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Strongco Corporation (TSX:SQP) today reported financial results for the three
months ended September 30, 2011.
Summary (i)
-- Total revenues increased by 36% to $108.4 million
-- Same-store revenues increased by 20%
-- Chadwick-BaRoss acquired in first quarter added $12.9 million in revenue
-- EBITDA increased by 86% to $13.3 million or 12.3% of revenue
-- Net income of $3.6 million compared to a loss of $0.3 million
-- Earnings per share of $0.28 compared to a loss per share of $0.03
(i) Comparisons are between third quarter 2011 and third quarter 2010
"During the third quarter Strongco achieved major gains in revenue, EBITDA, net
earnings and EPS over last year," said Robert Dryburgh, President and Chief
Executive Officer of Strongco. "The improvement reflects the execution of
Strongco's growth strategy, which is to combine the expansion of our position in
existing markets with the acquisition of other equipment dealers, while
continuously improving internal productivity. The results for the first nine
months of 2011 demonstrate the success of that strategy."
Financial Highlights (i)
Three-Month Periods Ended September 30
($ millions except per share amounts) 2011 2010
Revenues $ 108.4 $ 79.6
EBITDA $ 13.3 $ 7.2
Net income (loss) $ 3.6 $ (0.3)
Basic and diluted net income (loss) per share $ 0.28 $ (0.03)
Equipment inventory $ 188.2 $ 152.5
Equipment notes payable $ 160.4 $ 125.5
(i) All financial information conforms to International Financial Reporting
Standards. Results from 2010 have been restated in conformity with
IFRS.
Third Quarter 2011 Review
Total revenues in the three months ended September 30, 2011 were $108.4 million,
an increase of 36% from the third quarter of 2010. This included revenues of
$12.9 million from Chadwick-BaRoss Inc., acquired in February 2011. Revenues
from other existing Strongco branches were up 20% from a year ago.
Equipment sales increased by 36% from last year to $68.2 million. Product
support revenues gained 38% to $31.0 million. Rental revenues were $9.2 million,
up 33% from the year-earlier period.
Gross margin increased by 45% to $21.5 million during the third quarter. As a
percentage of revenue, gross margin increased slightly to 19.9% from 18.6% in
the same period of 2010. "The mix of revenue between sales, rentals and product
support in the third quarter of 2011 was consistent with the prior year. Gross
margins were slightly better in all three revenue categories," said David Wood,
Vice President and Chief Financial Officer.
Administrative, distribution and selling expenses during the third quarter
totalled $16.3 million or 15.0% of revenue, compared to $13.7 million, or 17.3%
of revenue in 2010. Expenses for the period just ended included $2.4 million in
operating costs for the newly acquired Chadwick-BaRoss unit.
EBITDA for the third quarter increased to $13.3 million (12.3% of revenue), from
$7.2 million (9.0% of revenue) a year earlier.
As a result of the strong revenue performance and incremental earnings from the
acquisition of Chadwick-BaRoss of $0.3 million, Strongco's net income in the
third quarter of 2011 was $3.6 million ($0.28 per share), a significant
improvement from a loss of $0.3 million (a loss of $0.03 per share) in the third
quarter of 2010.
Outlook
The improving trend in heavy equipment markets evident since mid-2010 continues
to show strength. Strongco's order intake levels have continued at a robust
level in 2011, which indicates that demand for heavy equipment continues to
improve. In addition, RPO activity has remained high. These factors bode well
for strong equipment sales in the fourth quarter.
The ongoing strength of oil prices during 2011 has powered a robust economic
recovery in Alberta, which is one of Strongco's key markets. In particular,
accelerating activity in the oil sands has led to increased spending for heavy
equipment in northern Alberta. In addition, the generally improving economy has
fueled an increase in construction and infrastructure activity throughout the
province. Strongco's sales in Alberta have demonstrated consistent growth in the
first three quarters of 2011 and backlogs have increased. Management is
optimistic that heavy equipment markets in the province will remain strong in
the fourth quarter of the year.
Based on this foundation and in line with Strongco's growth strategy, the
Company is improving its presence in this important market by building a new
branch in Edmonton, to be completed by the end of 2011. The Company also plans
to build a new branch in Fort McMurray during 2012 and is currently seeking an
appropriate location. Financing for this strategic commitment to northern
Alberta is in place.
"While we are building our presence in Western Canada, we are also extremely
pleased with our performance in Quebec and Ontario, which are strong markets in
Strongco's geographic diversification," said Mr. Dryburgh. These important
markets are also expected to continue contributing to growth in sales and
profitability. In New England, the acquisition of Chadwick-BaRoss in February
2011 has contributed positively to Strongco's overall results in the first three
quarters of 2011 and is anticipated to contribute to improved sales levels and
profitability in the balance of the year.
Demand for cranes, which started to show improvement toward the end of 2010, has
continued to increase in 2011 in concert with recovering construction markets,
the increase in infrastructure spending and rising activity in Alberta's oil
patch. Strongco's sales backlog for cranes has grown in 2011, and remains at a
high level in the fourth quarter.
Since the onset of the recovery, equipment manufacturers have struggled to
increase production capacity. While there has been some improvement, lead times
and availability of new machines remain an issue. In addition, the transition to
the new lower emission tier 4 engine technology that commenced in 2011 is a
complication that is impacting lead times and supply of equipment.
Strongco has achieved increased market share in most of its markets and aims to
sustain the improving operational effectiveness demonstrated in the first nine
months of 2011 through the fourth quarter of the year and into 2012.
Conference Call Details
Strongco will hold a conference call on Tuesday, November 8, 2011 at 10 am ET to
discuss third quarter results. Analysts and investors can participate by dialing
416-644-3415 or toll free 1-877-974-0445. An archived audio recording will be
available until midnight on November 22, 2011. To access it, dial 416-640-1917
and enter passcode 4478482#.
About Strongco
Strongco Corporation is one of Canada's largest multiline mobile equipment
dealers and also operates in the northeastern U.S. 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 600 employees
servicing customers from 24 branches in Canada and five in the U.S. Strongco
represents leading equipment manufacturers with globally recognized brands,
including Volvo Construction Equipment, Case Construction, Manitowoc Crane,
Terex Cedarapids, Terex Finlay, Ponsse, Skyjack, Fassi, Allied, Taylor, ESCO,
Dressta, Sennebogen, Ormet Jekko, Takeuchi, Link-Belt and Kawasaki. Strongco is
listed on the Toronto Stock Exchange under the symbol SQP.
Forward-Looking Statements
This news release may contain "forward-looking" statements within the meaning of
applicable securities legislation which involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Strongco or industry results, to be materially different from
any future results, events, expectations, performance or achievements expressed
or implied by such forward-looking statements. All such forward-looking
statements are made pursuant to the "safe harbour" provisions of applicable
Canadian securities legislation. Forward-looking statements typically contain
words or phrases such as "may", "outlook", "objective", "intend", "estimate",
"anticipate", "should", "could", "would", "will", "expect", "believe", "plan"
and other similar terminology suggesting future outcomes or events.
Forward-looking statements involve numerous assumptions and should not be read
as guarantees of future performance or results. Such statements will not
necessarily be accurate indications of whether or not such future performance or
results will be achieved. You should not unduly rely on forward-looking
statements as a number of factors, many of which are beyond the control of
Strongco, could cause actual performance or results to differ materially from
the performance or results discussed in the forward-looking statements,
including, inability to obtain requisite approvals; general economic conditions;
business cyclicality, relationships with manufacturers; access to products;
competition with existing business; reliance on key personnel; litigation and
product liability claims; inventory obsolescence; sufficiency of credit
availability; credit risks of customers; warranty claims; technology
interpretations; and labour relations. Although the forward-looking statements
contained in this news release are based upon what management of Strongco
believes are reasonable assumptions, Strongco cannot assure investors that
actual performance or results will be consistent with these forward-looking
statements. These statements reflect current expectations regarding future
events and operating performance and are based on information currently
available to Strongco's management. There can be no assurance that the plans,
intentions or expectations upon which these forward-looking statements are based
will occur. All forward-looking statements in this news release are qualified by
these cautionary statements. These forward-looking statements and outlook are
made as of the date of this news release and, except as required by applicable
law, Strongco assumes no obligation to update or revise them to reflect new
events or circumstances.
Information Contact
J. David Wood
Vice-President and Chief Financial Officer
Telephone: 905.565.3808
Email: jdwood@strongco.com
www.strongco.com
Strongco Corporation
Management's Discussion and Analysis
The following management 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 three months and nine months ended September 30,
2011. This discussion and analysis should be read in conjunction with the
accompanying unaudited consolidated financial statements as at and for the three
months and nine months ended September 30, 2011. For additional information and
details, readers are referred to the Company's audited consolidated financial
statements and accompanying MD&A as at and for the year ended December 31, 2010
contained in the Company's annual report for the year ended December 31, 2010,
the Company's unaudited consolidated financial statements and accompanying MD&A
as at and for the three month periods ended March 31, 2011 and June 30, 2011,
the Company's Notice of Annual and Special Meeting of Shareholders and
Management Information Circular ("MIC") 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.
The information in this MD&A is current to November 7, 2011.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------
Three months ended Nine months ended
Income Statement Highlights September 30 September 30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions, except per unit
amounts) 2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues $ 108.4 $ 79.6 $ 309.9 $ 202.9
----------------------------------------------------------------------------
Net income (loss) $ 3.6 $ (0.3) $ 7.9 $ (2.7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings
(loss) per share $ 0.28 $ (0.03) $ 0.60 $ (0.24)
EBITDA (note 1) $ 13.3 $ 7.2 $ 30.6 $ 13.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance Sheet Highlights
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions, except per unit
amounts)
----------------------------------------------------------------------------
Equipment inventory $ 188.2 $ 152.5
Total assets 302.0 224.3
Debt (bank debt and other
notes payable) 28.4 13.4
Equipment notes payable 160.4 125.5
Total liabilities $ 240.6 $ 181.1
----------------------------------------------------------------------------
Note 1 - EBITDA is a non-IFRS measure. See explanation under the heading
"Non-IFRS Measures" below.
COMPANY OVERVIEW
Strongco is one of the largest multi-line mobile equipment distributors in
Canada. In February 2011, Strongco acquired 100% of the shares of
Chadwick-BaRoss, Inc., a multi-line 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 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 manufacturers 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.
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 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 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.
FINANCIAL RESULTS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
Consolidated Results of Operations
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
----------------------------------------------------------------------------
($ millions, except per
share amounts) 2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues $ 108,395 $ 79,588 $ 309,940 $ 202,859
Cost of sales 86,864 64,781 250,187 162,540
----------------------------------------------------------------------------
Gross Margin 21,531 14,807 59,753 40,319
Administration,
distribution and
selling expenses 16,255 13,745 47,763 39,987
Other expense (income) (60) 122 (513) (467)
----------------------------------------------------------------------------
Total Expenses 16,195 13,867 47,250 39,520
----------------------------------------------------------------------------
Operating income 5,336 940 12,503 799
Interest expense 1,495 1,234 4,249 3,462
----------------------------------------------------------------------------
Earnings (loss) from
operations before
income taxes 3,841 (294) 8,254 (2,663)
Provision for income
taxes 213 - 396 -
----------------------------------------------------------------------------
Net income (loss) $ 3,628 $ (294) $ 7,858 $ (2,663)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
share $ 0.28 $ (0.03) $ 0.60 $ (0.24)
Weighted average number
of shares
- Basic 13,128,629 10,508,719 13,022,214 11,053,532
- Diluted 13,167,927 10,508,719 13,061,512 11,053,532
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key financial measures:
Gross margin as a
percentage of revenues 19.9% 18.6% 19.3% 19.9%
Administration,
distribution and
selling expenses as
percentage of revenues 15.0% 17.3% 15.4% 19.7%
Operating income as a
percentage of revenues 4.9% 1.2% 4.0% 0.4%
EBITDA (note 1) $ 13,286 $ 7,161 $ 30,562 $ 13,794
----------------------------------------------------------------------------
Note 1 - EBITDA is a non-IFRS measure. See explanation under the heading
"Non-IFRS Measures" below.
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") for net proceeds of US$11.1
million. The transaction value was satisfied with net cash proceeds of US$9.2
million and notes issued to the major shareholders of Chadwick-BaRoss totalling
US$1.9 million. Chadwick-BaRoss 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 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 are affected by
the economy but also tend to be driven by the 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 financial
resources of customers improve.
While the economic recession that persisted throughout most of 2009 was
officially over 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 quarters 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 patch in Alberta
increasing, customers were more willing to purchase equipment and exercise
purchase options under rental contracts ("RPO") 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 throughout the first and second quarters of 2010 and remained
strong throughout the balance of the year and into 2011.
With continuing strength in the Canadian economy, the improving trend in end use
markets and increased demand for heavy equipment evident in the latter half of
2010 continued into 2011. Significant infrastructure projects for hydro-electric
facilities, road construction and bridge repair and other infrastructure
improvements initiated in 2011 also increased demand for heavy equipment. In
addition, with continued strength in oil prices, 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 RPO contracts, also
remained strong in the first nine months of the year. With the increasing demand
for heavy equipment, sales backlogs in Canada have 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 big
driver of the US economy and heavy equipment markets in the past. However,
current housing activity in most states remains depressed which continues to
negatively affect demand for heavy equipment. Certain market segments, waste
management and scrap handling in particular, have experienced continued activity
and generated some demand for heavy equipment in the northeastern US. 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 ("OEM's") scaled
back production capacity. As demand in Canada and certain other countries around
the world has been increasing, OEM's have been challenged to bring production
back on line at the same pace. This has 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 have remained stretched in
2011. This has benefitted dealers carrying higher levels of older equipment
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 earlier in 2011 has affected
production and supply of certain brands and types of equipment manufactured in
Japan. In addition, supply of certain parts from Japan for equipment
manufactured in other parts of the world has also been affected by the crisis.
To date, Strongco has not been impacted by this disaster as the vast majority of
the equipment it distributes is manufactured outside of Japan. However, parts
shortages from Japan have impacted production schedules and could affect
equipment availability in the future.
Revenues
A breakdown of revenue for the quarter and nine months ended September 30, 2011
and 2010 is as follows:
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
Eastern Canada (Atlantic and Quebec)
------------------------------------
Equipment Sales $ 20.6 $ 20.1 $ 67.7 $ 47.8
Equipment Rentals 4.2 2.8 7.7 5.6
Product Support 11.4 9.6 32.3 27.9
----------------------------------------------------------------------------
Total Eastern Canada $ 36.2 $ 32.5 $ 107.7 $ 81.3
----------------------------------------------------------------------------
------------------------------------
Central Canada (Ontario)
------------------------------------
Equipment Sales $ 18.2 $ 17.1 $ 62.3 $ 47.1
Equipment Rentals 1.4 1.5 3.6 4.3
Product Support 9.0 8.1 25.9 23.5
----------------------------------------------------------------------------
Total Central Canada $ 28.6 $ 26.7 $ 91.8 $ 74.9
----------------------------------------------------------------------------
------------------------------------
Western Canada (Manitoba to BC)
------------------------------------
Equipment Sales $ 22.2 $ 13.0 $ 54.4 $ 26.6
Equipment Rentals 2.4 2.6 7.1 5.0
Product Support 6.1 4.8 18.1 15.1
----------------------------------------------------------------------------
Total Western Canada $ 30.7 $ 20.4 $ 79.6 $ 46.7
----------------------------------------------------------------------------
------------------------------------
Northeastern United States
------------------------------------
Equipment Sales $ 7.2 16.8
Equipment Rentals 1.2 2.3
Product Support 4.5 11.7
----------------------------------------------------------------------------
Total Northeastern United States $ 12.9 $ 30.8
----------------------------------------------------------------------------
------------------------------------
TOTAL Revenues
------------------------------------
Equipment Sales $ 68.2 $ 50.2 $ 201.2 $ 121.5
Equipment Rentals 9.2 6.9 20.7 14.9
Product Support 31.0 22.5 88.0 66.5
----------------------------------------------------------------------------
TOTAL $ 108.4 $ 79.6 $ 309.9 $ 202.9
----------------------------------------------------------------------------
Equipment Sales
Strongco's equipment sales in the three months ended September 30, 2011 were
$68.2 million which was up $18.0 million or 36% from $50.2 million in the third
quarter of 2010. For the nine months ended September 30, 2011, sales were $201.2
million compared to $121.5 million in the first three quarters of 2010. The
recent acquisition of Chadwick-BaRoss in February 2011 accounted for $7.2
million of the sales increase in the quarter and $16.8 million of the increase
year to date. Sales in Canada increased by $10.8 million or 22% in the quarter
and $62.9 million or 52% in the first nine months of the year. Sales were up in
all regions of Canada, with the largest increase in Alberta. The markets for new
heavy equipment in Canada in which Strongco operates were stronger in all
regions of the country. However, demand varied significantly from region to
region and between product categories. Demand was strongest in Alberta, where
activity in and around the oil sands has been robust, and in Quebec, as a result
of extensive infrastructure improvements and hydro electric projects in the
northern part of the province. Markets for cranes were also up in all regions of
Canada as many customers who curtailed spending during the recession began to
replenish their fleets. Crane sales were strongest in Central and Eastern Canada
in the first half of the year but increased significantly in Western Canada in
the third quarter due in part to conversion of a few large cranes that had been
on RPO contracts.
The improving economic conditions, continued recovery in construction markets,
higher infrastructure spending and increased activity in oil and gas and mining
sectors in Canada resulted in stronger demand for heavy equipment. The markets
for heavy equipment, other than cranes, that Strongco serves in Canada were
estimated to be up an average of 35% in the third quarter and nine months of
2011. Accurate market data for cranes is not available but the market in Canada
has improved in 2011 as many end users and large crane rental companies that
curtailed purchases during the recession replenished and replaced aging fleets.
The largest increase in demand for heavy equipment was in Alberta followed by
Quebec and Ontario. In most regions of Canada, Strongco continued to outperform
the market with the percentage increase in total unit volumes greater than the
total market growth and as a result, Strongco's market share increased.
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. Strongco's average selling prices
in the third quarter and first nine months of the year were higher than in 2010,
due primarily to a higher proportion of sales of larger, more expensive
equipment. Average selling prices in most product categories increased slightly
compared to the first three quarters of 2010. 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 $20.6 million in the third quarter, compared to $20.1 million
in the third quarter of 2010. For the nine months, equipment sales in Eastern
Canada totalled $67.7 million, which was $19.9 million or 42% above the same
period in 2010. The bulk of the increase was in Quebec where construction
markets continued to benefit from the high level of spending on infrastructure
projects and large hydroelectric projects in the northern region of the
province. The markets for heavy equipment in which Strongco participates in
Eastern Canada were estimated to increase more than 25% in the quarter and 20%
for the nine months compared to same periods in 2010. Strongco outperformed the
market and captured a larger market share, with total unit volume growth of
better than 35% in the quarter and 30% year to date. Most of the sales increase
has been in cranes, loaders and articulated trucks. In addition, sales of rock
crushing equipment in Quebec have been strong in the first three quarters of the
year. The crane market in Eastern Canada, which generally remained weak in 2010
following the recession, showed continued improvement throughout 2011 as certain
large crane rental customers in Quebec upgraded and increased their fleets and
sales of a few large cranes that had been on RPO contracts. The Company's sales
of cranes in Eastern Canada were up 66% in the first nine months of 2011.
Strongco's equipment sales in the third quarter in Central Canada were $18.2
million, which was up from $17.1 million in the third quarter of 2010. For the
nine months to September, the total was $62.3 million, $15.2 million or 32%
higher than the same period in 2010. Sales of both general purpose equipment
("GPE") and compact equipment increased in the quarter. 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 and third quarters, which increased demand
and spending for heavy equipment. In the markets that Strongco serves in Central
Canada, unit sales of heavy equipment in the third quarter were approximately
15% higher than a year ago and up over 20% year to date. Strongco outperformed
the market, almost doubling its unit volume in the quarter and increasing
volumes almost 80% year to date, capturing a larger share of the growing market.
Price competition in Ontario in both GPE and compact equipment remained
aggressive in the third quarter, especially from certain dealers attempting to
capture market share in particular product categories and markets. Crane sales
in Ontario in the first three quarters of 2011 were up more than 80% 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 third quarter were $22.2 million,
which was up $9.2 million or 71% over third quarter of 2010. For the nine months
to September, the total was $54.4 million, more than double a year earlier.
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. In
addition, 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 have improved. Construction activity and demand for heavy equipment
began to show signs of recovery in 2010, particularly in Northern Alberta in the
latter half of the year and that improvement continued in the first three
quarters of 2011. Total units sold in the markets served by Strongco in Alberta,
excluding cranes, were estimated to be up approximately 84% relative to the
first nine months of 2010. Strongco outperformed the market with total unit
volume growth of almost 100% in the first three quarters of the year and
captured a larger share of the recovering market. Most of the increase was in
sales of GPE and larger equipment where growth of better than 150% was achieved.
While this was a substantial increase over the first nine months of 2010, sales
in Northern Alberta were hampered by longer delivery lead times and product
availability issues on certain products. The market for cranes in Alberta has
been recovering since the recession but more slowly that other heavy equipment.
Demand for cranes in Western Canada, particularly in Northern Alberta, has
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. Benefitting from continued recovery in the market and a catch up
on OEM deliveries, Strongco's crane sales in Western Canada in the third quarter
grew by 171% over the third quarter of 2010 and 82% year to date. 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 $7.2 million
in the third quarter and $16.8 million for the eight months from February 1,
2011, the effective date of the acquisition of Chadwick-BaRoss (see "Acquisition
of Chadwick-BaRoss, Inc."), to September 30, 2011. The markets for heavy
equipment in New England remain soft and are down approximately 40% from
pre-recession levels. The traditional heavy equipment markets for residential
construction, forestry and infrastructure have remained depressed but other
markets for scrap handling and waste management have strengthened in the New
England area. Strongco's market share for GPE in this reduced market increased
during the quarter and sales were slightly ahead of the same period of the prior
year but still down from pre-recession levels. However, Strongco's market share
for compact equipment in the region has 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 the 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. 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, and normally the majority of
RPO's are converted to sales within a six month period. This market practice has
proven to be an effective method of building sales and increasing the field
population of equipment.
Strongco's rental revenue in the third quarter was $9.2 million, which was up
$2.3 million, or 33%, over the third quarter of 2010. For the nine months,
rental revenues totalled $20.7 million, which were $5.8 million or 39% ahead of
the same period in 2010. Rental revenue from the acquisition of Chadwick-BaRoss
in February 2011 contributed $1.2 million of the increase in the quarter and
$2.3 million of the increase year to date. Rental revenue in Canada was up $1.1
million, or 16%, in the quarter and $3.5 million, or 23%, in the first nine
months of 2011. Strongco's rental activity in Canada was slow at the beginning
of 2010 but grew steadily throughout the year, reflecting the preference of many
customers to rent equipment as construction markets recovered following the
recession. This was very evident with RPO activity, which was particularly
strong in the last quarter of 2010. Rental activity, including RPOs, remained
strong in the first three quarters of 2011. Most of the increase in rental
revenue in the third quarter was in Eastern Canada due to several RPO contracts
for articulated trucks and loaders. Rental activity has also been strong in
Alberta in 2011, demonstrating further evidence of recovery in that province
following the significant decline in rental activity during the recession.
Strongco's crane business, which has traditionally not had a significant rental
element, also experienced an increase in rental activity in 2011 in all regions
of Canada as customers showed a preference to rent following the recession as
the demand and market for cranes recovered.
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
differ from manufacturer to manufacturer and also vary depending 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 rising product support activities over time. Product support
activities are normally strongest in Canada in the first quarter due to
increased wintertime use of equipment for snow removal and during the third
quarter, which is the height of the construction season.
Product support activity declined during the recession because in the difficult
economic environment, customers made only critical repairs to equipment and only
when they had work requiring its use. However, product support declined less
than sales of equipment and represented a larger proportion of total revenue as
many customers chose to repair and extend the life of their existing machines,
rather than purchase new. Product support activity began to improve in the
latter half of 2010 and into 2011 as construction markets recovered from the
recession.
Strongco's product support revenues in the third quarter of 2011 totalled $31.0
million, including $4.5 million from the newly acquired Chadwick-BaRoss and
compares to $22.5 million in the third quarter of 2010. For the first nine
months of 2011, product support revenues totalled $88.0 million, including $11.7
million from Chadwick-BaRoss, up from $66.5 million in the same period of 2010.
Product support activities increased in all regions of Canada. Parts and service
revenues benefited from higher amounts of snow and increased use of snow removal
equipment in the first quarter of 2011, particularly in Western and Eastern
Canada. Product support sales remained strong in the second and third quarters
of 2011 as construction activity increased.
Gross Margin
----------------------------------------------------------------------------
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------------------------------------------
2011 2010 2011 2010
Gross
Margin $ millions GM% $ millions GM% $ millions GM% $ millions GM%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment
Sales $ 7.0 10.2% $ 4.6 9.2% $ 20.1 10.0% $ 11.3 9.3%
Equipment
Rentals 1.8 19.6% 1.0 14.1% 4.0 19.3% 2.3 15.3%
Product
Support 12.7 41.0% 9.2 41.1% 35.7 40.6% 26.7 40.2%
----------------------------------------------------------------------------
Total Gross
Margin $ 21.5 19.9% $ 14.8 18.6% $ 59.8 19.3% $ 40.3 19.9%
----------------------------------------------------------------------------
As a result of higher revenues in the third quarter of 2011, Strongco's gross
margin increased by $6.7 million to $21.5 million from $14.8 million in the
third quarter of 2010. For the nine months ended September 30, 2011, gross
margin increased to $59.8 million from $40.3 million in the first three quarters
of 2010. As a percentage of revenue, gross margin was 19.9% in the third quarter
compared to 18.6% in the same quarter last year. Equipment sales typically
generate a lower gross margin percentage than rental revenues and product
support activities and as a result, the mix of revenue between sales, rentals
and product support has a significant impact in the overall gross margin
percentage. The mix of revenue in the third quarter of 2011 was consistent with
the third quarter of 2010. Equipment sales accounted for approximately 63% of
total revenues in the third quarter of 2011, unchanged from a year ago, while
product support and rental revenues represented 29% and 8% of total revenues,
respectively, in the third quarter of 2011 compared to 28% and 9% of total
revenue, respectively, in the third quarter of 2010. For the first three
quarters the gross margin percentage was 19.3%, down slightly from 19.9% in the
first nine months of 2010. During this period, equipment sales represented 65%
of total revenues in 2011, while product support and rentals represented 28% and
7% of total revenues, respectively. This compared to 60%, 33% and 7% of total
revenue for equipment sales, product support and rentals, respectively, in the
first three quarters of 2010. Gross margins have been maintained despite the
impact of the steadily increasing strength of the Canadian dollar during the
first nine months of 2011.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the third quarter of 2011
were $16.3 million or 15.0% of revenue, which compared to $13.7 million or 17.3%
of revenues in the third quarter of 2010. For the nine months ended September
30, 2011, these expenses were $47.8 million or 15.4% of revenue, which compared
to $40.0 million or 19.7% of revenues in the first three quarters of 2010. Most
of the increase from 2010 relates to administration, distribution and selling
expenses of the newly acquired Chadwick-BaRoss which amounted to $2.4 million in
the quarter and $5.9 million for the eight months from the date of acquisition
to September 30, 2011. Expenses year to date also include the one-time costs for
the acquisition of Chadwick-BaRoss of $0.4 million incurred in the first
quarter. In addition, given the strong results year to date, Strongco is on
target to reach its annual incentive plan targets and employee bonuses of $0.9
million and $2.2 million were accrued in the third quarter and first nine months
of the year, respectively. No bonus accrual was made in 2010. In addition, the
significant increase in sales and service activity in 2011 resulted in larger
amounts of overtime labour. While labour utilization and recovery improved in
2011, overtime premiums could not be fully passed on, resulting in incremental
expenses of approximately $0.5 million in the third quarter and $0.8 million for
the first nine months of the year.
Other Income / (Expense)
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 third quarter of 2011 was $0.1 million, compared to a net other
expense of $0.1 million in the third quarter of 2010. For the first nine months
of 2011, other income was $0.5 million unchanged from the first three quarters
of 2010.
Interest Expense
Strongco's interest expense in the third quarter and first nine months of 2011
was $1.5 million and $4.2 million, respectively, compared to $1.2 million and
$3.5 million, respectively, in the same periods in 2010. The year over year
increase was due to slightly higher interest rates charged on the Company's bank
debt and equipment notes and a higher average level of interest bearing debt.
Strongco's interest bearing debt comprises bank indebtedness, interest bearing
equipment notes and notes payable. Strongco typically finances equipment
inventory under floor plan lines of credit available from various non-bank
finance companies. Most equipment financing has interest-free periods for up to
eight 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").
Prime lending rates and BA rates have increased from the low levels that existed
at the beginning of 2010. With the increase in prime rates and BA rates, the
interest charged on the Company's bank debt and equipment finance notes was
higher in the first nine months of 2011 compared to the same period in 2010. In
addition, the average amount of interest-bearing floor plan debt was higher in
the first three quarters of 2011 compared to the prior year. During the
recession, Strongco successfully reduced inventory and the related floor plan
financing. As a result, interest-bearing equipment notes were lower in the first
nine months of 2010. During 2010 and into 2011, Strongco has been increasing
equipment inventories to support the increasing demand for heavy equipment as
construction markets recovered. This resulted in a higher average level of
interest-bearing equipment notes in the first nine months of 2011 compared to
the same period of 2010 (see discussion under "Financial Condition and
Liquidity"). In addition, the Company obtained a $5 million term loan from its
bank in April 2011 to assist with the in the acquisition of CBR and issued and
interest bearing notes totalling $US1.9 million to the previous shareholders of
CBR which also contributed to a higher amount of interest bearing debt in 2011.
Earnings before Income Taxes
Strongco's earnings before income taxes in the third quarter were $3.8 million,
compared to a loss before income taxes of $0.3 million in the third quarter of
2010. For the first nine months of 2011, earnings before income taxes were $8.3
million, a significant improvement from a loss before income taxes of $2.7
million in the same period of 2010. The increase was due to the strong revenue
performance in 2011 and the incremental pretax earnings from the acquisition of
Chadwick-BaRoss of $0.5 million and $1.0 million in the third quarter and first
three quarters of 2011, respectively.
Provision for Income Tax
Following conversion to a corporation on July 1, 2010, Strongco is now subject
to income tax at corporate tax rates. As a consequence, Strongco is now able to
utilize tax losses, including those previously unrecognized from the Fund. In
addition, on the adoption of IFRS, temporary or timing differences between the
tax and accounting values arose resulting in a net deferred tax asset. However,
given the Company's history of losses, there was 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 tax asset. While Strongco has generated taxable income in
Canada in 2011, no provision for income tax has been made in the first nine
months of the year in Canada as the valuation allowance was drawn down by $1.7
million to recognize the benefit of the tax loss carry forwards and other
temporary differences. The balance of the valuation allowance at September 30,
2011 was $0.2 million, As a result, Strongco expects to record a tax provision
in Canada in the fourth quarter of 2011.
The tax provision of $0.2 million in the third quarter and $0.4 million in the
first nine months of the year related to Chadwick-BaRoss in the U.S.
Net Income (Loss)
Strongco's net income in the third quarter of 2011 was $3.6 million ($0.28 per
share) and for the first nine months of the year was $7.9 million ($0.60 per
share). This was significantly improved from a loss of 0.3 million (loss of
$0.03 per share) in the third quarter of 2010 and a net loss of $2.7 million
(loss of $0.24 per unit) in the first nine months of 2010.
EBITDA
EBITDA in the third quarter of 2011 was $13.3 million, up from $8.0 million in
2010. For the nine months to date, EBITDA increased to $30.6 million from $14.6
million in the same period of 2010.
EBITDA was calculated as follows:
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) $ 3.6 $ (0.3) $ 7.9 $ (2.7)
Add Back:
Interest 1.5 1.2 4.2 3.5
Income taxes 0.2 - 0.4 -
Amortization of capital assets 0.7 0.2 1.9 0.8
Amortization of equipment
inventory on rent 6.5 6.1 14.6 12.2
Amortization of rental fleet 0.8 - 1.6 -
----------------------------------------------------------------------------
EBITDA (note 1) $ 13.3 $ 7.2 $ 30.6 $ 13.8
----------------------------------------------------------------------------
Note 1 - EBITDA is a non-IFRS measure. See explanation under the heading
"Non-IFRS Measures" below.
Cash Flow, Financial Resources and Liquidity
Cash Flow Provided By (Used In) Operating Activities:
During the third quarter of 2011, Strongco provided $13.8 million of cash from
operating activities before changes in working capital. However, $3.6 million of
cash was used to increase net working capital, $1.2 million to fund future
employee benefits, $1.4 million to pay interest and $0.2 million to pay taxes,
resulting in a net source of cash from operations in the quarter of $7.4
million. By comparison, in the third quarter of 2010, $7.5 million of cash was
provided by operating activities before changes in working capital, $2.3 million
was used to increase working capital and $1.2 million to pay interest, resulting
in a net source of cash from operating activities of $4.0 million.
For the nine months ended September 30, 2011, Strongco provided $30.8 million of
cash from operating activities before changes in working capital. However, $19.0
million of cash was used to increase net working capital, $1.7 million to fund
future employee benefits, $4.2 million to pay interest and $0.1 million to pay
income taxes, resulting in a net source of cash from operations of $5.8 million.
By comparison, in the first three quarters of 2010, $14.3 million of cash was
provided by operating activities before changes in working capital, $11.5
million was used to increase working capital and $3.4 million to pay interest,
resulting in a net use of cash of $0.6 million.
The components of the cash used in and provided by operating activities were as
follows:
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) $ 3.6 $ (0.3) $ 7.9 $ (2.7)
Non-cash items:
Amortization of equipment
inventory on rent 6.5 6.0 14.5 12.3
Amortization of capital assets 0.6 0.2 1.9 0.9
Amortization of rental fleet 0.8 - 1.6 -
Gain on sale of rental
equipment (0.2) - (0.3) -
Share-based payment expense - 0.3 0.1 0.3
Interest expense 1.5 1.3 4.2 3.5
Income tax expense /
(recovery) 0.2 - 0.4 -
Deferred income tax liability - - (0.3) -
Employee future benefit
expense 0.7 - 0.7 -
Other 0.1 - 0.1 -
----------------------------------------------------------------------------
13.8 7.5 30.8 14.3
Changes in non-cash working
capital balances (3.6) (2.3) (19.0) (11.5)
Employee future benefit funding (1.2) - (1.7) -
Interest paid (1.4) (1.2) (4.2) (3.4)
Income taxes paid (0.2) - (0.1) -
----------------------------------------------------------------------------
Cash provided by (used in)
operating activities $ 7.4 $ 4.0 $ 5.8 $ (0.6)
----------------------------------------------------------------------------
Non-cash items include amortization of equipment inventory on rent of $6.5
million and $14.5 million in the three and nine months ended September 30, 2011,
respectively, which compares to $6.0 million and $12.3 million in the third
quarter and first nine months of 2010. Higher volumes of equipment rentals in
2011 resulted in the higher amortization of equipment inventory on rent.
Components of cash flow from the net change in non-cash working capital for the
three month and nine month periods ending September 30, 2011 and 2010 were as
follows:
----------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
----------------------------------------------------------------------------
($ millions) (Increase) /
Decrease 2011 2010 2011 2010
----------------------------------------------------------------------------
Accounts receivable $ 11.0 $ 0.5 $ (2.8) $ (5.4)
Inventories (22.5) (14.5) (56.9) (39.7)
Prepaids 0.1 0.3 (0.1) (0.9)
----------------------------------------------------------------------------
$ (11.4) $ (13.7) $ (59.8) $ (46.0)
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities 1.1 1.5 7.6 13.5
Deferred revenue & customer
deposits 0.1 (0.6) (0.5) 0.4
Income taxes payable - - (0.1) -
Equipment notes payable 6.6 10.5 33.8 20.6
----------------------------------------------------------------------------
$ 7.8 $ 11.4 $ 40.8 $ 34.5
----------------------------------------------------------------------------
Net increase in non-cash working
capital $ (3.6) $ (2.3) $ (19.0) $ (11.5)
----------------------------------------------------------------------------
Accounts receivable decreased in the third quarter by $11.0 million due to
strong collections, particularly in the month of September. By comparison,
accounts receivable in the third quarter of 2010 decreased by $0.5 million. The
average age of receivables outstanding at the end of the September 2011 was
approximately 35 days, which compared to 32 days at December 2010 and 37 days a
year ago.
Inventory levels were increased during the third quarter and first nine months
of the year by $22.5 million and $56.9 million, respectively, to support the
stronger sales and increase in demand in 2011. By comparison, Strongco's
accumulation of inventories in the third quarter and first nine months of 2010
totalled $14.5 million and $39.7 million, respectively.
Accounts payable and accrued liabilities increased by $1.1 million and $7.6
million in the third quarter and first nine months of the 2011, respectively,
due primarily to a higher level of parts purchased during 2011 to support the
increase in product support activity.
To finance the increase in equipment inventory, equipment notes were increased
by $6.6 million in the third quarter and $33.8 million in the first nine months
of the year. By comparison, equipment notes increased by $10.5 million and $20.6
million in the third quarter and first nine months of 2010, respectively.
Cash Provided By (Used In) Investing Activities
Net cash used in investing activities amounted to $4.4 million in the third
quarter of 2011. Chadwick-BaRoss sold rental fleet assets for proceeds of $1.9
million and added new equipment to its rental fleet at a cost of $4.6 million.
Capital expenditures totaled $1.7 million in the quarter and related to the
construction of the new Edmonton, Alberta branch, as well as facilities upgrades
and miscellaneous shop equipment purchases. By comparison, cash of $0.2 million
was used for miscellaneous shop equipment purchases in the third quarter of
2010.
For the nine months ended September 30, 2011, Strongco used net cash of $19.8
million in investing activities primarily related to the acquisition of
Chadwick-BaRoss for $11.1 million. Capital expenditures in the first nine months
of 2011 were $5.0 million which included the purchase of land in Edmonton and
construction costs for the new branch as well as miscellaneous facilities
upgrades and purchases of shop equipment. Chadwick-BaRoss sold its rental fleet
for proceeds of $5.4 million and purchased a new rental fleet totaling $9.1
million from February 1, 2011, the date of acquisition, to September 30, 2011.
Investing activities in the first nine months of 2010 amounted to $0.4 million
and related mainly to facilities upgrades and miscellaneous shop equipment.
The components of the cash used in investing activities were as follows:
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
Acquisition of Chadwick-BaRoss,
Inc. $ - $ - $ (11.1) $ -
Purchase of rental fleet
equipment (4.6) - (9.1) -
Proceeds on the sale of rental
fleet equipment 1.9 - 5.4 -
Purchase of capital assets (1.7) (0.2) (5.0) (0.5)
Other - - - 0.1
----------------------------------------------------------------------------
Cash used in investing
activities $ (4.4) $ (0.2) $ (19.8) $ (0.4)
----------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities
In the third quarter of 2011, net cash of $3.0 million was used in financing
activities compared to net cash of $3.8 million used in the same quarter of
2010. For the nine months ended September 30, 2011, net cash of $14.0 million
was provided by financing activities compared to $1.0 million provided in the
same period of 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").
-- 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" below). Repayments of this term loan amounted
to $0.2 million in the third quarter and $0.4 million year to date.
-- The Company issued promissory notes to the previous shareholders of
Chadwick-BaRoss on the acquisition of their company in the first quarter
totaling $1.9 million (see discussion under "Acquisition of Chadwick-
BaRoss" above). Payments against these vendor take-back notes were $0.2
million in the third quarter and $0.4 million year to date.
-- 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 $1.1 million in the quarter and $2.9 million year to date.
-- To finance the increase in rental fleet assets in the U.S., the Company
increased borrowing under its equipment note lines of credit by $0.5
million in the third quarter and $1.2 million year to date.
-- Cash of $3.7 million was used to reduce bank indebtedness in the third
quarter. In the first nine months of the year, cash of $1.6 million was
used to reduce bank indebtedness.
-- Repayments under finance leases (primarily service vehicles and computer
equipment) amounted to $0.5 million in the third quarter and $1.1
million year to date.
-- In March of 2011, Strongco made the final scheduled repayment of $1.2
million of the note issued to Volvo Construction Equipment on the
acquisition of Champion Road Machinery in 2008.
The components of cash provided in financing activities are summarized as follows:
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
Proceeds from rights offering $ - $ - $ 7.8 $ -
Term loan - acquisition of
Chadwick-BaRoss Inc. - - 5.0 -
Repayment of term loan -
acquisition of Chadwick-BaRoss
Inc. (0.2) - (0.4) -
Vendor take back note -
acquisition of Chadwick-BaRoss
Inc. - - 1.9 -
Repayment of vendor take back
note (0.2) - (0.4) -
Construction loan - new Edmonton
branch 1.1 - 2.9 -
Increase in long-term equipment
notes 0.5 - 1.2 -
Increase (decrease) in bank
indebtedness (3.7) (3.7) (1.6) 2.2
Repayment of finance lease
obligations (0.5) (0.1) (1.2) (0.1)
Repayment of Champion note - - (1.2) (1.1)
----------------------------------------------------------------------------
Cash provided by (used in)
financing activities $ (3.0) $ (3.8) $ 14.0 $ 1.0
----------------------------------------------------------------------------
Bank Credit Facilities
The Company has credit facilities with banks in Canada and United States that
provide 364-day committed operating lines of credit totaling 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
on 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 Bankers' Acceptance Rates ("BA rates") plus 1.50%
and BA rates 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 September 30, 2011,
there were outstanding letters of credit of $0.1 million and $7.6 million drawn
on the Company's bank operating lines of credit.
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 September 30, 2011, the Company had outstanding foreign
exchange forward contracts under this facility totaling US$0.3 million at an
average exchange rate of $0.9699 Canadian for each US$1.00 with settlement dates
between October 1, 2011 and October 28, 2011.
The Company's bank credit facilities also include term loans secured by real
estate in the United States. At September 30, 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$13.3 thousand 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.
In connection with the acquisition of Chadwick-BaRoss, in April 2011, Strongco
secured an additional $5 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 Acquisition Loan is subject to monthly
principal payments of $83.3 thousand plus accrued interest. As at September 30,
2011, there was $4.6 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 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 September 30, 2011, there was $2.9 million
drawn on Construction Loan #1.
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 Ft. 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 Ft McMurray branch will commence in the first quarter of 2012 and will be
completed before the end of 2012. 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 September 30, 2011, there was nothing drawn on
Construction Loan #2.
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 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
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 facilities as at September
30, 2011.
Equipment Notes
In addition to its bank credit facilities, the Company has lines of credit
available totaling approximately $220 million from various non-bank equipment
lenders in Canada and the United States that are used to finance equipment
inventory and rental fleet. At September 30, 2011, there was approximately $165
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 from
4.25% to 5.85% over the one-month BA rate and 3.25% to 4.9% over the prime rate
of a Canadian chartered bank in Canada, and from 2.5% to 5.5% over the one-month
LIBOR rate and between the U.S. bank prime rate and prime rate plus 3% in the
United States. At September 30, 2011, approximately $81 million of these
equipment notes were interest free and $84 million were interest bearing. 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 bear interest at
floating rates (BA rates or prime rates) plus a fixed component. In September,
Strongco put interest rate swaps in place that have effectively fixed the
floating rate component on $15 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 September 30, 2011.
Interest Rate Swaps
Currently, BA rates and prime rates are at very low levels but there is an
expectation that interest rates will 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 million of its floating
interest rate debt to a five-year fixed swap 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 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 company has put these swaps in place to effectively fix the interest
rate on $15 million of its interest-bearing equipment notes.
Summary of Outstanding Debt
The balance outstanding under Strongco's debt facilities at September 30, 2011
and 2010 consisted of the following:
----------------------------------------------------------------------------
Debt Facilities As at September 30
----------------------------------------------------------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
Bank indebtedness (including outstanding cheques) $ 10.7 $ 12.2
Equipment notes payable - non interest bearing 80.8 45.3
Equipment notes payable - interest bearing 84.4 80.2
Vendor take back note payable - acquisition of
Chadwick-BaRoss 1.5 -
Construction loan #1 2.9 -
Term loan - Canadian real estate 4.6
Term loans - US real estate 3.8 -
Other notes payable 0.1 1.2
----------------------------------------------------------------------------
$ 188.8 $ 138.9
----------------------------------------------------------------------------
As at September 30, 2011 there was $9.5 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
million and $15 million. Borrowing under 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 reduces through to the end of the year as cash flows
increase.
The Company also had approximately $52 million available under its equipment
finance facilities at September 30, 2011. Borrowing on the Company's equipment
finance lines typically increases in the first five months of the year as
equipment inventory is purchased for the season and declines through to the end
of the year as equipment sales increase, particularly in the fourth quarter.
With the level of funds available under the Company's bank credit lines, the
current availability under the equipment finance facilities and anticipated
improvement in cash flows from operations, management believes the Company will
have adequate financial resources to fund its operations and make the necessary
investment in equipment inventory and fixed assets to support its operations in
the future.
SUMMARY OF QUARTERLY DATA
In general, the heavy-equipment market follows a weather-related pattern of
seasonality. Typically, the first quarter is the weakest as winter weather
constrains construction and infrastructure activity. This is followed by a
strong gain in the second quarter as construction and other work gets under way
and contractors prepare for the main summer season. The third quarter tends to
be slightly slower from an equipment sales standpoint, but is partially offset
by continued strength in equipment rentals and customer support business. Fourth
quarter revenues generally strengthen as customers make year-end capital
spending decisions and exercise purchase options on equipment under RPO's. In
addition, purchases of snow removal equipment are typically made in the fourth
quarter.
A summary of quarterly results for the current and previous two years is as follows:
----------------------------------------------------------------------------
($ millions, except per 2011
share/unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 108.4 $ 114.1 $ 87.5
Earnings before income taxes 3.8 3.8 0.7
Net income 3.6 3.6 0.6
Basic and diluted earnings per
share $ 0.28 $ 0.28 $ 0.05
($ millions, except per 2010
share/unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 91.8 $ 79.6 $ 69.6 $ 53.7
Earnings (loss) from continuing
operations before income taxes 1.8 (0.3) (0.3) (2.1)
Net income (loss) 1.8 (0.3) (0.3) (2.1)
Basic and diluted earnings
(loss) per share/unit $ 0.16 $ (0.03) $ (0.03) $ (0.19)
2009
($ millions, except per unit (note 1)
amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 67.5 $ 74.6 $ 76.7 $ 73.0
Earnings (loss) from continuing
operations before income taxes (1.8) 0.1 2.0 1.2
Net income (loss) (2.1) (0.5) 1.4 1.2
Basic and diluted earnings
(loss) per unit $ (0.20) $ (0.05) $ 0.14 $ 0.11
----------------------------------------------------------------------------
(Note 1 - 2009 figures do not reflect accounting necessary to comply with
IFRS)
A discussion of the Company's previous quarterly results can be found in the
Company's quarterly Management's Discussion and Analysis reports available on
SEDAR at www.sedar.com.
CONTRACTUAL OBLIGATIONS
Strongco has contractual obligations for operating lease commitments totaling
$19.8 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 buyback of equipment. As at September 30, 2011, buy back
contracts outstanding totalled $13.6 million. A reserve of $1.0 million has been
accrued in the Company's accounts as at September 30, 2011 with respect to these
commitments.
The Company has provided a guarantee of lease payments under the assignment of a
property lease that expires January 31, 2014. Total lease payments from January
1, 2011 to January 31, 2014 are $0.5 million.
Contractual obligations are set out in the following tables. Management believes
that the Company will generate sufficient cash flow from operations to meet its
contractual obligations.
----------------------------------------------------------------------------
Payment due by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 year years years years
----------------------------------------------------------------------------
Operating leases $ 19.5 $ 0.2 $ 12.7 $ 4.5 $ 2.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingent obligation by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 Year years years years
----------------------------------------------------------------------------
Buy back contracts $ 13.6 $ 2.4 $ 5.1 $ 6.1 $ 0.0
----------------------------------------------------------------------------
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 heading "Conversion to a
Corporation").
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 shares outstanding
following completion of the rights offering was 13,128,719.
----------------------------------------------------------------------------
Common Shares Issued and Outstanding Shares Number of Shares
----------------------------------------------------------------------------
Common shares outstanding as at December 31, 2010 10,508,719
Common shares issued under rights offering 2,620,000
----------------------------------------------------------------------------
Common shares outstanding as at September 30, 2011 13,128,719
----------------------------------------------------------------------------
OUTLOOK
The improving trend in heavy equipment markets evident since mid-2010 shows no
signs of abating. Strongco's backlogs have continued at a robust level in 2011,
which indicates that demand for heavy equipment continues to improve. In
addition, RPO activity has remained high, which bodes well for strong sales in
the fourth quarter.
The ongoing strength of oil prices during 2011 has powered a robust economic
recovery in Alberta, which is one of Strongco's key markets. In particular,
accelerating activity in the oil sands has led to increased spending for heavy
equipment in northern Alberta. In addition, the generally improving economy has
fueled an increase in construction and infrastructure activity throughout the
province. Strongco's sales in Alberta have demonstrated consistent growth in the
first three quarters of 2011 and backlogs have increased. Management is
optimistic that heavy equipment markets in the province will remain strong in
the fourth quarter of the year. Markets in Quebec and Ontario are also expected
to continue contributing to both sales and profitability. In New England, the
acquisition of Chadwick-BaRoss in February 2011 has contributed positively to
Strongco's overall results in the first three quarters of 2011 and is
anticipated to contribute to improved sales levels and profitability in the
balance of the year.
Demand for cranes, which started to show improvement toward the end of 2010, has
continued to increase in 2011 in concert with recovering construction markets,
the increase in infrastructure spending and rising activity in Alberta's oil
patch. Strongco's sales backlog for cranes has grown in 2011, and remains at a
high level in the fourth quarter.
Since the onset of the recovery, equipment manufacturers have struggled to
increase production capacity. While there has been some improvement, lead times
and availability of new machines remain an issue. In addition, the transition to
the new lower emission tier 4 engine technology that commenced in 2011 is a
complication that is impacting lead times and supply of equipment.
Strongco has achieved increased market share in most of its markets and aims to
sustain the improving operational effectiveness demonstrated in the first nine
months of 2011 through the fourth quarter of the year and into 2012.
NON-IFRS MEASURES
"EBITDA" refers to earnings before interest, income taxes, amortization of
capital assets, amortization of intangible assets, amortization of equipment
inventory on rent, and goodwill impairment. EBITDA is a measure used by many
investors to compare issuers on the basis of ability to generate cash flow from
operations. EBITDA is not an earnings measure recognized by GAAP, does not have
standardized meanings prescribed by GAAP and is therefore unlikely to be
comparable to similar measures presented by other 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
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
GAAP as indicators of the Company's performance or to cash flows from operating,
investing and financing activities as measures of the Company's liquidity and
cash flows. The Company's method of calculating EBITDA may differ from the
methods used by other issuers and, accordingly, EBITDA may not be comparable to
similar measures presented by other issuers.
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 September 30, 2011 with
changes from June 30, 2011 is as follows:
----------------------------------------------------------------------------
Provision for Inventory Obsolescence ($ millions)
----------------------------------------------------------------------------
Provision for inventory obsolescence as at June 30, 2011 $ 4.8
Provision related to inventory disposed of during the quarter -
Additional provisions made during the quarter 0.7
----------------------------------------------------------------------------
Provision for inventory obsolescence as at September 30, 2011 $ 5.5
----------------------------------------------------------------------------
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 September 30, 2011 with changes from
June 30, 2011 is as follows:
----------------------------------------------------------------------------
Allowance for Doubtful Accounts ($ millions)
----------------------------------------------------------------------------
Allowance for doubtful accounts as at June 30, 2011 $ 1.8
Accounts written off during the quarter (0.1)
Additional provisions made during the quarter 0.2
----------------------------------------------------------------------------
Allowance for doubtful accounts as at September 30, 2011 $ 1.9
----------------------------------------------------------------------------
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 we expect 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 pension 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
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 Strongco's management. The
forward-looking 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
2011. 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
forward looking 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.
Strongco Corporation
Unaudited Interim Consolidated Financial Statements
September 30, 2011 and 2010
Notice required under National Instrument 51-102, "Continuous Disclosure
Obligations," Part 4.3 (3) (a).
The accompanying unaudited consolidated interim financial statements for
Strongco Corporation as at and for the three and nine-month periods ended
September 30, 2011, together with the accompanying notes have not been reviewed
by the Company's auditors.
Strongco Corporation
Unaudited Consolidated Balance Sheet
(in thousands of Canadian dollars, unless otherwise indicated)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 30, December 31, January 1,
As at 2011 2010 2010
----------------------------------------------------------------------------
Assets
Current assets
Trade and other receivables $ 43,260 $ 35,884 $ 27,088
Inventories (note 6) 213,111 159,988 144,461
Prepaid expenses and other
deposits 1,708 1,452 1,255
----------------------------------------------------------------------------
258,079 197,324 172,804
----------------------------------------------------------------------------
Non-current assets
Property and equipment 26,052 15,849 15,949
Rental fleet 14,688 - -
Deferred income tax asset (note
13) 1,166 - -
Intangible assets 1,800 1,800 1,800
Other assets 188 188 243
----------------------------------------------------------------------------
43,894 17,837 17,992
----------------------------------------------------------------------------
Total assets $ 301,973 $ 215,161 $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and shareholders'
equity
Current liabilities
Bank indebtedness (note 7) $ 10,737 $ 12,370 $ 10,014
Trade and other payables 39,444 28,829 19,648
Provisions 1,715 1,436 1,366
Deferred revenue and customer
deposits 788 1,321 515
Equipment notes payable -
- non-interest bearing (note 8) 78,889 40,097 28,671
Equipment notes payable
- interest bearing (note 8) 81,536 78,063 76,172
Current portion of finance lease
obligations 1,681 959 954
Current portion of notes payable
(note 9) 5,631 1,233 1,094
----------------------------------------------------------------------------
220,421 164,308 138,434
----------------------------------------------------------------------------
Non-current liabilities
Deferred income tax liabilities
(note 13) 2,910 - -
Notes payable (note 9) 12,014 - 1,218
Finance lease obligations 2,040 1,502 1,154
Employee future benefit
obligations (note 5(ii)(a)) 3,230 4,374 4,455
----------------------------------------------------------------------------
20,194 5,876 6,827
----------------------------------------------------------------------------
Total liabilities 240,615 170,184 145,261
----------------------------------------------------------------------------
Shareholders' equity
Shareholders' capital (note 11) 64,898 57,089 57,089
Accumulated other comprehensive
income 668 52 -
Deferred compensation 413 315 -
Deficit (4,621) (12,479) (11,554)
----------------------------------------------------------------------------
Total shareholders' equity 61,358 44,977 45,535
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 301,973 $ 215,161 $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingencies (note 14)
Strongco Corporation
Unaudited Consolidated Statement of Income (Loss)
(in thousands of Canadian dollars, unless otherwise indicated, except per
Share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three-month period ended Nine-month period ended
September 30 September 30
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Revenue (note 15) $ 108,395 $ 79,588 $ 309,940 $ 202,859
Cost of sales 86,864 64,781 250,187 162,540
----------------------------------------------------------------------------
Gross profit 21,531 14,807 59,753 40,319
----------------------------------------------------------------------------
Expenses
Administration 7,768 6,773 22,815 19,777
Distribution 5,187 4,391 14,775 12,914
Selling 3,300 2,581 10,173 7,296
Other (income) expense (60) 122 (513) (467)
----------------------------------------------------------------------------
Expenses 16,195 13,867 47,250 39,520
----------------------------------------------------------------------------
Operating income 5,336 940 12,503 799
----------------------------------------------------------------------------
Interest expense 1,495 1,234 4,249 3,462
----------------------------------------------------------------------------
Income (loss) before
income taxes 3,841 (294) 8,254 (2,663)
----------------------------------------------------------------------------
Provision for income
taxes (note 13) 213 - 396 -
----------------------------------------------------------------------------
Net income (loss)
attributable to
shareholders for the
period $ 3,628 $ (294) $ 7,858 $ (2,663)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per
share
Basic and dilutive $ 0.28 $ (0.03) $ 0.60 $ (0.24)
----------------------------------------------------------------------------
Weighted average number
of shares (note 12)
- basic 13,128,629 10,508,719 13,022,214 11,053,532
- diluted 13,167,927 10,508,719 13,061,512 11,053,532
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Changes in Comprehensive Income (Loss)
(in thousands of Canadian dollars, unless otherwise indicated, except per
share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three-month period Nine-month period
ended ended
September 30 September 30
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Net income (loss) attributable to
shareholders for the period $ 3,628 $ (294) $ 7,858 $ (2,663)
Other comprehensive income (loss)
Actuarial gain (loss) on post-
employment benefit obligations 144 - 144 -
Currency translation adjustment 915 - 472 -
----------------------------------------------------------------------------
Comprehensive income (loss)
attributable to shareholders for
the period $ 4,687 $ (294) $ 8,474 $ (2,663)
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Changes in Shareholders' Equity
(in thousands of Canadian dollars, unless otherwise indicated, except per
share amounts)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other
Unitholders' comprehensive
Number of units capital loss
----------------------------------------------------------------------------
Balance - January 1,
2010 10,508,719 $ 57,089 $ -
Net loss for the
period - -
Stock compensation - - -
----------------------------------------------------------------------------
Balance - Sept 30,
2010 10,508,719 $ 57,089 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred
compensation Deficit Total
----------------------------------------------------------------------------
Balance - January 1,
2010 $ - $ (11,554) $ 45,535
Net loss for the
period - (2,663) (2,663)
Stock compensation 281 - 281
----------------------------------------------------------------------------
Balance - Sept 30,
2010 $ 281 $ (14,217) $ 43,153
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other
Number of Shareholders' comprehensive
shares capital income
----------------------------------------------------------------------------
Balance - December 31,
2010 10,508,719 $ 57,089 $ 52
Net income for the
period - -
Other comprehensive
income
Post-employment
benefit obligations
(net of tax) - 144
Currency translation
adjustment - 472
Issuance of shares 2,620,000 7,809 -
Stock compensation - - -
----------------------------------------------------------------------------
Balance - Sept 30, 2011 13,128,719 $ 64,898 $ 668
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred
compensation Deficit Total
----------------------------------------------------------------------------
Balance - December 31,
2010 $ 315 $ (12,479) $ 44,977
Net income for the
period - 7,858 7,858
Other comprehensive
income
Post-employment
benefit obligations
(net of tax) - - 144
Currency translation
adjustment - - 472
Issuance of shares - - 7,809
Stock compensation 98 - 98
----------------------------------------------------------------------------
Balance - Sept 30, 2011 $ 413 $ (4,621) $ 61,358
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Cash Flows
(in thousands of dollars, unless otherwise indicated)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine-month period ended September 2011 2010
----------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) for the year $ 7,858 $ (2,663)
Adjustments for
Depreciation - property and equipment 1,924 777
Depreciation - equipment inventory on rent 14,548 12,313
Depreciation - rental fleet 1,589 -
(Gain) loss on disposal of property and equipment (26) 13
Gain on sale of rental equipment (277) -
Deferred compensation 98 281
Interest expense 4,249 3,530
Income tax expense 396 -
Deferred income taxes (258) -
Employee future benefit expense 673 23
Unrealized foreign exchange gains/losses 68 -
Changes in working capital (note 16) (19,020) (11,446)
Employee future benefit funding (1,673) -
Interest paid (4,175) (3,395)
Income taxes paid (138) -
----------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ 5,836 $ (567)
----------------------------------------------------------------------------
Cash flows from investing activities
Business acquisition net of cash acquired (note 4) (11,115) -
Purchase of rental equipment (9,061) -
Proceeds from sale of rental equipment 5,361 -
Purchase of property, plant and equipment (5,022) (495)
Proceeds from sale of property, plant and equipment 24 74
----------------------------------------------------------------------------
Net cash used in investing activities $ (19,813) $ (421)
----------------------------------------------------------------------------
Cash flows from financing activities
Increase (decrease) in bank indebtedness (1,633) 2,189
Increase in long term debt 9,139 -
Repayment of long term debt (1,751) (1,163)
Repayment of finance lease obligations (1,040) (38)
Issue of shareholders' capital (note 11) 7,809 -
Increase in notes payable (note 9) 1,867 -
Repayment of notes payable (404) -
----------------------------------------------------------------------------
Net cash provided by financing activities $ 13,987 $ 988
----------------------------------------------------------------------------
Foreign exchange on cash balances held in a foreign
currency (10) -
----------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
during the period $ - $ -
----------------------------------------------------------------------------
Cash and cash equivalents - Beginning of period - -
----------------------------------------------------------------------------
Cash and cash equivalents - End of period $ - $ -
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Notes to Unaudited Consolidated Financial Statements
September 30, 2011
(in thousands of dollars, unless otherwise indicated)
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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-for-one 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 September 30,
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 Company is a public entity, listed on the Toronto Stock Exchange. The
address of its registered office is 1640 Enterprise Road, Mississauga, Ontario
L4W 4L4.
2. Basis of presentation and adoption of International Financial Reporting
Standards
The Company prepares its interim consolidated financial statements in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP") as set
out in the Handbook of the Canadian Institute of Chartered Accountants ("CICA").
In 2010, the CICA Handbook was revised to incorporate International Financial
Reporting Standards ("IFRS"), and to require publicly accountable enterprises to
apply such standards effective for years beginning on or after January 1, 2011.
Accordingly, the Company is reporting on this basis in these interim
consolidated financial statements. In these interim consolidated financial
statements, the term Canadian GAAP refers to Canadian GAAP before adoption of
IFRS.
These interim consolidated financial statements have been prepared in accordance
with IFRS applicable to interim financial statements, including IAS 34, Interim
Financial Reporting, and IFRS 1, First-time Adoption of IFRS. The accounting
policies followed in these interim consolidated financial statements are the
same as those applied in the Company's interim consolidated financial statements
for the periods ended March 31, 2011 and June 30, 2011. The Company has
consistently applied the same accounting policies 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 equity as at
September 30, 2010 and comprehensive income for the three and nine months ended
September 30, 2010, 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.
The policies applied in these interim consolidated financial statements are
based on IFRS issued as of November 7, 2011, the date the Directors approved the
interim consolidated financial statements. Any subsequent changes to IFRS that
are given effect in the Company's annual consolidated financial statements for
the year ending December 31, 2011 could result in a restatement of these interim
consolidated financial statements, including the transition adjustments
recognized on changeover to IFRS.
These interim consolidated financial statements should be read in conjunction
with the Company's Canadian GAAP annual consolidated financial statements for
the year ended December 31, 2010 and the Company's unaudited interim
consolidated financial statements for the three-month period ended March 31,
2011 and the six-month period ended June 30, 2011 prepared in accordance with
IFRS applicable to interim financial statements.
3. Critical Accounting Estimates and Judgments
The preparation of interim 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 interim 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.
Changes or differences in these estimates or assumptions may result in changes
to the trade and other receivables balance on the consolidated balance sheet and
a charge or credit to administration expense in the consolidated statement of
income (loss).
Inventory valuation
The value of the Company's new and used equipment is evaluated by 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. Changes or differences in these estimates or assumptions
may result in changes to the inventory balance on the consolidated balance sheet
and a charge or credit to administration expense in the consolidated statement
of income (loss).
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 interim consolidated financial statements.
Changes or differences in these estimates or assumptions may result in changes
to the current or deferred tax balance on the consolidated balance sheet 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 tax assets are
recognized on the consolidated balance sheet. Deferred 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 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 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. Any changes in these assumptions will impact the
carrying amount of the employee future benefit obligations.
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 heavy equipment dealer with 90 employees headquartered in
Westbrook, Maine, with three branches in Maine and one in each of New Hampshire
and Massachusetts. CBR sells, rents and services heavy equipment used in sectors
such as construction, infrastructure, utilities, municipalities, waste
management and forestry.
The acquisition of all of the issued and outstanding shares of CBR was completed
for a purchase price of US$11,091, net of cash acquired. The purchase price was
satisfied with cash of US$9,228 and three promissory notes totalling US$1,863.
The three promissory notes mature on February 17, 2013 and bear interest at the
US Prime rate. Principal payments of US$195 will be made quarterly commencing
May 17, 2011. Costs of $416 related to the acquisition were expensed as period
costs within operating expenses in the consolidated statement of income (loss)
for the nine month period ended September 30, 2011.
The acquisition date fair value for each major class of asset acquired and
liabilities assumed:
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(in thousands of Canadian dollars)
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Trade and other receivables $ 4,388
Inventories 9,960
Property, plant and equipment 5,058
Rental fleet 11,722
Deferred income tax asset 1,125
Other assets 95
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Total assets $ 32,348
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Trade and other payables $ 3,077
Deferred income tax liabilities 2,807
Equipment notes payable 11,135
Finance lease obligations 419
Notes payable 3,795
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Total liabilities $ 21,233
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Net assets acquired $ 11,115
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The purchase price allocation is not final and is subject to post-closing
adjustments.
The results of operations of CBR have been consolidated into the Company's
results for the nine month period ended September 30, 2011, effective February
1, 2011. Revenues of $30,853 and net income from operations of $651 for CBR for
the nine-month period ended September 30, 2011 and revenues of $12,900 and net
income from operations of $306 for CBR for the three-month period ended
September 30, 2011 have been included in the Company's consolidated statement of
income and comprehensive income for the nine month period ended September 30,
2011.
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 the nine-month period ended September 30, 2011 would have been $312,979 and
$7,853, respectively.
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,
described in note 2, at January 1, 2010 and for the year ended December 31, 2010
is outlined in the notes to the interim consolidated financial statements for
the three-month period ended March 31, 2011 and the six-month period ended June
30, 2011. The reconciliation of shareholders' equity at December 31, 2010 and
comprehensive income (loss) for the year ended December 31, 2010 has been
amended to reflect the change in classification for the recognition of actuarial
losses and changes in the IFRIC 14 liability during the year. These changes
resulted in a decrease of $2,152 to net income and an increase to other
comprehensive income for the year ended December 31, 2010. In addition, these
changes resulted in a decrease of $2,152 to deficit and an increase in
accumulated other comprehensive income at December 31, 2010. There was no net
impact to comprehensive income or shareholders' equity as a result of this
reclassification. Summarized below is the reconciliation of shareholders' equity
at January 1, 2010, September 30, 2010 and December 31, 2010 and comprehensive
income (loss) for the three and nine month period ended September 30, 2010 and
the year ended December 31, 2010 as previously reported under Canadian GAAP to
IFRS.
i) Reconciliation of shareholders' equity as previously reported under Canadian
GAAP to IFRS
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(in thousands of Canadian
dollars) As at December 31, 2010
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Canadian
GAAP Adjustment Note IFRS
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Assets
Current assets
Trade and other
receivables $ 35,884 $ - $ 35,884
Inventories 159,988 - 159,988
Prepaid expenses and other
deposits 1,452 - 1,452
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197,324 - 197,324
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Non-current assets
Property and equipment 13,768 2,081 f) 15,849
Intangible assets 1,800 - 1,800
Accrued benefit asset 6,275 (6,275) a) -
Other assets 188 - 188
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22,031 (4,194) 17,837
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Total assets $ 219,355 $ (4,194) $ 215,161
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Liabilities and
shareholders' equity
Current liabilities
Bank indebtedness $ 12,370 $ - $ 12,370
Trade and other payables 30,265 (1,436) b) 28,829
Provisions - 1,436 b) 1,436
Deferred revenue and
customer deposits 1,321 - 1,321
Equipment notes payable 118,160 - 118,160
Current portion of finance
lease obligations 173 786 f) 959
Current portion of notes
payable 1,233 - 1,233
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163,522 786 164,308
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Non-current liabilities
Deferred income tax
liabilities 389 (389) d) -
Finance lease obligations 114 1,388 f) 1,502
Employee future benefit
obligations 819 3,555 a) 4,374
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1,322 4,554 5,876
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Total liabilities 164,844 5,340 170,184
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Shareholders' equity
Shareholders' capital 57,089 - 57,089
Accumulated other
comprehensive income - 52 a) 52
Deferred compensation 360 (45) c) 315
Deficit (2,938) (9,541) a), c), (12,479)
d), f)
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Total shareholders' equity 54,511 (9,534) 44,977
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Total liabilities and
shareholders' equity $ 219,355 $ (4,194) $ 215,161
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(in thousands of Canadian
dollars) As at September 30, 2010
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Canadian
GAAP Adjustment Note IFRS
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Assets
Current assets
Trade and other
receivables $ 32,505 $ - $ 32,505
Inventories 171,827 - 171,827
Prepaid expenses and other
deposits 2,144 - 2,144
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206,476 - 206,476
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Non-current assets
Property and equipment 13,886 1,850 f) 15,736
Intangible assets 1,800 - 1,800
Accrued benefit asset 6,304 (6,304) a) -
Other assets 242 - 242
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22,232 (4,454) 17,778
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Total assets $ 228,708 $ (4,454) $ 224,254
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Liabilities and
shareholders' equity
Current liabilities
Bank indebtedness $ 12,203 $ - $ 12,203
Trade and other payables 34,607 (1,367) b) 33,240
Provisions - 1,367 b) 1,367
Deferred revenue and
customer deposits 893 - 893
Equipment notes payable 125,477 - 125,477
Current portion of finance
lease obligations 88 801 f) 889
Current portion of notes
payable 1,217 - 1,217
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174,485 801 175,286
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Non-current liabilities
Deferred income tax
liabilities 109 (109) d) -
Finance lease obligations 193 1,144 f) 1,337
Employee future benefit
obligations 832 3,646 a) 4,478
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1,134 4,681 5,815
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Total liabilities 175,619 5,482 181,101
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Shareholders' equity
Shareholders' capital 57,089 - 57,089
Accumulated other
comprehensive income - - -
Deferred compensation 423 (142) c) 281
Deficit (4,423) (9,794) a), c), (14,217)
d), f)
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Total shareholders' equity 53,089 (9,936) 43,153
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Total liabilities and
shareholders' equity $ 228,708 $ (4,454) $ 224,254
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(in thousands of Canadian
dollars) As at January 1, 2010
----------------------------------------------------------------------------
Canadian
GAAP Adjustment Note IFRS
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Assets
Current assets
Trade and other
receivables $ 27,088 $ - $ 27,088
Inventories 144,461 - 144,461
Prepaid expenses and other
deposits 1,255 - 1,255
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Non-current assets 172,804 - 172,804
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Property and equipment 14,133 1,816 f) 15,949
Intangible assets 1,800 - 1,800
Accrued benefit 6,607 (6,607) a) -
Other assets 243 - 243
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22,783 (4,791) 17,992
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Total assets $ 195,587 $ (4,791) $ 190,796
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Liabilities and
shareholders' equity
Current liabilities
Bank indebtedness $ 10,014 $ - $ 10,014
Trade and other payables 20,866 (1,218) b) 19,648
Provisions 1,366 b) 1,366
Deferred revenue and
customer deposits 515 - 515
Equipment notes payable 104,843 - 104,843
Current portion of finance
lease obligations 92 862 f) 954
Current portion of notes
payable 1,094 - 1,094
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137,424 1,010 138,434
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Non-current liabilities
Deferred income tax
liabilities 1,424 (1,424) d) -
Notes payable 1,218 - 1,218
Finance lease obligations 104 1,050 f) 1,154
Post-employment benefit
obligations 769 3,686 a) 4,455
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3,515 3,312 6,827
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Total liabilities 140,939 4,322 145,261
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Shareholders' equity
Shareholders' capital 57,089 - 57,089
Accumulated other
comprehensive income - - -
Deferred compensation 80 (80) c) -
Deficit (2,521) (9,033) a), c), (11,554)
d), f)
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Total shareholders' equity 54,648 (9,113) 45,535
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Total liabilities and
shareholders' equity $ 195,587 $ (4,791) $ 190,796
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ii) Reconciliation of comprehensive income (loss) as previously reported under
Canadian GAAP to IFRS
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(in thousands of Canadian
dollars) Three-month period ended September 30, 2010
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Canadian
GAAP Adjustment Note IFRS
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Revenue $ 79,588 $ - $ 79,588
Cost of sales 64,781 - 64,781
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Gross Margin 14,807 - 14,807
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Expenses
Administration 7,082 (309) a), c), g) 6,773
Distribution 4,391 - g) 4,391
Selling 2,581 - g) 2,581
Other income 122 - 122
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Expenses 14,176 (309) 13,867
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Operating income (loss) $ 631 $ 309 $ 940
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Interest expense $ 1,234 $ - $ 1,234
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Income (loss) before taxes (603) 309 (294)
Income tax (recovery)
expense (1,307) 1,307 d) -
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Net income (loss) and
comprehensive income
(loss) attributable to
shareholders $ 704 $ (998) $ (294)
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(in thousands of Canadian
dollars) Nine-month period ended September 30, 2010
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Canadian
GAAP Adjustment Note IFRS
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Revenue $ 202,859 $ - $ 202,859
Cost of sales 162,540 - 162,540
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Gross Margin 40,319 - 40,319
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Expenses
Administration 20,333 (556) a), c), g) 19,777
Distribution 12,914 - g) 12,914
Selling 7,296 - g) 7,296
Other income (467) - (467)
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Expenses 40,076 (556) 39,520
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Operating income (loss) $ 243 $ 556 $ 799
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Interest expense $ 3,462 $ - $ 3,462
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Income (loss) before taxes (3,219) 556 (2,663)
Income tax (recovery)
expense (1,317) 1,317 d) -
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Net income (loss) and
comprehensive income
(loss) attributable to
shareholders $ (1,902) $ (761) $ (2,663)
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(in thousands of Canadian
dollars) Year ended December 31, 2010
----------------------------------------------------------------------------
Canadian
GAAP Adjustment Note IFRS
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Revenue $ 294,657 $ - $ 294,657
Cost of sales 237,971 - 237,971
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Gross Margin 56,686 - 56,686
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Expenses
Administration 17,873 (531) a), c), g) 17,342
Distribution 26,307 - g) 26,307
Selling 9,887 - g) 9,887
Other income (740) - (740)
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Expenses 53,327 (531) 52,796
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Operating income (loss) $ 3,359 $ 531 $ 3,890
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Interest expense $ 4,816 $ - $ 4,816
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Income (loss) before taxes (1,457) 531 (926)
Income tax (recovery)
expense (1,040) 1,040 d) -
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Net income (loss)
attributable to
shareholders (417) (509) (926)
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Other comprehensive loss
Post-employment benefit
obligations - 52 d) 52
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Comprehensive income
(loss) attributable to
shareholders $ (417) $ (457) $ (874)
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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 re-measurement
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), September 30, 2010 is lower by $8,447
($6,283 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
re-measurement of employee future benefit obligations in other comprehensive
income as they arise. Under Canadian GAAP, the Company applied the corridor
method of accounting for such gains and losses. As a result, the Company has
reflected a decrease in expense associated with its defined benefit employee
benefit plans under IFRS of $121 ($90 after tax) for the three-month period
ended September 30, 2010, $344 ($255 after tax) for the nine-month period ended
September 30, 2010 and 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,
(IFRIC 14) and recorded a liability of $1,503 ($1,118 after tax) at January 1,
2010 which remains at September 30, 2010. At December 31, 2010 the liability
decreased to $97 ($72 after tax).
In addition, the company recognized actuarial losses of $1,354 and the 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 buybacks, legal
matters and certain other items totalling $1,218 at January 1, 2010, $1,367 at
September 30, 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 where 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 $185 for the three -month period ended
September 30, 2010, $210 for the nine-month period ended September 30, 2010 and
$114 for the year-ended December 31, 2010.
Pursuant to the guidance under IAS 32, Financial Instruments: Preparation, the
Fund units, which 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 equity for the purpose of assessing the
classification under this standard. Consequently, the share options issued under
the Company's equity incentive plan are not accounted for in accordance with
IFRS 2, Share-based Payments and as a result, the Company has reclassified
compensation expense of $80 at January 1, 2010 from contributed surplus to
provisions.
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 has recorded future income taxes under Canadian GAAP during this period
using the enacted (or substantively enacted) income tax rates that, at the
consolidated balance sheet date, are 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 re-measured at the tax rate of approximately 46.4% applicable to
undistributed profits, which resulted in an increase to the Company's deferred
tax liability of $1,247 at January 1, 2010. The deferred taxes were subsequently
re-measured 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 tax balance with a corresponding adjustment to deferred tax expense and
to other comprehensive income for the impact on the deferred tax asset relating
to the IFRIC 14 adjustment.
(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 tax asset and determined that it did not meet the recognition
criteria under International Accounting Standards ("IAS") 12, Income Taxes. As a
result, the Company recorded an adjustment to reduce the deferred income tax
assets to $nil on September 30, 2010 and December 31, 2010.
The above adjustments increased income tax expense recognized in the
consolidated statement of income (loss) by $1,307 for the three-month period
ended September 30, 2010, $1,317 for the nine-month period ended September 30,
2010, and $1,040 for the year-ended December 31, 2010.
e) In accordance with the 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) Pursuant to the guidance under IAS 17, Leases, it was determined that certain
vehicle and equipment leases that were accounted for as operating leases under
Canadian GAAP met the criteria of a finance lease under IFRS. This resulted in
an increase of $1,816 to property and equipment and $1,912 to finance lease
obligations at January 1, 2010, $1,850 to property and equipment and $1,945 to
finance lease obligations at September 30, 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 its
respective function 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.
6. Inventories
Inventory components, net of write-downs and provisions are as follows:
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As at September 30, 2011 December 31, 2010
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Equipment $ 188,234 $ 142,080
Parts 19,843 15,401
Work in process 5,034 2,507
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$ 213,111 $ 159,988
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7. Bank Indebtedness
The Company has credit facilities with banks in Canada and United States which
provide 364-Day committed operating lines of credit totalling approximately
$22.5 million which are renewable annually. 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, 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, plant and equipment (subordinated to
collateral provided to lessors), real estate and on 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
Bankers' Acceptance Rates ("BA rates") plus 1.50% and BA rates 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 September 30, 2011, there were outstanding letters of credit of
$0.1 million.
The Company's bank credit facilities also include term loans secured by real
estate in both Canada and the United States (see note 9).
The Company'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. The Company was in compliance with all
financial covenants at September 30, 2011.
8. Equipment Notes Payable
In addition to its bank credit facilities, the Company has lines of credit
available totalling approximately $221 million from various non-bank equipment
lenders in Canada and the United States, which are used to finance equipment
inventory. At September 30, 2011, there was approximately $160 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 from
4.25% to 5.85% over the one month BA rate and 3.25% to 4.9% over the prime rate
of a Canadian chartered bank in Canada, and from 2.5% to 5.5% over one month
Libor rate and between prime and prime plus 3% 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. 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, 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 facilities 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"). The Company's equipment finance lenders have agreed to
amend covenants for the accounting changes under IFRS.
9. Notes Payable
Notes payable is comprised of the following:
----------------------------------------------------------------------------
September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Champion acquisition note (i) $ - $ 1,233
Promissory notes (ii) 1,531 -
Equipment plan notes payable - rental
fleet (iii) 4,758 -
Term note - United States (iv) 3,823 -
Term note - Canada (v) 4,583 -
Construction facility (vi) 2,937 -
Other 13 -
----------------------------------------------------------------------------
17,645 1,233
----------------------------------------------------------------------------
Current portion 5,631 1,233
----------------------------------------------------------------------------
Long-term portion $ 12,014 $ -
----------------------------------------------------------------------------
(i) On March 20, 2008, the Company purchased substantially all of the
assets (excluding real property) of the Champion Road Machinery
division of Volvo Group Canada Inc. ("Champion") for a 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 nine month period ended September 30, 2011, 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 US Prime rate. Quarterly principal payments of US$195
commenced in May 2011.
(iii) In addition to equipment notes payable as described in note 8, CBR
utilizes floor plan 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.
(iv) The Company's bank credit facilities in the United Sates 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 payments of principal 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
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.
(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 before the end of 2011. As at September 30, 2011, the
Company has drawn $2,937 against the construction loan facility. 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%.
10. 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
balance sheet 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.
The Company has a $15 million line 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 million with terms not to expire beyond the
remaining term of the operating line of credit. As at September 30, 2011, the
Company had outstanding foreign exchange forward contracts under this facility
totalling US$0.3 million at an average exchange rate of $0.9699 Canadian for
each US $1.00 with settlement dates between October 1, 2011 and October 28,
2011. Foreign currency contracts are classified as a derivative financial
instrument and are recorded at fair value using an observable market. The fair
value of foreign exchange contracts are based on the settlement rates on those
contracts compared to the current forward exchange rate. Strongco has not
adopted hedge accounting for these foreign currency contracts and, accordingly
the change in the fair value of the contracts is recorded in Other Expense
(Income). As at September 30, 2011 and December 31, 2010, the unrealized gain
(loss) associated with foreign currency contracts is $21 and ($239),
respectively.
In September 2011, the Company secured a Swap Facility with its bank which
allows the Company to swap the floating interest rate component (Bankers
Acceptance or BA rates) on up to $25 million of the Company's debt for a 5 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 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 September 30, 2011, the unrealized loss associated
with the swap is $89.
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. The interest rate swaps are not treated as a hedge
for accounting purposes and, accordingly, the change in fair value of the swaps
is recorded in trade and other payables in the consolidated balance sheet.
11. Shareholders' Capital
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
Corporation'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.
Authorized:
Unlimited number of shares
Issued:
As at September 30, 2011, a total of 13,128,719 shares (December 31,
2010 - 10,508,719) with a stated valued of $64,898 (December 31, 2010 -
$57,089) were issued and outstanding.
12. Earnings (Loss) Per Share
----------------------------------------------------------------------------
Three-month period ended Nine-month period ended
September 30, September 30,
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Weighted average number
of shares for basic
earnings per share
calculation 13,128,629 10,508,719 13,022,214 11,053,532
Effect of dilutive
options outstanding 39,298 - 39,298 -
----------------------------------------------------------------------------
Weighted average number
of shares for diluted
earnings per share
calculation 13,167,927 10,508,719 13,061,512 11,053,532
----------------------------------------------------------------------------
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 134,419 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 per share has been adjusted
for a factor related to the bonus element, impacting the calculation for the
three and nine-month periods ended September 30, 2011 and the nine-month period
ended September 30, 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-dilution
effect for the three-month and nine-month periods ended September 30, 2010.
13. Income Taxes
Significant components of the provision for income taxes are as follows:
----------------------------------------------------------------------------
For the nine-month period ended September 30 2011 2010
----------------------------------------------------------------------------
Current tax $ 396 $ -
Deferred tax - -
----------------------------------------------------------------------------
Total income tax expense $ 396 $ -
----------------------------------------------------------------------------
The provision for income taxes differs from that which would be obtained by
applying the statutory tax rate as a result of the following:
----------------------------------------------------------------------------
As at September 30 2011 2010
----------------------------------------------------------------------------
Earnings (loss) before taxes $ 8,254 $ (2,663)
Statutory tax rate 27.93% 30.12%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Provision for income taxes at statutory tax rate $ 2,305 $ (802)
Adjustments thereon for the effect of:
Permanent and other differences 101 201
Benefit of temporary and other differences
unrecognized (1,973) 576
Effect of Rate Change (62) -
Other 25 25
----------------------------------------------------------------------------
Total income tax expense $ 396 $ (0)
----------------------------------------------------------------------------
The future income tax assets and liabilities are represented by the following:
----------------------------------------------------------------------------
Deferred income tax assets and liabilities - Canada
----------------------------------------------------------------------------
As at September 30 2011 2010
----------------------------------------------------------------------------
Deferred income tax assets previously unrecognized:
Eligible capital expenditures and other reserves $ 1,203 $ 196
Pension 543 100
Loss carryforward - 117
----------------------------------------------------------------------------
Deferred income tax assets 1,746 413
----------------------------------------------------------------------------
Capital and other assets (391) (413)
----------------------------------------------------------------------------
Partnership income taxes payable in 2012 (1,355) -
----------------------------------------------------------------------------
Deferred income tax liabilities $ (1,746) $ (413)
----------------------------------------------------------------------------
On adoption of IFRS, temporary and other timing differences between tax and
accounting values arose resulting in an unrecognized net deferred tax asset of
which the Company utilized $1,746 during the nine-month period ended September
30, 2011 to offset the deferred tax liabilities in full. The remaining
unrecognized deferred tax asset as at September 30, 2011 is $170.
----------------------------------------------------------------------------
Deferred income tax assets and liabilities - United States
----------------------------------------------------------------------------
As at September 30 2011
----------------------------------------------------------------------------
Eligible capital expenditures and other reserves $ 1,166
----------------------------------------------------------------------------
Deferred income tax assets 1,166
----------------------------------------------------------------------------
Capital and other assets (2,910)
----------------------------------------------------------------------------
Deferred income tax liabilities $ (2,910)
----------------------------------------------------------------------------
Income tax expense is recognized based on management's best estimate of the
weighted average annual income tax rate expected for the full financial year.
The estimated annual rate used for the three-month period ended September 30,
2011 was 27.93% (September 30, 2010 - 30.12%).
14. Contingencies and Guarantees
a) The Company has agreed to buy back equipment from certain customers at the
option of the customer for a specified price at future dates ("buy back
contracts"). These contracts are subject to certain conditions being met by the
customer and range in term from three to ten years. At September 31, 2011, the
total obligation under these contracts was $13,292 (December 31, 2010 -
$10,279). 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 $1,122 (December 31, 2010 - $860)
has been accrued in the Company's accounts with respect to these commitments.
b) In the ordinary course of business activities, 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. Although the Company cannot
predict the outcome at this time, based on the opinion of external legal
counsel, management believes that the Company has a strong defence against the
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 to the defendants and names the Company as jointly and severally
liable for damages of approximately $4,800. Although the outcome is
indeterminable at this early stage of the proceedings, the Company believes that
they have a strong defence against this claim and that it is without merit. The
Company's insurer has provided conditional coverage for this claim.
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
October 1, 2011 to January 31, 2014 are $349 (December 31, 2010 - $461).
15. Segment Information
Management has determined the operating segments based on reports reviewed by
the chief operating decision maker. The Company has one reportable segment,
Equipment Distribution. 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:
----------------------------------------------------------------------------
Three-months ended Nine-months ended
September 30 September 30
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Equipment sales $ 68,161 $ 50,168 $ 201,236 $ 121,475
Equipment rentals 9,204 6,913 20,746 14,909
Product support 31,030 22,507 87,958 66,475
----------------------------------------------------------------------------
Total Equipment Distribution $ 108,395 $ 79,588 $ 309,940 $ 202,859
----------------------------------------------------------------------------
Geographical information:
----------------------------------------------------------------------------
As at September 30, 2011 December 31, 2010
----------------------------------------------------------------------------
Canada US Total Canada US Total
----------------------------------------------------------------------------
Total assets $257,661 $ 44,312 $301,973 $215,161 $ - $215,161
----------------------------------------------------------------------------
16. Changes in Non-Cash Working Capital
The components of the changes in non-cash working capital are detailed below:
----------------------------------------------------------------------------
For the nine-month period ended September 30 2011 2010
----------------------------------------------------------------------------
Changes in working capital
Trade and other receivables $ (2,800) $ (5,416)
Inventories (56,864) (39,678)
Prepaid expense and other deposits (146) (889)
Trade and other payables 7,310 13,525
Provisions 280 -
Deferred revenue and customer deposits (548) 378
Income taxes recoverable/payable (55) -
Equipment notes payable 33,803 20,634
----------------------------------------------------------------------------
$ (19,020) $ (11,446)
----------------------------------------------------------------------------
17. Seasonality
The Company's interim period revenues and earnings historically 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.
18. Economic Relationship
The Company sells, rents and services heavy equipment and related parts.
Distribution agreements are maintained with several equipment manufacturers, of
which the most significant are with Volvo Construction Equipment North America
Inc. The distribution and servicing of Volvo products account for a substantial
portion of overall operations. The Company has had an ongoing relationship with
Volvo since 1991.
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