
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of Canadian dollars)
Cash flows from operating activities
Net income (loss) for the year
Adjustments for
Depreciation – property and equipment
Depreciation – equipment inventory on rent
Gain on disposal of property and equipment
Gain on sale of rental fleet
Contributed surplus
Interest expense
Foreign exchange gain
Changes in working capital (note 28)
Funding of employee future benefit obligations
Interest paid
Income taxes paid
Net cash provided by operating activities
Cash flows from investing activities
Business acquisition net of cash acquired (note 4)
Purchase of rental fleet
Proceeds from sale of rental fleet
Purchase of property and equipment
Proceeds from sale of property and equipment
Net cash used in investing activities
Cash flows from financing activities
Increase in long-term debt
Repayment of long-term debt
Issue of share capital
Repayment of business acquisition purchase financing
Net cash provided by (used in) financing activities
Foreign exchange on cash balances
Change in cash and cash equivalents during the period
Cash and cash equivalents – Beginning of period
Cash and cash equivalents – End of period
44
2011
$
9,929
$
2,975
20,668
2,447
(40)
(997)
183
5,841
1,203
(400)
(1,297)
3,883
(10)
(26,168)
(2,958)
(5,824)
(190)
9,245
$
(9,248)
(13,382)
8,349
(9,038)
40
(23,279)
$
$
$
(1,442)
12,063
(2,059)
(1,738)
7,809
(594)
14,039
(5)
–
–
–
2010
$
(925)
$
2,085
18,211
–
(3)
–
315
4,816
(1,040)
–
1,040
1,437
–
(19,349)
(1,466)
(4,770)
–
351
$
–
–
–
(336)
74
(262)
$
$
$
2,356
171
(1,250)
(1,366)
–
–
(89)
–
–
–
–
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, unless otherwise indicated)
December 31, 2011 and 2010
NOTE 1
General information
Strongco Corporation (“Strongco” or “the Company”) sells and rents
new and used equipment and provides after-sale product support (parts
and service) to customers that operate in infrastructure, construction,
mining, oil and gas exploration, forestry and industrial markets in Canada
and the United States.
Prior to July 1, 2010, Strongco was an unincorporated, open-ended,
limited purpose trust operating under the name Strongco Income Fund
(“the Fund”), domiciled and established under the laws of the Province
of Ontario pursuant to a declaration of trust dated March 21, 2005, as
amended and restated on April 28, 2005 and September 1, 2006.
On July 1, 2010, the Fund completed the conversion from an income
trust to a corporation (the “Conversion”) through the incorporation
of Strongco. Pursuant to a plan of arrangement under the Business
Corporations Act (Ontario), the Company issued shares to the
unitholders of the Fund in exchange for units of the Fund on a one-forone basis. The Company’s Board of Directors and management team
are the former Board of Trustees and management team of the Fund.
Immediately subsequent to the Conversion, the Fund was wound up into
the Company. The Company has carried on the business of the Fund
unchanged except that the Company is subject to tax as a corporation.
References to the Company in these consolidated financial statements
for periods prior to July 1, 2010 refer to the Fund and for periods on
or after July 1, 2010 refer to the Company. Additionally, references to
shares and shareholders of the Company are comparable to units and
unitholders previously under the Fund. The conversion was accounted
for as a continuity of interests. Transaction costs of $463 related to the
conversion were expensed on conversion.
The Company is a public entity, incorporated and domiciled in Canada
and listed on the Toronto Stock Exchange. The address of its registered
office is 1640 Enterprise Road, Mississauga, Ontario L4W 4L4.
NOTE 2
Summary of significant accounting policies
STATEMENT OF COMPLIANCE
The consolidated financial statements represent the first annual financial
statements of the Company prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”) and are in compliance therewith.
The Company adopted IFRS in accordance with IFRS 1, First-Time
Adoption of International Financial Reporting Standards (“IFRS 1”) as
discussed in note 5.
The consolidated financial statements were approved and authorized
for issue by the Board of Directors on March 21, 2012.
The principal accounting policies applied in the preparation of these
consolidated financial statements are set out below.
BASIS OF PRESENTATION AND ADOPTION OF INTERNATIONAL
FINANCIAL REPORTING STANDARDS
The Company prepares its consolidated financial statements in
accordance with IFRS, as issued by the IASB. In these consolidated
financial statements, the term “Canadian GAAP” refers to Canadian
generally accepted accounting principles before the adoption of IFRS.
The consolidated financial statements of Strongco have been
prepared by management in accordance with IFRS and International
Financial Reporting Interpretations Committee (“IFRIC”) interpretations,
including IFRS 1, First-Time Adoption of IFRS. Subject to certain
transition elections disclosed in note 5, the Company has consistently
applied the same accounting policies in its opening IFRS consolidated
statement of financial position as at January 1, 2010 and throughout all
periods presented as if these policies had always been in effect. Note 5
discloses the impact of the transition to IFRS on the Company’s reported
financial position, financial performance and cash flows, including the
nature and effect of significant changes in accounting policies from
those used in the Company’s consolidated financial statements for the
year ended December 31, 2010. Comparative figures for 2010 in these
consolidated financial statements have been restated to give effect to
these changes.
The consolidated financial statements have been prepared on a
going concern basis and the historical cost convention, as modified by
the revaluation of financial assets and liabilities at fair value.
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements
of Strongco and its subsidiaries as at December 31, 2011. Subsidiaries
are fully consolidated from the date of acquisition, being the date on
which Strongco gains control, and continue to be consolidated until
the date when such control ceases. All intercompany transactions,
balances, unrealized gains and losses from intercompany transactions
and dividends are eliminated on consolidation.
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 is the President and Chief Executive Officer,
who is responsible for allocating resources, assessing performance
45
of the operating segments and making key strategic decisions. The
Company has determined it has one operating segment, Equipment
Distribution, which is located in both Canada and the United States.
REVENUE RECOGNITION
Revenue is recognized when there is a written arrangement in the form of
a contract or purchase order with the customer, a fixed or determinable
sales price is established with the customer, performance requirements
are achieved, ultimate collection of the revenue is reasonably assured
and when specific criteria have been met for each of the Company’s
activities, as described below.
a) Revenue from equipment sales is recognized at the time title to the
equipment and significant risks of ownership pass to the customer,
which is generally at the time of shipment of the product to the
customer. From time to time, the Company agrees to buy back
equipment from certain customers at the option of the customer for
a specified price at future dates. The Company’s maximum potential
losses pursuant to the majority of these buy-back contracts are
limited, under an agreement with a third party, to 10% of the original
sale amounts. These transactions are accounted for as finance
leases under IAS 17, Leases. In accordance with the standard, these
types of transactions are accounted for as sales.
b) Revenue from equipment rentals is recognized in accordance with
the terms of the relevant agreement with the customer, either evenly
over the term of that agreement or on a usage basis such as the
number of hours that the equipment is used. Certain rental contracts
contain an option for the customer to purchase the equipment at the
end of the rental period. Should the customer exercise this option
to purchase, revenue from the sale of the equipment is recognized
as in a) above.
c) Product support services include sales of parts and servicing of
equipment. For the sale of parts, revenue is recognized when the
part is shipped to the customer. For servicing of equipment, revenue
related to the service performed and parts consumed is recognized
as the service work is completed.
FOREIGN CURRENCY TRANSLATION
a) Functional and presentational currency
The Company’s consolidated financial statements are presented in
Canadian dollars, which is also the Company’s functional currency.
b) Transactions and balances
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the
settlement of foreign currency transactions and from the translation
at year-end exchange rates of monetary assets and liabilities
denominated in currencies other than an operation’s functional
currency are recognized as other income in the consolidated
statement of income (loss).
46
The financial statements of entities that have a functional currency
different from that of Strongco (“foreign operations”) are translated
into Canadian dollars as follows: assets and liabilities—at the closing
rate at the date of the consolidated statement of financial position;
income and expenses—at the average rate of the period (as this is
considered a reasonable approximation to actual rates). All resulting
changes are recognized in other comprehensive income (loss) as
currency translation adjustments.
EMPLOYEE BENEFIT OBLIGATIONS
a) Pension obligations
Employees of the Company have entitlements under Company
pension plans, which are either defined contribution or defined
benefit plans.
The liability recognized in the consolidated statement of financial
position in respect of defined benefit pension plans is the present
value of the defined benefit obligation at the end of the reporting
period less the fair value of plan assets, together with adjustments
for unrecognized past service costs. The defined benefit obligation
is calculated annually by independent actuaries using the projected
unit credit method. Actuarial valuations for defined benefit plans
are carried out annually. The present value of the defined benefit
obligation is determined by discounting the estimated future cash
outflows using interest rates of high-quality corporate bonds that are
denominated in the currency in which the benefits will be paid and
that have terms to maturity approximating the terms of the related
pension liability.
Actuarial gains (losses) arise from the difference between the
actual long-term rate of return on plan assets for a period and the
expected long-term rate of return on plan assets for that period,
and from changes in actuarial assumptions used to determine the
accrued benefit obligation. Actuarial gains and losses are charged
or credited to the consolidated statement of other comprehensive
income (loss) in the period in which they arise.
Past-service costs are recognized immediately within operating
expenses in the consolidated statement of income (loss), unless
the changes to the pension plan are conditional on the employees
remaining in service for a specified period of time (the “vesting
period”). In this case, the past service costs are amortized on a
straight-line basis over the vesting period.
For defined contribution plans, contributions are recognized
as post-employment benefit expense when they are due. Prepaid
contributions are recognized as an asset to the extent that a cash
refund or a reduction in the future payments is available.
b) Other employee future obligations
The Company also has other employee future obligations, including
an unfunded retiring allowance plan and a non-contributory dental
and health-care plan. The expected costs of these benefits are
accrued over the period of employment using the same accounting
methodology as used for defined benefit pension plans. These
obligations are valued annually by independent qualified actuaries.
CONTRIBUTED SURPLUS
The Company operates an equity-settled, share-based compensation
plan, under which the Company receives services from employees
as consideration for equity instruments (“options”) of the Company.
The options vest over a specified period of time. The fair value of the
services received in exchange for the grant of the options is recognized
as an expense. Awards under the share-based compensation plan are
made in tranches. Each tranche is considered a separate award with
its own vesting period and grant date value. The fair value of each
tranche is measured at the date of grant using the Black-Scholes option
pricing model. The expense is recognized over the tranche’s vesting
period based on the number of awards expected to vest, by increasing
contributed surplus, a component within shareholders’ equity. The
number of awards expected to vest is reviewed at least annually, with
any impact being recognized immediately. For expired and cancelled
options, contributed surplus expense is not reversed and the related
credit remains in contributed surplus. When options are exercised, the
Company issues new shares. The proceeds received are credited to
shareholders’ capital, together with the related amounts previously
added to contributed surplus.
SHAREHOLDERS’ CAPITAL
Shareholders’ capital is classified as equity. Incremental costs directly
attributable to the issue of new shares or options are shown in equity
as a deduction from proceeds.
INVENTORIES
Inventories are recorded at the lower of cost and net realizable value.
The cost of equipment inventories is determined on a specific item basis.
The cost of parts is determined on a weighted average cost basis. Net
realizable value is the estimated selling price in the ordinary course of
business, less applicable selling expenses. Equipment inventory on rent
is amortized based on expected usage during the rental period, which is
generally at a rate of 60% of rental revenue, which approximates usage.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and any impairment. Cost includes expenditures that are directly
attributable to the acquisition of the assets. When parts of an item of
property and equipment have different useful lives, they are accounted
for as separate items (“major components”) of property and equipment
and each component is depreciated separately. Subsequent costs are
included in the asset’s carrying amount or recognized as a separate
asset, as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Company and the cost
can be measured reliably. Repairs and maintenance costs are charged
to operating expenses in the consolidated statement of income (loss)
during the period in which they are incurred. Assets’ residual values,
useful lives and methods of depreciation are reviewed, and adjusted
if appropriate, at each financial period end. Land is not depreciated.
Depreciation of other assets is provided at rates that approximate the
estimated useful life on a diminishing balance method as follows:
Buildings
Machinery and equipment
Vehicles
Computer equipment
3% to 5%
10% to 30%
25% to 30%
30%
Computer equipment under capital lease and leasehold improvements
are amortized on a straight-line basis over the remaining term of the
lease.
An asset’s carrying amount is immediately written down to its
recoverable amount if the asset’s carrying amount is greater than its
estimated fair value. Gains and losses on disposal are determined by
comparing the proceeds with the carrying amount and are recognized
within operating expenses in the consolidated statement of income
(loss).
RENTAL FLEET
The Company’s rental fleet is stated at cost, less accumulated
depreciation. For financial statement purposes, depreciation is
computed on a percentage of rent basis, generally at a rate of 60%
of rental revenue, which approximates the usage. Cost includes
expenditures that are directly attributable to the acquisition of the assets,
as well as charges that increase the useful life of the asset. Routine
repair and maintenance costs are charged to operating expenses in
the consolidated statement of income (loss) during the period in which
they are incurred.
INTANGIBLE ASSET
The intangible asset is comprised of a distribution right acquired in a
business combination that was recognized at fair value at the acquisition
date. The distribution right has an indefinite life and is not subject to
amortization but is subject to an annual review for impairment, or more
frequently if events or changes in circumstances indicate that the asset
may be impaired.
BORROWING COSTS
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. All other borrowing costs are recognized as interest expense in
the consolidated statement of income (loss) in the period in which they
are incurred.
47
INCOME TAXES
The provision for (recovery of) income taxes for the period comprises
current and deferred income taxes. Income taxes are recognized as an
expense in the consolidated statement of income (loss), except to the
extent that they relate to items recognized in other comprehensive income
(loss) or directly in equity. For items recognized in other comprehensive
income (loss) or directly in equity, any applicable income taxes are also
recognized in other comprehensive income (loss) or directly in equity.
The current income tax charge is calculated on the basis of the tax
laws enacted or substantively enacted at the consolidated statement
of financial position date. 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 recognized, using the liability method, on
temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the consolidated financial
statements. However, deferred income tax is 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 substantively enacted by the consolidated statement of financial
position date and that are expected to apply when the related deferred
income tax asset is realized or the deferred income tax liability is settled.
Deferred income tax assets are recognized only to the extent it is
probable that future taxable profit will be available against which the
temporary differences can be utilized.
Deferred income tax is provided on temporary differences arising on
investments in subsidiaries and associates, except where the timing of
the reversal of the temporary difference is controlled by the Company
and it is probable that the temporary difference will not reverse in the
foreseeable future.
Deferred income tax assets and liabilities are offset when there is a
legally enforceable right to offset current tax assets against current tax
liabilities and when the deferred income tax assets and liabilities relate
to income taxes levied by the same taxation authority on either the
taxable entity or different taxable entities where there is an intention to
settle the balances on a net basis.
For the period from January 1, 2010 to June 30, 2010, Strongco
operated as an income trust and, under the terms of the Income Tax
Act (Canada), was not subject to income taxes to the extent that its
taxable income in a period was paid or payable to unitholders. Strongco
distributed to its unitholders all or virtually all of its taxable income and
taxable capital gains that would otherwise have been taxable in the
Company and met the requirements under the Income Tax Act (Canada)
applicable to such trusts. Accordingly, no provision for current income
taxes for the Company was made during this period.
Deferred income tax assets and liabilities are presented as noncurrent.
48
PROVISIONS
Provisions for restructuring costs, legal claims, equipment buybacks
and certain other obligations are recognized when the Company has
a present legal or constructive obligation as a result of past events; it
is probable that an outflow of resources will be required to settle the
obligation; and the amount can be reliably estimated.
EQUIPMENT NOTES PAYABLE
Equipment notes payable are used to finance the purchase of equipment
inventory. The equipment notes payable are recognized initially at fair
value and are subsequently measured at amortized cost; any difference
between the proceeds and redemption value is recognized as interest
expense in the consolidated statement of income (loss) over the term of
the equipment notes payable using the effective interest rate method.
DEBT
Debt comprises bank indebtedness under the Company’s operating
line of credit, finance lease obligations and notes payable. Debt is
recognized initially at fair value, net of transaction costs incurred. Debt
is subsequently measured at amortized cost. Any difference between
the proceeds and redemption value is recognized as interest expense
in the consolidated statement of income (loss) over the term of the
borrowings using the effective interest rate method.
IMPAIRMENT OF NON-FINANCIAL ASSETS
Property and equipment and the Company’s rental fleet are tested for
impairment when events or changes in circumstances indicate that the
carrying amount may not be recoverable. Long-lived assets that are not
amortized, comprising the Company’s distribution right intangible asset,
are subject to an annual impairment test. For the purpose of measuring
recoverable amounts, assets are grouped into the lowest levels for which
there are separately identifiable cash inflows (“cash-generating units”
or “CGUs”). The recoverable amount is the higher of an asset’s fair
value less costs to sell and value in use (being the present value of the
expected future cash flows of the relevant asset or CGU). An impairment
loss is recognized for the amount by which the asset’s carrying amount
exceeds its recoverable amount.
The Company evaluates potential reversals on previously recorded
impairment losses when events or circumstances warrant such
consideration.
LEASES
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 operating expenses in the consolidated
statement of income (loss) on a straight-line basis over the period of
the lease.
Leases of property and equipment, where the Company has
substantially all the risks and rewards of ownership, are classified as
finance leases. Finance leases are capitalized at the lease commencement
date at the lower of the fair value of the leased asset and the present
value of the minimum lease payments.
Finance lease payments are allocated between their liability and
finance components so as to achieve a constant rate on their outstanding
obligations. The interest element of the finance cost is charged to the
consolidated statement of income (loss) over the lease period so as to
produce a constant periodic rate of interest on the remaining balance
of the liability for each period. The property and equipment acquired
under finance leases are depreciated over the shorter of the useful life
of the asset and the lease term.
FINANCIAL INSTRUMENTS
Financial assets and liabilities are recognized when the Company
becomes a party to the contractual provisions of the instrument.
Financial assets are derecognized when the rights to receive cash flows
from the assets have expired or have been transferred and the Company
has transferred substantially all risks and rewards of ownership.
Financial assets and liabilities are offset and the net amount reported
in the consolidated statement of financial position when there is a
legally enforceable right to offset the recognized amounts and there is
an intention to settle on a net basis, or realize the asset and settle the
liability simultaneously.
At initial recognition, the Company classifies its financial instruments
in the following categories depending on the purpose for which the
instruments were acquired:
i) Financial assets and liabilities at fair value through profit or loss:
a financial asset or liability is classified in this category if acquired
principally for the purpose of selling or repurchasing in the short
term. Derivatives are also included in this category unless they are
designated as hedges. The only instruments held by the Company
classified in this category are foreign currency forward contracts and
interest rate swaps.
Financial instruments in this category are recognized initially
and subsequently at fair value. Transaction costs are recorded as
an expense in the consolidated statement of income (loss). Gains
and losses arising from changes in fair value are presented in the
consolidated statement of income (loss) within other income in the
period in which they arise. Financial assets and liabilities at fair
value through profit or loss are classified as current except for the
portion expected to be realized or paid beyond 12 months of the
consolidated statement of financial position date, which is classified
as non-current.
ii) Loans and receivables: loans and receivables are non-derivative
financial assets with fixed or determinable payments that are not
quoted in an active market. The Company’s loans and receivables
are comprised of trade and other receivables, and are included in
current assets due to their short-term nature. Loans and receivables
are initially recognized at the amount expected to be received less,
when material, a discount to reduce the loans and receivables to
fair value. Subsequently, loans and receivables are measured at
amortized cost using the effective interest method less a provision
for impairment.
iii) Financial liabilities at amortized cost: financial liabilities at amortized
cost include bank indebtedness, trade and other payables,
provisions, income taxes payable, interest-bearing and non-interestbearing equipment notes payable, finance lease obligations and
notes payable.
iv) Derivative financial instruments: the Company uses derivatives in
the form of foreign currency forward contracts to reduce the impact
of currency fluctuations on the cost of equipment ordered for future
delivery to customers. The Company also uses interest rate swaps
to reduce the impact of interest rate fluctuations on their borrowings.
Derivatives have been classified as held-for-trading and are included
in the balance within trade and other payables.
IMPAIRMENT OF FINANCIAL ASSETS
The Company assesses at the end of each reporting period whether
there is objective evidence that a financial asset or group of financial
assets is impaired. A financial asset or group of financial assets is
impaired and impairment losses are incurred only if there is objective
evidence of impairment as a result of one or more loss events that
occurred after the initial recognition of the asset, and that loss event, or
events, has an impact on the estimated future cash flows of the financial
asset or group of financial assets that can be reliably estimated.
The amount of the loss is measured as the difference between the
asset’s carrying amount and the present value of estimated future
cash flows, excluding future credit losses that have not been incurred,
discounted at the financial asset’s original effective interest rate. The
carrying amount of the asset is reduced and the amount of the loss is
recognized within operating expenses in the consolidated statement of
income (loss).
If, in a subsequent period, the amount of the impairment loss decreases
and the decrease can be related objectively to an event occurring after
the impairment was recognized, such as an improvement in a customer’s
credit rating, the reversal of the previously recognized impairment loss
is recognized as a reduction in expense in the consolidated statement
of income (loss).
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (“EPS”) is calculated by dividing the net
income (loss) for the period attributable to shareholders of Strongco by
the weighted average number of common shares outstanding during
the period.
49
Diluted EPS is calculated by adjusting the weighted average number
of common shares outstanding for dilutive instruments. The number of
shares included with respect to options, warrants and similar instruments
is computed using the treasury stock method. Strongco’s potentially
dilutive common shares comprise options granted to employees.
CHANGES IN ACCOUNTING POLICY AND DISCLOSURE
Unless otherwise noted, the following standards and amendments are
effective for accounting periods beginning on or after January 1, 2013,
with earlier adoption permitted. The Company has not yet assessed
the impact of these standards or determined whether it will adopt these
standards early.
IAS 1, Presentation of Financial Statements, has been amended to
require entities to separate items presented in other comprehensive
income (“OCI”) into two groups, based on whether or not items may be
recycled in the future. Entities that choose to present OCI items before
tax will be required to show the amount of tax related to the two groups
separately. The amendment is effective for annual periods beginning on
or after July 1, 2012, with earlier application permitted.
IAS 19, Employee Benefits, has been amended to make significant
changes to the recognition and measurement of defined benefit pension
expense and termination benefits and to enhance the disclosure of
all employee benefits. The amended standard requires immediate
recognition of actuarial gains and losses in other comprehensive income
(loss) as they arise, without subsequent recycling to net income. This is
consistent with the Company’s current accounting policy. Past service
cost (which will now include curtailment gains and losses) will no longer
be recognized over a service period but will instead be recognized
immediately in the period of a plan amendment. Pension benefit cost
will be split between (i) the cost of benefits accrued in the current period
(service cost) and benefit changes (past service cost, settlements and
curtailments); and (ii) finance expense or income. The finance expense
or income component will be calculated based on the net defined benefit
asset or liability. A number of other amendments have been made to
recognition, measurement and classification, including redefining shortterm and other long-term benefits, guidance on the treatment of taxes
related to benefit plans, guidance on risk/cost-sharing features and
expanded disclosures.
IFRS 7, Financial Instruments: Disclosures, has been amended to
include additional disclosure requirements in the reporting of transfer
transactions and risk exposures relating to transfers of financial assets
and the effect of those risks on an entity’s financial position, particularly
those involving securitization of financial assets. The amendment is
applicable for annual periods beginning on or after July 1, 2011, with
earlier application permitted.
IFRS 9, Financial Instruments, was issued in November 2009 and
contains requirements for financial assets. This standard addresses
classification and measurement of financial assets and replaces
50
the multiple category and measurement models in IAS 39, Financial
Instruments – Recognition and Measurement, for debt instruments with
a new mixed measurement model having only two categories: amortized
cost and fair value through profit or loss. IFRS 9 also replaces the models
for measuring equity instruments, and such instruments are either
recognized at fair value through profit or loss, or at fair value through
comprehensive income (loss), and dividends are recognized in income
in the consolidated statement of comprehensive income (loss); however,
other gains and losses (including impairments) associated with such
instruments remain in accumulated other comprehensive income (loss)
indefinitely. Requirements for financial liabilities were added in October
2010 and they largely carried forward existing requirements in IAS 39,
except that fair value changes due to credit risk for liabilities designated
at fair value through profit or loss would generally be recorded in the
consolidated statement of comprehensive income (loss).
IFRS 10, Consolidation, requires an entity to consolidate an investee
when it is exposed, or has rights, to variable returns from its involvement
with the investee and has the ability to affect those returns through its
power over the investee. Under existing IFRS, consolidation is required
when an entity has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. IFRS 10
replaces SIC-12, Consolidation – Special Purpose Entities and parts of
IAS 27, Consolidated and Separate Financial Statements.
IFRS 13, Fair Value Measurement, is a comprehensive standard for
fair value measurement and disclosure requirements for use across all
IFRS standards. The new standard clarifies that fair value is the price
that would be received to sell an asset, or paid to transfer a liability in an
orderly transaction between market participants, at the measurement
date. It also establishes disclosures about fair value measurement.
Under existing IFRS, guidance on measuring and disclosing fair
value is dispersed among the specific standards requiring fair value
measurements and in many cases does not reflect a clear measurement
basis or consistent disclosures.
NOTE 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, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities, in the
consolidated financial statements. The Company bases its estimates
and assumptions on past experience and various other assumptions
that are believed to be reasonable in the circumstances. This involves
varying degrees of judgment and uncertainty, which may result in a
difference in actual results from these estimates. The more significant
estimates are as follows:
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs credit evaluations of customers and limits the
amount of credit extended to customers as appropriate. The Company
is, however, exposed to credit risk with respect to trade receivables and
maintains provisions for possible credit losses based upon historical
experience and known circumstances. The allowance for doubtful
accounts as at December 31, 2011, with changes from January 1, 2011,
is disclosed in note 6.
INVENTORY VALUATION
management throughout each period. Where appropriate, a provision
is recorded against the book value of specific pieces of equipment to
ensure that inventory values reflect the lower of cost and estimated net
realizable value. The Company identifies slow-moving or obsolete parts
inventory and estimates appropriate obsolescence provisions by aging
the inventory. The Company takes advantage of supplier programs
that allow for the return of eligible parts for credit within specified time
periods.
INTANGIBLE ASSET
An impairment exists when the carrying value of an asset or CGU
exceeds its recoverable amount, which is the higher of its fair value
less costs to sell and its value in use. The fair value less costs to sell
calculation is based on available data from binding sales transactions
in arm’s-length transactions of similar assets or observable market
prices less incremental costs for disposing of the asset. The value-inuse calculation is based on a discounted cash flow model. The cash
flows are derived from the budget and forecasts for the next five years
and do not include restructuring activities that the Company is not yet
committed to or significant future investments that will enhance the
asset’s performance of the CGU being tested. The recoverable amount
is most sensitive to the discount rate used for the discounted cash
flow model as well as the expected future cash inflows and the growth
rate used for extrapolation purposes. The key assumptions used to
determine the recoverable amount for the different CGUs, including a
sensitivity analysis, are further explained in note 9.
DEFERRED INCOME TAXES
At each period end, the Company evaluates the value and timing of
its temporary differences. Deferred income tax assets and liabilities,
measured at substantively enacted tax rates, are recognized for all
temporary differences caused when the tax bases of assets and liabilities
differ from those reported in the consolidated financial statements.
Changes or differences in these estimates or assumptions may
result in changes to the current or deferred income tax balance on the
consolidated statement of financial position and a charge or credit to
income tax expense in the consolidated statement of income (loss),
and may result in cash payments or receipts. Where appropriate, the
provisions for deferred income taxes and deferred income taxes payable
are adjusted to reflect management’s best estimate of the Company’s
income tax accounts.
Judgment is also required in determining whether deferred income
tax assets are recognized on the consolidated statement of financial
position. Deferred income tax assets, including those arising from
unutilized tax losses, require management to assess the likelihood that
the Company will generate taxable earnings in future periods in order
to utilize recognized deferred income tax assets. Estimates of future
taxable income are based on forecasted cash flows from operations and
the application of existing tax laws in each jurisdiction. To the extent that
future cash flows and taxable income differ significantly from estimates,
the ability of the Company to realize the net deferred income tax assets
recorded at the reporting date could be impacted.
EMPLOYEE FUTURE BENEFIT OBLIGATIONS
The present value of the employee future benefit obligations depends
on a number of factors that are determined on an actuarial basis using
a number of assumptions. The assumptions used in determining the net
cost (income) for these obligations include the discount rate.
The Company determines the appropriate discount rate at the end of
each period. This is the interest rate that should be used to determine the
present value of estimated future cash outflows expected to be required
to settle the obligations. In determining the appropriate discount rate,
the Company considers the interest rates of high-quality corporate
bonds that are denominated in the currency in which the benefits will
be paid and that have terms to maturity approximating the terms of the
related employee future benefit liability.
Other key assumptions for employee future benefit obligations are
based in part on current market conditions. Additional information is
disclosed in note 10. Any changes in these assumptions will impact the
carrying amount of the employee future benefit obligations.
SHARE-BASED PAYMENT TRANSACTIONS
The Company measures the cost of equity-settled transactions with
employees by reference to the fair value of the equity instruments at
the date at which they are granted. Estimating fair value for sharebased payment transactions requires determining the most appropriate
valuation model, which is dependent on the terms and conditions of
the grant. This estimate also requires determining the most appropriate
inputs to the valuation model, including the expected life of the share
option, volatility and dividend yield and making assumptions about
them. The assumptions and models used for estimating fair value for
share-based payment transactions are disclosed in note 22.
51
NOTE 4
Acquisition of Chadwick-BaRoss, Inc.
On February 17, 2011, Strongco, through its wholly owned subsidiary
Strongco USA Inc., completed the acquisition of 100% of the issued
and outstanding shares of Chadwick-BaRoss, Inc. (“CBR”).
CBR is a multiline equipment dealer headquartered in Westbrook,
Maine, with three branches in Maine and one each in New Hampshire
and Massachusetts. CBR sells, rents and services equipment used in
sectors such as construction, infrastructure, utilities, municipalities,
waste management and forestry. CBR represents such brands as Volvo,
Terex Finlay and Link-Belt, as well as many others.
The acquisition of all of the issued and outstanding shares of
CBR was completed for a purchase price of US$11.1 million, net of
US$0.4 million in cash acquired. The purchase price was satisfied with
cash of US$9.2 million and three promissory notes totalling US$1.9 million. The three promissory notes mature on February 17, 2013 and bear
interest at the U.S. prime rate. Principal payments of US$0.2 million are
made quarterly and commenced on May 17, 2011. Costs of $0.4 million
related to the acquisition were expensed as period costs within operating expenses in the consolidated statement of income (loss) for the year
ended December 31, 2011.
The acquisition date fair value for each major class of asset acquired
and liabilities assumed is as follows:
(in thousands of Canadian dollars)
Inventories
Property and equipment
Rental fleet
Other assets
Total assets
Deferred income tax liabilities
Finance lease obligations
Notes payable
Total liabilities
Net assets acquired
$
$
$
$
$
4,388
9,960
5,058
11,722
1,125
95
32,348
3,077
2,807
11,135
419
3,795
21,233
11,115
The results of operations of CBR have been consolidated into the
Company’s results for the year ended December 31, 2011, effective
February 17, 2011. Revenues of $46.6 million and net income of
$1.2 million for CBR have been included in the Company’s consolidated
statement of income (loss) for the year ended December 31, 2011.
52
Had the results of CBR been incorporated into the Company’s
consolidated statement of comprehensive income (loss) as though
the acquisition had been completed on January 1, 2011, the revenue
and net income of the combined entity for 2011 would have been
$426.2 million and $9.5 million, respectively.
NOTE 5
Transition to IFRS
The date of transition to IFRS for the Company was January 1, 2010.
IFRS 1 sets forth guidance for the initial adoption of IFRS. IFRS 1 requires
first-time adopters to retrospectively apply all effective IFRS standards
as of the transition date, except that IFRS 1 also provides for certain
optional exemptions and certain mandatory exceptions to the general
requirements of retrospective application. The effect of the Company’s
transition to IFRS is summarized as follows:
i) Optional exemptions and mandatory exceptions;
ii) Reconciliation of shareholders’ equity and comprehensive income
(loss) as previously reported under Canadian GAAP to IFRS; and
iii) Adjustments to the consolidated statement of cash flows.
i) Optional exemptions
The Company has applied the optional exemptions to full retrospective
application of IFRS for employee future benefits—treatment of actuarial
gains and losses and business combinations. A description of the
exemptions and impact on the Company is further described in (ii) below.
Mandatory exceptions
The Company has complied with all mandatory exceptions to full
retrospective application of IFRS. The estimates previously made by
the Company under Canadian GAAP were not revised for the application
of IFRS.
ii) Reconciliation of shareholders’ equity and comprehensive income (loss) as previously reported under Canadian GAAP to IFRS
Canadian
GAAP
As at December 31, 2010
ASSETS
Current assets
Inventories
Non-current assets
Intangible assets
Accrued benefit asset
Other assets
Total assets
Current liabilities
Bank indebtedness
Provision for other liabilities
Current portion of finance lease obligations
Current portion of notes payable
Employee future benefit obligations
Total liabilities
Shareholders’ capital
Deferred compensation
Deficit
$
35,884
159,988
1,452
197,324
Adjustment
$
13,768
1,800
6,275
188
22,031
$ 219,355
$
$
$
12,370
30,265
–
1,321
118,160
173
1,233
163,522
–
–
–
–
2,081
–
(6,275)
–
(4,194)
(4,194)
–
(1,436)
1,436
–
–
786
–
786
389
114
819
1,322
164,844
(389)
1,388
3,555
4,554
5,340
57,089
–
360
(2,938)
54,511
$ 219,355
–
–
(45)
(9,489)
(9,534)
(4,194)
$
Note
IFRS
$
f)
a)
15,849
1,800
–
188
17,837
$ 215,161
$
b)
b)
f)
d)
f)
a)
a)
c)
a), c), d), f)
35,884
159,988
1,452
197,324
12,370
28,829
1,436
1,321
118,160
959
1,233
164,308
–
1,502
4,374
5,876
170,184
57,089
–
315
(12,427)
44,977
$ 215,161
53
Canadian
GAAP
As at January 1, 2010
ASSETS
Current assets
Inventories
Non-current assets
Intangible assets
Accrued benefit asset
Other assets
Total assets
Current liabilities
Bank indebtedness
Current portion of finance lease obligations
Current portion of notes payable
Notes payable
Employee future benefit obligations
Total liabilities
Shareholders’ capital
Deferred compensation
Deficit
54
$
27,088
144,461
1,255
172,804
Adjustment
$
14,133
1,800
6,607
243
22,783
$ 195,587
$
$
$
10,014
20,866
–
–
–
–
1,816
–
(6,607)
–
(4,791)
(4,791)
515
104,843
92
1,094
137,424
–
(1,218)
1,366
–
–
862
–
1,010
1,424
1,218
104
769
3,515
140,939
(1,424)
–
1,050
3,686
3,312
4,322
57,089
–
80
(2,521)
54,648
$ 195,587
–
–
(80)
(9,033)
(9,113)
(4,791)
$
Note
IFRS
$
f)
a)
15,949
1,800
–
243
17,992
$ 190,796
$
b)
b)
f)
d)
27,088
144,461
1,255
172,804
10,014
19,648
1,366
515
104,843
954
1,094
138,434
f)
a)
–
1,218
1,154
4,455
6,827
145,261
c)
a), c), d), f)
57,089
–
–
(11,554)
45,535
$ 190,796
Canadian
GAAP
Year ended December 31, 2010
Revenue
Cost of sales
Gross Profit
$ 294,657
237,971
56,686
Expenses
Administration
Distribution
Selling
Other income
Expenses
Operating income
Interest expense
Loss before taxes
Net loss attributable to shareholders
Other comprehensive income
Post-employment benefit obligations
Comprehensive loss attributable to shareholders
Explanatory notes
a) Employee future benefits
In accordance with the IFRS transitional provisions, the Company
has chosen to recognize unamortized actuarial gains and losses
arising from the remeasurement of employee future benefit obligations as an adjustment to retained earnings as at January 1, 2010.
Under Canadian GAAP, the Company applied the corridor method
of accounting for such gains and losses. Under this method, gains
and losses are recognized only if they exceed specified thresholds
and are amortized over the expected average remaining service life
of active employees. The carrying value of the net asset for employee future benefit obligations at January 1, 2010 is lower by $8,791
($4,712 after tax) and at December 31, 2010 is lower by $9,733
($7,239 after tax) under IFRS as a result of the Company’s decision
to recognize unamortized net actuarial losses as at January 1, 2010.
Under IFRS, the Company recognizes actuarial gains and losses
arising from the remeasurement of employee future benefit obligations in other comprehensive income (loss) as they arise. The
Company has reflected a decrease in expense associated with its
defined benefit employee benefit plans under IFRS of $411 ($306
after tax) for the year ended December 31, 2010.
In addition, on January 1, 2010, the Company completed the calculation with respect to the limitation of the defined benefit asset under
IFRIC 14, The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction, and recorded a liability of $1,503
($1,118 after tax) as at January 1, 2010. As at December 31, 2010,
the liability decreased to $97 ($72 after tax).
Adjustment
$
27,292
16,879
9,896
(740)
53,327
$
$
$
3,359
4,816
(1,457)
(1,040)
(417)
–
(417)
(532)
–
–
–
(532)
$
$
$
Note
–
–
–
532
–
532
1,040
(508)
52
(456)
IFRS
$ 294,657
237,971
56,686
a), c), g)
g)
g)
26,760
16,879
9,896
(740)
52,795
$
$
d)
d)
$
3,891
4,816
(925)
–
(925)
52
(873)
The Company recognized actuarial losses of $1,354 and a reduction in the IFRIC 14 liability of $1,406 through other comprehensive
income (loss) for the year ended December 31, 2010 in accordance
with the Company’s policy decision under IFRS.
b) Provisions
The Company reclassified liabilities related to equipment buy-backs,
legal matters and certain other items totalling $1,218 at January 1,
2010 and $1,436 at December 31, 2010 from trade and other payables to provisions.
c) Stock-based compensation
Under IFRS, the Company recognizes the cost of employee
share options over the vesting period using the graded method of
amortization rather than the straight-line method, which was the
Company’s policy under Canadian GAAP. In addition, under IFRS the
recognition of compensation expense can occur prior to the grant
date, when services have commenced, whereas under Canadian
GAAP compensation expense is not recognized prior to the grant
date. Further, the Company adjusted for forfeitures under Canadian
GAAP as they occurred whereas IFRS requires an estimate of the
forfeitures on initial recognition.
These changes increased provisions and reduced retained earnings at January 1, 2010 by $68. In addition, these changes decreased
share-based compensation expense and contributed surplus by
$114 for the year ended December 31, 2010.
Pursuant to the guidance under IAS 32, Financial Instruments:
Preparation, the Fund units that were outstanding in the comparative
period from January 1, 2010 to June 30, 2010, while the Company
operated as an income trust, are only allowed to be classified as
55
equity for the purpose of assessing the classification under this standard. Consequently, the share options issued under the Company’s
equity incentive plan were not accounted for in accordance with
IFRS 2, Share-based Payments, and as a result, the Company had
reclassified compensation expense of $80 at January 1, 2010 from
contributed surplus to provisions. With the Company’s conversion
to a corporation on July 1, 2010, the Company reclassified these
amounts to contributed surplus.
d) Deferred income taxes
Deferred income tax liabilities have been adjusted as follows:
i) As at January 1, 2010 and for the six-month period ended June
30, 2010, Strongco operated as an income trust that qualified
for special tax treatment permitting a tax deduction by the trust
for distributions paid to the trust’s unitholders. The change in tax
legislation in 2007 effectively imposed an income tax for income
trusts for taxation years beginning in 2011. As a result, Strongco
had recorded future income taxes under Canadian GAAP during
this period using the enacted (or substantively enacted) income
tax rates that, at the consolidated statement of financial position
date, were expected to apply when the temporary differences
reverse in years 2011 and beyond.
Although IFRS recognizes that in some jurisdictions income
taxes may be payable at a higher or lower rate or be refundable
or payable if part, or all, of the net profit or retained earnings
is paid out as a dividend to shareholders of the entity, there is
a general requirement that income taxes be measured at the
tax rate applicable to undistributed profits. As a result, deferred
income taxes were remeasured at a tax rate of approximately
46.4% applicable to undistributed profits, which resulted in an
increase to the Company’s deferred income tax liability of $1,247
at January 1, 2010. The deferred income taxes were subsequently
remeasured at the applicable corporate rates effective July 1,
2010, the date the Company converted to a corporation. This
resulted in an adjustment to the deferred income tax balance with
a corresponding adjustment to deferred income tax expense.
ii) In addition, following the adjustments made to the opening
balance at January 1, 2010 on the adoption of IFRS, the Company
assessed the recoverability of its deferred income tax asset and
determined that it did not meet the recognition criteria under
IAS 12, Income Taxes. As a result, the Company recorded an
adjustment to reduce the deferred income tax assets to $nil on
January 1, 2010 and December 31, 2010.
The above adjustments and the impact on the deferred income
tax asset and expense related to the IFRIC 14 adjustment itemized
in a) above increased income tax expense recognized in the consolidated statement of income (loss) by $1,040 for the year ended
December 31, 2010.
56
e) In accordance with IFRS transitional provisions, the Company
elected not to apply IFRS 3, Business Combinations, retrospectively
to business combinations that occurred before the date of transition
to IFRS. As such, Canadian GAAP balances relating to business
combinations entered into before the date of transition have been
carried forward without adjustment.
f) It was determined that certain vehicle and equipment leases that were
accounted for as operating leases met the criteria of a finance lease.
This resulted in an increase of $1,816 to property and equipment and
$1,912 to finance lease obligations at January 1, 2010, and $2,081
to property and equipment and $2,175 to finance lease obligations
at December 31, 2010. This also resulted in a reclassification of
lease costs from rent expense to depreciation expense and interest
expense. The net impact on the consolidated statement of income
(loss) was not significant.
g) Pursuant to the guidance under IAS 1, Presentation of Financial
Statements, the Company has presented expenses by function and
accordingly has reclassified administration, distribution and selling
expenses under Canadian GAAP to their respective functions under
IFRS.
iii) Adjustments to the consolidated statement of cash flows
The transition from Canadian GAAP to IFRS had no significant impact on
cash flows generated by the Company, except that cash flows related
to interest are classified as financing activities. Under Canadian GAAP,
cash flows relating to interest payments were classified as operating
activities.
NOTE 6
As at
December 31,
2011
December 31,
2010
January 1,
2010
Trade receivables
Less:
Provision for impairment
of trade receivables
Trade receivables, net
Other receivables
Total trade
and other receivables
$
39,656
$
33,517
$
24,329
$
1,774
37,882
4,877
$
1,196
32,321
3,563
$
1,362
22,967
4,121
$
42,759
$
35,884
$
27,088
Due to their short-term nature, the fair value of trade and other receivables
is not materially different from their carrying value.
As at December 31, 2011, trade receivables of $14,485 (December 31,
2010 – $9,002) were past due but not impaired. These relate to a number
of customers for which there is no recent history of default. The aging of
these receivables is as follows:
As at December 31
Up to 3 months
3 to 6 months
Over 6 months
2011
$
$
13,493
860
132
14,485
Up to 3 months
3 to 6 months
Over 6 months
$
2011
$
$
2,429
69
1,790
4,288
8,496
441
65
9,002
2010
$
$
334
277
1,244
1,855
Movements on the Company’s provision for impairment of trade
receivables are as follows:
2011
As at January 1
Provisions for impairment
Amounts written off as uncollectible
As at December 31
$
$
1,196
273
461
(156)
1,774
Inventories
Inventory components as at December 31 (net of write-downs and
provisions) are as follows:
2010
$
As at December 31, 2011, trade receivables of $4,288 (2010 – $1,855)
were impaired. The amount of provision was $1,774 as at December 31,
2011 (December 31, 2010 – $1,196). The individually impaired receivables mainly relate to parts and service invoices. It was assessed that
a portion of the receivables is expected to be recovered. The aging of
these receivables is as follows:
As at December 31
NOTE 7
2010
$
$
1,362
–
402
(568)
1,196
The provision for impaired receivables is recognized in the consolidated
statement of income (loss) within administrative expenses in the period
of provision. When a balance is considered uncollectible, it is written
off against the provision. Subsequent recoveries of amounts previously
written off are credited to administrative expenses in the consolidated
statement of income (loss).
Other receivables within trade and other receivables do not contain
impaired amounts.
The maximum exposure to credit risk at the reporting date is the
carrying value of each class of receivable mentioned above. The
Company does not hold any collateral as security.
As at
December 31,
2011
December 31,
2010
January 1,
2010
Equipment
Parts
Work-in-process
$ 185,335
21,148
3,645
$ 210,128
$ 142,080
15,401
2,507
$ 159,988
$ 124,518
17,679
2,264
$ 144,461
management throughout each year. Where appropriate, a write-down is
recorded against the book value of specific pieces of equipment to ensure
that inventory values reflect the lower of cost or estimated net realizable
value. For the year ended December 31, 2011, the Company recorded
$1,256 of equipment write-downs (December 31, 2010 – $440).
Throughout the year, Company management identifies slow-moving
or obsolete parts inventory and estimates appropriate obsolescence
provisions by aging the inventory. The changes in the inventory provision
as at December 31, 2011 and December 31, 2010 are as follows:
2011
Inventory obsolescence as at January 1
$
Inventory disposed of during the year
Reversal of provision
Additional provision made during the year
Inventory obsolescence as at December 31 $
3,045
1,298
(451)
–
1,505
5,397
2010
$
$
3,139
–
(746)
(230)
882
3,045
Inventory costs recognized as an expense and reflected in cost of sales
in the consolidated statement of income (loss) amounted to $306,048
(December 31, 2010 – $211,230). Cost of sales also includes amortization
of equipment inventory on rent of $20,668 (December 31, 2010 – $18,211).
The carrying value of equipment inventory on rent as at December 31,
2011 was $50,959 (December 31, 2010 – $49,783 and January 1, 2010 –
$33,919). In 2011, the Company reversed $nil (December 31, 2010 – $230)
of a previously recorded inventory write-down.
57
NOTE 8
Property and equipment and rental fleet
Land
Cost
Accumulated depreciation
Net book value
$
2,883
–
2,883
Buildings
and leasehold
improvements
$
13,052
(5,481)
7,571
Machinery, Computers and
equipment equipment under
and vehicles
capital lease
$
14,154
(10,669)
3,485
$
2,052
(42)
2,010
Total
property and
equipment
$
32,141
(16,192)
15,949
Rental fleet
$
–
–
–
Total property
and equipment
and rental fleet
$
32,141
(16,192)
15,949
Opening net book value
Additions
Disposals
Depreciation
Closing net book value
2,883
–
–
–
2,883
7,571
19
–
(336)
7,254
3,485
317
(71)
(382)
3,349
2,010
1,720
–
(1,367)
2,363
15,949
2,056
(71)
(2,085)
15,849
–
–
–
–
–
15,949
2,056
(71)
(2,085)
15,849
Cost
Net book value
2,883
–
2,883
13,071
(5,817)
7,254
14,400
(11,051)
3,349
3,772
(1,409)
2,363
34,126
(18,277)
15,849
–
–
–
34,126
(18,277)
15,849
Opening net book value
Acquired on business combination (note 4)
Additions
Disposals
Depreciation
Closing net book value
2,883
417
2,573
–
–
5,873
7,254
3,850
5,784
–
(517)
16,371
3,349
369
681
–
(585)
3,814
2,363
422
4,308
–
(1,873)
5,220
15,849
5,058
13,346
–
(2,975)
31,278
–
11,722
13,382
(7,093)
(2,447)
15,564
15,849
16,780
26,728
(7,093)
(5,422)
46,842
Cost
Net book value
5,873
–
5,873
22,705
(6,334)
16,371
15,450
(11,636)
3,814
8,502
(3,282)
5,220
52,530
(21,252)
31,278
18,011
(2,447)
15,564
70,541
(23,699)
46,842
$
$
$
$
$
$
$
Building and leasehold improvements include $5,254 of assets under construction related to the new branch in Edmonton, Alberta. The Company
expects to complete construction and begin depreciation of the facility in fiscal 2012.
All trade accounts receivable related to the rental fleet at December 31, 2011 have maturities of less than one year.
The Company leases various computers and equipment under non-cancellable finance lease agreements. The lease terms are between one
year and eight years.
58
NOTE 9
NOTE 10
Intangible asset
Employee benefit obligations
As at December 31, 2011 and 2010, the intangible asset is comprised
of a distribution right with an indefinite life that was acquired as part
of the acquisition of the Champion Road Machinery division of Volvo
Group Canada Inc. (“Champion”) in 2008. The distribution right does
not contain an expiry date and management believes that the benefits
to the Company of the distribution right is ongoing. As a result, the
distribution right has an indefinite useful life.
IMPAIRMENT TEST FOR INDEFINITE-LIFE INTANGIBLE ASSET
The distribution right intangible asset was tested for impairment at the
Ontario region CGU level and it was determined that as at December 31,
2011 no impairment existed.
The recoverable amount of the Ontario region CGU is determined
based on value-in-use calculations. These calculations use pre-tax cash
flow projections based on financial budgets and forecasts approved by
management covering a five-year period. Cash flows beyond five years
are extrapolated using the estimated growth rates stated below.
The key assumptions used for value-in-use are as follows:
Revenue growth
Gross margin percentage
Expense growth
Discount rate
2011
2010
5% to 14%
21%
3%
9% to 15%
5% to 26%
21% to 23%
3%
9% to 15%
The discount rates used are pre-tax and reflect specific risks relating
to relevant operations. Management determined forecasted revenue
growth rates, gross margin percentage and expense growth rates based
on past performance and its expectations of market development.
Discount rates represent the current market assessment of the risks
specific to the Ontario region CGU, taking into consideration the time
value of money and individual risks of the underlying assets that have not
been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of the Ontario region CGU
and is derived from the Company’s weighted average cost of capital
(“WACC”). A sensitivity analysis included adjusting key assumptions for
a variety of scenarios and applying a range to the discount rate.
December 31,
2011
Balance sheet
obligations for:
Pension benefits
$
Dental, health and other
post-employment benefits
$
Income statement
charge for:
Pension benefits
$
Dental, health and other
post-employment benefits
$
December 31,
2010
January 1,
2010
10,653
$
3,267
$
2,907
1,107
11,760
$
1,107
4,374
$
1,548
4,455
1,511
$
1,388
48
1,559
$
82
1,470
Total cash payments for employee future benefits for 2011, consisting
of cash contributed by the Company to its funded defined benefit plans,
cash payments directly to beneficiaries for its unfunded other benefit
plans and cash contributed to its funded defined contribution plan, were
$2,958 (2010 – $1,466).
The history and experience adjustments in respect of post-employment benefit obligations are as follows:
Present value
of benefit obligations
Fair value of plan assets
Deficit in the plan
Experience adjustments
in plan liabilities
Experience adjustments
in plan assets
December 31,
2011
December 31,
2010
$
$
38,082
26,322
11,760
(4,492)
$
(4,361)
32,458
28,084
4,374
January 1,
2010
$
(2,533)
$
1,179
30,543
26,088
4,455
–
$
–
a) Pension benefits
The Company has a number of funded and unfunded benefit plans
that provide pension as well as other retirement benefits to some of
its employees.
i) Defined contribution plans
The Company maintains a defined contribution plan available only to
certain employees (approximately 9% of the workforce (2010 – 11%)).
In 2011, the Company’s contributions were $191 (2010 – $172). The
Company also maintains a group RSP/LIRA available only to certain
employees (approximately 10% of the workforce (2010 – 12%))
under the terms of a collective bargaining agreement. In 2011, the
Company’s contributions were $177 (2010 – $192).
59
The Company maintains defined contribution retirement savings plans for executive officers and general managers. The expense related to
these plans for the year ended December 31, 2011 was $247 (2010 – $241).
CBR, which was acquired in February 2011, has a 401(k) defined contribution retirement savings program for its U.S. employees. The expense
related to the 401(k) for the year ended December 31, 2011 was $46. Employees receiving the 401(k) benefit made up approximately 11% of
the workforce in 2011.
ii) Defined benefit pension plans
The amounts recognized in the consolidated statement of financial position are determined as follows:
December 31, 2011
Employee plan
Fair value of plan assets
Present value of funded obligations
$
$
Impact of asset ceiling
Deficit of plan and liability in the balance sheet
$
25,245
35,113
9,868
–
9,868
December 31, 2010
Executive plan
$
1,077
1,862
785
–
785
$
$
Employee plan
$
$
$
26,772
29,434
2,662
–
2,662
January 1, 2010
Executive plan
$
1,312
1,820
508
97
605
$
$
Employee plan
$
$
$
24,751
25,662
911
1,360
2,271
Executive plan
$
1,337
1,830
493
143
636
$
$
The movement in the deferred benefit obligation over the year is as follows:
December 31, 2011
Employee plan
Accrued benefit obligation as at January 1
Current service cost
Interest cost
Benefits paid
Actuarial loss
Accrued benefit obligation as at December 31
$
$
29,434
1,600
1,650
(1,909)
4,338
35,113
December 31, 2010
Executive plan
$
1,820
–
82
(170)
130
1,862
$
Employee plan
$
$
25,661
1,419
1,625
(2,159)
2,888
29,434
Executive plan
$
1,831
–
87
(170)
72
1,820
$
The movement in the fair value of plan assets over the year is as follows:
December 31, 2011
Employee plan
Fair value of plan assets as at January 1
Actual return on plan assets
Employer contributions
Employee contributions
Benefits paid
Fair value of plan assets as at December 31
$
$
26,772
(2,382)
2,128
636
(1,909)
25,245
December 31, 2010
Executive plan
$
1,312
(133)
68
–
(170)
1,077
$
Employee plan
$
$
24,751
2,699
785
696
(2,159)
26,772
Executive plan
$
1,337
132
13
–
(170)
1,312
$
Plan assets consist of:
December 31, 2011
Asset category
Equity securities
Debt securities
Other
60
December 31, 2010
January 1, 2010
Employee plan
Executive plan
Employee plan
Executive plan
Employee plan
Executive plan
67.7%
31.6%
0.7%
100.0%
68.0%
31.3%
0.7%
100.0%
68.5%
30.9%
0.6%
100.0%
68.5%
31.0%
0.5%
100.0%
67.2%
29.2%
3.6%
100.0%
69.5%
30.4%
0.1%
100.0%
The amounts recognized in the consolidated statement of income (loss) and consolidated statement of comprehensive income (loss) are as follows:
2011
Statement of income (loss)
Employee plan
Employer current service costs
Interest on accrued benefits
Expected return on plan assets
Subtotal
$
Statement of comprehensive income (loss)
Employee plan
Gain (loss) for the year on obligation
Gain (loss) for the year on asset
Effect of asset ceiling
Subtotal
Total
$
$
(964)
(1,650)
1,764
(850)
2010
Executive plan
$
–
(82)
82
–
$
Employee plan
$
$
2011
$
(4,338)
(4,146)
–
(8,484)
(9,334)
Executive plan
(723)
(1,625)
1,570
(778)
$
–
(87)
82
(5)
$
2010
Executive plan
$
(130)
(215)
97
(248)
(248)
$
Employee plan
$
$
Executive plan
(2,888)
1,129
1,360
(399)
(1,177)
$
(72)
49
45
22
17
$
Expected contributions to the defined benefit pension plan for employees and executives for the year ending December 31, 2012 are $2,316
and $68, respectively.
The Company measures its accrued benefit obligations and the fair value of plan assets for accounting purposes as of December 31 of each
year. For the employee pension plan, the most recent actuarial valuation for funding purposes was performed as of August 31, 2011 and the
next required valuation will be due no later than August 31, 2012.
For the executive pension plan, the most recent actuarial valuation for funding purposes was performed as at June 30, 2009 and the next
required valuation will be due no later than June 30, 2012.
The principal actuarial assumptions used are as follows:
December 31, 2011
December 31, 2010
January 1, 2010
Employee plan
Executive plan
Employee plan
Executive plan
Employee plan
Executive plan
Discount rate
Expected return on plan assets
Future salary increases
4.50%
6.50%
3.00%
4.00%
6.50%
3.00%
5.50%
6.50%
3.00%
4.75%
6.50%
3.00%
6.25%
6.50%
3.00%
5.00%
6.50%
3.00%
Mortality table
Note 1
Note 1
Note 1
Note 1
Note 1
Note 1
39.2
41.4
19.6
22.0
–
–
19.6
22.0
39.1
41.4
19.5
22.0
–
–
19.5
22.0
37.5
40.4
19.4
21.8
–
–
19.4
21.8
Average life expectancy
> Male aged 45
> Female aged 45
> Male aged 65
> Female aged 65
Note 1: UP 94 Projected generationally, sex distinct
The sensitivity of the overall pension liability to changes in assumptions is as follows:
Employee plan
Discount rate
Salary growth rate
Executive plan
Discount rate
Valuation assumption
Percentage change
Change in overall liability
4.50%
3.00%
1.00%
1.00%
$
4,643
829
4.00%
1.00%
$
133
61
b) Post-employment health and dental benefits
and retiring allowance
The Company has other post-employment benefit obligations, which
include an unfunded retiring allowance and a non-contributory dental
and health-care plan.
The amounts recognized in the consolidated statement of financial
position are determined as follows:
NOTE 11
As at
December 31,
2011
December 31,
2010
Trade payables
Accrued expenses
$
$
$
As at
December 31,
2011
Present value of obligation
$
Unamortized past
service costs
Accrued benefit obligation in
the consolidated statement
of financial position
$
1,107
December 31,
2010
$
1,107
$
9,890
18,939
28,829
$
$
6,852
12,796
19,648
January 1,
2010
$
1,548
NOTE 12
–
1,107
–
$
1,107
–
$
1,548
The movement in the accrued benefit obligation over the year is as
follows:
As at December 31
Accrued benefit obligations as at January 1
Current service cost
Interest cost
Benefits paid
Actuarial gain (loss)
Accrued benefit obligations
as at December 31
2011
2010
$
1,107
–
47
(71)
24
$
1,548
–
82
(95)
(428)
$
1,107
$
1,107
The assumed health-care cost trend rate is 7% in 2012, declining by
0.5% per annum to 5% per annum in 2016 and thereafter. The assumed
dental cost trend rate is 4% per annum.
Assumed health-care and dental-care cost trend rates have a
significant effect on the amounts reported for the health-care and dentalcare plans. A 1% change in assumed health-care and dental-care cost
trend rates would have the following effects for 2011:
Total service and interest cost (at 5%)
Accrued benefit obligations
as at December 31, 2011
62
9,664
25,322
34,986
January 1,
2010
Increase
Decrease
5
(4)
126
(103)
In addition to its bank credit facilities, the Company has lines of credit
available totalling approximately $240 million from various non-bank
equipment lenders in Canada and the United States, which are used
to finance equipment inventory (December 31, 2010 – $200 million and
January 1, 2010 – $149 million). As at December 31, 2011, there was
approximately $160 million borrowed on these equipment finance lines
(December 31, 2010 – $118 million and January 1, 2010 – $105 million).
Typically, these equipment notes are interest-free for periods of up
to 12 months from the date of financing, after which they bear interest
in Canada at rates ranging from 4.00% to 5.50% over the one-month
Bankers’ Acceptance rate (“BA rate”) and 3.25% to 4.25% over the
prime rate of a Canadian chartered bank, and from 2.50% to 5.50% over
the one-month LIBOR and between prime and prime plus 3.00% in the
United States. As collateral for these equipment notes, the Company
has provided liens on the specific inventories financed and any related
accounts receivable. In the normal course of business, these liens cover
substantially all of the inventories. Monthly principal repayments equal to
3.00% of the original principal balance of the note commence 12 months
from the date of financing and the remaining balance is due in full at the
earlier of 24 months after financing or when the financed equipment is
sold. While financed equipment is out on rent, monthly curtailments
are required equal to the greater of 70% of the rental revenue and
2.5% of the original value of the note. Any remaining balance after 24
months, which is due in full, is normally refinanced with the lender over
an additional period of up to 24 months. All of the Company’s equipment
notes are renewable annually.
Certain of the Company’s equipment finance credit agreements
contain restrictive financial covenants, including requiring the Company
to remain in compliance with the financial covenants under all of its other
lending agreements (“cross default provisions”). As at December 31,
2011, the Company was in compliance with these covenants.
The equipment notes are payable on demand and therefore have
been classified as current liabilities. The carrying amount of equipment
notes payable are as follows:
As at
– non-interest-bearing
– interest-bearing
December 31,
2011
December 31,
2010
$
$
72,262
88,151
$ 160,413
40,097
78,063
$ 118,160
January 1,
2010
$
28,671
76,172
$ 104,843
Due to the short-term nature of equipment notes payable, management
has determined that their fair value does not differ materially from their
carrying value.
NOTE 13
The operating lines of credit bear interest at rates that range between
the bank’s prime rate plus 0.50% and the bank’s prime rate plus 3.00%
and between the one-month Canadian BA rate plus 1.50% and the BA
rate plus 4.00% in Canada, and at LIBOR plus 2.60% in the United
States. Under its bank credit facilities, the Company is able to issue
letters of credit up to a maximum of $5 million. Outstanding letters of
credit reduce the Company’s availability under its operating lines of
credit. For certain customers, Strongco issues letters of credit as a
guarantee of Strongco’s performance on the sale of equipment to the
customer. As at December 31, 2011, there were outstanding letters of
credit of $113 million (December 31, 2010 – $74 million and January 1,
2010 – $74 million).
b) Finance lease obligations
As at December 31, 2011, the Company had vehicles and computer
equipment under finance leases. The weighted average effective interest
rate is 6.6% (December 31, 2010 – 4.8%). The future minimum annual
payments, interest and balance of obligations are as follows:
Debt
As at
December 31,
2011
Current
Bank indebtedness (a)
$
Finance lease obligations (b)
Notes payable (c)
$
Non-current
Finance lease obligations (b) $
Notes payable (c)
Total Debt
$
10,951
2,110
6,242
19,303
3,291
13,558
36,152
December 31,
2010
$
$
$
$
12,370
960
1,233
14,563
1,502
–
16,065
January 1,
2010
$
$
$
$
10,014
954
1,094
12,062
1,154
1,218
14,434
a) Bank indebtedness
The Company has credit facilities with banks in Canada and the United
States which provide 364-day committed operating lines of credit
totalling approximately $22.5 million, which are renewable annually.
As at December 31, 2011, the Company had utilized $11.0 million
(December 31, 2010 – $12.4 million and January 1, 2010 – $10.0 million)
of the operating line of credit.
Borrowings under the lines of credit are limited by standard borrowing
base calculations based on trade receivables and inventories, which is
typical of such lines of credit. As collateral in Canada, the Company
has provided a $50 million debenture and a security interest in trade
receivables, inventories (subordinated to the collateral provided to the
equipment inventory lenders), property and equipment (subordinated
to collateral provided to lessors), real estate and on intangible and other
assets.
As at
December 31,
2011
December 31,
2010
No later than 1 year
Later than 1 year but
no later than 5 years
Later than 5 years
Total minimum
lease payments
$
$
Future finance charges
on finance leases
Present value of
finance lease liabilities
2,110
3,475
–
$
5,585
5,401
$
1,589
–
$
(184)
$
960
January 1,
2010
2,549
1,245
–
$
(87)
$
2,462
954
2,199
(91)
$
2,108
The present value of financial lease liabilities is as follows:
As at
December 31,
2011
December 31,
2010
Later than 1 year but
no later than 5 years
Later than 5 years
$
2,020
$
924
$
3,381
–
5,401
$
1,538
–
2,462
January 1,
2010
$
954
$
1,154
–
2,108
63
c) Notes payable
Notes payable are comprised of the following:
As at
December 31,
2011
Champion acquisition note (i) $
Promissory notes (ii)
Equipment plan notes payable
– rental fleet (iii)
Term note – United States (iv)
Term note – Canada (v)
Construction facility (vi)
Other
$
Current portion
Long-term portion
$
–
1,301
5,455
3,702
4,333
4,987
22
19,800
6,242
13,558
December 31,
2010
$
$
$
1,233
–
–
–
–
–
–
1,233
1,233
–
January 1,
2010
$
$
$
2,312
–
–
–
–
–
–
2,312
1,094
1,218
i) On March 20, 2008, the Company purchased substantially all of the
assets (excluding real property) of Champion for total consideration
of $24,984, including deal-related costs of $190. The consideration
included a non-interest-bearing note payable in favour of Volvo
Group Canada Inc. of $2,500 with instalment payments of $1,250
due in March 2010 and March 2011. The note was secured with
certain assets of Champion. The note had been discounted at 6.0%
using the effective interest rate method, resulting in a discount of
$346 that was amortized to interest expense over the three-year
period to March 2011. During the year, the final principal payment
on the non-interest-bearing note was made.
ii) As part of the acquisition of CBR, the Company issued, through a
wholly owned subsidiary, three promissory notes totalling US$1,863.
The three promissory notes mature on February 17, 2013 and bear
interest at the U.S. prime rate. Quarterly principal payments of
US$195 commenced in May 2011. At December 31, 2011, US$139 of
the outstanding promissory notes was owed to a former shareholder
and current employee of CBR, which is recorded at the exchange
amount.
iii) In addition to equipment notes payable as described in note 12,
CBR also utilizes equipment notes payable to finance its rental
fleet. Payment is required at the earlier of the sale of items or per
contractual schedule ranging from 12 to 24 months. Effective interest
rates range from 2.01% to 5.80%, with various maturity dates. As
collateral for these equipment notes, the Company has provided
liens on substantially all of the inventories financed and any related
accounts receivable.
iv) The Company’s bank credit facilities in the United States include a
term note secured by real estate and cross-collateralized with the
Company’s revolving line of credit in the United States. The term note
matures in September 2012 and bears interest at a rate of LIBOR plus
3.05%. Monthly principal payments of US$13 plus accrued interest
are required under the terms of the note. The Company has interest
rate swap agreements in place related to the term note, which have
64
converted the variable rate on the term loans to a fixed rate of 5.17%.
The term loans and swap agreements expire in September 2012, at
which point a balloon payment for the balance of the loans is due.
v) In April 2011, the Company’s bank credit facilities were amended
to add a $5,000 demand non-revolving term loan (“Term note –
Canada”). The Term note – Canada is for a term of 60 months and
bears interest at the bank’s prime lending rate plus 2.0%. Monthly
principal payments of $83 plus accrued interest commenced in
May 2011. As collateral, the Term note – Canada is secured against
the Company’s Mississauga, Ontario facility and land, which had a
carrying value of $7,361 as at December 31, 2011.
vi) In May 2011, the bank credit facilities were further amended to
add a construction loan facility (“Construction Loan”) to finance
the construction of the Company’s new Edmonton, Alberta branch.
Under the Construction Loan, the Company is able to borrow 70%
of the cost of the land and building construction costs to a maximum
of $7,100. The Company purchased the property in March 2011
and commenced construction in June 2011. The construction is
scheduled to be completed during fiscal 2012. As at December 31,
2011, the Company has drawn $4,987 against the construction loan
facility. Interest costs for the period ended December 31, 2011 were
$97. Upon completion, the Construction Loan will be converted to a
demand non-revolving term loan (“Mortgage Loan”). The Mortgage
Loan will be for a term of 60 months. The Construction Loan and
Mortgage Loan bear interest at the bank’s prime lending rate plus
2%. As collateral, the Construction Loan is secured against the
Company’s Edmonton, Alberta facility and land, which had a carrying
value of $7,820 as at December 31, 2011.
d) The carrying amount and fair value of the debt are as follows:
Carrying amount
December 31,
2011
December 31,
2010
Bank indebtedness
Notes payable
$
$
$
10,951
19,800
5,401
36,152
$
12,370
1,233
2,462
16,065
Fair value
December 31,
2011
December 31,
2010
Bank indebtedness
Notes payable
$
$
$
10,951
19,140
5,401
35,492
$
12,370
1,233
2,462
16,065
January 1,
2010
$
$
10,014
2,312
2,108
14,434
January 1,
2010
$
$
10,014
2,312
2,108
14,434
The fair values were determined using a discount rate equivalent to
the interest charged against the relevant debt item. Notes payable
at December 31, 2010 were classified as short-term, with a carrying
value that approximated the fair value. The fair value of finance lease
obligations does not differ materially from their carrying value.
The analysis of deferred income tax assets and liabilities is as follows:
NOTE 14
Income taxes
Significant components of the provision for (recovery of) income taxes
are as follows:
2011
Components of current income
tax expense:
Relating to current year income taxes
$
Adjustment in respect of current
income tax of acquired business
Total current income tax expense
Components of deferred income tax expense:
Origination and reversal
of temporary differences
Tax attributes not benefited
Benefit of previously unrecognized
tax attributes
Total deferred income tax expense
Total income tax expense
$
196
2010
$
–
(468)
(272)
–
–
3,620
–
(203)
203
(2,145)
1,475
1,203
$
2011
$
$
2011
$
$
2,708
2,732
990
6,430
(4,886)
(2,568)
(7,454)
(1,024)
2010
$
$
220
145
67
432
(432)
–
(432)
–
–
–
–
$
3,106
$
(2,145)
(172)
146
(20)
1,203
2011
$
$
1,541
(2,565)
2010
$
$
–
–
The recognition of deductible temporary differences represented by the
deferred income tax asset above is dependent on taxable profits in the
future that arise in the same taxation periods in which those deductible
temporary differences are to be utilized.
The gross movement on deferred tax is as follows:
2010
11,132
27.90%
288
–
$
Eligible capital expenditures
and other reserves
Pension
Loss carryforward
Deferred income tax assets
Capital and other assets
Partnership income taxes payable in 2012
Net deferred income tax liability
The above is presented on the balance sheet as follows:
The tax on the profit before tax differs from that which would be obtained
by applying the statutory tax rate as a result of the following:
Earnings (loss) before taxes
Statutory tax rate
at statutory tax rate
Adjustments thereon for the effect of:
Permanent differences
Tax attributes not benefited
Benefit of previously
unrecognized tax attributes
Rate differences
Foreign rate differential
Other
Total income tax expense
Deferred income tax assets and liabilities
As at December 31
(925)
30.07%
(278)
157
203
2011
As at January 1
Acquisition of a business
Other
Income statement charge (deferred tax)
Tax charges relating to components
of other comprehensive income
As at December 31
$
$
–
(1,707)
(86)
(1,475)
2,244
(1,024)
2010
$
–
–
–
$
–
–
–
$
(82)
–
65
The movement in deferred income tax assets and liabilities during the year, without taking into account offsetting, is as follows:
Charged to income statement
Charged to other comprehensive income
Deferred income tax assets
Other
66
Property and
equipment
and other assets
$
$
(765)
333
–
(432)
$
(2,849)
(1,605)
–
(4,886)
Partnership
income taxes
payable in the
following year
$
$
–
–
–
–
$
–
(2,568)
–
(2,568)
Eligible capital
expenditures and
other reserves
$
$
589
(368)
–
221
$
1,142
(86)
1,431
–
2,708
Other
$
$
–
–
–
–
$
–
–
–
–
Employee
benefits
$
$
176
(31)
–
145
$
–
–
343
2,244
2,732
Total
$
$
(765)
333
–
(432)
$
(2,849)
(4,173)
–
(7,454)
Unused
tax losses
$
$
–
66
–
66
$
–
–
924
–
990
Total
$
$
765
(333)
–
432
$
1,142
(86)
2,698
2,244
6,430
Deductible temporary differences for which no deferred tax asset is
recognized include:
2011
Eligible capital expenditures
and other reserves
Employee benefits
Unused tax losses
$
$
–
–
–
2010
$
$
4,257
2,744
1,276
b) Legal matters
The Company has set up provisions for certain legal matters based on
management’s assessment and support from external legal counsel.
As at December 31, 2011, these provisions totalled $83 (December 31,
2010 – $576 and January 1, 2010 – $519).
NOTE 16
Gross unused tax losses of $951 and $673 in Canada will expire in 2029
and 2030, respectively. Gross unused tax losses of $1,432 in the U.S.
will expire in 2032.
Issued:
As at December 31, 2011, a total of 13,128,719 shares (2010 – 10,508,719)
with a stated valued of $64,898 (December 31, 2010 and January 1,
2010 – $57,089) were issued and outstanding.
NOTE 15
Equipment
buy-back
obligation (a)
At as January 1, 2011
$
Charged (credited)
to the income statement
Additional provision
Unused amounts reversed
Used during the year
$
860
326
–
(71)
1,115
Legal
matters (b)
$
576
$
–
(493)
–
83
Equipment
buy-back
obligation (a)
At as January 1, 2010
$
Charged (credited)
to the income statement
Additional provision
Unused amounts reversed
Used during the year
$
700
160
–
–
860
Authorized:
Unlimited number of shares
Total
$
1,436
$
–
326
(493)
(71)
1,198
Legal
matters (b)
$
$
666
100
(190)
–
576
Total
$
1,366
$
–
260
(190)
–
1,436
a) Equipment buy-back obligation
The Company has agreed to buy back equipment from certain customers
at the option of the customer for a specified price at future dates (“buyback contracts”). These contracts are subject to certain conditions
being met by the customer and range in term from three to 10 years. As
at December 31, 2011, the total obligation under these contracts was
$13,512 (December 31, 2010 – $10,279 and January 1, 2010 – $9,769).
The Company’s maximum potential losses pursuant to the majority
of these buy-back contracts are limited, under an agreement with a
third party, to 10% of the original sale amounts. A reserve of $1,115
(December 31, 2010 – $860 and January 1, 2010 – $699) has been
accrued in the Company’s accounts with respect to these commitments.
On January 17, 2011, the Company completed a rights offering for
aggregate proceeds of $7,809, net of transaction costs of $51. The
offering was virtually fully subscribed, with a total of 9,941,964 rights being
exercised for 2,485,491 common shares and 134,509 common shares
being issued pursuant to the additional subscription privilege. Under the
offering, each registered holder of the Company’s Common Shares as
of December 17, 2010 received one Right for each Common Share held.
Four Rights plus the sum of $3.00 were required to subscribe for one
Common Share. Each Common Share was issued at a price of $3.00.
NOTE 17
Segment information
Management has determined that the Company has one reportable
operating segment, Equipment Distribution, based on reports reviewed
by the President and Chief Executive Officer. This business sells and rents
new and used equipment and provides after-sale product support (parts
and service) to customers that operate in infrastructure, construction,
mining, oil and gas exploration, forestry and industrial markets.
A breakdown of revenue from the Equipment Distribution segment
is as follows:
Analysis of revenue by category:
Equipment sales
Equipment rental
Product support
2011
2010
$ 275,654
29,834
117,665
$ 423,153
$ 183,744
22,093
88,820
$ 294,657
67
Geographical information for the year ended and as at:
NOTE 19
Expenses by nature
December 31, 2011
Revenue
Rental fleet
Intangible asset
Other assets
December 31, 2010
Revenue
Rental fleet
Intangible asset
Other assets
January 1, 2010
Revenue
Rental fleet
Intangible asset
Other assets
Canada
$ 376,561
26,381
–
1,800
$ 219,032
$
$
Canada
$ 294,657
15,849
–
1,800
$ 197,512
$
$
Canada
$ 291,795
15,949
–
1,800
$ 173,047
$
$
U.S.
Total
46,592
4,896
15,564
–
36,963
$ 423,153
31,277
15,564
1,800
$ 255,995
U.S.
Total
–
–
–
–
–
$ 294,657
15,849
–
1,800
$ 197,512
U.S.
Total
–
–
–
–
–
$ 291,795
15,949
–
1,800
$ 173,047
Changes in inventories of equipment,
parts and work-in-process
Raw materials and consumables used
Depreciation
Utilities
Operating lease expenses
Transportation expenses
Advertising expenses
Salaries and commissions (a)
Telephone, fax and office supplies
Other
Total cost of sales, administration,
distribution and selling expenses
2011
2010
$ 317,230
549
5,422
1,374
6,687
3,082
1,151
55,000
2,716
14,132
$ 220,126
1,038
2,085
1,093
7,038
2,516
563
45,571
2,454
9,022
$ 407,343
$ 291,506
a) Salaries and commission expense comprises the following:
2011
Wages
Commissions
Employee future benefits
$
52,418
2,286
296
55,000
Bank indebtedness
$
Equipment notes payable – interest-bearing
Notes payable
$
1,052
4,619
160
10
5,841
NOTE 18
$
2010
$
$
43,973
1,354
244
45,571
Other income
Other income for the year ended December 31, 2011 of $1,163
(December 31, 2010 – $740) included gains relating to the reversal of
certain legal and other provisions no longer required, foreign currency
gains, gains on mark-to-market adjustments for foreign currency swaps
and interest rate swaps, and miscellaneous commission income from
suppliers.
68
NOTE 20
Interest expense
2011
2010
$
$
516
4,202
84
14
4,816
NOTE 21
Earnings (loss) per share
Basic earnings (loss) per share is calculated by dividing the income (loss)
attributable to shareholders of the Company by the weighted average
number of shares outstanding during the year. Diluted earnings (loss) per
share is calculated by adjusting the weighted average number of shares
outstanding to assume conversion of all potentially dilutive shares.
Weighted average number
of shares for basic earnings (loss)
per share calculation
Effect of dilutive options outstanding
Weighted average number
of shares for dilutive earnings (loss)
per share calculation
2011
2010
13,049,126
39,842
11,053,608
–
13,088,968
11,053,608
On January 17, 2011, the Company completed a rights offering for a
total of 9,941,964 rights being exercised for 2,485,491 common shares
and 134,509 common shares being issued pursuant to the additional
subscription privilege. The rights were issued at a discount to the market
price at the date of issue, resulting in a bonus element related to this
discount. The calculation of the weighted average number of shares for
basic earnings (loss) per share has been adjusted for a factor related
to the bonus element, impacting the calculation for the years ended
December 31, 2011 and 2010.
The computation of dilutive options outstanding only includes those
options having exercise prices below the average market price of the
shares during the period. A total of 445,000 options were excluded due
to their anti-dilutive effect for the year ended December 31, 2010.
NOTE 22
Share-based compensation
On May 26, 2011, the shareholders of the Company approved a
stock option plan (the “Plan”), under which options may be granted
to any officer or member of senior management of the Company by
the Directors. Options are non-assignable and non-transferrable. The
aggregate number of shares reserved for issuance upon the exercise of
all options granted under the Plan shall not exceed 850,000. The strike
price for an option is equal to the volume weighted average trading
price of the shares on the Toronto Stock Exchange for the five trading
days immediately preceding the date that the option was granted by
the Directors of the Company. Each option holder will have 10 years
from the date of grant to exercise the options. Options vest 33 1/3% on
each of the fourth, fifth and sixth anniversary of the date of grant. As
of December 31, 2011, no options have been granted under the Plan.
On August 11, 2008, the Company issued irrevocable options to the
then newly appointed Chief Executive Officer to purchase 100,000 units in
the capital of the Company. These options have an exercise price of $2.98
per unit, which is equal to the average trading price of the Company’s
units over the five days immediately following August 11, 2008. Fifty
percent of the options vested and became exercisable 12 months from
the grant date and the balance vested and became exercisable 24 months
from the grant date. The options expire five years from the issue date on
August 11, 2013. The options were approved by the shareholders at the
annual meeting of the unitholders on April 30, 2009. The stock-based
compensation expense of these options is based upon the estimated
fair value of the options at the grant date, which was determined using
the Black-Scholes option pricing model, amortized over the two-year
vesting period of the options. The following assumptions were used in
determining the fair value of the options using the Black-Scholes model:
Risk-free interest rate
Option life
Expected volatility
Estimated forfeiture rate
3%
5 years
60%
5%
On October 28, 2009, the Company issued irrevocable options to
certain members of senior management to purchase 375,000 units of the
Company. These options have an exercise price of $4.50 per unit, which
is equal to the average trading price of the Company’s units over the five
days immediately preceding October 28, 2009. A third of the options vest
and become exercisable after 36 months from the grant date, a third of
the options vest and become exercisable after 48 months from the grant
date and the balance vest and become exercisable after 60 months from
the grant date. The options expire seven years from the issue date, on
October 28, 2016. The options were approved by the shareholders at the
annual meeting of the shareholders on May 14, 2010. The stock-based
compensation expense of these options is based upon the estimated
fair value of the options at the grant date, which was determined using
the Black-Scholes option pricing model, amortized over the five-year
vesting period of the options. The following assumptions were used in
determining the fair value of the options using the Black-Scholes model:
Option life
Expected volatility
3%
7 years
64%
5%
On December 16, 2010, the Company issued irrevocable options
to certain members of senior management to purchase 15,000 units of
the Company. These options have an exercise price of $3.71 per unit,
which is equal to the average trading price of the Company’s units over
69
the five days immediately preceding December 16, 2010. A third of the
options vest and become exercisable after 36 months from the grant
date, a third of the options vest and become exercisable after 48 months
from the grant date and the balance vest and become exercisable after
60 months from the grant date. The options expire seven years from
the issue date, on December 16, 2017. The options were approved
by the shareholders at the annual meeting of the shareholders on
May 26, 2011. The stock-based compensation expense of these
options is based upon the estimated fair value of the options at the grant
date, which was determined using the Black-Scholes option pricing
model, amortized over the five-year vesting period of the options. The
following assumptions were used in determining the fair value of the
options using the Black-Scholes model:
Option life
Expected volatility
3%
7 years
64%
5%
The expected volatility reflects the assumption that the historical
volatility over a period similar to the life of the options is indicative of
future trends, which may not necessarily be the actual outcome. At
December 31, 2011, the weighted average remaining contractual life of
the outstanding stock options was 50.7 months (2010 – 62.7 months)
and the weighted average exercise price was $4.14 (2010 – $4.18). The
stock-based compensation expense related to stock options for 2011
was $131 (2010 – $166). A summary of activity in the year is as follows:
As at December 31
Number
of options
Options outstanding – beginning of year
Granted
Exercised
Forfeited
Options outstanding – end of year
Options vested and exercisable – end of year
NOTE 23
Contingencies, commitments and guarantees
a) In the ordinary course of business, the Company may be contingently
liable for litigation. On an ongoing basis, the Company assesses
the likelihood of any adverse judgments or outcomes, as well as
potential ranges of probable costs or losses. A determination of the
provision required, if any, is made after analysis of each individual
matter. The required provision may change in the future due to new
developments in each matter or changes in approach such as a
change in settlement strategy dealing with these matters.
A statement of claim has been filed naming a former division of
the Company as one of several defendants in proceedings under the
Superior Court of Quebec. The action claims errors and omissions in
the contractual execution of work entrusted to the defendants and
names the Company as jointly and severally liable for damages of
approximately $5.9 million. Management believes that the Company
has a strong defence against this claim and that it is without merit.
The Company’s insurer has provided conditional coverage for this
claim.
A statement of claim has been filed naming a former division of
the Company as one of several defendants in proceedings under
the Court of Queen’s Bench of Manitoba. The action claims errors
and omissions in the contractual execution of work entrusted
70
460,000
–
–
–
460,000
100,000
2011
2010
Weighted
average
exercise price
Weighted
average
exercise price
$
$
$
Number
of options
4.02
–
–
–
4.14
2.98
475,000
15,000
–
(30,000)
460,000
100,000
$
$
$
4.18
–
–
–
4.02
2.98
to the defendants and names the Company as jointly and severally
liable for damages of approximately $4.8 million. Management
believes that the Company has a strong defence against this claim
and that it is without merit. The Company’s insurer has provided
conditional coverage for this claim.
b) The Company has entered into various operating leases for its
premises, certain vehicles, furniture and fixtures, and equipment. The
lease terms are between one year and eight years, and the majority
of lease agreements are renewable at the end of the lease period at
market rates. Approximate future minimum annual payments under
these operating leases are as follows:
2011
Later than 1 year but no later
than 5 years
Later than 5 years
$
4,656
$
12,755
2,949
20,360
2010
$
5,241
$
12,787
4,291
22,319
c) The Company has provided a guarantee of lease payments under
the assignment of a property lease, which expires January 31, 2014.
Total lease payments from December 31, 2011 to January 31, 2014
are $311 (December 31, 2010 – $461 and January 1, 2010 – $610).
The fair value of the Company’s foreign exchange forward contracts
and interest rate swap contracts as at December 31, 2011 and 2010 is
as follows:
NOTE 24
Categories of financial assets and liabilities
Financial instruments are classified into one of five categories: assets
and liabilities held at fair value through profit or loss; held-to-maturity
investments; loans and receivables; available-for-sale financial assets;
and other financial liabilities. The carrying values of the Company’s
financial instruments are classified into the following categories:
As at
December 31,
2011
December 31,
2010
Loans and receivables (1)
Liabilities (2)
$
$
42,759
231,551
35,884
163,053
January 1,
2010
$
December 31,
2011
27,088
138,925
(1) Includes trade and other receivables.
(2) Includes bank indebtedness, trade and other payables, finance lease obligations,
equipment and other notes payable.
Fair value estimation
The Company applies the following fair value measurement hierarchy to
assets and liabilities in the consolidated statement of financial position,
which are carried at fair value:
Level 1: quoted (unadjusted) prices in active markets for identical assets
or liabilities;
Level 2: other techniques for which all inputs that have a significant effect
on the recorded fair value are observable, either directly or indirectly; and
Level 3: techniques that use inputs that have a significant effect on
the recorded fair value that are not based on observable market data.
This fair value measurement hierarchy applies to the Company’s
derivative instruments, consisting of foreign exchange forward contracts
and interest rate swap contracts, which are all considered Level 2 inputs.
The Company enters into derivative financial instruments with various
counterparties, principally financial institutions with investment grade
credit ratings. Derivatives valued using valuation techniques with market
observable inputs are interest rate swaps and foreign exchange forward
contracts. The most frequently applied valuation techniques include
forward pricing and swap models using present value calculations.
The models incorporate various inputs, including the credit quality of
counterparties, foreign exchange spot and forward rates, interest rate
curves and forward rate curves of the underlying commodity.
Level 1
Liabilities measured at fair value
Foreign exchange
forward contracts
$
(16)
Interest rate
swap contracts
$ (306)
Level 3
$
–
$
(16)
$
–
$
–
$ (306)
$
–
Level 1
Level 2
December 31,
2010
Assets measured at fair value
Foreign exchange
forward contracts
$ 239
Level 2
$
–
$
Level 3
239
$
–
The maturity of the carrying value of the Company’s non-derivative
debt and contractual obligations relating to outstanding derivative
instruments as at December 31, 2011 is as follows:
Non-derivatives
Bank indebtedness
Equipment notes
Notes payable
Derivatives
Foreign exchange
forward contracts
Interest rate
swap contracts
$
Less than
1 year
Between
1 and 5 years
10,951
160,413
6,242
$
6,340
$
49
–
–
13,558
Total
$
–
$
15,000
10,951
160,413
19,800
6,340
$
15,049
NOTE 25
Financial risk management
The Company’s activities expose it to a variety of financial risks: market
risk (including foreign exchange and interest rate risk); credit risk; and
liquidity risk. The Company’s overall risk management program focuses
on the unpredictability of financial markets and seeks to minimize
potential adverse effects on the Company’s financial performance.
The Company does not purchase derivative financial instruments for
speculative purposes.
Financial risk management is the responsibility of the corporate
finance function. The Company’s operations, along with the corporate
finance function, identify, evaluate and, where appropriate, hedge
financial risks. Material risks are monitored and are regularly discussed
with the Audit Committee of the Board of Directors.
71
MARKET RISK
a) Foreign exchange risk
The Company operates in Canada and the northeastern United
States. Foreign exchange risk arises because of varying currency
exposure, primarily to the U.S. dollar, and impacts receivables or
payables on transactions denominated in foreign currencies, which
vary due to changes in exchange rates (transaction exposures). The
consolidated statement of financial position includes U.S. dollar
denominated trade payables and trade receivables. These amounts
are translated into Canadian dollars at each period end, with
resulting gains and losses recorded in the consolidated statement
of income (loss).
The objective of the Company’s foreign exchange risk management activities is to minimize transaction exposures. The Company
manages this risk by entering into foreign exchange forward contracts
on a transaction-specific basis. The Company does not currently
hedge translation exposures. Substantially all of the Company’s
purchases are translated into Canadian dollars at the date of receipt.
As at December 31, 2011, the Company carried $26,532 in U.S.
dollar denominated liabilities net of U.S. dollar denominated trade
receivables (December 31, 2010 – $3,836 and January 1, 2010 –
$2,487). A $0.10 change in the exchange rate between the Canadian
and U.S. currencies would have an effect of approximately $2,781
on net income for the year ended December 31, 2011 (December 31,
2010 – $384 and January 1, 2010 – $249).
Foreign exchange forward contracts
On a transaction-specific basis, the Company utilizes financial
instruments to manage the risk associated with fluctuations in foreign
exchange.
The Company enters into foreign exchange forward contracts
to reduce the impact of currency fluctuations on the cost of certain
pieces of equipment ordered for future delivery to customers. The
Company has a $15,000 line of credit for foreign exchange forward
contracts (“FX Line”) as part of its Canadian facility, available to
hedge foreign currency exposure. Under the FX Line, Strongco can
purchase foreign exchange forward contracts up to a maximum of
$15,000 with terms not to expire beyond the remaining term of the
operating line of credit. As at December 31, 2011, the Company had
outstanding foreign exchange forward contracts under this facility
totalling US$6,206 at an average exchange rate of $1.0203 Canadian
for each US$1.00 with settlement dates between January 31, 2012
and the end of May 2012 (December 31, 2010 – US$7,447 and
January 1, 2010 – US$2,438). Foreign currency forward contracts
are classified as a derivative financial instrument and are recorded
at fair value using an observable market. The fair value of foreign
currency forward contracts is based on the settlement rates on those
72
contracts compared to the current forward exchange rate. Strongco
has not adopted hedge accounting for these foreign currency forward contracts and, accordingly, the change in the fair value of the
contracts is recorded in other income. As at December 31, 2011, the
unrealized loss associated with foreign currency forward contracts
is $16 (December 31, 2010 – $239 and January 1, 2010 – $45).
Interest rate swap contracts
In September 2011, the Company secured a swap facility with its
bank, which allows the Company to swap the floating interest rate
component (“BA rates”) on up to $25 million of the Company’s debt
for a five-year fixed swap rate of interest. On September 8, 2011,
the Company entered into an interest rate swap to fix the floating
rate of interest component on $15 million of interest rate debt at
a fixed interest rate equal to 1.615% for a period of five years to
September 8, 2016. The interest rate swap is classified as a derivative
financial instrument and is recorded at fair value using an observable
market. Interest rate swaps are valued using the notional amount of
the interest rate swaps multiplied by the observable inputs of time to
maturity, interest rates and credit spreads. Strongco has not adopted
hedge accounting for the interest rate swap and, accordingly, the
change in the fair value of the swap is recorded in interest expense.
As at December 31, 2011, the unrealized loss associated with the
swap is $257.
The Company has interest rate swap agreements in place related
to the term loans secured by real estate in the United States, which
have converted the variable rate on the term loans to a fixed rate of
5.17%. The term loans and swap agreements expire in September
2012, at which point a balloon payment for the balance of the loans
is due. Strongco has not adopted hedge accounting for the interest
rate swap and, accordingly, the change in the fair value of the swap
is recorded in interest expense.
b) Interest rate risk
The Company’s interest rate risk primarily arises from its floating rate
debt, in particular its bank operating line of credit and its interestbearing equipment notes payable. As at December 31, 2011, a portion
of the Company’s interest-bearing debt is subject to movements in
floating interest rates.
The Company analyzes its interest rate exposure on a dynamic
basis. Various scenarios are simulated, taking into consideration
refinancing, renewal of existing positions, alternative financing and
hedging. Based on these scenarios, the Company calculates the
impact on the consolidated statement of income (loss) of a defined
interest rate shift.
As at December 31, 2011, the Company had $100,200 in interestbearing floating rate debt (December 31, 2010 – $91,666 and January 1,
2010 – $88,498). A 1.0% change in interest rates would have an effect
of approximately $1,002 on net income for the year ended December
31, 2011 (December 31, 2010 – $917 and January 1, 2010 – $885).
CREDIT RISK
Credit risk arises from cash and cash equivalents held with banks and
financial institutions, derivative financial instruments (foreign exchange
forward contracts and interest rate swap contracts), as well as credit
exposure to customers, including outstanding trade receivables. The
maximum exposure to credit risk is equal to the carrying value of the
financial assets.
The objective of managing counterparty credit risk is to prevent
losses in financial assets. The Company’s management continuously
performs credit evaluations of customers and limits the amount of credit
extended to customers as appropriate. The Company is, however, exposed to credit risk with respect to trade receivables and maintains
provisions for possible credit losses based upon historical experience
and known circumstances. In certain circumstances, the Company registers liens, priority agreements and other security documents to further
reduce the risk of credit losses. From time to time the Company requires
deposits before certain services are provided or contracts undertaken.
As at December 31, 2011, the Company held customer deposits of $756
(December 31, 2010 – $560 and January 1, 2010 – $515).
LIQUIDITY RISK
Liquidity risk arises through an excess of financial obligations over
available financial assets due at any point in time. The Company’s
objective in managing liquidity risk is to maintain sufficient readily
available reserves in order to meet its liquidity requirements at any point
in time. The Company achieves this by maintaining sufficient availability
of funding from committed credit facilities. As at December 31, 2011,
the Company had undrawn lines of credit available of $11.5 million
(December 31, 2010 – $7.6 million and January 1, 2010 – $9.9 million).
NOTE 26
Management of capital
The Company defines capital that it manages as shareholders’ equity
and total managed debt instruments consisting of equipment notes
payable (both interest-bearing and non-interest-bearing) and other
interest-bearing debt.
The Company’s objectives when managing capital are to ensure that
the Company has adequate financial resources to maintain the liquidity
necessary to fund its operations and provide returns to its shareholders.
Equipment notes payable comprise a significant portion of the
Company’s capital. Increases and decreases in equipment notes
payable can be significant from period to period and are dependent upon
multiple factors, including availability of supply from manufacturers,
seasonal market conditions, local market conditions and date of receipt
of inventories from the manufacturer.
The Company manages its capital structure in a manner to ensure
its ratio of total managed debt instruments to shareholders’ equity does
not exceed 4.5.
As at December 31, 2011 and 2010, the above capital management
criteria can be illustrated as follows:
As at
December 31,
2011
December 31,
2010
Interest-bearing debt
Other debt
Total managed
debt instruments
Ratio of total managed
debt instruments to
shareholders’ equity
$
$
10,951
160,413
19,800
12,370
118,160
1,233
January 1,
2010
$
10,014
104,843
2,312
$ 191,164
$ 56,591
$ 131,763
$ 44,977
$ 117,169
$ 45,535
3.4
2.9
2.6
The Company has credit facilities with a Canadian bank and a U.S. bank,
which provide an operating line of credit (refer to note 13).
The Company’s bank credit facilities contain financial covenants
that require the Company to maintain certain financial ratios and meet
certain financial thresholds. In particular, the facility contains covenants
that require the Company to maintain a minimum ratio of total current
assets to current liabilities (the “Current Ratio covenant”) of 1.1:1, a
minimum tangible net worth (the “TNW covenant”) of $50 million, a
maximum ratio of total debt to tangible net worth (the “Debt to TNW
Ratio covenant”) of 4.0:1 and a minimum ratio of earnings before interest,
taxes, depreciation and amortization minus capital expenditures to
total interest (the “Debt Service Coverage Ratio covenant”) of 1.3:1.
For the purposes of calculating covenants under the credit facility,
debt is defined as total liabilities less future income tax amounts and
subordinated debt. The Debt Service Coverage Ratio is measured at
the end of each quarter on a trailing 12-month basis. Other covenants
are measured as at the end of each quarter.
The Company was in compliance with all covenants under its bank
credit facility and all equipment finance lines as at December 31, 2011.
73
NOTE 27
NOTE 29
Key management compensation
Seasonality
Key management is comprised of the Chief Executive Officer, Chief
Financial Officer, external directors and vice-presidents of the Company.
The compensation paid or payable to key management for employee
services is shown below:
Historically, the Company’s revenues and earnings throughout the year
follow a weather-related pattern of seasonality. Typically, the first quarter
is the weakest quarter as construction and infrastructure activity is
constrained in the winter months. This is followed by a strong increase in
the second quarter as construction and other contracts begin to be put
out for bid and companies begin to prepare for summer activity. The third
quarter generally tends to be slower from an equipment sales standpoint,
which is partially offset by continued strength in equipment rentals and
customer support (parts and service) activities. Fourth quarter activity
generally strengthens as companies make year-end capital spending
decisions in addition to the exercise of purchase options on equipment
that has previously gone out on rental contracts.
2011
Salaries and short-term benefits
Employee future benefits
Share-based payments
$
$
1,583
125
115
1,823
2010
$
$
1,539
172
146
1,857
NOTE 28
Changes in non-cash working capital
NOTE 30
The components of the changes in non-cash working capital are detailed
below:
2011
Changes in working capital
$ (2,366)
Inventories
(60,519)
Prepaid expense and other deposits
133
Other assets
42
3,017
(238)
(355)
Income taxes recoverable/payable
(55)
34,173
$ (26,168)
74
2010
$
(8,796)
(33,739)
(197)
55
9,135
70
806
–
13,317
$ (19,349)
Economic relationship
The Company sells and services equipment and related parts. Distribution
agreements are maintained with several equipment manufacturers, of
which the most significant is with Volvo Construction Equipment North
America, Inc. The distribution and servicing of Volvo products account
for a substantial portion of the Company’s operations. The Company
has had a strong, ongoing relationship with Volvo since 1991.
FIVE-YEAR FINANCIAL SUMMARY
Financial Statistics
($ millions, except per share amounts and per unit amounts)
Operating Results
Revenue
Gross profit
Administrative, distribution and selling expense
Amortization of intangibles – order backlog
Goodwill impairment
Reorganization expense
Other income
Interest expense
Earnings from continuing operations before income taxes
Earnings (loss) from discontinued operations
Net income (loss)
2011
$
Balance Sheet Data
Assets held for sale – net
Total assets
Bank indebtedness
Equipment notes payables
Notes payables
Total liabilities
Share Trading Data
Price
High
Low
Close
Per Share Data
Shares outstanding – basic
Shares outstanding – diluted
Earnings per share/unit
– basic and diluted
Distributions per unit
423.2
80.5
64.8
–
–
–
(1.2)
5.8
11.1
–
9.9
2010
$
31.3
–
304.6
11.0
160.4
19.8
248.0
56.6
$
$
$
6.24
3.55
5.25
294.7
56.7
53.1
–
–
0.5
(0.7)
4.8
(0.9)
–
(0.9)
$
15.8
–
215.2
12.4
118.2
1.2
170.2
45.0
$
$
$
4.35
2.81
3.56
$
$
$
2009
2008
2007
Note 1
Note 2
Note 2
291.8
59.9
55.8
–
–
–
(1.8)
4.4
1.5
(0.7)
–
$
398.3
65.8
61.1
0.5
0.8
–
(0.7)
4.1
(0.1)
(0.0)
(0.4)
$
348.1
59.8
52.6
–
–
–
(2.6)
2.7
7.2
2.4
8.3
Note 1
Note 2
Note 2
15.9
–
190.8
10.0
104.8
2.3
145.3
45.5
15.1
7.3
240.9
12.8
118.9
2.3
186.3
54.6
18.2
7.3
206.7
5.8
94.9
–
147.3
59.4
4.80
1.15
3.66
$
$
$
6.92
1.00
1.38
$
$
$
15.19
5.95
6.48
Note 1
Note 2
Note 2
13,049,126
13,088,968
11,053,608
11,053,608
10,508,719
10,508,719
10,508,719
10,508,719
10,043,185
10,043,185
$
$
$
$
$
$
$
$
$
$
0.76
–
(0.08)
–
–
–
(0.04)
0.70
0.79
1.36
Note 1 – 2009 income statement figures reflect Canadian Generally Accepted Accounting Principles (“GAAP”) before the adoption of International Financial Reporting Standards
(“IFRS”); 2009 balance sheet figures include the impact of changes related to the adoption of IFRS.
Note 2 – This financial information is presented under Canadian GAAP prior to the adoption of IFRS.
75
CORPORATE AND SHAREHOLDER INFORMATION
CORPORATE ADDRESS
Strongco Corporation
1640 Enterprise Road
Mississauga, Ontario
Canada L4W 4L4
Telephone: 905 670-5100
Fax: 905 565-1907
Website: www.strongco.com
INVESTOR RELATIONS
J. David Wood, C.A.
Vice President and Chief Financial Officer
Telephone: 905 565-3808
E-mail: [email protected]
DIRECTORS
OFFICERS AND SENIOR MANAGEMENT
John K. Bell 1
Chairman, BSM Wireless Incorporated
Robert J. Beutel
Chairman of the Board
Robert J. Beutel 1, 2
President, Oakwest Corporation Limited
Ian C.B. Currie, Q.C. 2
Corporate Director
Christopher D. Forbes
Vice President, Human Resources
Strongco Corporation
William J. Ostrander
Vice President, Crane
AUDITORS
Ernst & Young LLP
Toronto, Ontario
Colin Osborne, P.Eng. 2
Vicwest Inc.
TRANSFER AGENT AND REGISTRAR
Inquiries regarding change of address,
registered shareholdings, share transfers,
lost certificates and duplicate mailings
should be directed to the transfer agent:
Computershare Investor Services Inc.
100 University Avenue
Toronto, Ontario M5J 2Y1
Telephone: 1-800-564-6253
Fax: 1-800-453-0330
E-mail: [email protected]
Ian Sutherland 1
Chairman of the Board
MCAN Mortgage Corporation
STOCK EXCHANGE LISTING
Toronto Stock Exchange
Stock symbol: SQP
SHARES OUTSTANDING
13,128,719 at December 31, 2011
ANNUAL GENERAL MEETING
10:00 am Eastern Time
May 1, 2012
Fraser Milner Casgrain LLP
77 King Street West
Suite 400
Toronto, Ontario
76
Thomas J. Perks
Vice President, Corporate Development
Leonard V. Phillips, C.A.
Vice President, Administration and Secretary
Anna C. Sgro
Vice President, Multiline
J. David Wood, C.A.
Vice President and Chief Financial Officer
1. Member of Audit Committee
2. Member of Corporate Governance, Nominating,
Compensation and Pension Committee
Stuart E. Welch
President, Chadwick-BaRoss, Inc.
Michel G. Rhéaume
General Manager, Case
Peter Duperrouzel
Manager, Information Services
Strong People
Strong Brands
Strong Commitments
The Unmistakable Power of Strongco

strongco corporation . 2011 annual report

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