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| Share Name | Share Symbol | Market | Type |
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Hot Features
Premium
Strongco Corporation (TSX:SQP) today reported financial results for the three
months ended March 31, 2011.
Summary (i)
-- Total revenues increased by 63% to $87.5 million
-- Chadwick-BaRoss acquisition added $6 million in revenue
-- Same-store revenues increased by 52%
-- EBITDA increased by 214% to $6.8 million
-- Net income of $598,000 compared to loss of $2.0 million
-- Earnings per share of $0.05 compared to loss of $0.20
-- Completed rights offering totalling $7.9 million
(i) Comparisons are between first quarter 2011 and first quarter 2010
"The momentum we created in the third and fourth quarters of last year continued
into the first quarter of 2011," said Robert Dryburgh, President and Chief
Executive Officer of Strongco. "We are seeing growth in all revenue categories
in virtually all regions as a result of improving markets and better sales
execution. We are also pleased that Chadwick-BaRoss, Inc. has made a positive
contribution to earnings since we completed the acquisition on February 1,
2011."
"The market signs in both Canada and the United States are positive and our
order book reflects our efforts in the marketplace. Expense levels in the first
quarter were higher because of the costs of the acquisition of Chadwick-BaRoss
but we anticipate those to normalize through the rest of the year. The
combination of these factors gives us optimism for the balance of 2011."
First Quarter 2011 Review
Total revenues in the three months ended March 31, 2011 were $87.5 million, an
increase of 63% from the first quarter of 2010.
Equipment sales increased by 87% from last year to $56.0 million. Product
support revenues gained 29% to $26.0 million. Rental revenues were $5.5 million,
up 49% from the year-earlier period.
Financial Highlights (i)
Three-Month Periods Ended March 31
($ millions except per share amounts) 2011 2010
Revenues $87.5 $53.7
EBITDA $6.8 $2.2
Net income (loss) $0.6 $(2.0)
Basic and diluted net income (loss) $0.05 $(0.20)
per share
Equipment in inventory $174.4 $146.2
Equipment notes payable $128.7 $103.0
(i) All financial information conforms to International Financial Reporting
Standards. Results from 2010 have been restated in conformity with IFRS
rules.
Gross margin increased by 49.1% to $17.0 million during the first quarter. As a
percentage of revenue, gross margin declined slightly to 19.4% from 21.3% in the
same period of 2010. "The change in gross margin percentage was primarily due to
the large increase and resulting higher proportion of equipment sales relative
to the higher margin product support and rental revenues," said David Wood, Vice
President and Chief Financial Officer.
Administrative, distribution and selling expenses during the first quarter
totalled $15.2 million, compared to $12.7 million in 2010. Expenses for the
period just ended included $0.4 million in one-time acquisition costs and $1.2
million in operating costs for the newly acquired Chadwick-BaRoss unit.
EBITDA for the first quarter increased to $6.8 million from $2.2 million a year
earlier.
As a result of the strong revenue and EBITDA performance, Strongco's net income
in the first quarter of 2011 was $0.6 million ($0.05 per share), a significant
improvement from a net loss of $2.0 million ($0.20 per share) in the first
quarter of 2010.
Financial Position
Strongco improved its balance sheet in the first quarter with the issue of 2.6
million shares under a rights offering for gross proceeds of $7.9 million.
Strongco acquired Chadwick-BaRoss during the period for $11.1 million, comprised
of $9.2 million in cash and a note taken back by the vendors of $1.9 million. In
connection with the acquisition, the company obtained a $5.0 million term loan
from its existing bank, which was funded in April.
Subsequent to the first quarter, the bank credit facility was further amended to
add a construction loan facility to finance construction of the Company's
previously announced new Edmonton branch. The loan, which provides for a maximum
of $7.1 million, will be converted to a mortgage when the new facility is
completed.
Outlook
The recovery in construction markets that became evident in the latter half of
2010 continued into 2011. With that, demand for equipment has continued to
increase. The economy and construction markets across Canada are expected to
continue to improve throughout 2011, which in turn is expected to lead to
increased demand for heavy equipment, and increased willingness of customers to
purchase equipment. Strongco's equipment sales backlogs increased during the
first half of 2010 and remained strong through the balance of the year and into
2011, a positive sign that demand for heavy equipment is improving.
As expected following a recession, recovery has been more evident in the markets
for earth moving equipment. The markets for cranes, which are typically utilized
in latter stages of construction, have been slower to recover. However demand
for cranes started to show improvement toward the end of 2010 and is expected to
increase in 2011 as construction activity continues to grow. Strongco's sales
backlog for cranes has also risen, which is a sign that demand is improving.
An important contribution to anticipated growth in 2011 is expected from
Alberta. Oil prices have shown strength and stability and with that, the economy
in Alberta has continued to improve. Activity in the oil sands has accelerated
and that has led to increased spending for heavy equipment in northern Alberta.
In addition, there has been a general increase in construction activity
throughout the province. Strongco's sales backlogs in Alberta have increased and
management is optimistic that heavy equipment markets in the province will
continue to improve in 2011.
Most original equipment manufacturers ("OEM's") had scaled back production and
reduced capacity in response to the weak North American economy in 2009 and
2010. This has resulted in increased delivery times and shortages of certain
types of equipment. These suppliers are continuing to struggle to increase
production capacity and improve lead time and availability. There have been
indications of improvement but the transition to the new low-emission tier 4
engine technology in 2011 is an added complication that may lead to longer lead
times and reduced supply. In addition, the seismic disruptions in Japan are
beginning to cause global shortages of certain equipment and parts. OEM's are
still evaluating the impact of the Japanese disaster on their ability to supply
but have notified dealers that there could be delays and shortages.
Management remains cautiously optimistic that the improving trend in Canadian
construction markets will continue through 2011. Growing demand for heavy
equipment will lead to increased revenues in 2011. In addition, the acquisition
of Chadwick-BaRoss in the first quarter will contribute to improved sales levels
for Strongco in 2011.
Conference Call Details
----------------------------------------------------------------------------
Strongco will hold a conference call on Friday, May 27, 2011 at 10 am ET to
discuss first quarter results. Analysts and investors can participate by
dialing 416-644-3418 or toll free 1-877-974-0446. An archived audio
recording will be available until midnight on June 10, 2011. To access it,
dial 416-640-1917 and enter passcode 4444460#.
----------------------------------------------------------------------------
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, Ponsse, Powerscreen, Skyjack, Fassi, Allied, Taylor, ESCO,
Dressta, Sennebogen, 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.
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 ended March 31, 2011. This discussion
and analysis should be read in conjunction with the accompanying unaudited
consolidated financial statements as at and for the three months ended March 31,
2011. For additional information and details, readers are referred to the
Company's audited consolidated financial statements and accompanying notes as at
and for the year ended December 31, 2010 contained in the Company's annual
report for the year ended December 31, 2010. For additional information and
details, readers are referred to 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 quarter ended March 31, 2011 is the first quarter in which Strongco has
adopted International Financial Reporting Standards ("IFRS") as the basis for
its accounting and financial reporting. Prior year comparative figures for the
quarter ended March 31, 2010 have been restated to comply with IFRS (see
discussion below under the heading "Conversion to International Financial
Reporting Standards"). All financial information within this discussion and
analysis, for both 2011 and 2010, is presented on the basis of IFRS.
Unless otherwise indicated, all financial information within this discussion and
analysis is in millions of Canadian dollars except per share amounts. The
information in this MD&A is current to May 25, 2011.
FINANCIAL HIGHLIGHTS
Three months
ended Variances
Income Statement Highlights March 31, 2011/2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions, except per share
amounts) 2011 2010 %
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenues $ 87.5 $ 53.7 $ 33.8 63%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) $ 0.6 $ (2.0) $ 2.6 130%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings (loss)
per share $ 0.05 $ (0.20) $ 0.25 125%
EBITDA (note 1) $ 6.8 $ 2.2 $ 4.6 209%
Balance Sheet Highlights Variances
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions, except per unit
amounts) 2011 2010 2011/2010 %
----------------------------------------------------------------------------
Equipment inventory $ 174.4 $ 146.2 $ 28.2 19%
Total assets 255.9 190.6 65.3 34%
Debt (bank debt and other notes
payable) 26.9 16.2 10.7 66%
Equipment notes payable 128.8 103.0 25.8 25%
Total liabilities $ 202.8 $ 147.1 $ 55.7 38%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 secondary or ancillary 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 General 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 MONTHS ENDED MARCH 31, 2011 AND 2010
Consolidated Results of Operations
Three months ended March
31, Variance
--------------------------- ----------------
($ thousands, except per
share amounts) 2011 2010 $ %
----------------------------------------------------------- ----------------
Revenues $ 87,495 $ 53,680 $ 33,815 63.0%
Cost of sales 70,511 42,263 28,248 66.8%
----------------------------------------------------------- ----------------
Gross Margin 16,984 11,417 5,567 48.8%
Administration, distribution
and selling expenses 15,241 12,658 2,583 20.4%
Other expense (income) (274) (268) -6 2.1%
----------------------------------------------------------- ----------------
Operating income 2,017 (973) 2,990 307.4%
Interest expense 1,356 1,100 256 23.3%
----------------------------------------------------------- ----------------
Earnings (loss) from
operations before income
taxes 661 (2,073) 2,733 131.9%
Provision for income taxes 63 - 63 0.0%
----------------------------------------------------------- ----------------
Net income (loss) $ 598 $ (2,073) $ 2,670 128.8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings
(loss) per share $ 0.05 $ (0.20) $ 0.24 123.9%
Weighted average number of
shares
- Basic 12,633,757 10,508,719
- Diluted 12,665,004 10,508,719
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key financial measures:
Gross margin as a percentage
of revenues 19.4% 21.3% -1.9%
Administration, distribution
and selling expenses
as percentage of revenues 17.4% 23.6% -6.2%
Operating income as a
percentage of revenues 2.3% -1.8% 4.1%
EBITDA (note 1) $ 6,822 $ 2,200 $ 4,622
----------------------------------------------------------- ----------------
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
Construction markets generally follow the cycles of the broader economy, but
typically lag. 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
in that sector strengthen, they have historically replenished and upgraded their
equipment fleets after a period of restrained capital expenditures. 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. Rental of heavy equipment is typically stronger
following a recession until confidence in construction markets 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 second quarter of 2010. This
improvement continued in the third and fourth quarters of 2010 as confidence in
the economy increased. Similarly, 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 the year. That trend continued
in the second half of 2010, but with confidence in the economy continuing to
rise and construction activity increasing, customers were more willing to
purchase equipment and exercise purchase options under rental contracts 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. 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.
The improving trend in construction markets and strong demand for heavy
equipment evident in the latter half of 2010, continued into the first quarter
of 2011. While customer confidence to purchase equipment strengthened in the
first quarter of 2011, rental activity, especially under contracts with purchase
options ("RPO"), also remained strong in the quarter. In addition, sales
backlogs remained at robust levels, a positive indication of the continuing
recovery of construction markets and demand for heavy equipment.
Product support (parts and service) activity is normally strong in the first
quarter as equipment used in harsh winter conditions for snow removal and other
applications require higher levels of service and repair. Product support
activity in the first quarter of 2011 was stronger due to the higher amounts of
snow compared to 2010 and customers repairing equipment in anticipation of a
more robust construction season in 2011.
Revenues
A breakdown of revenue for the quarter ended March 31, 2011 and 2010 by type
within each geographic region is as follows:
Revenue by Region
Three months ended 2011/2010
March 31 VARIANCE
($ millions) 2011 2010 $ %
----------------------------------------------------------------------------
Eastern Canada (Atlantic and
Quebec)
---------------------------------
Equipment Sales $ 20.1 $ 9.6 $ 10.5 109%
Equipment Rentals 1.6 1.2 0.4 33%
Product Support 9.3 7.8 1.5 19%
----------------------------------------------------------------------------
Total Eastern Canada $ 31.0 $ 18.6 $ 12.4 67%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------
Central Canada (Ontario)
---------------------------------
Equipment Sales $ 18.3 $ 14.0 $ 4.3 31%
Equipment Rentals 1.3 1.4 (0.1) -7%
Product Support 8.0 7.4 0.6 8%
----------------------------------------------------------------------------
Total Central Canada $ 27.6 $ 22.8 $ 4.8 21%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------
Western Canada (Manitoba to BC)
---------------------------------
Equipment Sales $ 14.9 $ 6.3 $ 8.6 137%
Equipment Rentals 2.3 1.1 1.2 109%
Product Support 5.7 4.9 0.8 16%
----------------------------------------------------------------------------
Total Western Canada $ 22.9 $ 12.3 $ 10.6 86%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------
United States
---------------------------------
Equipment Sales $ 2.7 $ $ 2.7
Equipment Rentals 0.3 0.3
Product Support 3.0 3.0
------------------------------------------------------------------
Total United States $ 6.0 $ - $ 6.0
------------------------------------------------------------------
------------------------------------------------------------------
---------------------------------
Total Strongco Corporation
---------------------------------
Equipment Sales $ 56.0 $ 29.9 $ 26.1 87%
Equipment Rentals 5.5 3.7 1.8 49%
Product Support 26.0 20.1 5.9 29%
----------------------------------------------------------------------------
Total Strongco Corporation $ 87.5 $ 53.7 $ 33.8 63%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment Sales
Strongco's equipment sales in the first quarter of 2011 were $56.0 million which
was up $26.1 million or 87% from $29.9 million in the first quarter of 2010. The
recent acquisition of Chadwick-BaRoss in February 2011, contributed $2.7 million
of the increase while sales in Canada were up $23.4 million or 78%. Sales were
up in all regions of the country, with the largest increases in Alberta and
Quebec. 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 between product categories. Demand was
strongest in general purpose construction equipment ("GPE"), particularly in
Western and Eastern Canada, while demand for compact equipment was up a lesser
amount. Markets for cranes were also up from the first quarter of 2010, with the
largest increases in Central and Eastern Canada.
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 first quarter were up from a year ago due primarily to a higher
proportion of sales of larger, more expensive equipment. While below pre-
recession levels, average selling prices in most product categories increased
slightly compared to the first quarter of 2010. While the ongoing strength of
the Canadian dollar and price competition continued to put pressure on selling
prices, the increase in demand, combined with supply issues during the quarter,
helped support stronger selling prices. After scaling back during the recession,
OEM's have been challenged to ramp up production in response to the increasing
demand, which has resulted in longer lead times and reduced availability of
certain types of equipment. In addition, the scheduled transition from tier 3 to
the new lower-emission tier 4 engine technology has affected supply and
increased demand for equipment with tier 3 engines.
On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic
regions) were $20.1 million, which was more than double the level of the first
quarter of 2010. Construction markets in Quebec continued to benefit from the
high level of infrastructure projects in that province. The markets for GPE in
which Strongco participates in Eastern Canada were estimated to be up
approximately 25% compared to the first quarter of 2010. Strongco significantly
outperformed the market and captured a larger market share with total GPE unit
volume growth in the quarter of greater than 100%. Most of the sales improvement
has been in rock crushing equipment, loaders and articulated trucks. The crane
market in Eastern Canada, which generally remained weak in 2010 following the
recession, showed an improvement as certain large crane rental customers in
Quebec upgraded and increased their fleets.
Strongco's equipment sales in Central Canada were $18.3 million, which was up
$4.3 million or 31% from the first quarter of 2010. Most of the increase was due
to higher sales of cranes in Ontario as certain crane rental customers, who
refrained from purchasing new cranes during the recession, started to replenish
their fleets during the quarter. While the economy in Ontario has been
recovering following the recession, there has been fewer new large construction
projects started in the province compared to other parts of the country and many
announced construction and infrastructure projects have been delayed due to the
cold, snowy winter weather conditions, followed by a very wet spring. This has
resulted in certain customers delaying their buying decisions. Price competition
in Ontario in GPE and compact equipment remained aggressive in the first
quarter, especially from certain dealers attempting to capture market share in
particular product categories and markets. While Strongco's market shares in
Ontario were lower in January and February, sales activity and market share
increased significantly in March. At the same time, sales backlogs and the level
of RPOs in Ontario have improved which should lead to stronger sales in the
second and third quarters.
Equipment sales in Western Canada during the first quarter were up $8.6 million
or 137% over first quarter of 2010 to $14.9 million. 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 have been significantly impacted by
weakness in the energy sector during 2009. In addition, Strongco serves
construction and infrastructure segments in the region, which 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 quarter of 2011. Total units
sold in the markets served by Strongco in Alberta, excluding cranes, were
estimated to be up approximately 95% relative to the first quarter of 2010.
Strongco outperformed the market with total unit volume growth in the first
quarter in excess of 190% and captured a larger share of the market. Most of the
increase was in sales of GPE and larger equipment. While this was a substantial
increase over the first quarter of 2010, sales in Northern Alberta were hampered
by longer delivery lead times and product availability issues on certain
products. Crane sales have been slower to recover in Alberta, but sales backlogs
of cranes has improved and RPO activity has increased, positive signs that the
crane markets in Western Canada is improving.
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 a specific project.
In other cases, certain customers prefer to enter into short-term rental
contracts with an option to purchase after a period of time or hours of machine
usage. This latter type of contract is referred to as a rental purchase option
contract ("RPO"). Under an RPO, a portion of the rental revenue is applied
toward the purchase price of the equipment should the customer exercise the
purchase option. This provides flexibility to the customer and results in a more
affordable purchase price after the rental period. Normally, the significant
majority of RPO's are converted to sales within a six month period and this
market practice is a method of building sales revenues and the field population
of equipment.
Strongco's rental revenue in the first quarter was $5.5 million which was up
$1.8 million over the first quarter of 2010. Rental revenue from the acquisition
of Chadwick-BaRoss in February 2011 contributed $0.3 million of the increase
while rental revenue in Canada was up $1.5 million. 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 quarter of 2011.
Most of the increase in rental revenue was realized in Alberta, demonstrating
further evidence of recovery in that province following the significant decline
in rental activity experienced during the recession. Strongco's crane business,
which has traditionally not had a significant rental element, also experienced
an increase in rental activity in the quarter as customers showed an initial
preference to rent while the demand for cranes improved.
Product Support
Sales of new equipment usually carry the warranty from the manufacturer for a
defined term. Product support revenues from the sales of parts and service are
therefore not impacted until the warranty period expires. Warranty periods vary
from manufacturer to manufacturer and 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 increased product support activities over time. Product
support activities are normally strongest in Canada in the first quarter due to
increased use of equipment for snow removal in the winter and during the third
quarter in the height of the construction season.
Product support revenues in the first quarter of 2011 were $26.0 million, which
included $3.0 million from Chadwick-BaRoss. This was up from $20.1 million in
the first quarter of 2010. Product support activities were up across all regions
in Canada. Parts and service revenues, particularly in Western and Eastern
Canada, benefited from higher amounts of snow and increased use of snow removal
equipment in the first quarter of 2011, while the mild winter and lack of snow
in the first quarter of 2010, particularly in Eastern and Central Canada,
resulted in reduced parts and service activity in the prior year.
Gross Margin
Three Months Ended
March 31, 2011/2010
2011 2010 Variance
--------------------------------------------------------------
--------------------------------------------------------------
Gross Margin $ millions GM% $ millions GM% $ millions %
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment
Sales $ 5.4 9.5% $ 2.6 8.8% $ 2.8 108%
Equipment
Rentals 1.1 18.5% 0.6 16.2% 0.5 83%
Product
Support 10.5 40.8% 8.2 40.8% 2.3 28%
----------------------------------------------------------------------------
Total Gross
Margin $ 17.0 19.4% $ 11.4 21.3% $ 5.6 49%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As a result of the higher revenues in the first quarter of 2011, Strongco's
gross margin increased to $17.0 million from $11.4 million in the first quarter
of 2010. The gross margin of the newly acquired Chadwick-BaRoss was $1.5 million
in the quarter. As a percentage of revenue, gross margin declined to 19.4% in
the first quarter of 2011 from 21.3% in the first quarter of 2010. Equipment
sales typically generate a lower gross margin percentage than rental revenues
and product support activities. The large increase in equipment sales resulted
in equipment sales representing a higher proportion of total revenues in the
quarter which contributed to the decline in the overall gross margin percentage.
Equipment sales accounted for approximately 64% of total revenues in the first
quarter of 2011 compared to 56% in the first quarter of 2010, while product
support and rental revenues represented 30% and 6% of total revenues,
respectively, in the first three months of 2011 compared to 37% and 7% of total
revenue, respectively, in the same period of 2010.
The gross margin percentage on equipment sales was 9.5% in the first quarter of
2011, which was up from 8.8% in the first quarter of 2010. Product sales mix
contributed most to the increased gross margin percentage on equipment sales. In
addition, while price competition and the strength of the Canadian dollar
continued to put pressure on selling prices, the increase in demand combined
with longer delivery lead times and reduced availability of certain equipment
from the OEMs supported slightly higher selling prices, contributing to further
improvement in the gross margin percentage. Gross margin percentage on rentals
was 18.5% in the first quarter of 2011, compared to 16.2% in the first quarter
of 2010. Gross margin percentage on product support activities was 40.8% in the
first quarter of 2011, consistent with the prior year.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the first quarter of 2011
were $15.2 million, which compared to $12.7 million in the first quarter of
2010. As a percent of revenue, administration, distribution and selling expenses
were 17.4%, down from 23.6% in the first quarter of 2010. Administration,
distribution and selling expenses of the newly acquired Chadwick-BaRoss were
$1.2 million in the quarter. Expenses in the quarter also include the one-time
costs for the acquisition of Chadwick-BaRoss of $0.4 million. Strongco
participated in and attended two large trade shows in the quarter that the
Company did not attend in the prior year resulting in additional expenses for
travel, advertising and promotion of approximately $0.2 million. Beyond these
one-time and unusual expenses, the Company incurred additional travel and
freight costs of approximately $0.2 million as a result of the recent rise in
fuel costs which were not passed on to customers. In addition, the significant
increase in sales and service activity in the quarter resulted in larger amounts
of overtime labour. While labour utilization and recovery improved in the
quarter, the overtime premiums could not be fully passed on resulting in
incremental expenses of approximately $0.3 million. The cost of performing
warranty work in the quarter was lower compared to the first quarter of 2010.
However, as OEMs have become more restrictive in the type and amount of warranty
they will cover, the amount of recovery from OEMs was lower, resulting in a net
warranty recovery that was approximately $0.2 million lower than the first
quarter of 2010.
Other Income
Other income and expense is primarily comprised of gains or losses on
disposition of fixed assets, foreign exchange gains or losses, service fees
received by Strongco as compensation for sales of new equipment by other third
parties into the regions where Strongco has distribution rights for that
equipment and commissions received from third party financing companies for
customer purchase financing Strongco places with such finance companies. Other
income in the first quarter of 2011 was $0.3 million compared to $0.3 million in
the first quarter of 2010.
Interest Expense
Strongco's interest bearing debt comprises bank indebtedness and interest
bearing equipment notes. 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 indebtedness and interest bearing
equipment notes varies with Canadian chartered bank prime rate ("prime rate")
and Canadian Bankers Acceptances Rates ("BA rates").
Strongco's interest expense in the first quarter of 2011 was $1.4 million,
compared to $1.1 million in the first quarter of 2010. The increase was mainly
due to slightly higher average balance of interest-bearing debt in the first
quarter of 2011 coupled with slightly higher effective interest rates on that
debt. In addition, interest expense of the newly acquired Chadwick-BaRoss was
$0.1 million.
Prime lending rates and BA rates have increased from the very 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 indebtedness and equipment finance
notes was higher in the first quarter of 2011 compared to the first quarter of
2010. In addition, the average amount of interest-bearing debt was slightly
higher in the first quarter of 2011 compared to the prior year. During the
recession in 2009, Strongco successfully reduced inventory and the related floor
plan financing. As a result, interest-bearing equipment notes were lower in the
first quarter of 2010. During 2010 and into 2011, Strongco has been increasing
equipment inventories to the 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 quarter of 2011 compared to the
first quarter of 2010, (see discussion under "Financial Condition and
Liquidity").
Earnings before Income Taxes
Strongco's earnings before income taxes in the first quarter of 2011 were $0.7
million, which was significantly improved from a loss before income taxes of
$2.1 million in the first quarter of 2010. The increase was due to the strong
revenue performance in the quarter and the incremental pretax earnings from the
acquisition of Chadwick-BaRoss in February of $0.2 million.
Net Income (Loss)
Following conversion to a corporation on July 1, 2010, Strongco is now subject
to income tax at corporate tax rates, whereas previously, as an income trust,
the Fund was not subject to corporate tax. In addition, as a consequence of
conversion, Strongco is now able to utilize tax losses, including tax losses
previously unrecognized from the Fund. The recognition of tax loss carry
forwards resulted in no provision for income tax in the first quarter of 2011
for Strongco in Canada. However, the tax provision from the newly acquired
Chadwick-BaRoss was $0.1 million in the first quarter.
Strongco's net income in the first quarter of 2011 was $0.6 million ($0.05 per
share), which was significantly improved from a net loss of $2.0 million (loss
of $0.20 per unit) in the first quarter of 2010.
EBITDA
EBITDA in the first quarter of 2011 was $6.8 million which compares to $2.2
million in the first quarter of 2010. EBITDA was calculated as follows:
Three Months Ended December 31,
2011 2010 2011/2010
------------------------------------ -----------
------------------------------------ -----------
$ millions $ millions $ Variance
---------------------------------------------------------------- -----------
---------------------------------------------------------------- -----------
Net Income $ 0.6 $ (2.1) $ 2.7
Add Back:
Interest 1.3 1.1 0.2
Income taxes 0.1 0.1 -
Amortization of capital
assets 0.7 0.2 0.5
Amortization of equipment
inventory on rent 3.9 2.9 1.0
Amortization of rental
fleet equipment 0.2 - 0.2
---------------------------------------------------------------- -----------
EBITDA (note 1) $ 6.8 $ 2.2 $ 4.6
---------------------------------------------------------------- -----------
---------------------------------------------------------------- -----------
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 Provide By (Used In) Operating Activities:
As a result of the strong revenues and earnings in the first quarter of 2011,
Strongco generated $7.3 million of cash before changes in working capital and
interest. Cash of $5.4 million was used in building working capital and cash
employee future benefits funding of $0.1 and cash interest payments were $1.3
million resulting in zero cash from operating activities in the first quarter.
By comparison, in the first quarter of 2010, $2.2 million of cash was provided
by operating activities before changes in working capital and interest, which
was offset by cash used to increase working capital of $4.9 million and interest
payments of $1.1 million, resulting in net use of cash from operations of $3.8
million.
The components of the cash used in and provided by operating activities were as
follows:
Three Months
ended
March 31,
($ millions) 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) from continuing operations $ 0.6 $ (2.0)
Non-cash items:
Amortization of property, plant and equipment 0.7 0.2
Amortization of equipment inventory on rent 3.9 2.9
Amortization of rental fleet 0.2 -
Gain on disposal of property and equipment - -
Gain on sale of rental equipment 0.5
Interest expense 1.4 1.1
Income tax expense / (recovery) 0.1 -
Deferred income tax liability (0.1) -
----------------------------------------------------------------------------
7.3 2.2
----------------------------------------------------------------------------
Changes in non-cash working capital balances (5.4) (4.9)
Employee future benefit funding (0.1) -
Interest paid (1.3) (1.1)
----------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $ 0.5 $ (3.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Items not involving the outlay of cash includes amortization of equipment
inventory on rent of $3.9 million in the first quarter of 2011 which compares to
$2.9 million in the first quarter of 2010. Higher volumes of equipment rentals
in the first quarter of 2011 resulted in the higher amortization of equipment
inventory on rent.
Components of the net change in non-cash working capital for the three month
period ending March 31, 2011 and 2010 were as follows:
Net (Increase)/Decrease in Non-cash Working
Capital
(millions)
(increase)/decrease 2011 2010
----------------------------------------------------------------------------
Accounts receivable $ (2.2) $ 2.5
Inventories (8.7) (4.6)
Prepaids (0.6) (0.6)
----------------------------------------------------------------------------
$ (11.5) $ (2.7)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
increase/(decrease)
--------------------------------------------------
Accounts payable and accrued liabilities 2.7 (1.1)
Deferred revenue & customer deposits 0.4 0.8
Deferred income tax liability (0.1) (0.1)
Equipment notes payable 3.0 (1.8)
----------------------------------------------------------------------------
$ 6.1 $ (2.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Increase in Non-cash Working Capital $ (5.4) $ (4.9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
With an increase in parts and service revenue, accounts receivable increased in
the first quarter of 2011 by $2.2 million. By comparison, product support
revenues were lower in the first quarter of 2010 which resulted in a decrease in
accounts receivable of $2.5 million in the first quarter of 2010. The average
age of receivables outstanding at the end of the year was approximately 35 days,
slightly improved from December 2010 at approximately 38 days and 40 days a year
ago.
Equipment inventory had been reduced by the strong sales in the fourth quarter
of 2010. Inventory levels were increased during the first quarter in
anticipation of stronger sales throughout 2011 compared to 2010. By comparison,
with weak construction markets in the first quarter of 2010 and an expectation
of a slow recovery throughout the year, there was a smaller build of inventories
in the first quarter of 2010.
As business activity increased in 2011, accounts payable and accrued liabilities
increased, in particular due to an increase in parts purchased during the first
quarter. By comparison, accounts payable and accrued liabilities were down on
the first quarter of 2010 due primarily to the timing of payments and also due
to lower purchases of parts inventory.
With the increase in equipment inventory, equipment notes also increased. By
comparison equipment notes were reduced in the first quarter of 2010 as
equipment inventory was sold and new inventory purchases were lower.
Cash Provided By (Used In) Investing Activities:
Net cash used in investing activities of continuing operations amounted to $13.4
million in the first quarter of 2011 primarily related to the acquisition of
Chadwick-BaRoss for $11.2 million. Capital expenditure in the quarter of $2.9
million includes the purchase of land in Edmonton, Alberta for a new branch for
$2.6 million. Chadwick-BaRoss sold older rental fleet for proceeds of $1.1
million and added new equipment to its rental fleet at a cost of $0.5 million.
Investing activities in the first quarter of 2010 amounted to $0.1 million
related mainly to facilities upgrades and miscellaneous shop equipment.
The components of the cash used in investing activities were as follows:
Three Months Ended
March 31,
----------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Acquisiton of Chadwick-BaRoss, Inc. $ (11.2) $ -
Purchase of rental fleet equipment (0.5) -
Proceeds on the sale of rental fleet equipment 1.1 -
Purchase of capital assets (2.9) (0.1)
----------------------------------------------------------------------------
Cash used in investing activities $ (13.4) $ (0.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities:
In the first three months of 2011, Strongco provided $13.9 million of cash from
financing activities which compared to cash of $3.9 million provided from
financing activities in the first quarter of 2010. Net cash of $7.8 million was
provided from the issue or shares under the rights offering completed in the
first quarter of 2011 (see discussion under "Shareholder Capital"). Additional
cash of $5.5 million was provided from increased borrowing under bank credit
lines. In March of 2011, Strongco made the final scheduled repayment of $1.2
million of the note taken back from Volvo Construction Equipment on the
acquisition of Champion in 2008.
The components of the cash used in financing activities were as follows:
Three Months Ended
March 31,
-----------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Proceeds from rights offering $ 7.8 $ -
Increase in bank indebtedness 5.5 5.0
Repayment of note from purchase of Champion (1.2) (1.1)
Vendor take back not on purchase of Chadwick-
BaRoss 1.8 -
----------------------------------------------------------------------------
Cash used in financing activities $ 13.9 $ 3.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bank Credit Facilities
The Company has credit facilities with banks in Canada and United States which
provide 364-Day committed operating lines of credit totaling approximately $22.4
million which are renewable annually. Borrowings under the lines of credit are
limited by standard borrowing base calculations based on accounts receivable and
inventory, typical of such lines of credit. As collateral the Company has
provided a $50 million debenture and a security interest in accounts
receivables, 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 1.50% and between the one month Canadian Bankers'
Acceptance Rates ("BA rates") plus 1.75% and BA rates plus 2.75 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 March 31, 2011, there were outstanding letters of credit of $0.1
million.
In addition to its operating lines of credit, the Company 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,
Strongco can purchase foreign exchange forward contracts up to a maximum of $15
million. As at March 31, 2011, the Company had outstanding foreign exchange
forward contracts under this facility totaling US$6.7 million at an average
exchange rate of $1.0023 Canadian for each US $1.00 with settlement dates
between April 30, 2011 and August 31, 2011.
The Company's bank credit facilities also include a term loan secured by real
estate in the United States. At March 31, 2011 the outstanding balance on this
term loan was US$3.8 million. The term loan bears interest at LIBOR plus 3.05%
and requires monthly principal payments of US$13,334 plus accrued interest. The
Company has interest rate swap agreements in place which have converted the
variable rate on the term loan 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 loan is due.
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. In particular, the credit facilities
contains 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 $54 million, a maximum ratio of
total debt to tangible net worth ("Debt to TNW Ratio covenant") of 3.5 : 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 twelve month basis. Other
covenants are measured as at the end of each quarter. The Company's bank has
agreed to amend covenants for the accounting changes under IFRS (see discussion
under heading "Conversion to International Financial Reporting Standards"
below). The Company was in compliance with all covenants under its bank credit
facilities as at March 31, 2011, before accounting adjustments for IFRS.
In connection with the acquisition of Chadwick-BaRoss, in April 2011, the
Company's credit facilities were amended to add a $5 million demand
non-revolving term loan ("Acquisition Loan"). The Acquisition Loan is for a term
of 60 months and bears interest at the bank's prime lending rate plus 200 bps.
The Acquisition Loan is subject to monthly principal payments of $83,333 plus
accrued interest.
In addition, in April 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 $7.1 million. Construction of the
new branch will commence in June 2011 and is scheduled to be completed before
the end of 2011. 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 2.0%.
Equipment Notes
In addition to its bank credit facilities, the Company has lines of credit
available totaling approximately $250 million from various non-bank equipment
lenders in Canada and the United States, which are used to finance equipment
inventory and rental fleet. At March 31, 2011, there was approximately $132.3
million borrowed on these equipment finance lines.
Typically, these equipment notes are interest free for periods up to 12 months
from the date of financing, after which they bear interest at rates ranging from
4.25% to 5.85% over the one month BA rate or 3.25% to 4.9% over the prime rate
of a Canadian chartered bank in Canada, and between 0.0% and 5.85% in the United
States. As collateral for these equipment notes, the Company has provided liens
on the specific inventories financed and any related accounts receivable.
Monthly principal repayments or "curtailments" equal to 3% of the original
principal balance of the note commence 12 months from the date of financing and
the remaining balance is due in full at the earlier of 24 months after financing
or when the financed equipment is sold. While financed equipment is out on rent,
monthly curtailments are required equal to the greater of 70% of the rental
revenue and 2.5% of the original value of the note. Any remaining balance after
24 months, which is due in full, is normally refinanced with the lender over an
additional period of up to 24 months. All of the Company's equipment notes
facilities are renewable annually.
Certain of the Company's equipment finance credit agreements contain restrictive
financial covenants, including requiring the Company to remain in compliance
with the financial covenants under all of its other lending agreements ("cross
default provisions"). The Company's equipment finance lenders have agreed to
amend covenants for the accounting changes under IFRS (see discussion under
heading "Conversion to International Financial Reporting Standards" below). The
Company was in compliance with all covenants under its equipment finance credit
facilities as at March 31, 2011, before accounting adjustments for IFRS.
The balance outstanding under the Company's debt facilities at March 31, 2011
and 2010 was as follows:
Debt Facilities
As at March 31 ($ millions) 2011 2010
--------------------------------------------------------------------------
Bank indebtedness (including outstanding
cheques) $ 17.9 $ 15.0
Equipment notes payable - non interest bearing 43.0 27.4
Equipment notes payable - interest bearing 85.7 75.6
Other notes payable 9.0 1.2
--------------------------------------------------------------------------
$ 155.6 $ 119.2
--------------------------------------------------------------------------
--------------------------------------------------------------------------
As at March 31, 2011 there was $4.6 million of unused credit available under the
Company's bank credit lines. While availability under the bank line 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
higher in the first quarter when cash flows from operations is the lowest, and
reduces through to the end of the year as cash flows increase.
The Company also had availability under its equipment finance facilities of
$117.7 million at March 31, 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, business activity in the Equipment Distribution segment follows 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 gain in the second quarter as
construction and other contracts begin to be tendered and companies begin to
prepare for summer activity. The third quarter generally tends to be slightly
slower from an equipment sales standpoint, which is partially offset by
continued strength in equipment rentals and customer support activities. Fourth
quarter activity generally strengthens as customers make year-end capital
spending decisions and exercise purchase options on equipment which has
previously gone out on RPO's. In addition, purchases of snow removal equipment
are typically made in the fourth quarter. However, as a result of weak economic
conditions and significantly reduced construction activity in Canada, the
markets for heavy equipment in 2009 were extremely weak throughout the year.
Construction markets and demand for heavy equipment have improved in 2010 and
into the first quarter of 2011 but volumes remained below historic pre-recession
levels.
A summary of quarterly results for the current and previous two years is as follows:
2011
($ millions, except per
share/unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue $ 87.5
Earnings before income taxes 0.7
Net income 0.6
Basic and diluted earnings per
share $ 0.05
2010
($ millions, except per
share/unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 91.8 $ 79.6 $ 69.6 $ 53.7
Earnings (loss) from continuing
operations before income taxes 1.5 0.7 (0.5) (2.1)
Net income (loss) 1.5 0.7 (0.5) (2.1)
Basic and diluted earnings
(loss) per share/unit $ 0.14 $ 0.07 $ (0.05) $ (0.20)
2009
(note 1)
($ millions, except per unit
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 figure do not reflect changes
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
The Company has contractual obligations for operating lease commitments totaling
$23.8 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 March 31, 2011, the total buy back
contracts outstanding were $12.2 million. A reserve of $1.0 million has been
accrued in the Company's accounts as at March 31, 2011 with respect to these
commitments.
The Company has provided a guarantee of lease payments under the assignment of a
property lease which expires January 31, 2014. Total lease payments from January
1, 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 $ 23.8 $ 4.8 $ 12.4 $ 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 $ 12.2 $ 2.2 $ 5.5 $ 4.5 $ -
----------------------------------------------------------------------------
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 $7.86 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 13,128,629.
Number of
Common Shares/Trust Units Issued and Outstanding Shares Shares/Units
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Common shares outstanding as at December 31, 2010 10,508,719
Common shares issued under rights offering 2,619,910
----------------------------------------------------------------------------
Common shares outstanding as at March 31, 2011 13,128,629
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OUTLOOK
The recovery in construction markets evident in the latter half of 2010 is
continuing into 2011. With that, demand for equipment has continued to increase.
The economy and construction markets across Canada are expected to continue to
improve throughout 2011, which in turn, will lead to increased demand for heavy
equipment, and increased willingness of customers to purchase equipment.
Strongco's equipment sales backlogs, which rose during the first half of 2010
from the very low levels that existed at the end of 2009, remained strong
through the balance of the year and into 2011, a positive sign that demand for
heavy equipment is improving.
As expected following a recession, recovery has been more evident in the markets
for earth moving equipment. The markets for cranes, which are typically utilized
in latter stages of construction, have been slower to recover, but demand for
cranes started to show improvement towards the end of 2010 and is expected to
increase in 2011 as construction activity continues to grow. Strongco's sales
backlog for cranes has also risen, which is a sign that demand is improving.
An important contribution to the anticipated growth in 2011 is expected from
Alberta. Oil prices have continued to show strength and stability and with that,
the economy in Alberta has continued to improve. Activity in the oil sands has
accelerated which has led to increase spending for heavy equipment in northern
Alberta. That improvement was first evident late in 2010 but has continued into
2011. In addition, there has been an increase in construction activity in
general throughout the province. Strongco's sales backlogs in Alberta have
increased and management is optimistic that heavy equipment markets in the
province will continue to improve in 2011.
Most OEM's have scaled back production and reduced capacity in response to the
weak North American economy in 2009 and 2010. This has resulted in increased
delivery times and shortages of certain types of equipment. OEM's are continuing
to struggle to increase production capacity and improve lead time and
availability. There have been indications of improvement but the transition to
the new low emission tier 4 engine technology in 2011 is an added complication
which may lead to longer lead times and reduced supply. In addition, the
earthquakes and tsunami in Japan is beginning to cause global shortages of
certain equipment and parts. OEM's are still evaluating the impact of the
Japanese disaster on their ability to supply but have notified dealer that there
could be delays and shortages.
Management remains cautiously optimistic that the improving trend in
construction markets evidenced in Canada in the latter half of 2010 and first
quarter of 2011 will continue through the balance of the year and expects demand
for heavy equipment will grow which will lead to increased revenues in 2011. In
addition, the acquisition of Chadwick-BaRoss, effective February 1, 2011 will
contribute to improved sales levels for Strongco in 2011.
CONVERSION to INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
As further described in the Company's interim unaudited consolidated financial
statements and notes for the first quarter of 2011, the Company began reporting
its financial results in accordance with IFRS effective January 1, 2011.
The following summarizes the significant financial effects on the Company's
consolidated financial statements resulting from the conversion to IFRS and a
summary of the significant accounting policies adopted by the Company in
preparing its IFRS consolidated financial statements.
First-time adoption of IFRS ("IFRS 1")
The interim unaudited consolidated financial statements and notes for the first
quarter of 2011 contain the accounting policies adopted under IFRS as well as
reconciliations of the impacts to the consolidated financial statements on
transition. IFRS 1 allows first-time adopters certain exemptions from the
general requirements contained in IFRS. The Company has elected to apply the
following optional exemptions:
Business Combinations
The Company had the option of applying IFRS 3 - Business Combinations either
retrospectively for all business combinations from a particular pre-transition
date selected by the Company or prospectively from the transition date of
January 1, 2010. The Company has elected not to apply IFRS 3 retrospectively to
business combinations that occurred before January 1, 2010. Accordingly, this
election has the effect of maintaining the accounting for past business
combinations as previously reported.
Employee benefits
The Company had the option to retroactively apply the requirements of IAS 19 -
Employee Benefits or to recognize all cumulative unamortized actuarial gains and
losses at the date of transition to IFRS in retained earnings. The Company has
elected to recognize all cumulative unamortized actuarial gains and losses on
its pension and other postretirement benefit plans as at January 1, 2010
directly in retained earnings. This election resulted in a reduction to retained
earnings of $8.8 million ($4.7 million after tax) as at January 1, 2010. In
addition, the Company recognized an additional minimum funding liability on
transition to IFRS in the amount of $1.5 million ($0.8 million after tax) in
accordance with the provisions contained in IFRIC 14, The Limit on a Defined
Benefit Asset, Minimum Funding Requirements and their Interaction.
Borrowing costs
The Company had the option of adopting IAS 23 - Borrowing Costs as at January 1,
2009 or the date of transition to IFRS, whichever is later. The Company has
elected to apply this standard on the date of transition to IFRS. This election
had no impact on the Company's financial results.
Mandatory exceptions
IFRS 1 provides for a number of mandatory exceptions from full retrospective
application of IFRS, with estimates being the only mandatory exception
applicable to the Company. Estimates previously made by the Company under
previous Canadian GAAP are consistent with their application under IFRS.
Income Taxes
For the comparative six month period ended June 30, 2010 when the Company
operated under an income trust structure, deferred income taxes were measured at
the 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 of $1.2 million to the
Company's deferred tax liability as at January 1, 2010. The deferred taxes were
subsequently re-measured at the applicable corporate rates on July 1, 2010, the
date the Company converted to a corporation.
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 IAS 12. As a result, the Company recorded an adjustment of $2.1 million to
reduce retained earnings and deferred income tax assets on January 1, 2010.
Employee Benefits
The Company considered the various alternatives under IFRS with respect to the
accounting for actuarial gains and losses and elected to follow the method of
recognizing actuarial gains and losses to equity in other comprehensive income
(loss) in the period in which they arise.
Property, plant and equipment
The Company has elected to continue to account for property, plant and equipment
using the cost model. In addition, a review of the significant components of
property, plant and equipment was completed at January 1, 2010 and it was
determined that no changes were necessary with respect to componentization and
the useful lives of property, plant and equipment.
Impairment of assets
As the market capitalization of the Company was less than the carrying value of
equity, the Company has completed an impairment test on its long-lived assets at
January 1, 2010 and December 31, 2010 and determined that no impairment exists.
In addition, the Company completed an impairment test on the indefinite life
intangible asset at January 1, 2010 and December 31, 2010 and determined that no
impairment exists. The Company used the value in use methodology for its
impairment testing using the following five cash generating units: Ontario
region, Quebec region, Atlantic region, Western Canada region and Crane
division.
Share-based payments
The Company amended its accounting policies related to the recognition and
measurement of share options issued under the Company's equity incentive plan to
conform to the requirements under IFRS. As required under IFRS 2, Share-based
Payment, the Company recognizes compensation cost associated with employee share
options when services have commenced and accrues for the cost over the vesting
period using the graded method of amortization. Accordingly, each tranche in an
award is considered a separate award with its own vesting period and grant date
value. The fair value of each tranche is measured at the date of grant using the
Black-Scholes option pricing model. The Company assessed the impact of the
recognition and measurement criteria under IFRS 2 and recorded a reduction to
retained earnings of $0.1 million at January 1, 2010.
Trust units
The Company reviewed their trust indenture and concluded that the Fund units,
which were outstanding during the period the Company operated as an income
trust, met the requirements of a puttable financial instrument in accordance
with IAS 32. Accordingly, the Fund units, which were outstanding for the
six-month period ended June 30, 2010, were classified as equity under IFRS.
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, the Company's 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 March 31, 2011 with
changes from December 31, 2010 is as follows:
Provision for Inventory Obsolescence ($ millions)
----------------------------------------------------------------------------
Provision for inventory obsolescence as at December 31,
2010 $ 3.0
Inventory disposed of during the quarter -
Additional provisions made during the quarter 0.1
Provision for obsolescence of Chadwick-BaRoss 1.7
----------------------------------------------------------------------------
Provision for inventory obsolescence as at March 31, 2011 $ 4.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 March 31, 2011 with changes from
December 31, 2010 is as follows:
Allowance for Doubtful Accounts $ millions
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December 31, 2010 $ 1.2
Accounts written off during the quarter (0.1)
Additional provisions made during the quarter 0.1
Allowance for doubtful accounts of Chardwick-BaRoss 0.4
----------------------------------------------------------------------------
Allowance for doubtful accounts as at March 31, 2011 $ 1.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 the Company'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
March 31, 2011 and 2010
The attached unaudited consolidated interim financial statements for Strongco
Corporation as at and for the three month period ended March 31, 2011, together
with the accompanying notes, were prepared by management and have not been
reviewed by the Company's auditors.
Strongco Corporation
Unaudited Consolidated Balance Sheet
----------------------------------------------------------------------------
(in thousands of Canadian dollars,
unless otherwise indicated)
----------------------------------------------------------------------------
December
March 31, 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Assets
Current assets
Trade and other receivables (note
5(v)(a)) $ 42,316 $ 35,884 $ 27,088
Inventories (note 6) 174,444 159,988 144,461
Prepaid expenses and other deposits 2,122 1,452 1,255
----------------------------------------------------------------------------
218,882 197,324 172,804
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-current assets
Property and equipment (note 5(v)(b)) 22,869 15,849 15,949
Rental fleet 11,055 - -
Deferred income tax asset (note 12) 1,091 - -
Intangible assets (note 5(v)(c)) 1,800 1,800 1,800
Other assets 188 188 243
----------------------------------------------------------------------------
37,003 17,837 17,992
----------------------------------------------------------------------------
Total assets $ 255,885 $ 215,161 $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness (note 7) $ 17,902 $ 12,370 $ 10,014
Trade and other payables (note 5(v)(d)) 34,273 28,829 19,648
Provisions (note 5(v)(e)) 1,583 1,436 1,366
Deferred revenue and customer deposits 1,753 1,321 515
Equipment notes payable - non-interest
bearing (note 8) 43,041 40,097 28,671
Equipment notes payable - interest
bearing (note 8) 85,739 78,063 76,172
Current portion of finance lease
obligations 1,197 960 954
Current portion of notes payable (note
9) 912 1,233 1,094
----------------------------------------------------------------------------
186,400 164,309 138,434
----------------------------------------------------------------------------
Non-current liabilities
Deferred income tax liabilities (note
12) 2,722 - -
Notes payable (note 9) 8,105 - 1,218
Finance lease obligations 1,303 1,502 1,154
Employee future benefit obligations
(note 5(ii)(a)) 4,293 4,374 4,455
----------------------------------------------------------------------------
16,423 5,876 6,827
----------------------------------------------------------------------------
Total liabilities 202,823 170,185 145,261
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholders' equity
Shareholders' capital (note 10) 64,898 57,089 57,089
Accumulated other comprehensive loss (420) (67) -
Deferred compensation 347 315 -
Deficit (11,763) (12,361) (11,554)
----------------------------------------------------------------------------
Total shareholders' equity 53,062 44,976 45,535
----------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 255,885 $ 215,161 $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingencies (note 13)
The accompanying notes are an integral part of these consolidated financial
statements.
Approved: May 26, 2011
On behalf of the Board:
Robert J. Beutel Ian Sutherland
Strongco Corporation
Unaudited Consolidated Statement of Income (Loss)
For the Three-Month Periods Ended March 31
(in thousands of Canadian dollars, unless otherwise indicated, except per
share amounts)
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue (note 14) $ 87,495 $ 53,680
Cost of sales (note 5 (v)(f)) 70,511 42,263
----------------------------------------------------------------------------
Gross profit 16,984 11,417
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Expenses
Administration (note 5(v)(f)) 7,268 6,218
Distribution (note 5(v)(f)) 4,542 4,250
Selling (note 5(v)(f)) 3,431 2,190
Other income (274) (268)
----------------------------------------------------------------------------
Operating income 2,017 (973)
----------------------------------------------------------------------------
Interest expense (note 5(v)(g)) 1,356 1,100
----------------------------------------------------------------------------
Income (loss) before income taxes 661 (2,073)
----------------------------------------------------------------------------
Provision for income taxes (note 12) 63 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) attributable to
shareholders for the period $ 598 $ (2,073)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per share
Basic and dilutive $ 0.05 $ (0.20)
----------------------------------------------------------------------------
Weighted average number of shares (note 11)
- basic 12,633,757 10,508,719
----------------------------------------------------------------------------
- dilutive 12,665,004 10,508,719
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Comprehensive Income (Loss)
For the three-month periods ended March 31
(in thousands of Canadian dollars, unless otherwise indicated, except per
share amounts)
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) attributable to shareholders for
the period $ 598 $ (2,073)
Other comprehensive income
Currency translation adjustment 353 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive income (loss) attributable to
shareholders
for the period $ 245 $ (2,073)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Changes in Shareholders' Equity
For the three-month period ended March 31
(in thousands of Canadian dollars, unless otherwise indicated, except per
share amounts)
----------------------------------------------------------------------------
Accumulated
other
Number Share- compre-
of holders' hensive
shares capital loss
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance - January 1, 2010 10,508,719 $ 57,089 $ -
Net loss and comprehensive loss
for the period - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance - March 31, 2010 10,508,719 $ 57,089 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
other
Number Share- compre-
of holders' hensive
shares capital loss
----------------------------------------------------------------------------
Balance - December 31, 2010 10,508,719 $ 57,089 $ (67)
Net loss for the period - -
Other comprehensive loss:
Currency translation
adjustment - (353)
Issuance of shares (note 11) 2,619,910 7,809 -
Deferred compensation - - -
----------------------------------------------------------------------------
Balance - March 31, 2011 13,128,629 $ 64,898 $ (420)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred
compen-
sation Deficit Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance - January 1, 2010 $ - $ (11,554) $ 45,535
Net loss and comprehensive loss
for the period - (2,073) (2,073)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance - March 31, 2010 $ - $ (13,627) $ 43,462
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred
compen-
sation Deficit Total
----------------------------------------------------------------------------
Balance - December 31, 2010 $ 315 $ (12,361) $ 44,976
Net loss for the period - 598 598
Other comprehensive loss:
Currency translation - - (353)
adjustment
Issuance of shares (note 11) - - 7,809
Deferred compensation 32 - 32
----------------------------------------------------------------------------
Balance - March 31, 2011 $ 347 $ (11,763) $ 53,062
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Consolidated Statement of Cash Flows
For the three-month period ended March 31
(in thousands of dollars, unless otherwise indicated)
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) for the year $ 598 $ (2,073)
Adjustments for
Depreciation - property and equipment 731 228
Depreciation - equipment inventory on rent 3,876 2,900
Depreciation - rental fleet 202 -
Gain on disposal of property and equipment - (6)
Gain on sale of rental equipment (547) -
Deferred compensation 32 -
Interest expense 1,356 1,100
Income tax expense 63 -
Deferred income tax asset 12 -
Deferred income tax liability (73) -
Changes in working capital (note 15) (5,353) (4,878)
Employee future benefit funding (81) 4
Interest paid (1,348) (1,066)
----------------------------------------------------------------------------
Net cash used in operating activities $ (532) $ (3,791)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from investing activities
Business acquisition net of cash acquired (note 4) (11,198) -
Purchase of rental equipment (473) -
Proceeds from sale of rental equipment 1,124 -
Purchase of property, plant and equipment (2,850) (129)
----------------------------------------------------------------------------
Net cash used in investing activities $ (13,397) $ (129)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash flows from financing activities
Increase in bank indebtedness 5,535 4,959
Increase in long term debt 383 -
Repayment of long term debt (1,233) (1,129)
Repayment of finance lease obligations (367) 90
Issue of shareholders' capital (note 10) 7,809 -
Increase in notes payable (note 9) 1,811 -
----------------------------------------------------------------------------
Net cash provided by financing activities $ 13,938 $ 3,920
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Foreign exchange on cash balances held in a foreign
currency (9) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
For the three month periods ended March 31, 2011 and March 31, 2010
(in thousands of dollars, unless otherwise indicated)
1. General Information
Strongco Corporation ("Strongco" or "the Company") is a distributor of machinery
and equipment 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 financial statements for periods prior to June 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 Conversion was accounted for as a continuity of interests. Transaction costs
of $463 related to the Conversion were expensed on conversion.
The Company is a public entity, listed on the Toronto Share Exchange. The
address of its registered office is 1640 Enterprise Road, Mississauga, Ontario
L4W 4L4.
2. Summary of Significant Accounting Policies
The principal accounting policies applied in the preparation of these
consolidated financial statements are set out below. These policies have been
applied consistently to all years presented.
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 require publicly accountable enterprises to
apply such standards effective for years beginning on or after January 1, 2011.
Accordingly, the Company has commenced 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. Subject to certain
transition elections disclosed in note 5, the Company has consistently applied
the same accounting policies in its opening IFRS consolidated balance sheet at
January 1, 2010 and throughout all periods presented, as if these policies had
always been in effect. Note 5 discloses the impact of the transition to IFRS on
the Company's shareholders' equity, comprehensive income (loss) and cash flows,
including the nature and effect of significant changes in accounting policies
from those used in the Company's Canadian GAAP consolidated financial statements
for the year ended December 31, 2010.
Comparative figures in these interim consolidated financial statements have been
restated to give effect to these changes.
The policies applied in these interim consolidated financial statements are
based on IFRS issued and outstanding as of May 25, 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.
The consolidated financial statements have been prepared on a going concern
basis and the historical cost convention, as modified by the revaluation of
financial assets and liabilities at fair value through profit or loss.
The preparation of financial statements in conformity with IFRS requires
management to make certain critical estimates and assumptions that affect the
reported amounts of assets and liabilities and contingent assets and liabilities
at the date of the interim consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. The areas
involving a higher degree of judgment or complexity, or areas where assumptions
and estimates are significant to the interim consolidated financial statements,
are disclosed in note 3.
Basis of consolidation
The interim consolidated financial statements include the financial statements
of Strongco and its subsidiaries. Subsidiaries are entities that are controlled,
either directly or indirectly, by Strongco. All intercompany transactions,
balances and unrealized gains and losses from intercompany transactions are
eliminated on consolidation.
Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision maker. The chief operating
decision maker is the President and Chief Executive Officer and is responsible
for allocating resources, assessing performance of the operating segments and
making key strategic decisions. The Company has determined it has one operating
segment, Equipment Distribution, which is located in Canada and the U.S.
Revenue recognition
Revenue is recognized when the amount of revenue can be reliably measured, it is
probable that future economic benefits will flow to the entity and when specific
criteria have been met for each of the Company's activities as described below.
Revenue from equipment sales is recognized at the time title to the equipment
and significant risks of ownership passes to the customer, which is generally at
the time of shipment of the product to the customer. From time to time, the
Company agrees to buy back equipment from certain customers at the option of the
customer for a specified price at future dates. The Company's maximum potential
losses pursuant to the majority of these buy-back contracts are limited, under
an agreement with a third party, to 10% of the original sale amounts. These
transactions are accounted for as finance leases under IAS 17: Leases. In
accordance with the standard, selling profit or loss relating to these types of
sales is accounted for as an outright sale.
b) Revenue from equipment rentals is recognized in accordance with the terms of
the relevant agreement with the customer, either evenly over the term of that
agreement or on a usage basis such as the number of hours that the equipment is
used. Certain rental contracts contain an option for the customer to purchase
the equipment at the end of the rental period. Should the customer exercise this
option to purchase, revenue from the sale of the equipment is recognized as in
(a) above.
c) Product support services include sales of parts and servicing of equipment.
For the sale of parts, revenue is recognized when the part is shipped to the
customer. For servicing of equipment, revenue is recognized as the service work
is completed and billed.
Foreign currency translation
a) Functional and presentational currency
Items included in the financial statements of each of the Company's entities are
measured using the currency of the primary economic environment in which the
entity operates (the functional currency). The consolidated financial statements
are presented in the Company's presentational currency.
The financial statements of entities that have a functional currency different
from that of Strongco (foreign operations) are translated into Canadian dollars
as follows: assets and liabilities - at the closing rate at the date of the
balance sheet; income and expenses - at the average rate of the period (as this
is considered a reasonable approximation to actual rates). All resulting changes
are recognized in other comprehensive income in the consolidated statement of
comprehensive income as currency translation adjustments.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of foreign currency transactions
and from the translation at year-end exchange rates of monetary assets and
liabilities denominated in currencies other than an operation's functional
currency are recognized as other income in the consolidated statement of income
(loss).
Employee future benefit obligations
a) Pension obligations
Employees of the Company have entitlements under Company pension plans, which
are either defined contribution or defined benefit plans.
The liability recognized in the consolidated balance sheet in respect of defined
benefit pension plans is the present value of the defined benefit obligation at
the end of the reporting period less the fair value of plan assets, together
with adjustments for unrecognized past-service costs. The defined benefit
obligation is calculated annually by independent actuaries using the projected
unit credit method. Actuarial valuations for defined benefit plans are carried
out at each balance sheet date. The present value of the defined benefit
obligation is determined by discounting the estimated future cash outflows using
interest rates of high-quality corporate bonds that are denominated in the
currency in which the benefits will be paid, and that have terms to maturity
approximating the terms of the related pension liability.
Actuarial gains (losses) arise from the difference between the actual long-term
rate of return on plan assets for a period and the expected long-term rate of
return on plan assets for that period, and from changes in actuarial assumptions
used to determine the accrued benefit obligation. Actuarial gains and losses are
charged or credited to equity in other comprehensive income in the period in
which they arise.
Past-service costs are recognized immediately within operating expenses in the
consolidated statement of income (loss), unless the changes to the pension plan
are conditional on the employees remaining in service for a specified period of
time (the vesting period). In this case, the past-service costs are amortized on
a straight-line basis over the vesting period.
For defined contribution plans, contributions are recognized as post-employment
benefit expense when they are due. Prepaid contributions are recognized as an
asset to the extent that a cash refund or a reduction in the future payments is
available.
b) Other employee future obligations
The Company also has other employee future obligations, including an unfunded
retiring allowance plan and a non-contributory dental and health-care plan. The
expected costs of these benefits are accrued over the period of employment using
the same accounting methodology as used for defined benefit pension plans. These
obligations are valued annually by independent qualified actuaries.
Deferred compensation
The Company operates an equity-settled, share-based compensation plan, under
which the Company receives services from employees as consideration for equity
instruments (options) of the Company. The options vest over a period of time.
The fair value of the services received in exchange for the grant of the options
is recognized as an expense. Each tranche in an award is considered a separate
award with its own vesting period and grant date value. The fair value of each
tranche is measured at the date of grant using the Black-Scholes option pricing
model. Deferred compensation expense is recognized over the tranche's vesting
period based on the number of awards expected to vest, by increasing deferred
compensation, a component within shareholders' equity. The number of awards
expected to vest is reviewed at least annually, with any impact being recognized
immediately. For expired and cancelled options, deferred compensation expense is
not reversed and the related credit remains in deferred compensation. When
options are exercised, the Company issues new shares. The proceeds received are
credited to shareholders' capital, together with the related amounts previously
added to deferred compensation.
Shareholders' capital
Shareholders' capital is classified as equity. Incremental costs directly
attributable to the issue of the new shares or options are shown in equity as a
deduction from proceeds.
Cash and cash equivalents
Cash and cash equivalents consist of all bank balances and short-term
investments with remaining maturities of less than 90 days at the date of
acquisition.
Trade and other receivables
Trade and other receivables are amounts due from customers for service performed
in the ordinary course of business. If collection is expected within one year,
they are classified as current assets; if not, they are presented as non-current
assets.
Trade and other receivables are initially recognized at fair value and
subsequently measured at amortized cost using the effective interest rate
method, less provisions for impairment.
Inventories
Inventories are recorded at the lower of cost and net realizable value. The cost
of equipment inventories is determined on a specific item basis. The cost of
repair and distribution parts is determined on a weighted average cost basis.
Net realizable value is the estimated selling price in the ordinary course of
business, less applicable selling expenses. Equipment inventory on rent is
amortized based on expected usage.
Property, plant and equipment and rental fleet
Property, plant and equipment and rental fleet are stated at cost less
accumulated depreciation and any impairment. The rental fleet is carried at
cost, less depreciation computed on a percentage of rent basis for financial
statement purposes. Cost includes expenditures that are directly attributable to
the acquisition of the assets. Asset classes are sub-divided into major
components to recognize differences in the life spans of the components
identified. When parts of an item of property and equipment and rental fleet
have different useful lives, they are accounted for as separate items (major
components) of property and equipment and rental fleet and each component is
depreciated separately. Subsequent costs are included in the asset's carrying
amount or recognized as a separate asset, as appropriate, only when it is
probable that future economic benefits associated with the item will flow to the
Company and the cost can be measured reliably. The carrying amount of a replaced
asset is derecognized when replaced. Repairs and maintenance costs are charged
to operating expenses in the consolidated statement of income (loss) during the
period in which they are incurred. Assets' residual values, useful lives and
methods of depreciation are reviewed, and adjusted, if appropriate, at each
financial period-end. Land is not depreciated. Depreciation is provided on other
assets at rates calculated to write off the cost of property and equipment, and
rental fleet less estimated residual value over the estimated useful economic
life on a diminishing balance method using the following annual rates:
Buildings 3% to 5%
Machinery and equipment 10% to 30%
Vehicles 25% to 30%
Computer equipment 30%
Rental fleet equipment is amortized at a rate of 60% of rental revenue.
Leasehold improvements are amortized on a straight-line basis over the remaining
term of the lease.
An asset's carrying amount is written down immediately to its recoverable amount
if the asset's carrying amount is greater than its estimated fair value. Gains
and losses on disposal are determined by comparing the proceeds with the
carrying amount and are recognized within operating expenses in the consolidated
statement of income (loss).
Borrowing costs
Borrowing costs attributable to the acquisition, construction or production of
qualifying assets are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use. All other borrowing costs
are recognized as interest expense in the consolidated statement of income
(loss)in the period in which they are incurred.
Income taxes
The income tax expense for the period comprises current and deferred taxes.
Taxes are recognized as tax expense (recovery) in the consolidated statement of
income (loss), except to the extent that it relates to items recognized in other
comprehensive income or directly in equity. In this latter case, the taxes are
also recognized in other comprehensive income or directly in equity.
The current income tax charge is calculated on the basis of the tax laws enacted
or substantively enacted at the consolidated balance sheet date. Management
periodically evaluates positions taken in tax returns with respect to situations
in which applicable tax regulation is subject to interpretation. It establishes
provisions, where appropriate, on the basis of amounts expected to be paid to
the tax authorities.
Deferred income tax is recognized, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their
carrying amounts in the interim consolidated financial statements. However, the
deferred income tax is not accounted for if it arises from initial recognition
of an asset or liability in a transaction other than a business combination
that, at the time of the transaction, affects neither accounting nor taxable
profit or loss. Deferred income tax is determined using tax rates and laws that
have been enacted or substantially enacted by the consolidated balance sheet
date and that are expected to apply when the related deferred income tax asset
is realized or the deferred income tax liability is settled.
Deferred income tax assets are recognized only to the extent it is probable that
future taxable profit will be available against which the temporary differences
can be utilized.
Deferred income tax is provided on temporary differences arising on investments
in subsidiaries and associates, except where the timing of the reversal of the
temporary difference is controlled by the Company and it is probable that the
temporary difference will not reverse in the foreseeable future.
Deferred income tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets against current tax liabilities
and when the deferred income tax assets and liabilities relate to income taxes
levied by the same taxation authority on either the taxable entity or different
taxable entities where there is an intention to settle the balances on a net
basis.
For the period from January 1, 2010 to June 30, 2010, Strongco operated as an
income fund and, under the terms of the Income Tax Act (Canada), was not subject
to income taxes to the extent that its taxable income in a period was paid or
payable to unitholders. Strongco distributed to its unitholders all or virtually
all of its taxable income and taxable capital gains that would otherwise have
been taxable in the Company and met the requirements under the Income Tax Act
(Canada) applicable to such trusts. Accordingly, no provision for current income
taxes for the Company was made during this period.
Trade and other payables
Trade and other payables are obligations to pay for goods or services that have
been acquired in the ordinary course of business from suppliers. Accounts
payable are classified as current liabilities if payment is due within one year
or less; if not, they are presented as non-current liabilities.
Trade and other payables are initially recognized at fair value and subsequently
measured at amortized cost using the effective interest rate.
Provisions
Provisions for restructuring costs, legal claims, equipment buybacks and certain
other obligations are recognized when: the Company has a present legal or
constructive obligation as a result of past events; it is probable that an
outflow of resources will be required to settle the obligation; and the amount
can be reliably estimated.
Provisions are measured at the present value of the expenditures expected to be
required to settle the obligation using a pre-tax rate that reflects current
market assessments of the time value of money and the risks specific to the
obligation, where the effect is material. The increase in the provision due to
passage of time is recognized as interest expense in the consolidated statement
of income (loss).
Equipment notes payable
Equipment notes payable are used to finance equipment purchases. Equipment notes
payable are accounted for in current liabilities. The equipment notes payable
are recognized initially at fair value and are subsequently measured at
amortized cost; any difference between the proceeds and redemption value is
recognized as interest expense in the consolidated statement of income (loss)
over the period of the equipment notes payable using the effective interest rate
method.
Debt
Debt comprises the Company's operating line of credit, notes payable and finance
lease obligations. Debt is recognized initially at fair value, net of
transaction costs incurred. Debt is subsequently measured at amortized cost; any
difference between the proceeds and redemption value is recognized as interest
expense in the consolidated statement of income (loss) over the period of the
borrowings using the effective interest rate method.
Impairment of non-financial assets
Property and equipment and rental fleet are tested for impairment when events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Long-lived assets that are not amortized, comprising the Company's
distribution right intangible asset, are subject to an annual impairment test.
For the purpose of measuring recoverable amounts, assets are grouped into the
lowest levels for which there is separately identifiable cash inflows
(cash-generating units or "CGUs"). The recoverable amount is the higher of an
asset's fair value less costs to sell and value in use (being the present value
of the expected future cash flows of the relevant asset or CGU). An impairment
loss is recognized for the amount by which the asset's carrying amount exceeds
its recoverable amount.
The Company evaluates impairment losses for potential reversals when events or
circumstances warrant such consideration.
Leases
Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) are charged to
operating expenses in the consolidated statement of income (loss) on a
straight-line basis over the period of the lease.
The Company leases certain property and equipment. Leases of property and
equipment, where the Company has substantially all the risks and rewards of
ownership, are classified as finance leases. Finance leases are capitalized at
the lease commencement date at the lower of the fair value of the leased
property and the present value of the minimum lease payments.
Each lease payment is allocated between the liability and finance charges so as
to achieve a constant rate on the finance balance outstanding. The interest
element of the finance cost is charged to the consolidated statement of income
(loss) over the lease period so as to produce a constant periodic rate of
interest on the remaining balance of the liability for each period. The property
and equipment acquired under finance leases are depreciated over the shorter of
the useful life of the asset and the lease term.
Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party
to the contractual provisions of the instrument. Financial assets are
derecognized when the rights to receive cash flows from the assets have expired
or have been transferred and the company has transferred substantially all risks
and rewards of ownership.
Financial assets and liabilities are offset and the net amount reported in the
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.
At initial recognition, the Company classifies its financial instruments in the
following categories depending on the purpose for which the instruments were
acquired:
i) Financial assets and liabilities at fair value through profit or loss: A
financial asset or liability is classified in this category if acquired
principally for the purpose of selling or repurchasing in the short-term.
Derivatives are also included in this category unless they are designated as
hedges. The only instruments held by the Company classified in this category are
foreign currency forward contracts (see (v) below).
Financial instruments in this category are recognized initially and subsequently
at fair value. Transaction costs are recorded as an expense in the consolidated
statement of income (loss). Gains and losses arising from changes in fair value
are presented in the consolidated statement of income (loss) within other gains
and losses in the period in which they arise. Financial assets and liabilities
at fair value through profit or loss are classified as current except for the
portion expected to be realized or paid beyond 12 months of the balance sheet
date, which is classified as non-current.
ii) Available-for-sale investments: Available-for-sale investments are
non-derivatives that are either designated in this category or not classified in
any of the other categories.
Available-for-sale investments are recognized initially at fair value plus
transaction costs and are subsequently carried at fair value. Gains or losses
arising from changes in fair value are recognized in other comprehensive income
in the consolidated statement of comprehensive income (loss). Available-for-sale
investments are classified as non-current, unless the investment matures within
12 months, or management expects to dispose of them within 12 months. The
Company does not currently have any available-for-sale assets.
iii) Loans and receivables: Loans and receivables are non-derivative financial
assets with fixed or determinable payments that are not quoted in an active
market. The Company's loans and receivables are comprised of cash and trade and
other receivables, and are included in current assets due to their short-term
nature. Loans and receivables are initially recognized at the amount expected to
be received less, when material, a discount to reduce the loans and receivables
to fair value. Subsequently, loans and receivables are measured at amortized
cost using the effective interest method less a provision for impairment.
iv) Financial liabilities at amortized cost: Financial liabilities at amortized
cost include bank indebtedness, trade and other payables, provisions, income
taxes payable, interest bearing and non-interest bearing equipment note payable,
finance lease obligations and notes payable.
Financial liabilities are classified as current liabilities if payment is due
within 12 months. Otherwise, they are presented as non-current liabilities.
v) Derivative financial instruments: The Company uses derivatives in the form of
foreign currency forward contracts to reduce the impact of currency fluctuations
on the cost of equipment ordered for future delivery to customers. Derivatives
have been classified as held-for-trading and are included on the balance within
trade and other payables.
Derivatives are initially recognized at fair value on the date a derivative
contract is entered into and are subsequently re-measured at their fair value.
The method of recognizing the resulting gain or loss depends on whether the
derivative is designated as a hedging instrument and, if so, the nature of the
item being hedged. If hedge accounting is used, the effectiveness of the
derivative in managing an identified risk is assessed on initial application and
on an ongoing basis thereafter. Unrealized gains and losses, net of related
income taxes, on the derivative contracts are recorded in other comprehensive
income (loss) in the consolidated statement of comprehensive income (loss). If a
hedge becomes ineffective, hedge accounting is discontinued and the derivative
contracts are adjusted to fair value at each reporting date with changes in fair
value recorded in the consolidated statement of income (loss).
Impairment of financial assets
The Company assesses at the end of each reporting period whether there is
objective evidence that a financial asset or group of financial assets is
impaired. A financial asset or a group of financial assets is impaired and
impairment losses are incurred only if there is objective evidence of impairment
as a result of one or more events that occurred after the initial recognition of
the asset, a loss event and that loss event, or events, has an impact on the
estimated future cash flows of the financial asset or group of financial assets
that can be reliably estimated.
The amount of the loss is measured as the difference between the asset's
carrying amount and the present value of estimated future cash flows, excluding
future credit losses that have not been incurred, discounted at the financial
asset's original effective interest rate. The carrying amount of the asset is
reduced and the amount of the loss is recognized within operating expenses in
the consolidated statement of income (loss).
If, in a subsequent period, the amount of the impairment loss decreases and the
decrease can be related objectively to an event occurring after the impairment
was recognized, such as an improvement in the customer's credit rating, the
reversal of the previously recognized impairment loss is recognized as a
reduction in expense in the consolidated statement of income (loss).
Impairment testing of trade and other receivables is described in note 5(v)(a).
Earnings per share
Basic earnings per share (EPS) is calculated by dividing the net income (loss)
for the period attributable to shareholders of Strongco by the weighted average
number of common shares outstanding during the period.
Diluted EPS is calculated by adjusting the weighted average number of common
shares outstanding for dilutive instruments. The number of shares included with
respect to options, warrants and similar instruments is computed using the
treasury stock method. Strongco's potentially dilutive common shares comprise
share options granted to employees.
Changes in accounting policy and disclosure
Standards that are not yet effective and have not been early-adopted:
IFRS 9, Financial Instruments (IFRS 9), was issued in November 2009 and contains
requirements for financial assets. This standard addresses classification and
measurement of financial assets and replaces the multiple category and
measurement models in IAS 39, Financial Instruments - Recognition and
Measurement (IAS 39), for debt instruments with a new mixed measurement model
having only two categories: amortized cost and fair value through profit or
loss. IFRS 9 also replaces the models for measuring equity instruments and such
instruments are either recognized at fair value through profit or loss, or at
fair value through comprehensive income, dividends are recognized in income in
the consolidated statement of comprehensive income (loss); however, other gains
and losses (including impairments) associated with such instruments remain in
accumulated other comprehensive income indefinitely.
Requirements for financial liabilities were added in October 2010 and they
largely carried forward existing requirements in IAS 39 except that fair value
changes due to credit risk for liabilities designated at fair value through
profit or loss would generally be recorded in the consolidated statement of
comprehensive income (loss). This standard is required to be applied for
accounting periods beginning on or after January 1, 2013, with earlier adoption
permitted. The Company has not yet assessed the impact of the standard or
determined whether it will adopt the standard early.
IFRS 10, Consolidation (IFRS 10) requires an entity to consolidate an investee
when it is exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its power over
the investee. Under existing IFRS, consolidation is required when an entity has
the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. IFRS 10 replaces SIC-12
Consolidation-Special Purpose Entities and parts of IAS 27 Consolidated and
Separate Financial Statements The Company has not yet assessed the impact of the
standard or determined whether it will adopt the standard early.
IFRS 13, Fair Value Measurement (IFRS 13) is a comprehensive standard for fair
value measurement and disclosure requirements for use across all IFRS standards.
The new standard clarifies that fair value is the price that would be received
to sell an asset, or paid to transfer a liability in an orderly transaction
between market participants, at the measurement date. It also establishes
disclosures about fair value measurement. Under existing IFRS, guidance on
measuring and disclosing fair value is dispersed among the specific standards
requiring fair value measurements and in many cases does not reflect a clear
measurement basis or consistent disclosures. The Company has not yet assessed
the impact of the standard or determined whether it will adopt the standard
early.
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 accounts receivable and maintains provisions for
possible credit losses based upon historical experience and known circumstances.
The allowance for doubtful accounts as at December 31, 2010 with changes from
January 1, 2010 is disclosed in note 5 (v)(a).
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.
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 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
forecast 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. CBR represents such brands as Volvo, Powerscreen and
Link-Belt, as well as many others.
The acquisition of all of the issued and outstanding shares of CBR was completed
for a purchase price of US$11.1 million, net of cash acquired. The purchase
price was satisfied with cash of US$9.2 million and three promissory notes
totalling US$1.9 million. The three promissory notes mature on February 17, 2013
and bear interest at the US Prime rate. Principal payments of US$0.2 million
will be made quarterly commencing May 17, 2011. Costs of $415 related to the
acquisition were expensed as period costs within operating expenses in the
consolidated statement of income (loss) for the three month period ended March
31, 2011.
The acquisition date fair value for each major class of asset acquired and
liabilities assumed:
----------------------------------------------------------------------------
(in thousands of Canadian dollars)
----------------------------------------------------------------------------
Trade and other receivables $ 4,387
Inventories 9,961
Property, plant and equipment 5,058
Rental fleet 11,722
Deferred income tax asset 1,125
Other assets 94
----------------------------------------------------------------------------
Total assets $ 32,347
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Trade and other payables $ 2,993
Deferred income tax liabilities 2,807
Equipment notes payable 7,853
Finance lease obligations 419
Notes payable 7,077
----------------------------------------------------------------------------
Total liabilities $ 21,149
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net assets acquired $ 11,198
----------------------------------------------------------------------------
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 three month period ended March 31, 2011, effective February 1,
2011. Revenues of $6.0 million and net income from operations of $0.2 million
for CBR have been included in the Company's consolidated statement of income and
comprehensive income for the three month period ended March 31, 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
would have been $90.6 million and $0.6 million, 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, is summarized in this note as follows:
(i) Optional exemptions and mandatory exceptions;
(ii) Reconciliation of shareholders' equity and comprehensive income as
previously reported under Canadian GAAP to IFRS;
(iii) Adjustments to the statement of cash flows;
(iv) Additional IFRS information for year ended December 31, 2010.
i) Optional exemptions
The Company has applied the following optional exemptions to full retrospective
application of IFRS. A description of the exemptions and impact to the Company
is further described in (ii) below:
-- Employee future benefits - treatment of actuarial gains and losses; and
-- Business combinations.
Mandatory exceptions
The Company has complied with all mandatory exceptions to full retrospective
application of IFRS. The estimates previously made by the Company under Canadian
GAAP were not revised for application of IFRS.
ii) Reconciliation of shareholders' equity and comprehensive income as
previously reported under Canadian GAAP to IFRS
----------------------------------------------------------------------------
(in thousands of Canadian As at December
dollars) 31, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian
GAAP Adjustment Note IFRS
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
Non-current assets 197,324 - 197,324
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Property and equipment 13,768 2,081 f) 15,849
Intangible assets 1,800 - 1,800
Accrued benefit 6,275 (6,275) a) -
Other assets 188 - 188
----------------------------------------------------------------------------
22,031 (4,194) 17,837
----------------------------------------------------------------------------
Total assets $ 219,355 $ (4,194) $ 215,161
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 173 787 f) 960
Current portion of notes
payable 1,233 - 1,233
----------------------------------------------------------------------------
163,522 787 164,309
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-current liabilities
Deferred income tax liabilities 389 (389) d) -
Finance lease obligations 114 1,388 f) 1,502
Post-employment benefit
obligations 819 3,555 a) 4,374
----------------------------------------------------------------------------
1,322 4,554 5,876
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total liabilities 164,844 5,341 170,185
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholders' equity
Shareholders' capital 57,089 - 57,089
Accumulated other
comprehensive income - (2,101) c) (2,101)
Deferred compensation 360 (45) c) 315
Deficit (2,938) (7,389) (10,327)
----------------------------------------------------------------------------
Total shareholders' equity 54,511 (9,535) 44,976
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 219,355 $ (4,194) $ 215,161
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(in thousands of
Canadian dollars) As at March 31, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian GAAP Adjustment Note IFRS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Assets
Current assets
Trade and other
receivables $ 24,576 $ - $ 24,576
Inventories 146,203 - 146,203
Prepaid expenses
and other
deposits 1,893 - 1,893
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-current assets 172,672 - 172,672
----------------------------------------------------------------------------
Property and
equipment 14,008 1,848 f) 15,856
Intangible assets 1,800 - 1,800
Accrued benefit 6,512 (6,512) a) -
Deferred income tax
asset - - -
Other assets 242 - 242
----------------------------------------------------------------------------
----------------------------------------------------------------------------
22,562 (4,664) 17,898
----------------------------------------------------------------------------
Total assets $ 195,234 $ (4,664) $ 190,570
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
shareholders'
equity
Current liabilities
Bank indebtedness $ 14,973 $ - $ 14,973
Trade and other
payables 19,726 (1,280) b) 18,446
Provisions - 1,478 b) 1,478
Deferred revenue
and
customer deposits 1,347 - 1,347
Equipment notes
payable 103,024 - 103,024
Current portion of
finance
lease obligations 119 837 f) 956
Current portion of
notes
payable 1,183 - 1,183
----------------------------------------------------------------------------
140,372 1,035 141,407
----------------------------------------------------------------------------
Non-current
liabilities
Deferred income tax
liabilities 1,383 (1,383) d) -
Finance lease
obligations 134 1,108 f) 1,242
Post-employment
benefit
obligations 782 3,677 a) 4,459
----------------------------------------------------------------------------
2,299 3,402 5,701
----------------------------------------------------------------------------
Total liabilities 142,671 4,437 147,108
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholders'
equity
Shareholders'
capital 57,089 - 57,089
Accumulated other
comprehensive
income - - -
Deferred
compensation 110 (110) c) -
Deficit (4,636) (8,991) (13,627)
----------------------------------------------------------------------------
Total shareholders'
equity 52,563 (9,101) 43,462
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total liabilities
and shareholders'
equity $ 195,234 $ (4,664) $ 190,570
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(in thousands of
Canadian dollars) As at January 1, 2010
----------------------------------------------------------------------------
Canadian GAAP Adjustment Note IFRS
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
Non-current assets 172,804 - 172,804
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
22,783 (4,791) 17,992
----------------------------------------------------------------------------
Total assets $ 195,587 $ (4,791) $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
137,424 1,010 138,434
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
3,515 3,312 6,827
----------------------------------------------------------------------------
Total liabilities 140,939 4,322 145,261
----------------------------------------------------------------------------
Shareholders' equity
Shareholders' capital 57,089 - 57,089
Accumulated other
comprehensive income - - -
Deferred
compensation 80 (80) c) -
Deficit (2,521) (9,033) (11,554)
----------------------------------------------------------------------------
Total shareholders'
equity 54,648 (9,113) 45,535
----------------------------------------------------------------------------
Total liabilities
and shareholders' equity $ 195,587 $ (4,791) $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(in thousands of Canadian dollars) Three-months ended March 31, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian Adjust-
GAAP ment Note IFRS
----------------------------------------------------------------------------
Revenue $ 53,680 $ - $ 53,680
Cost of sales 42,263 - 42,263
----------------------------------------------------------------------------
Gross Margin 11,417 - 11,417
----------------------------------------------------------------------------
Expenses
Administration 6,301 (83) a), c), g) 6,218
Distribution 4,250 - g) 4,250
Selling 2,190 - g) 2,190
Plan of arrangement - - -
Other expense (268) - (268)
----------------------------------------------------------------------------
Operating income (loss) $ (1,056) $ 83 $ (973)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest expense $ 1,100 $ - $ 1,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income (loss) before taxes (2,156) 83 (2,073)
Income tax (recovery) expense (41) 41 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) attributable
to shareholders (2,115) 42 (2,073)
----------------------------------------------------------------------------
Other comprehensive loss
Actuarial loss on post-
employment benefit
obligations - - -
Comprehensive income (loss)
attributable to shareholders $ (2,115) $ 42 $ (2,073)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
------------------------------------------------------------------------
(in thousands of Canadian dollars) Year ended December 31, 2010
------------------------------------------------------------------------
------------------------------------------------------------------------
Canadian Adjust-
GAAP ment Note IFRS
------------------------------------------------------------------------
Revenue $ 294,657 $ - $294,657
Cost of sales 237,971 - 237,971
------------------------------------------------------------------------
Gross Margin 56,686 - 56,686
------------------------------------------------------------------------
Expenses
Administration 17,410 (527) a), c), g) 16,883
Distribution 26,307 - g) 26,307
Selling 9,887 - g) 9,887
Plan of arrangement 463 - 463
Other expense (740) - (740)
------------------------------------------------------------------------
Operating income (loss) $ 3,359 $ 527 $ 3,886
------------------------------------------------------------------------
------------------------------------------------------------------------
Interest expense $ 4,816 $ - $ 4,816
------------------------------------------------------------------------
------------------------------------------------------------------------
Income (loss) before taxes (1,457) 527 (930)
Income tax (recovery) expense (1,040) (1,118) a), d) (2,158)
------------------------------------------------------------------------
------------------------------------------------------------------------
Net income (loss) attributable
to shareholders (417) 1,645 1,228
------------------------------------------------------------------------
Other comprehensive loss
Actuarial loss on post- -
employment benefit
obligations - 2,101 a) 2,101
Comprehensive income (loss)
attributable to shareholders $ (417) $ (456) $ (873)
------------------------------------------------------------------------
------------------------------------------------------------------------
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 has been decreased by
$8,791 ($4,712 after tax) to recognize cumulative net unamortized actuarial
losses as at January 1, 2010 with a corresponding charge to retained earnings.
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.
The carrying value of the net liability for employee future benefit obligations
has been increased by $8,687 and $9,733 at March 31, 2010 and December 31, 2010,
respectively.
In addition, the Company completed the calculation with respect to the
limitation of the defined benefit asset under IFRIC 14, The Limit on a Defined
Benefit Asset, Minimum Funding Requirements and their Interaction, and recorded
a liability of $1,503 ($805, after tax) and $97 ($72, after tax) at January 1,
2010 and December 31, 2010, respectively.
b) Provisions
The Company reclassified liabilities related to equipment buybacks, legal
matters, stock- based compensation and certain other items totalling $1,218,
$1,280 and $1,436 at January 1, 2010, March 31, 2010 and December 31, 2010,
respectively, 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. For the three month period ended March 31, 2010, these changes
increased share- based compensation expense and provisions by $20 and decreased
share-based compensation expense and provisions by $114 for the year ended
December 31, 2010.
Pursuant to the guidance under IAS 32, Financial Instruments: Presentation, 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 and $110 at January 1, 2010 and March 31, 2010,
respectively, from contributed surplus to provisions.
d) Deferred income taxes
Deferred income liabilities have been adjusted as follows:
----------------------------------------------------------------------------
December 31, March 31, January
2010 2010 31, 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Employee future benefits (a) $ (2,518) $ (4,728) $ (4,776)
Rate change (i) - 1,215 1,247
Recoverability assessment (ii) 2,518 3,513 3,529
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 and $1,215 at January 1, 2010 and March 31, 2010,
respectively. The deferred taxes were subsequently re- measured at the
applicable corporate rates effectively July 1, 2010, the date Strongco converted
to a corporation. This resulted in an income tax recovery of $1,247 for the
year-ended December 31, 2010.
(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 IAS 12. As a result, the Company recorded an adjustment of
$3,529, $3,513 and $2,518 to reduce the deferred income tax assets on January 1,
2010, March 31, 2010 and December 31, 2010, respectively.
The above adjustments decreased income tax recovery recognized in the
consolidated statement of income (loss) by $41 for the three months ended March
31, 2010 and increased income tax recovery by $1,118 for the year ended December
31, 2010. The adjustments increased deferred income tax expense recognized in
other comprehensive income by $nil for the three-month period ended March 31,
2010 and $2,152 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, $1,848 and $2,081 to property and equipment and $1,912,
$1,945 and $2,175 to finance lease obligations at January 1, 2010, March 31,
2010 and 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, 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.
iv) 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.
v) Additional IFRS Information for the Year Ended December 31, 2010
a) Trade and other receivables
----------------------------------------------------------------------------
December 31, 2010
----------------------------------------------------------------------------
Trade receivables $ 33,517
Less: Provision for impairment of trade receivables 1,196
----------------------------------------------------------------------------
Trade receivables - net 32,321
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other receivables 3,563
----------------------------------------------------------------------------
Total trade and other receivables $ 35,884
----------------------------------------------------------------------------
The fair value of trade and other receivables is not materially different from
their carrying value.
As at December 31, 2010, trade receivables of $9,737 were past due but not
impaired. These relate to a number of customers for whom there is no recent
history of default. The aging of these receivables is as follows:
----------------------------------------------------------
December 31, 2010
----------------------------------------------------------
Up to 3 months $ 8,695
3 to 6 months 623
Over 6 months 419
----------------------------------------------------------
$ 9,737
----------------------------------------------------------
As at December 31, 2010, trade receivables of $5,476 were impaired and provided
for. The amount of provision against these receivables was $1,196 as at December
31, 2010. The aging of these receivables is as follows:
----------------------------------------------------------
December 31, 2010
----------------------------------------------------------
Up to 3 months $ 2,793
3 to 6 months 1,111
Over 6 months 1,573
----------------------------------------------------------
$ 5,476
----------------------------------------------------------
Movements on the Company's provision for impairment of trade receivables are as
follows:
----------------------------------------------------------
December 31, 2010
----------------------------------------------------------
As at January 1 $ 1,362
Provision for impairment 402
Amounts written off as
uncollectible (568)
----------------------------------------------------------
$ 1,196
----------------------------------------------------------
The provision for impaired receivables is recognized in the consolidated
statement of income (loss) within operating expenses in the period of provision.
When a balance is considered uncollectible, it is written off against the
provision. Subsequent recoveries of amounts previously written off are credited
to operating expenses in the consolidated statement of income (loss).
The other classes of trade and other receivables do not contain impaired amounts.
The maximum exposure to credit risk at the reporting date is the carrying value
of each class of receivable mentioned above. The Company does not hold any
collateral as security.
b) Property and equipment
----------------------------------------------------------------------------
Computers,
vehicles
and
Building Machinery, equipment
and equipment under
leasehold and finance
Land improvements vehicles lease Total
----------------------------------------------------------------------------
As at January
1, 2010
Cost $ 2,883 $ 13,059 $ 14,144 $ 2,052 $ 32,138
Accumulated
depreciation - (5,479) (10,669) (41) (16,189)
----------------------------------------------------------------------------
Net book value $ 2,883 $ 7,580 $ 3,475 $ 2,011 $ 15,949
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended
December 31,
2010
Opening net
book value $ 2,883 $ 7,580 $ 3,475 $ 2,276 $ 16,214
Additions - 11 397 223 631
Disposals - - (140) - (140)
Depreciation - (338) (382) (136) (856)
----------------------------------------------------------------------------
Closing net
book value $ 2,883 $ 7,253 $ 3,350 $ 2,363 $ 15,849
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at December
31, 2010
Cost $ 2,883 $ 13,071 $ 14,401 $ 2,540 $ 32,895
Accumulated
depreciation - (5,818) (11,051) (177) (17,046)
----------------------------------------------------------------------------
Net book value $ 2,883 $ 7,253 $ 3,350 $ 2,363 $ 15,849
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company leases various computers, vehicles and equipment under
non-cancellable finance lease agreements. The lease terms are between one and
five years.
c) Non-financial asset impairments
Impairment test for indefinite-life intangible assets
As at December 31, 2010, intangible assets comprise a distribution right with an
indefinite life that was acquired as part of the acquisition of the Champion
Road machinery division of Volvo Group Canada Inc. in 2008.
The distribution right intangible asset was tested for impairment at the Ontario
region level. As the distribution right provides a benefit to all of the
Company's branches in Ontario, the Company conducted an impairment test of the
intangible asset at this level as at January 1, 2010 and December 31, 2010 and
determined that no impairment existed.
The recoverable amount of the Ontario region cash generating unit is determined
based on the value-in-use methodology. These calculations use pre-tax cash flow
projections based on financial budgets approved by management covering a
five-year period. Cash flows beyond five years are extrapolated using an
estimated terminal growth rate of 3%. The cash flows were discounted using a
pre-tax discount rate of 18% and 17% at January 1, 2010 and December 31, 2010.
Impairment test for property and equipment
As the market capitalization of the Company was less than the carrying value of
its shareholders' equity, the Company completed an impairment test on its
property and equipment at January 1, 2010 and December 31, 2010 and determined
that no impairment exists. For the purposes of the impairment testing, the
Company determined the following five cash generating units: Ontario region,
Quebec region, Atlantic region, Western Canada region and Crane division.
The recoverable amount of cash generating units was determined based on the
value-in-use methodology. These calculations use pre-tax cash flow projections
based on financial budgets approved by management covering a five-year period.
Cash flows beyond five years are extrapolated using an estimated terminal growth
rate of 3%. The cash flows were discounted using a pre-tax income discount rate
of 18% and 17% at January 1, 2010 and December 31, 2010.
d) Trade and other payables
----------------------------------------------------------
December 31, 2010
----------------------------------------------------------
Trade payables $ 14,837
Accrued expenses 13,992
----------------------------------------------------------
$ 28,829
----------------------------------------------------------
e) Provisions
---------------------------------------------------------------------------
Equipment
buy-back Legal Share-based
obligations matters compensation
(a) (b) costs (c) Total
---------------------------------------------------------------------------
As at January 1,
2010 $ 699 $ 519 $ 148 $ 1,366
Charged (credited)
to consolidated
statement of
income (loss) 161 - - 161
Additional
provision - 100 100 200
Unused amounts
reversed - (43) - (43)
Transferred to
deferred
compensation - - (248) (248)
---------------------------------------------------------------------------
As at December 31,
2010 $ 860 $ 576 $ - $ 1,436
---------------------------------------------------------------------------
a) Equipment buy-back obligation
The Company has agreed to buy back equipment from certain customers at the
option of the customer for a specified price at future dates (buy-back
contracts). These contracts are subject to certain conditions being met by the
customer and range in term from three to ten years. As at December 31, 2010, the
total obligation under these contracts was $10,234. 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 $860 has been accrued in the Company's accounts with respect
to these commitments.
a) Legal matters
The Company has set up provisions for certain legal matters based on management
assessment and support from external legal counsel. As December 31, 2010, these
provisions totalled $576.
b) Stock-based compensation expense
The Company has calculated stock-based compensation expense on stock options
granted to certain of the Company's employees. This amount was transferred to
deferred compensation on July 1, 2010 as a result of the Company's conversion to
a corporation.
f) Expenses by nature
-----------------------------------------------------------------
December 31, 2010
-----------------------------------------------------------------
Changes in inventories of equipment, parts
and work-in-process $ 220,126
Raw materials and consumables used 1,038
Depreciation 925
Utilities 1,093
Operating lease expenses 7,038
Transportation expenses 2,516
Advertising expenses 563
Salaries and commissions (a) 45,571
Telephone, fax and office supplies 2,454
Other 9,724
-----------------------------------------------------------------
Total cost of sales, administration,
distribution and selling expenses $ 291,048
-----------------------------------------------------------------
Salaries and commission expense comprise the following:
-------------------------------------------------------------
December 31, 2010
-------------------------------------------------------------
Wages $ 43,973
Commissions 1,354
Employee future benefits 244
-------------------------------------------------------------
$ 45,571
-------------------------------------------------------------
g) Interest expense
----------------------------------------------------------
December 31, 2010
----------------------------------------------------------
Bank indebtedness $ 516
Equipment notes payable - interest
bearing 4,202
Notes payable 84
Finance lease obligations 14
----------------------------------------------------------
$ 4,816
----------------------------------------------------------
h) Key management compensation
Key management comprise the Chief Executive Officer, Chief Financial Officer,
external directors and vice-presidents of the organization. The compensation
paid or payable to key management for employee services is shown below:
----------------------------------------------------------
December 31, 2010
----------------------------------------------------------
Salaries and short-term benefits $ 1,539
Post-employment benefits 172
Other long-term benefits -
Stock-based payments 315
----------------------------------------------------------
$ 2,026
----------------------------------------------------------
6 Inventories
Inventory components, net of write-downs and provisions are as follows:
----------------------------------------------------------------------------
As at: March 31, 2011 December 31, 2011
----------------------------------------------------------------------------
Equipment $ 152,056 $ 142,080
Parts 17,363 15,401
Work in process 5,025 2,507
----------------------------------------------------------------------------
$ 174,444 $ 159,988
----------------------------------------------------------------------------
7 Bank Indebtedness
The Company has credit facilities with banks in Canada and United States which
provide 364-Day committed operating lines of credit totaling approximately $22.4
million which are renewable annually. Borrowings under the lines of credit are
limited by standard borrowing base calculations based on accounts receivable and
inventory, typical of such lines of credit. As collateral the Company has
provided a $50 million debenture and a security interest in accounts
receivables, 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 1.50% and between the one month Canadian
Bankers' Acceptance Rates ("BA rates") plus 1.75% and BA rates plus 2.75% 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 March 31, 2011, there were outstanding letters of credit of $0.1
million.
In addition to its operating lines of credit, the Company 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 March 31, 2011, the Company had outstanding foreign exchange
forward contracts under this facility totaling US$6.7 million at an average
exchange rate of $1.0023 Canadian for each US $1.00 with settlement dates
between April 30, 2011 and August 31, 2011.
The Company's bank credit facilities also include a term loan secured by real
estate in the United States. At March 31, 2011 the outstanding balance on this
term loan was US$3.8 million. The term loan bears interest at LIBOR plus 3.05%
and requires monthly principal payments of US$13 thousand plus accrued interest.
The Company has interest rate swap agreements in place which have converted the
variable rate on the term loan to a fixed rate of 5.17%. The term loan and swap
agreements expire in September 2012 at which point a balloon payment for the
balance of the loan is due.
The Company's bank has agreed to amend covenants for the accounting changes
under IFRS. The Company was in compliance with all covenants under its bank
credit facilities as at March 31, 2011, before accounting adjustments for IFRS.
8 Equipment Notes Payable
In addition to its bank credit facilities, the Company has lines of credit
available totalling approximately $250 million from various non-bank equipment
lenders in Canada and the United States, which are used to finance equipment
inventory. At March 31, 2011, there was approximately $128.8 million borrowed on
these equipment finance lines.
The 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 or 3.25% to 4.9% over the prime rate of a
Canadian chartered bank in Canada, and between 0.0% and 5.85% over LIBOR 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 or "curtailments" 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.
The Company had availability under its equipment finance facilities of $80.2
million at March 31, 2011.
The Company was in compliance with all covenants under its equipment finance
credit facilities as at March 31, 2011, before accounting adjustments for IFRS.
9 Notes Payable
Notes payable is comprised of the following:
----------------------------------------------------------------------------
March 31, 2011 December 31, 2011
----------------------------------------------------------------------------
Champion acquisition note (i) $ - $ 1,233
Promissory notes (ii) 1,811 -
Floor plan notes payable (iii) 3,553 -
Term note (iv) 3,653 -
----------------------------------------------------------------------------
9,017 1,233
----------------------------------------------------------------------------
Current portion 912 1,233
----------------------------------------------------------------------------
Long-term portion $ 8,105 $ -
----------------------------------------------------------------------------
i. On March 20, 2008, the Company purchased substantially all of the
assets (excluding real property) of the Champion Road Machinery
division ("Champion") of Volvo Group Canada Inc. 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 is secured with certain
assets of Champion. The note has been discounted at 6.0% using the
effective interest rate method, resulting in a discount of $346 that is
amortized as interest expense over the three-year period to March 2011.
During the three month period ended March 31, 2011, the final principal
payment on non-interest bearing note was made.
ii. As part of the acquisition of Chadwick-BaRoss, Inc., the Company
issued, through a wholly-owned subsidiary, three promissory notes
totalling US$1.9 million. The three promissory notes mature on February
17, 2013 and bear interest at the US Prime rate. Principal payments of
US$0.2 million will be made quarterly commencing May 17, 2011.
iii. In addition to equipment notes payable as described in note 8,
Chadwick-BaRoss, Inc. 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. Term note: as part of the acquisition of Chadwick-BaRoss, Inc., the
Company assumed a term note secured by real estate and cross-
collateralized with Chadwick-BaRoss' revolving line of credit. The term
note is interest bearing at a rate of LIBOR plus 3.05% and matures in
September 2012.
10 Shareholders' Capital
On January 17, 2011, the Company completed a rights offering for aggregate
proceeds of $7.8 million, 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 134,419 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. The Company incurred expenses of $51 related to the offering.
Authorized
Unlimited number of shares
Issued
As at March 31, 2011 a total of 13,128,629 shares (December 31, 2010 -
10,508,719), valued at $64,898 (December 31, 2010 - $57,089) were issued and
outstanding.
11 Earnings (Loss) Per Share
-----------------------------------------------------------------------
Three month period ended March 31, March 31,
2011 2010
-----------------------------------------------------------------------
Weighted average number of
shares for basic earnings per
share calculation 12,633,757 10,508,719
Effect of dilutive options
outstanding 31,247 -
-----------------------------------------------------------------------
Weighted average number of
shares for diluted earnings
per share calculation 12,665,004 10,508,719
-----------------------------------------------------------------------
The computation of dilutive options outstanding only includes those options
having exercise prices below the average market price of the shares during the
period. As a result, 100,000 options and 475,000 options were excluded due to
their anti-dilution effect as at March 31, 2011 and March 31, 2010,
respectively.
12 Income Taxes
Significant components of the provision for income taxes are as follows:
----------------------------------------------------------------------------
For the three months ended March 31, March 31,
2011 2010
----------------------------------------------------------------------------
Current tax $ 169 $ -
----------------------------------------------------------------------------
Deferred tax (106) -
----------------------------------------------------------------------------
Total income tax expense $ 63 $ -
----------------------------------------------------------------------------
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 March 31, 2011 2010
----------------------------------------------------------------------------
Earnings (loss) before taxes 661 (2,156)
Statutory tax rate 25.57% 46.40%
----------------------------------------------------------------------------
Provision for income taxes at
statutory tax rate $ 169 $ (1,000)
Adjustments thereon for the effect
of:
Permanent and other differences 29 65
Benefit of temporary and other
differences unrecognized (62)
Fund's loss for tax purposes for
which benefit is not recognized 935
Utilization of losses previously
unrecognized (73)
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$ 63 $ -
----------------------------------------------------------------------------
2011 2010
Eligible capital expenditures and
other reserves $ 1,144 $ 589
Pension 34 170
Loss carryforward 329
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Deferred income tax assets 1,507 759
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Capital and other assets (3,138) (759)
----------------------------------------------------------------------------
Deferred income tax liabilities (3,138) (759)
----------------------------------------------------------------------------
Net deferred income tax liability $ (1,631) $ -
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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 March 31, 2011
was 27.9% (March 31, 2010 - 46.4%).
13 Contingencies and Guarantees
a) 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 issue. 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 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 Queens Branch 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 $4.8 million. 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.
b) 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
April 1, 2011 to January 31, 2014 are $424 (December 31, 2010 - $461).
14 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 March 31, 2011 March 31, 2010
----------------------------------------------------------------------------
Equipment Sales $ 55,984 $ 29,868
Equipment Rentals 5,470 3,734
Product Support 26,041 20,078
----------------------------------------------------------------------------
Total Equipment Distribution $ 87,495 $ 53,680
----------------------------------------------------------------------------
Geographical information:
--------------------------------------------------------------------------
Three month period ended Year ended
March 31, 2011 December 31, 2010
--------------------------------------------------------------------------
Canada US Total Canada US Total
--------------------------------------------------------------------------
Total
assets $ 221,963 $ 33,922 $ 255,885 $ 215,161 $ - $ 215,161
--------------------------------------------------------------------------
15 Changes in Non-Cash Working Capital
The components of the changes in non-cash working capital are detailed below:
-------------------------------------------------------------------------
For the three-month period ended March 31, 2011 2010
-------------------------------------------------------------------------
Changes in working capital
Trade and other receivables $ (2,173) $ 2,512
Inventories (8,714) (4,641)
Prepaid expense and other deposits (578) (638)
Trade and other payables 2,597 (1,236)
Provisions 147 112
Deferred revenue and customer deposits 432 832
Income taxes recoverable/payable (55) -
Equipment notes payable 2,992 (1,819)
-------------------------------------------------------------------------
$ (5,353) $ (4,878)
-------------------------------------------------------------------------
16 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.
17 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.
18 Subsequent Events
In April 2011, the Company's credit facilities were amended to add a $5 million
demand non-revolving term loan ("Acquisition Loan"). The Acquisition Loan is for
a term of 60 months and bears interest at the bank's prime lending rate plus 200
basis points. The Acquisition Loan is subject to monthly principal payments of
$83 thousand plus accrued interest.
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 $7.1 million. Construction of the new branch will commence
in June 2011 and is scheduled to be completed before the end of 2011. 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 200 basis points.
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