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| Share Name | Share Symbol | Market | Type |
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| TSXV:GPE | TSX Venture | Common Stock |
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Strongco Corporation (TSX:SQP) today reported financial results for the three
months ended June 30, 2011.
Summary (i)
-- Total revenues increased by 64% to $114.1 million
-- Same-store revenues increased by 47%
-- Chadwick-BaRoss acquired in first quarter added $12 million in revenue
-- EBITDA increased by 133% to $10.5 million
-- Net income of $3.6 million compared to a loss of $0.3 million
-- Earnings per share of $0.28 compared to a loss of $0.03
(i) Comparisons are between second quarter 2011 and second quarter 2010
"We achieved substantial revenue growth in the quarter in all regions, with
Western Canada particularly strong, and there were increases in all revenue
categories," said Robert Dryburgh, President and Chief Executive Officer of
Strongco. "While demand for equipment was certainly stronger, we also benefited
from better sales execution, increased market share and contributions from
Chadwick-BaRoss."
Financial Highlights (i)
Three-Month Periods Ended June 30
($ millions except per share amounts) 2011 2010
Revenues $ 114.1 $ 69.6
EBITDA $ 10.5 $ 4.5
Net income (loss) $ 3.6 $ (0.3)
Basic and diluted net income (loss) per share $ 0.28 $ (0.03)
Equipment in inventory $ 171.9 $ 142.1
Equipment notes payable $ 152.7 $ 118.1
(i) All financial information conforms to International Financial Reporting
Standards. Results from 2010 have been restated in conformity with IFRS rules.
Second Quarter 2011 Review
Total revenues in the three months ended June 30, 2011 were $114.1 million, an
increase of 64% from the second quarter of 2010.
Equipment sales increased by 85% from last year to $77.1 million. Product
support revenues gained 29% to $30.9 million. Rental revenues were $6.1 million,
up 53% from the year-earlier period.
Gross margin increased by 51% to $21.2 million during the second quarter. As a
percentage of revenue, gross margin declined slightly to 18.6% from 20.3% in the
same period of 2010. "The change in gross margin percentage was primarily due to
the large increase in 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 second quarter
totalled $16.3 million, compared to $13.6 million in 2010. Expenses for the
period just ended included $2.3 million in operating costs for the newly
acquired Chadwick-BaRoss unit.
EBITDA for the second quarter increased to $10.5 million from $4.5 million a
year earlier.
As a result of the strong revenue performance and the incremental earnings from
the acquisition of Chadwick-BaRoss of $0.2 million, Strongco's net income in the
second quarter of 2011 was $3.6 million ($0.28 per share), a significant
improvement from a net loss of $0.3 million (loss of $0.03 per share) in the
second quarter of 2010.
Outlook
Management is optimistic that Strongco will continue to demonstrate improved
performance over 2010 levels in the balance of 2011, but does anticipate some
impact from the traditional seasonality of the industry in the third and fourth
quarters.
The economy and construction markets across Canada are expected to continue to
improve throughout 2011, which in turn should spur demand for heavy equipment,
and willingness of customers to purchase equipment. Strongco's equipment sales
backlogs have continued at a high level in 2011, which indicates that demand for
heavy equipment is improving.
Oil prices have continued to show strength and stability during 2011, which is
supporting economic recovery in Alberta. In particular, accelerating activity in
the oil sands has led to increased spending for heavy equipment in northern
Alberta. In addition, the generally improving economy has fueled an increase in
construction activity throughout the province. Strongco's sales in Alberta have
shown strong growth in the first half of the year and backlogs have increased.
Management is optimistic that heavy equipment markets in the province will
continue to improve in 2011.
Demand for cranes, which started to show improvement toward the end of 2010, has
continued to increase in 2011 in concert with recovering construction markets
and rising activity in Alberta's oil patch. Strongco's sales backlog for cranes
has grown in 2011, which is a sign that demand is improving.
Equipment manufacturers continue to improve production capacity, to reduce lead
times and improve availability of new machines but this has remained an issue in
the first half of 2011. In addition, the transition to the new lower emission
tier 4 engine technology in 2011 presents an added complication that is
impacting lead times and supply of equipment.
Seismic events in Japan have resulted in global shortages of certain brands and
types of equipment and parts. Strongco has not been seriously impacted to date,
as the vast majority of the equipment it distributes is manufactured outside of
Japan. However, parts shortages from Japan could impact availability of
equipment manufactured elsewhere in future.
Management remains optimistic that the improving trend in Canadian construction
markets in the first half of 2011 will continue through the balance of the year.
The Company also aims to sustain the improving operational effectiveness
demonstrated in the first six months of 2011.
The normal third quarter seasonal pattern of lower equipment sales but strong
product support with parts and service is anticipated in the third quarter. The
ongoing high level of rental purchase option (RPO) contracts also suggests
strong sales from rental conversions in the fourth quarter. In addition, the
acquisition of Chadwick-BaRoss Inc., effective February 1, 2011, is anticipated
to contribute to improved sales levels and profitability for Strongco in the
balance of 2011.
Conference Call Details
Strongco will hold a conference call on Tuesday, August 9, 2011 at 10 am ET to
discuss second quarter results. Analysts and investors can participate by
dialing 416-644-3415 or toll free 1-877-974-0445. An archived audio recording
will be available until midnight on August 23, 2011. To access it, dial
416-640-1917 and enter passcode 4460139#.
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.
Information Contact
J. David Wood
Vice-President and Chief Financial Officer
Telephone: 905.565.3808
Email: jdwood@strongco.com
www.strongco.com
Strongco Corporation
Management's Discussion and Analysis
The following management discussion and analysis ("MD&A") provides a review of
the consolidated financial condition and results of operations of Strongco
Corporation, formerly Strongco Income Fund ("the Fund"), Strongco GP Inc. and
Strongco Limited Partnership collectively referred to as "Strongco" or "the
Company", as at and for the three months and six months ended June 30, 2011.
This discussion and analysis should be read in conjunction with the accompanying
unaudited consolidated financial statements as at and for the three months and
six months ended June 30, 2011. For additional information and details, readers
are referred to the Company's audited consolidated financial statements and
accompanying MD&A as at and for the year ended December 31, 2010 contained in
the Company's annual report for the year ended December 31, 2010, the Company's
unaudited consolidated financial statements and accompanying MD&A as at and for
the three months ended March 31, 2011, the Company's Notice of Annual and
Special Meeting of Shareholders and Management Information Circular ("MIC")
dated April 20, 2011, and the Company's Annual Information Form ("AIF") dated
March 30, 2011, all of which are published separately and are available on SEDAR
at www.sedar.com.
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 August 8, 2011.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------
Three-months ended Six-months ended
Income Statement Highlights June 30 June 30
----------------------------------------------------------------------------
($ millions, except per unit
amounts) 2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues $ 114.1 $ 69.6 $ 201.5 $ 123.3
----------------------------------------------------------------------------
Net income (loss) $ 3.6 $ (0.3) $ 4.2 $ (2.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings (loss)
per share $ 0.28 $ (0.03) $ 0.33 $ (0.23)
EBITDA (note 1) $ 10.5 $ 4.5 $ 17.3 $ 6.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance Sheet Highlights
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions, except per unit
amounts)
----------------------------------------------------------------------------
Equipment inventory $ 171.9 $ 144.3
Total assets 290.0 216.8
Debt (bank debt and other notes
payable) 30.3 17.1
Equipment notes payable 152.8 115.0
Total liabilities $ 233.2 $ 173.6
----------------------------------------------------------------------------
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 and Special Meeting on May 14, 2010, the Fund was converted to a
corporation effective July 1, 2010. The conversion involved the incorporation of
Strongco Corporation, which issued shares to the unitholders in exchange for the
units of the Fund on a one for one basis so that the unitholders became
shareholders in Strongco Corporation, after which the Fund was wound up into
Strongco Corporation.
Following the conversion on July 1, 2010, Strongco Corporation has carried on
the business of the Fund unchanged except that Strongco Corporation is subject
to taxation as a corporation. The results of operations, balance sheet and cash
flow figures presented in the following MD&A for comparative periods prior to
July 1, 2010 reflect those of the Fund. References in this MD&A to shares and
shareholders of the Company are comparable to units and unitholders previously
under the Fund.
Details of the conversion are outlined in the Fund's Management Information
Circular dated April 6, 2010, which contains the Plan of Arrangement, available
on SEDAR at www.sedar.com.
FINANCIAL RESULTS - THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Consolidated Results of Operations
----------------------------------------------------------------------------
Three months ended June 30 Six months ended June 30
----------------------------------------------------------------------------
($ millions, except
per share amounts) 2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues $ 114,050 $ 69,591 $ 201,545 $ 123,271
Cost of sales 92,812 55,496 163,323 97,759
----------------------------------------------------------------------------
Gross Margin 21,238 14,095 38,222 25,512
Administration,
distribution and
selling expenses 16,267 13,584 31,508 26,242
Other expense
(income) (179) (322) (453) (590)
----------------------------------------------------------------------------
Total Expenses 16,088 13,262 31,055 25,652
----------------------------------------------------------------------------
Operating income 5,150 833 7,167 (140)
Interest expense 1,398 1,128 2,754 2,228
----------------------------------------------------------------------------
Earnings (loss) from
operations before
income taxes 3,752 (295) 4,413 (2,368)
Provision for income
taxes 120 - 183 -
----------------------------------------------------------------------------
Net income (loss) $ 3,632 $ (295) $ 4,230 $ (2,368)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
share $ 0.28 $ (0.03) $ 0.33 $ (0.23)
Weighted average
number of shares
- Basic 13,128,719 10,508,719 12,882,642 10,508,719
- Diluted 13,167,347 10,508,719 12,921,270 10,508,719
----------------------------------------------------------------------------
Key financial
measures:
Gross margin as a
percentage of
revenues 18.6% 20.3% 19.0% 20.7%
Administration,
distribution and
selling expenses as
percentage of
revenues 14.3% 19.5% 15.6% 21.3%
Operating income as a
percentage of
revenues 4.5% 1.2% 3.6% -0.1%
EBITDA (note 1) $ 10,454 $ 4,520 $ 17,276 $ 6,624
----------------------------------------------------------------------------
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 ("RPO")
in the fourth quarter of 2010. Recovery was first evident in the markets for
compact and lower priced equipment while demand for larger higher priced
equipment was slower to recover. In particular, the market for cranes remained
weak in the first and second quarters of 2010 but started to show improvement in
the latter half of the year. 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 increasing demand for heavy
equipment evident in the latter half of 2010 continued into the first quarter of
2011. Construction activity continued to rise in the second quarter of 2011 and
with that, demand for heavy equipment strengthened further. While customers were
more confident and willing to purchase equipment in the first and second
quarters of 2011, rental activity, especially under RPO contracts, also remained
strong in the first half of the year. In addition, sales backlogs remained at
robust levels, a positive indication of the continuing recovery of construction
markets and demand for heavy equipment.
As a consequence of the weak economy during the recession, particularly in the
United States, Original Equipment Manufacturers ("OEM's") scaled back production
capacity. While the economy and construction markets in Canada have been
improving, OEM's have been unable to bring production back on line at the same
pace resulting in longer delivery lead times and reduced availability. OEM
production levels are improving, but delivery lead times for new equipment have
remained stretched in 2011, which has benefitted dealers carrying higher levels
of older equipment inventories. In addition, the scheduled transition from tier
3 engines to the new lower-emission tier 4 technology has affected supply and
increased demand for equipment with tier 3 engines.
The tsunami and nuclear disaster in Japan has affected production and supply of
certain brands and types of equipment manufactured in Japan. In addition, supply
of certain parts from Japan for equipment manufactured in other parts of the
world has also been affected by the Japanese crisis. Strongco has not been
impacted to date from this disaster as the vast majority of the equipment it
distributes is manufactured outside of Japan, but parts shortages from Japan
could impact equipment availability in the future.
Revenues
A breakdown of revenue for the quarter and six months ended June 30, 2011 and
2010 is as follows:
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
Eastern Canada (Atlantic and
Quebec)
--------------------------------
Equipment Sales $ 27.2 $ 18.1 $ 47.3 $ 27.7
Equipment Rentals 1.9 1.6 3.4 2.8
Product Support 11.4 10.5 20.7 18.3
----------------------------------------------------------------------------
Total Eastern Canada $ 40.5 $ 30.2 $ 71.4 $ 48.8
----------------------------------------------------------------------------
--------------------------------
Central Canada (Ontario)
--------------------------------
Equipment Sales $ 25.8 $ 16.0 $ 44.0 $ 30.0
Equipment Rentals 1.0 1.4 2.3 2.8
Product Support 8.8 8.0 16.9 15.4
----------------------------------------------------------------------------
Total Central Canada $ 35.6 $ 25.4 $ 63.2 $ 48.2
----------------------------------------------------------------------------
--------------------------------
Western Canada (Manitoba to BC)
--------------------------------
Equipment Sales $ 17.2 $ 7.3 $ 32.2 $ 13.6
Equipment Rentals 2.4 1.3 4.8 2.4
Product Support 6.4 5.4 12.0 10.3
----------------------------------------------------------------------------
Total Western Canada $ 26.0 $ 14.0 $ 49.0 $ 26.3
----------------------------------------------------------------------------
--------------------------------
Northeastern United States
--------------------------------
Equipment Sales $ 6.9 $ 9.6
Equipment Rentals 0.8 1.1
Product Support 4.3 7.3
----------------------------------------------------------------------------
Total Northeastern United States $ 12.0 $ 18.0
----------------------------------------------------------------------------
--------------------------------
TOTAL Revenues
--------------------------------
Equipment Sales $ 77.1 $ 41.4 $ 133.1 $ 71.3
Equipment Rentals 6.1 4.3 11.6 8.0
Product Support 30.9 23.9 56.9 44.0
----------------------------------------------------------------------------
TOTAL $ 114.1 $ 69.6 $ 201.6 $ 123.3
----------------------------------------------------------------------------
Equipment Sales
Strongco's equipment sales in the three months ended June 30, 2011 were $77.1
million which was up $35.7 million or 86% from $41.4 million in the second
quarter of 2010. For the six months ended June 30, 2011, sales were $133.1
million compared to $71.3 million in the first half of 2010. The recent
acquisition of Chadwick-BaRoss in February 2011 accounted for $6.9 million of
the sales increase in the quarter and $9.6 million of the increase year to date.
Sales in Canada were up $28.8 million or 70% in the quarter and $52.2 million or
73% in the six months of the year. Sales were up in all regions of the country,
with the largest increases in Alberta, Ontario 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 half of 2010, with the largest gains in Central and
Eastern Canada.
The continued recovery in construction markets in Canada has resulted in
increased demand for heavy equipment. The markets for heavy equipment that
Strongco serves in Canada were estimated to be up on average 30% in the second
quarter and more than 35% year to date. The largest increase in demand was in
Alberta followed by Quebec and Ontario. Strongco outperformed the market with a
total unit volume increase more than 55% from the second quarter of 2010 and
captured a larger share of the growing market.
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 second quarter and first six months of the year were higher than in 2010,
due primarily to a higher proportion of sales of larger, more expensive
equipment. Average selling prices in most product categories increased slightly
compared to the first half of 2010. While the ongoing strength of the Canadian
dollar and price competition continued to put pressure on selling prices,
increased demand, combined with product availability and delivery issues, helped
support stronger selling prices in 2011.
On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic
regions) were $27.2 million in the second quarter, which was up $9.1 million or
50% from the second quarter of 2010. For the six months to June, equipment sales
in Eastern Canada totalled $47.3 million, which was $19.6 million or 71% above
the same period in 2010. Construction markets in Quebec continued to benefit
from the high level of infrastructure spending. The markets for GPE in which
Strongco participates in Eastern Canada were estimated to be approximately 16%
higher for the quarter and six months to date compared to same periods in 2010.
Strongco outperformed the market and captured a larger market share, with total
GPE unit volume growth of nearly 55% year to date. Most of the sales increase
has been in loaders and articulated trucks. In addition, sales of rock crushing
equipment in Quebec have been strong in the first half of the year. The crane
market in Eastern Canada, which generally remained weak in 2010 following the
recession, showed an improvement 2011 as certain large crane rental customers in
Quebec upgraded and increased their fleets. In addition, the sale of a few large
cranes that had been on RPO contracts contributed to increased sales in the
first and second quarters.
Strongco's equipment sales in the second quarter in Central Canada were $25.8
million, which was up $9.8 million or 61% from the second quarter of 2010. For
the six months to June, the total was $44.0 million, $14.0 million or 47% higher
than the same period in 2010. Most of the increase in the quarter was due to
higher sales of GPE equipment. While the cold, snowy winter and very wet spring
weather conditions delayed many announced construction and infrastructure
projects, construction activity in Ontario picked up in the second quarter,
which led to increased spending for GPE equipment in the quarter. Total market
volume of GPE equipment sold in the quarter increased by approximately 30% from
a year ago. Strongco outperformed the market, almost doubling its GPE equipment
volume in the quarter and captured a larger share of the growing market. The
market for compact equipment in Ontario increased to a lesser extent as the wet
weather conditions, particularly in the early part of the quarter, impacted the
purchasing decisions of many smaller customers. Price competition in Ontario in
both GPE and compact equipment remained aggressive in the second quarter,
especially from certain dealers attempting to capture market share in particular
product categories and markets. Crane sales in Ontario in the first half of 2011
were more than double that of a year ago as certain crane rental customers, who
refrained from purchasing new cranes during the recession, replenished their
fleets.
Equipment sales in Western Canada during the first quarter were $17.2 million,
which was up $9.9 million or 136% over second quarter of 2010. For the six
months to June, the total was $32.2 million, $18.6 million or 137% higher than
the same period in 2010. Strongco's product lines in Alberta serve the oil
sector, primarily in the site preparation phase, as well as natural gas
production, both of which were significantly impacted by weakness in the energy
sector during 2009. 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 half of 2011. Total units sold in the markets served by Strongco in
Alberta, excluding cranes, were estimated to be up approximately 83% relative to
the first six months of 2010. Strongco outperformed the market with total unit
volume growth in excess of 165% in the first half of the year 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 six months of
2010, sales in Northern Alberta were hampered by longer delivery lead times and
product availability issues on certain products. The market for cranes in
Alberta has been recovering in 2011 but more slowly that other heavy equipment.
Strongco's crane sales in Alberta are up 21% year to date. Sales backlog of
cranes remains strong and RPO activity has increased, positive signs that the
crane markets in Western Canada are continuing to improve.
Strongco's equipment sales in the northeastern United States were $6.9 million
in the second quarter and $9.6 million for the five months from February 1,
2011, the effective date of the acquisition of Chadwick-BaRoss (see "Acquisition
of Chadwick-BaRoss, Inc."), to June 30, 2011. The markets for heavy equipment in
New England have not recovered from a year ago and are down approximately 40%
from pre-recession levels. Strongco's market share for GPE in this reduced
market increased during the quarter and sales were slightly ahead of the same
period of the prior year but still down from pre-recession levels. However,
Strongco's market share for compact equipment in the region has declined in 2011
due primarily to lack of product.
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. 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 second quarter was $6.1 million, which was up
$1.8 million, or 42%, over the second quarter of 2010. For the six months to
date, rental revenues totalled $11.6 million, which were $3.6 million or 45%
ahead of the same period in 2010. Rental revenue from the acquisition of
Chadwick-BaRoss in February 2011 contributed $0.8 million of the increase in the
quarter and $1.1 million of the increase year to date. Rental revenue in Canada
was up $1.0 million, or 23%, in the quarter and $2.5 million, or 31%, in the
first six months of the year. 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 half 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 during the
recession. Rental activity was also strong in Quebec, in particular RPO's for
larger loaders and excavators. Strongco's crane business, which has
traditionally not had a significant rental element, also experienced an increase
in rental activity in 2011 in Alberta and Quebec as customers showed an initial
preference to rent while the demand and market 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 also vary depending on customer purchases
of extended warranties. Product support activities (sales of parts and service
outside of warranty), therefore tend to increase at a slower rate and lag
equipment sales by three to five years. The increasing equipment population in
the field leads to 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 activity declined during the recession because in the difficult
economic environment, customers elected to make only critical repairs to
equipment and only when they had work requiring its use. However, product
support declined less than sales of equipment and represented a larger
proportion of total revenue as many customers chose to repair and extend the
life of their existing machines, rather than purchase new. Product support
activity began to improve in the latter half of 2010 and into 2011 as
construction market recovered from the recession.
Strongco's product support revenues in the second quarter of 2011 were $30.9
million, which included $4.3 million from the newly acquired Chadwick-BaRoss.
This was up 29% from $23.9 million in the second quarter of 2010. For the six
months to the end of June, product support revenues totalled $56.9 million,
including $7.3 million from Chadwick- BaRoss, up from $44.0 million in the first
six months of 2010. Product support activities were up across all regions in
Canada. Parts and service revenues benefited from higher amounts of snow and
increased use of snow removal equipment in the first quarter of 2011,
particularly in Western and Eastern Canada. Product support activity remained
strong in the second quarter 2011 as construction activity increased.
Gross Margin
----------------------------------------------------------------------------
Three Months Ended June 30 Six Months Ended June 30
----------------------------------------------------------------------------
2011 2010 2011 2010
$ $ $ $
Gross Margin millions GM% millions GM% millions GM% millions GM%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment
Sales $ 7.5 9.7% $ 4.1 9.9% $ 12.7 9.5% $ 6.7 9.4%
Equipment
Rentals 1.3 21.3% 0.7 16.4% 2.5 21.5% 1.3 16.3%
Product
Support 12.4 40.1% 9.3 38.9% 23.0 40.4% 17.5 39.8%
----------------------------------------------------------------------------
Total Gross
Margin $ 21.2 18.6% $ 14.1 20.3% $ 38.2 18.9% $ 25.5 20.7%
----------------------------------------------------------------------------
As a result of the higher revenues in the second quarter of 2011, Strongco's
gross margin increased by $7.1 million to $21.2 million from $14.1 million in
the second quarter of 2010. For the six months ended June 30, 2011, gross margin
increased to $38.2 million from $25.5 million in the first half of 2010.
However, as a percentage of revenue, gross margin declined to 18.6% in the
second quarter and 18.9% for the first six months of 2011 from 20.3% and 20.7%
in the second quarter and half of 2010, respectively. Equipment sales typically
generate a lower gross margin percentage than rental revenues and product
support activities and as a result, the mix of revenue between sales, rentals
and product support has a significant impact in the overall gross margin
percentage. With a larger increase in equipment sales in 2011, equipment sales
represented a higher proportion of total revenues than rentals and product
support which resulted in the decline in the overall gross margin percentage.
Equipment sales accounted for approximately 68% of total revenues in the three
months ended June 30, 2011 compared to 60% in the second quarter of 2010, while
product support and rental revenues represented 27% and 5% of total revenues,
respectively, in the second quarter of 2011 compared to 34% and 6% of total
revenue, respectively, in the second quarter of 2010. For the first half of the
year equipment sales represented 66% of total revenues, while product support
and rentals represented 28% and 6% of total revenues, respectively. This
compared to 58%, 36% and 6% of total revenue for equipment sales, product
support and rentals, respectively, in the first half of 2010.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the second quarter of 2011
were $16.3 million or 14.3% of revenue, which compared to $13.6 million or 19.8%
of revenues in the second quarter of 2010. For the six months ended June 30,
2011, these expenses were $31.5 million or 15.6% of revenue, which compared to
$26.2 million or 21.3% of revenues in the first half of 2010. Most of the
increase from 2010 relate to administration, distribution and selling expenses
of the newly acquired Chadwick-BaRoss which were $2.3 million in the quarter and
$3.5 million for the five months from the date of acquisition to June 30, 2011.
Expenses year to date also include the one-time costs for the acquisition of
Chadwick-BaRoss of $0.4 million incurred in the first quarter. In addition,
given the strong results year to date, Strongco is on target to reach its annual
incentive plan targets and employee bonuses of $1.2 million were accrued in the
second quarter. No bonus accrual was made in 2010. Travel and freight costs were
higher by $0.1 million in the quarter and $0.3 million in the first half of the
year compared to the same periods in 2010. The increase was mainly due to the
higher cost of fuel in 2011, which has not been passed on to customers. In
addition, the significant increase in sales and service activity in the 2011
resulted in larger amounts of overtime labour. While labour utilization and
recovery improved in the 2011, overtime premiums have not been fully passed on,
resulting in incremental expenses of approximately $0.2 million in the second
quarter and $0.5 million for the first six months of the year.
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 second quarter of 2011 was $0.2 million, compared to $0.3 million
in the second quarter of 2010. For the first six months of 2011, other income
was $0.5 million compared to $0.6 million in the first half of 2010.
Interest Expense
Strongco's interest expense in the second quarter and first six months of 2011
was $1.4 million and $2.8 million, respectively, compared to $1.1 million and
$2.2 million, respectively, in the same periods in 2010. The increase year over
year is due to slightly higher interest rates charged on the company's bank debt
and equipment notes and a higher average level of interest bearing debt.
Strongco's interest bearing debt comprises bank indebtedness 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").
Prime lending rates and BA rates have increased from the low levels that existed
at the beginning of 2010. With the increase in prime rates and BA rates, the
interest charged on the Company's bank indebtedness and equipment finance notes
was higher in the first six months of 2011 compared to the first half of 2010.
In addition, the average amount of interest-bearing debt was slightly higher in
the first half of 2011 compared to the prior year. During the recession,
Strongco successfully reduced inventory and the related floor plan financing. As
a result, interest-bearing equipment notes were lower in the first six months of
2010. During 2010 and into 2011, Strongco has been increasing equipment
inventories to support the increasing demand for heavy equipment as construction
markets recovered. This resulted in a higher average level of interest-bearing
equipment notes in the first six months of 2011 compared to the first half of
2010 (see discussion under "Financial Condition and Liquidity").
Earnings before Income Taxes
Strongco's earnings before income taxes in the second quarter and first six
months of 2011 were $3.8 million and $4.4 million, respectively, which were
significantly improved from a loss before income taxes of $0.3 million and $2.4
million, respectively, in the same periods of 2010. The increase was due to the
strong revenue performance in the 2011 and the incremental pretax earnings from
the acquisition of Chadwick-BaRoss of $0.3 million and $0.5 million in the
second quarter and first half of 2011, respectively.
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 or second quarters
of 2011 for Strongco in Canada. However, the tax provision from the newly
acquired Chadwick-BaRoss was $0.1 million in the second quarter and $0.2 million
year to date.
Strongco's net income in the second quarter and first six months of 2011 was
$3.6 million ($0.28 per share) and $4.2 million ($0.33 per share), respectively,
which was significantly improved from a net loss of $0.3 million (loss of $0.03
per share) and $2.4 million (loss of $0.23 per unit) in the same periods of
2010.
EBITDA
EBITDA in the second quarter of 2011 was $10.5 million, up from $4.5 million in
the second quarter of 2010. For the six months to date, EBITDA increased to
$17.3 million from $6.6 million in the first half of 2010.
EBITDA was calculated as follows:
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) $ 3.6 $ (0.3) $ 4.2 $ (2.4)
Add Back:
Interest 1.4 1.1 2.8 2.2
Income taxes 0.1 - 0.2 -
Amortization of capital assets 0.5 0.3 1.3 0.5
Amortization of equipment
inventory on rent 4.3 3.4 8.1 6.3
Amortization of rental fleet 0.6 - 0.7 -
----------------------------------------------------------------------------
EBITDA (note 1) $ 10.5 $ 4.5 $ 17.3 $ 6.6
----------------------------------------------------------------------------
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 Provided By (Used In) Operating Activities:
During the second quarter of 2011, Strongco provided $9.4 million of cash from
operating activities before changes in working capital. However, $10.1 million
of cash was used to increase net working capital and $0.4 million to fund future
employee benefits, resulting in a net use of cash from operations in the quarter
of $1.1 million. By comparison, in the second quarter of 2010, $3.5 million of
cash was provided by operating activities before changes in working capital and
$4.3 million of cash was used to increase working capital, resulting in net use
of cash of $0.8 million.
For the six months ended June 30, 2011, Strongco provided $14.3 million of cash
from operating activities before changes in working capital. However, $15.5
million of cash was used to increase net working capital and $0.4 million to
fund future employee benefits, resulting in a net use of cash from operations in
the quarter of $1.6 million. By comparison, in the first six months of 2010,
$4.5 million of cash was provided by operating activities before changes in
working capital and $9.1 million of cash was used to increase working capital,
resulting in net use of cash from continuing operations of $4.6 million.
The components of the cash used in and provided by operating activities were as
follows:
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) $ 3.6 $ (0.3) $ 4.2 $ (2.4)
Non-cash items:
Amortization of equipment
inventory on rent 4.2 3.4 8.1 6.3
Amortization of capital
assets 0.5 0.4 1.3 0.6
Amortization of rental fleet 0.6 - 0.8 -
(Gain) loss on sale of
rental equipment 0.5 - (0.1) -
Income tax expense /
(recovery) 0.1 - 0.2 -
Deferred income tax
liability (0.1) - (0.2) -
Other 0.1 -
----------------------------------------------------------------------------
9.4 3.5 14.4 4.5
Changes in non-cash working
capital balances (10.1) (4.3) (15.5) (9.1)
Employee future benefit
funding (0.4) - (0.5) -
----------------------------------------------------------------------------
Cash provided by (used in)
operating activities $ (1.1) $ (0.8) $ (1.6) $ (4.6)
----------------------------------------------------------------------------
Non-cash items include amortization of equipment inventory on rent of $4.2
million and $8.1 million in the three and six months ended June 30, 2011,
respectively, which compares to $3.4 million and $6.3 million in the second
quarter and first half of 2010. Higher volumes of equipment rentals in 2011
resulted in the higher amortization of equipment inventory on rent.
Components of cash flow from the net change in non-cash working capital for the
three month and six month period ending June 30, 2011 and 2010 were as follows:
----------------------------------------------------------------------------
Three months ended Six months ended
June 30 June 30
----------------------------------------------------------------------------
($ millions) (Increase) /
Decrease 2011 2010 2011 2010
----------------------------------------------------------------------------
Accounts receivable $ (11.7) $ (8.4) $ (13.8) $ (5.9)
Inventories (25.7) (20.5) (34.4) (25.1)
Prepaids 0.4 (0.6) (0.2) (1.2)
Income & other taxes
receivable (0.1) -
----------------------------------------------------------------------------
$ (37.0) $ (29.5) $ (48.5) $ (32.2)
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities 3.7 13.1 6.5 12.0
Deferred revenue & customer
deposits (1.0) 0.1 (0.7) 1.0
Equipment notes payable 24.2 12.0 27.2 10.1
----------------------------------------------------------------------------
$ 26.9 $ 25.2 $ 33.0 $ 23.1
----------------------------------------------------------------------------
$ (10.1) $ (4.3) $ (15.5) $ (9.1)
----------------------------------------------------------------------------
With an increase in parts and service revenue, accounts receivable increased in
the second quarter and first six months of 2011 by $11.7 million and $13.8
million respectively. The average age of receivables outstanding at the end of
the June 2011 was approximately 33 days, improved from December 2010 at
approximately 38 days and 40 days a year ago.
Inventory levels were increased during the first and second quarters in support
of the stronger sales in 2011. By comparison, Strongco's build of inventories in
the first six months of 2010 was smaller as construction markets were just
beginning to show signs of recovery in the early part of 2010.
As product support activity increased in 2011, there was an increase in parts
purchased during the first half of 2011 which contributed to an increase in
accounts payable and accrued liabilities of $3.7 million and $6.5 million in the
second quarter and first six months of the year, respectively.
With the increase in equipment inventory, equipment notes also increased. By
comparison, with a smaller build of equipment inventory, equipment notes
increased a smaller amount in the first half of 2010.
Cash Provided By (Used In) Investing Activities:
Net cash used in investing activities amounted to $3.1 million in the second
quarter of 2011. Chadwick-BaRoss sold rental fleet assets for proceeds of $2.3
million and added new equipment to its rental fleet at a cost of $4.0 million
during the quarter. Capital expenditures totaled $1.5 million in the quarter and
related to the construction of the new Edmonton branch as well as facilities
upgrades and miscellaneous shop equipment purchases. Investing activities in the
second quarter of 2010 amounted to $0.5 million related mainly to facilities
upgrades and purchase of miscellaneous shop equipment.
For the six months ended June 30, 2011, Strongco used net cash of $16.5 million
in investing activities primarily related to the acquisition of Chadwick-BaRoss
for $11.1 million. Capital expenditures in the first six months of 2011 were
$4.3 million which included the purchase of land in Edmonton, Alberta for a new
branch for $2.6 million. Chadwick-BaRoss sold its rental fleet for proceeds of
$3.4 million and purchased a new rental fleet totaling $4.5 million from
February 1, 2011, the date of acquisition, to June 30, 2011. Investing
activities in the first half of 2010 amounted to $0.6 million related mainly to
facilities upgrades and miscellaneous shop equipment.
The components of the cash used in investing activities were as follows:
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
Acquisition of Chadwick-
BaRoss, Inc. $ - $ - $ (11.1) $ -
Purchase of rental fleet
equipment (4.0) - (4.5) -
Proceeds on the sale of
rental fleet equipment 2.3 - 3.4 -
Purchase of capital assets (1.5) (0.5) (4.3) (0.6)
Other 0.1 - - -
----------------------------------------------------------------------------
Cash used in investing
activities $ (3.1) $ (0.5) $ (16.5) $ (0.6)
----------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities:
In the second quarter of 2011, Strongco provided $4.2 million of cash from
financing activities which compared to cash of $1.2 million provided from
financing activities in the second quarter of 2010. To help finance the purchase
of Chadwick-BaRoss, the Company secured a $5 million term loan from its bank
(see discussion under "Bank Credit Facilities" below) and made payments of $0.2
million against this acquisition loan in the quarter. In addition, the Company
issued a promissory notes from the previous shareholders of Chadwick-BaRoss on
the acquisition of their company in the first quarter totaling $1.8 million (see
discussion under "Acquisition of Chadwick-BaRoss" above). Payments against these
vendor take-back notes were $0.2 million in the quarter. To support the
construction of its new Edmonton branch, the Company secured a construction loan
from its bank, (see discussion under "Bank Credit Facilities" below). Borrowing
under this construction loan amounted to $1.8 million in the quarter. During the
quarter the Company reduced its bank indebtedness by $2.8 million.
For the six months ended June 30, 2011, net cash of $7.8 million was provided
from the issue of shares under the rights offering completed in the first
quarter of 2011 (see discussion under "Shareholder Capital"). Additional cash of
$2.8 million was provided from increased borrowing under bank credit lines. In
March of 2011, Strongco made the final scheduled repayment of $1.2 million of
the note issued to Volvo Construction Equipment on the acquisition of Champion
in 2008.
The components of the cash provided in financing activities were as follows:
----------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
----------------------------------------------------------------------------
($ millions) 2011 2010 2011 2010
----------------------------------------------------------------------------
Proceeds from rights offering $ - $ - $ 7.8 $ -
Acquisition loan 5.0 - 5.0 -
Repayment acquisition loan (0.2) (0.2)
Construction loan 1.8 - 1.8 -
Increase (decrease) in long-
term equipment notes (0.3) - - -
Vendor take back note on
acquisition of Chadwick-
BaRoss Inc. - - 1.8 -
Repayment of vendor take back
note (0.2) (0.2) -
Increase (decrease) in bank
indebtedness (2.8) 0.9 2.8 5.9
Net increase in finance lease
obligations 0.9 0.3 0.5 0.4
Repayment of note from
purchase of Champion - - (1.2) (1.1)
----------------------------------------------------------------------------
Cash provided in financing
activities $ 4.2 $ 1.2 $ 18.1 $ 5.2
----------------------------------------------------------------------------
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 that 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 receivable,
inventories (subordinated to the collateral provided to the equipment inventory
lenders), capital assets (subordinated to collateral provided to lessors), real
estate and on intangible and other assets. The operating lines bear interest at
rates that range between bank prime rate plus 0.50% and bank prime rate plus
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 June 30,
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 June 30, 2011, the Company had outstanding foreign exchange
forward contracts under this facility totaling US$3.0 million at an average
exchange rate of $0.9832 Canadian for each US$1.00 with settlement dates between
July 15, 2011 and September 15, 2011.
The Company's bank credit facilities also include term loans secured by real
estate in the United States. At June 30, 2011 the outstanding balance on these
term loans was US$3.6 million. The term loans bear interest at LIBOR plus 3.05%
and require 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 loans to a fixed rate of 5.17%. The term loan and swap
agreements expire in September 2012 at which point a balloon payment from the
balance of the loans is due.
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 in
Canada contain covenants that require the Company to maintain a minimum ratio of
total current assets to current liabilities ("Current Ratio covenant") of 1.1:1,
a minimum tangible net worth ("TNW covenant") of $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 12-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 June 30, 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 commenced 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 $220 million from various non-bank equipment
lenders in Canada and the United States, which are used to finance equipment
inventory and rental fleet. At June 30, 2011, there was approximately $156
million borrowed on these equipment finance lines.
Typically, these equipment notes are interest free for periods up to 12 months
from the date of financing, after which they bear interest at rates ranging from
4.25% to 5.85% over the one month BA rate and 3.25% to 4.9% over the prime rate
of a Canadian chartered bank in Canada, and from 2.5% to 5.5% over on month
Libor rate and between prime and prime plus 3% in the United States. As
collateral for these equipment notes, the Company has provided liens on the
specific inventories financed and any related accounts receivable. Monthly
principal repayments 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 June 30, 2011, before accounting adjustments for IFRS.
The balance outstanding under the Company's debt facilities at June 30, 2011 and
2010 was as follows:
----------------------------------------------------------------------------
Debt Facilities As at June 30
----------------------------------------------------------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
Bank indebtedness (including outstanding cheques) $ 15.2 $ 15.9
Equipment notes payable - non interest bearing 79.5 38.2
Equipment notes payable - interest bearing 76.5 76.8
Acquisition term loan 4.8 -
Construction loan 1.8 -
Term notes - US real estate 3.6 -
Other notes payable 1.6 1.2
----------------------------------------------------------------------------
$ 183.0 $ 132.1
----------------------------------------------------------------------------
As at June 30, 2011 there was $9.5 million of unused credit available under the
Company's bank credit lines. While availability under the bank lines fluctuates
daily depending on the amount of cash received and cheques and other
disbursements clearing the bank, availability generally ranges between $5
million and $15 million. Borrowing under the Company's bank lines is typically
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
$42.2 million at June 30, 2011. Borrowing on the Company's equipment finance
lines typically increases in the first five months of the year as equipment
inventory is purchased for the season and declines through to the end of the
year as equipment sales increase, particularly in the fourth quarter.
With the level of funds available under the Company's bank credit lines, the
current availability under the equipment finance facilities and anticipated
improvement in cash flows from operations, management believes the Company will
have adequate financial resources to fund its operations and make the necessary
investment in equipment inventory and fixed assets to support its operations in
the future.
SUMMARY OF QUARTERLY DATA
In general, business activity follows a weather related pattern of seasonality.
Typically, the first quarter is the weakest quarter as construction and
infrastructure activity is constrained in the winter months. This is followed by
a strong gain in the second quarter as construction and other contracts begin to
be tendered and companies prepare for summer activity. The third quarter
generally tends to be slightly slower from an equipment sales standpoint, which
is partially offset by continued strength in equipment rentals and customer
support activities. Fourth quarter activity generally strengthens as customers
make year end capital spending decisions and exercise purchase options on
equipment which has previously gone out on RPO's. In addition, purchases of snow
removal equipment are typically made in the fourth quarter.
A summary of quarterly results for the current and previous two years is as follows:
----------------------------------------------------------------------------
2011
($ millions, except per
share/unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 114.1 $ 87.5
Earnings before income taxes 3.8 0.7
Net income 3.6 0.6
Basic and diluted earnings
per share $ 0.28 $ 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 (0.3) (2.1)
Net income (loss) 1.5 0.7 (0.3) (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 figures do not reflect accounting necessary to comply with
IFRS
A discussion of the Company's previous quarterly results can be found in the
Company's quarterly Management's Discussion and Analysis reports available on
SEDAR at www.sedar.com.
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations for operating lease commitments totaling
$19.8 million. In addition, the Company has contingent contractual obligations
where it has agreed to buy back equipment from customers at the option of the
customer for a specified price at future dates ("buy back contracts"). These buy
back contracts are subject to certain conditions being met by the customer and
range in term from three to 10 years. The Company's maximum potential losses
pursuant to the majority of these buy back contracts are limited, under an
agreement with the original equipment manufacturer, to 10% of the original sale
amounts. In addition, this agreement provides a financing arrangement in order
to facilitate the buyback of equipment. As at 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 that expires January 31, 2014. Total lease payments from January
1, 2011 to January 31, 2014 are $0.5 million.
Contractual obligations are set out in the following tables. Management believes
that the Company will generate sufficient cash flow from operations to meet its
contractual obligations.
----------------------------------------------------------------------------
Payment due by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After
($ millions) Total 1 Year years years 5 years
----------------------------------------------------------------------------
Operating leases $ 19.8 $ 2.4 $ 10.7 $ 4.6 $ 2.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingent obligation by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After
($ millions) Total 1 Year years years 5 years
----------------------------------------------------------------------------
Buy back
contracts $ 13.5 $ 3.0 $ 5.2 $ 5.3 $ -
----------------------------------------------------------------------------
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 13,128,719.
----------------------------------------------------------------------------
Common Shares Issued and Outstanding Shares Number of Shares
----------------------------------------------------------------------------
Common shares outstanding as at December 31, 2010 10,508,719
Common shares issued under rights offering 2,620,000
----------------------------------------------------------------------------
Common shares outstanding as at June 30, 2011 13,128,719
----------------------------------------------------------------------------
OUTLOOK
Management is optimistic that Strongco will continue to demonstrate improved
performance over 2010 levels in the balance of 2011, but does anticipate some
impact from the traditional seasonality of the industry in the third and fourth
quarters.
The economy and construction markets across Canada are expected to continue to
improve throughout 2011, which in turn should spur demand for heavy equipment,
and willingness of customers to purchase equipment. Strongco's equipment sales
backlogs have continued at a high level in 2011, which indicates that demand for
heavy equipment is improving.
Oil prices have continued to show strength and stability during 2011, which is
supporting economic recovery in Alberta. In particular, accelerating activity in
the oil sands has led to increased spending for heavy equipment in northern
Alberta. In addition, the generally improving economy has fueled an increase in
construction activity throughout the province. Strongco's sales in Alberta have
shown strong growth in the first half of the year and backlogs have increased.
Management is optimistic that heavy equipment markets in the province will
continue to improve in 2011.
Demand for cranes, which started to show improvement toward the end of 2010, has
continued to increase in 2011 in concert with recovering construction markets
and rising activity in Alberta's oil patch. Strongco's sales backlog for cranes
has grown in 2011, which is a sign that demand is improving.
Equipment manufacturers are currently seeking to increase production capacity,
reduce lead times and improve availability of new machines but this has remained
an issue in the first half of 2011. In addition, the transition to the new lower
emission tier 4 engine technology in 2011 presents an added complication that is
impacting lead times and supply of equipment.
Seismic events in Japan have resulted in global shortages of certain brands and
types of equipment and parts. Strongco has not been seriously impacted to date,
as the vast majority of the equipment it distributes is manufactured outside of
Japan. However, parts shortages from Japan could impact availability of
equipment manufactured elsewhere in future.
Management remains optimistic that the improving trend in Canadian construction
markets in the first half of 2011 will continue through the balance of the year.
The Company also aims to sustain the improving operational effectiveness
demonstrated in the first six months of 2011.
The normal third quarter seasonal pattern of lower equipment sales but strong
product support with parts and service is anticipated in the third quarter. The
ongoing high level of rental purchase option (RPO) contracts also suggests
stronger sales from rental conversions in the fourth quarter. In addition, the
acquisition of Chadwick-BaRoss Inc., effective February 1, 2011 is anticipated
to contribute to improved sales levels and profitability for Strongco in the
balance of 2011.
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 June 30, 2011 with changes
from March 31, 2011 is as follows:
----------------------------------------------------------------------------
Provision for Inventory Obsolescence ($ millions)
----------------------------------------------------------------------------
Provision for inventory obsolescence as at March 31, 2011 $ 4.8
Inventory disposed of during the quarter (0.4)
Additional provisions made during the quarter 0.4
----------------------------------------------------------------------------
Provision for inventory obsolescence as at June 30, 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 June 30, 2011 with changes from March
31, 2011 is as follows:
----------------------------------------------------------------------------
Allowance for Doubtful Accounts ($ millions)
----------------------------------------------------------------------------
Allowance for doubtful accounts as at March 31, 2011 $ 1.6
Accounts written off during the quarter -
Additional provisions made during the quarter 0.2
----------------------------------------------------------------------------
Allowance for doubtful accounts as at June 30, 2011 $ 1.8
----------------------------------------------------------------------------
Post Retirement Obligations
Strongco performs a valuation at least every three years to determine the
actuarial present value of the accrued pension and other non-pension post
retirement obligations. Pension costs are accounted for and disclosed in the
notes to the financial statements on an accrual basis. Strongco records employee
future benefit costs other than pensions on an accrual basis. The accrual costs
are determined by independent actuaries using the projected benefit method
prorated on service and based on assumptions that reflect management's best
estimates. The assumptions were determined by management recognizing the
recommendations of Strongco's actuaries. These key assumptions include the rate
used to discount obligations, the expected rate of return on plan assets, the
rate of compensation increase and the growth rate of per capita health care
costs.
The discount rate is used to determine the present value of future cash flows
that 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
June 30, 2011 and 2010
Notice required under National Instrument 51-102, "Continuous Disclosure
Obligations," Part 4.3 (3) (a).
The accompanying unaudited consolidated interim financial statements for
Strongco Corporation as at and for the three and six month periods ended June
30, 2011, together with the accompanying notes have not been reviewed by the
Company's auditors.
Strongco Corporation
Unaudited Consolidated Balance Sheet
(in thousands of Canadian dollars, unless otherwise indicated)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, December 31,
As at 2011 2010
----------------------------------------------------------------------------
Assets
Current assets
Trade and other receivables $ 53,893 $ 35,884
Inventories (note 6) 195,839 159,988
Prepaid expenses and other deposits 1,755 1,452
----------------------------------------------------------------------------
251,487 197,324
----------------------------------------------------------------------------
Non-current assets
Property and equipment 23,805 15,849
Rental fleet 11,645 -
Deferred income tax asset (note 12) 1,083 -
Intangible assets 1,800 1,800
Other assets 188 188
----------------------------------------------------------------------------
38,521 17,837
----------------------------------------------------------------------------
Total assets $ 290,008 $ 215,161
----------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness (note 7) $ 14,426 $ 12,370
Trade and other payables 38,011 28,829
Provisions 1,624 1,436
Deferred revenue and customer deposits 674 1,321
Equipment notes payable - non-interest bearing
(note 8) 76,546 40,097
Equipment notes payable - interest bearing
(note 8) 76,212 78,063
Current portion of finance lease obligations 1,506 960
Current portion of notes payable (note 9) 1,905 1,233
----------------------------------------------------------------------------
210,904 164,309
----------------------------------------------------------------------------
Non-current liabilities
Deferred income tax liabilities (note 12) 2,701 -
Notes payable (note 9) 14,011 -
Finance lease obligations 1,849 1,502
Employee future benefit obligations (note
5(ii)(a)) 3,762 4,374
----------------------------------------------------------------------------
22,323 5,876
----------------------------------------------------------------------------
Total liabilities 233,227 170,185
----------------------------------------------------------------------------
Shareholders' equity
Shareholders' capital (note 10) 64,898 57,089
Accumulated other comprehensive loss (2,400) (2,101)
Deferred compensation 380 315
Deficit (6,097) (10,327)
----------------------------------------------------------------------------
Total shareholders' equity 56,781 44,976
----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 290,008 $ 215,161
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingencies (note 13)
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Income (Loss)
(in thousands of Canadian dollars, unless otherwise indicated, except per
share amount)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three-month period ended Six-month period ended
June 30 June 30
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Revenue (note 14) $ 114,050 $ 69,591 $ 201,545 $ 123,271
Cost of sales 92,812 55,496 163,323 97,759
----------------------------------------------------------------------------
Gross profit 21,238 14,095 38,222 25,512
----------------------------------------------------------------------------
Expenses
Administration 7,778 6,786 15,046 13,004
Distribution 5,046 4,273 9,588 8,523
Selling 3,443 2,525 6,874 4,715
Other income (179) (322) (453) (590)
----------------------------------------------------------------------------
Expenses 16,088 13,262 31,055 25,652
----------------------------------------------------------------------------
Operating income
(loss) 5,150 833 7,167 (140)
----------------------------------------------------------------------------
Interest expense 1,398 1,128 2,754 2,228
----------------------------------------------------------------------------
Income (loss) before
income taxes 3,752 (295) 4,413 (2,368)
----------------------------------------------------------------------------
Provision for income
taxes (note 12) 120 - 183 -
Net income (loss)
attributable to
shareholders for the
period $ 3,632 $ (295) $ 4,230 $ (2,368)
----------------------------------------------------------------------------
Earnings (loss) per
share
Basic and diluted $ 0.28 $ (0.03) $ 0.33 $ (0.23)
----------------------------------------------------------------------------
Weighted average
number of shares
(note 11)
- basic 13,128,719 10,508,719 12,882,642 10,508,719
- diluted 13,167,347 10,508,719 12,921,270 10,508,719
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Comprehensive Income (Loss)
(in thousands of Canadian dollars, unless otherwise indicated, except per
share amount)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three-month period Six-month period
ended June 30 ended June 30
---------------------------------------------------------------------------
2011 2010 2011 2010
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net income (loss)
attributable to
shareholders for
the period $ 3,632 $ (295) $ 4,230 $ (2,368)
Other comprehensive
income
Actuarial gain on
post-employment
benefit obligations 144 - 144 -
Currency translation
adjustment (90) - (443) -
---------------------------------------------------------------------------
Comprehensive income
(loss) attributable
to shareholders for
the period $ 3,542 $ (295) $ 3,787 $ (2,368)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Changes in Shareholders' Equity
(in thousands of Canadian dollars, unless otherwise indicated, except per
share amounts)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumulated
other
Number Shareholders' comprehensive
of shares capital loss
---------------------------------------------------------------------------
Balance - January 1, 2010 10,508,719 $ 57,089 $ -
Net loss and
comprehensive loss
for the period - - -
---------------------------------------------------------------------------
Balance - June 30, 2010 10,508,719 $ 57,089 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Deferred
compensation Deficit Total
---------------------------------------------------------------------------
Balance - January 1, 2010 $ - $ (11,554) $ 45,535
Net loss and
comprehensive loss
for the period - (2,368) (2,368)
---------------------------------------------------------------------------
Balance - June 30, 2010 $ - $ (13,922) $ 43,167
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumulated
other
Number Shareholders' comprehensive
of shares capital loss
---------------------------------------------------------------------------
Balance - December 31, 2010 10,508,719 $ 57,089 $ (2,101)
Net income for the period - - -
Other comprehensive loss:
Actuarial gain on
post-employment benefit
obligations 144
Currency translation
adjustment - (443)
Issuance of shares (note 10) 2,620,000 7,809 -
Deferred compensation - - -
---------------------------------------------------------------------------
Balance - June 30, 2011 13,128,719 $ 64,898 $ (2,400)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Deferred
compensation Deficit Total
---------------------------------------------------------------------------
Balance - December 31, 2010 $ 315 $ (10,327) $ 44,976
Net income for the period - 4,230 4,230
Other comprehensive loss:
Actuarial gain on
post-employment benefit
obligations 144
Currency translation
adjustment - - (443)
Issuance of shares (note 10) - - 7,809
Deferred compensation 65 - 65
---------------------------------------------------------------------------
Balance - June 30, 2011 $ 380 $ (6,097) $ 56,781
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Consolidated Statement of Cash Flows
(in thousands of dollars, unless otherwise indicated)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
For the six-month period ended June 30 2011 2010
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) for the year $ 4,230 $ (2,368)
Adjustments for
Depreciation - property and equipment 1,261 569
Depreciation - equipment inventory
on rent 8,090 6,331
Depreciation - rental fleet 758 -
Gain on disposal of property and
equipment (20) (11)
Gain on sale of rental equipment (75) -
Deferred compensation 65 -
Interest expense 2,754 2,228
Income tax expense 183 -
Deferred income tax liability (183) -
Changes in working capital (note 15) (15,453) (9,129)
Employee future benefit funding (468) 10
Interest paid (2,778) (2,177)
---------------------------------------------------------------------------
Net cash used in operating activities $ (1,636) $ (4,547)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cash flows from investing activities
Business acquisition net of cash
acquired (note 4) (11,115) -
Purchase of rental equipment (4,498) -
Proceeds from sale of rental equipment 3,445 -
Purchase of property, plant and equipment (4,349) (689)
Proceeds from sale of property, plant
and equipment 20 72
---------------------------------------------------------------------------
Net cash used in investing activities $ (16,497) $ (617)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Cash flows from financing activities
Increase in bank indebtedness 2,058 5,878
Increase in long term debt 7,579 -
Repayment of long term debt (1,400) (1,112)
Increase in finance lease obligations 491 398
Issue of shareholders' capital (note 10) 7,809 -
Increase in notes payable (note 9) 1,796 -
Repayment of notes payable (188) -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net cash provided by financing activities $ 18,145 $ 5,164
---------------------------------------------------------------------------
Foreign exchange on cash balances held
in a foreign currency (12) -
---------------------------------------------------------------------------
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
June 30, 2011
(in thousands of dollars, unless otherwise indicated)
---------------------------------------------------------------------------
1. General Information
Strongco Corporation ("Strongco" or "the Company") sells and rents new and used
equipment and provides after-sale product support (parts and service) to
customers that operate in infrastructure, construction, mining, oil and gas
exploration, forestry and industrial markets in Canada and the United States.
Prior to July 1, 2010, Strongco was an unincorporated, open-ended, limited
purpose trust operating under the name Strongco Income Fund ("the Fund"),
domiciled and established under the laws of the Province of Ontario pursuant to
a declaration of trust dated March 21, 2005, as amended and restated on April
28, 2005 and September 1, 2006.
On July 1, 2010, the Fund completed the conversion from an income trust to a
corporation ("the Conversion") through the incorporation of Strongco. Pursuant
to a plan of arrangement under the Business Corporations Act (Ontario), the
Company issued shares to the unitholders of the Fund in exchange for units of
the Fund on a one-for-one basis. The Company's Board of Directors and management
team are the former Board of Trustees and management team of the Fund.
Immediately subsequent to the Conversion, the Fund was wound up into the
Company. The Company has carried on the business of the Fund unchanged except
that the Company is subject to tax as a corporation. References to the Company
in these consolidated financial statements for periods prior to 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 Stock Exchange. The
address of its registered office is 1640 Enterprise Road, Mississauga, Ontario
L4W 4L4.
2. Basis of presentation and adoption of International Financial Reporting Standards
The Company prepares its interim consolidated financial statements in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP") as set
out in the Handbook of the Canadian Institute of Chartered Accountants ("CICA").
In 2010, the CICA Handbook was revised to incorporate International Financial
Reporting Standards ("IFRS"), and to require publicly accountable enterprises to
apply such standards effective for years beginning on or after January 1, 2011.
Accordingly, the Company is reporting on this basis in these interim
consolidated financial statements. In these interim consolidated financial
statements, the term Canadian GAAP refers to Canadian GAAP before adoption of
IFRS.
These interim consolidated financial statements have been prepared in accordance
with IFRS applicable to interim financial statements, including IAS 34, Interim
Financial Reporting, and IFRS 1, First-time Adoption of IFRS. The accounting
policies followed in these interim consolidated financial statements are the
same as those applied in the Company's interim consolidated financial statements
for the period ended March 31, 2011. The Company has consistently applied the
same accounting policies throughout all periods presented as if these policies
had always been in effect. Note 5 discloses the impact of the transition to IFRS
on the Company's reported equity as at June 30, 2010 and comprehensive income
for the three and six months ended June 30, 2010, including the nature and
effect of significant changes in accounting policies from those used in the
Company's consolidated financial statements for the year-ended December 31,
2010.
The policies applied in these interim consolidated financial statements are
based on IFRS issued as of August 8, 2011, the date the Directors approved the
interim consolidated financial statements. Any subsequent changes to IFRS that
are given effect in the Company's annual consolidated financial statements for
the year ending December 31, 2011 could result in a restatement of these interim
consolidated financial statements, including the transition adjustments
recognized on changeover to IFRS.
These interim consolidated financial statements should be read in conjunction
with the Company's Canadian GAAP annual consolidated financial statements for
the year ended December 31, 2010 and the Company's unaudited interim
consolidated financial statements for the three-month period ended March 31,
2011 prepared in accordance with IFRS applicable to interim financial
statements.
3. Critical Accounting Estimates and Judgments
The preparation of interim consolidated financial statements in conformity with
IFRS requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and the
disclosure of contingent assets and liabilities in the interim consolidated
financial statements. The Company bases its estimates and assumptions on past
experience and various other assumptions that are believed to be reasonable in
the circumstances. This involves varying degrees of judgment and uncertainty,
which may result in a difference in actual results from these estimates. The
more significant estimates are as follows:
Allowance for doubtful accounts
The Company performs credit evaluations of customers and limits the amount of
credit extended to customers as appropriate. The Company is, however, exposed to
credit risk with respect to trade receivables and maintains provisions for
possible credit losses based upon historical experience and known circumstances.
Changes or differences in these estimates or assumptions may result in changes
to the trade and other receivables balance on the consolidated balance sheet and
a charge or credit to administration expense in the consolidated statement of
income (loss).
Inventory valuation
The value of the Company's new and used equipment is evaluated by management
throughout each period. Where appropriate, a provision is recorded against the
book value of specific pieces of equipment to ensure that inventory values
reflect the lower of cost and estimated net realizable value. The Company
identifies slow-moving or obsolete parts inventory and estimates appropriate
obsolescence provisions by aging the inventory. The Company takes advantage of
supplier programs that allow for the return of eligible parts for credit within
specified time periods. Changes or differences in these estimates or assumptions
may result in changes to the inventory balance on the consolidated balance sheet
and a charge or credit to administration expense in the consolidated statement
of income (loss).
Deferred income taxes
At each period-end, the Company evaluates the value and timing of its temporary
differences. Deferred income tax assets and liabilities, measured at
substantively enacted tax rates, are recognized for all temporary differences
caused when the tax bases of assets and liabilities differ from those reported
in the interim consolidated financial statements.
Changes or differences in these estimates or assumptions may result in changes
to the current or deferred tax balance on the consolidated balance sheet and a
charge or credit to income tax expense in the consolidated statement of income
(loss), and may result in cash payments or receipts. Where appropriate, the
provisions for deferred income taxes and deferred income taxes payable are
adjusted to reflect management's best estimate of the Company's income tax
accounts.
Judgment is also required in determining whether deferred tax assets are
recognized on the consolidated balance sheet. Deferred tax assets, including
those arising from unutilized tax losses, require management to assess the
likelihood that the Company will generate taxable earnings in future periods, in
order to utilize recognized deferred tax assets. Estimates of future taxable
income are based on forecasted cash flows from operations and the application of
existing tax laws in each jurisdiction. To the extent that future cash flows and
taxable income differ significantly from estimates, the ability of the Company
to realize the net deferred tax assets recorded at the reporting date could be
impacted.
Employee future benefit obligations
The present value of the employee future benefit obligations depends on a number
of factors that are determined on an actuarial basis using a number of
assumptions. The assumptions used in determining the net cost (income) for these
obligations include the discount rate.
The Company determines the appropriate discount rate at the end of each period.
This is the interest rate that should be used to determine the present value of
estimated future cash outflows expected to be required to settle the
obligations. In determining the appropriate discount rate, the Company considers
the interest rates of high-quality corporate bonds that are denominated in the
currency in which the benefits will be paid and that have terms to maturity
approximating the terms of the related employee future benefit liability.
Other key assumptions for employee future benefit obligations are based in part
on current market conditions. Any changes in these assumptions will impact the
carrying amount of the employee future benefit obligations.
4. Acquisition of Chadwick-BaRoss, Inc.
On February 17, 2011, Strongco, through its wholly owned subsidiary Strongco USA
Inc., completed the acquisition of 100% of the issued and outstanding shares of
Chadwick-BaRoss, Inc. ("CBR").
CBR is a multiline heavy equipment dealer with 90 employees headquartered in
Westbrook, Maine, with three branches in Maine and one in each of New Hampshire
and Massachusetts. CBR sells, rents and services heavy equipment used in sectors
such as construction, infrastructure, utilities, municipalities, waste
management and forestry.
The acquisition of all of the issued and outstanding shares of CBR was completed
for a purchase price of US$11,091, net of cash acquired. The purchase price was
satisfied with cash of US$9,228 and three promissory notes totalling US$1,863.
The three promissory notes mature on February 17, 2013 and bear interest at the
US Prime rate. Principal payments of US$195 will be made quarterly commencing
May 17, 2011. Costs of $416 related to the acquisition were expensed as period
costs within operating expenses in the consolidated statement of income (loss)
for the six month period ended June 30, 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 $ 4,388
Inventories 9,960
Property, plant and equipment 5,058
Rental fleet 11,722
Deferred income tax asset 1,125
Other assets 95
---------------------------------------------------------------------------
Total assets $ 32,348
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Trade and other payables $ 3,077
Deferred income tax liabilities 2,807
Equipment notes payable 11,135
Finance lease obligations 419
Notes payable 3,795
---------------------------------------------------------------------------
Total liabilities $ 21,233
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net assets acquired $ 11,115
---------------------------------------------------------------------------
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 six month period ended June 30, 2011, effective February 1,
2011. Revenues of $17,953 and net income from operations of $345 for CBR have
been included in the Company's consolidated statement of income and
comprehensive income for the six month period ended June 30, 2011.
Had the results of CBR been incorporated into the Company's consolidated
statement of comprehensive income (loss) as though the acquisition had been
completed on January 1, 2011, the revenue and net income of the combined entity
would have been $204,584 and $4,225, respectively.
5. Transition to IFRS
The date of transition to IFRS for the Company was January 1, 2010. IFRS 1 sets
forth guidance for the initial adoption of IFRS. IFRS 1 requires first-time
adopters to retrospectively apply all effective IFRS standards as of the
transition date, except that IFRS 1 also provides for certain optional
exemptions and certain mandatory exceptions to the general requirements of
retrospective application. The effect of the Company's transition to IFRS,
described in note 2, at January 1, 2010 and for the year ended December 31, 2010
is outlined in the notes to the interim consolidated financial statements for
the three-month period ended March 31, 2011. Summarized below is the
reconciliation of shareholders' equity at June 30, 2010 and comprehensive income
(loss) for the three and six month period ended June 30, 2010 as previously
reported under Canadian GAAP to IFRS.
i) Reconciliation of shareholders' equity as previously reported under Canadian
GAAP to IFRS
---------------------------------------------------------------------------
(in thousands of
Canadian dollars) As at June 30, 2010
---------------------------------------------------------------------------
Canadian
GAAP Adjustment Note IFRS
---------------------------------------------------------------------------
Assets
Current assets
Trade and other receivables $ 32,961 $ - $ 32,961
Inventories 163,280 - 163,280
Prepaid expenses and other
deposits 2,485 - 2,485
---------------------------------------------------------------------------
198,726 - 198,726
---------------------------------------------------------------------------
Non-current assets
Property and equipment 13,920 2,088 f) 16,008
Intangible assets 1,800 - 1,800
Accrued benefit asset 6,412 (6,412) a) -
Deferred income tax asset - - -
Other assets 242 - 242
---------------------------------------------------------------------------
22,374 (4,324) 18,050
---------------------------------------------------------------------------
Total assets $ 221,100 $ (4,324) $ 216,776
---------------------------------------------------------------------------
Liabilities and
shareholders' equity
Current liabilities
Bank indebtedness $ 15,892 $ - $ 15,892
Trade and other payables 32,839 (1,214) b) 31,625
Provisions - 1,463 b), c) 1,463
Deferred revenue and
customer deposits 1,478 - 1,478
Equipment notes payable 114,981 - 114,981
Current portion of finance
lease obligations 125 911 f) 1,036
Current portion of notes
payable 1,200 - 1,200
---------------------------------------------------------------------------
166,515 1,160 167,675
---------------------------------------------------------------------------
Non-current liabilities
Deferred income tax
liabilities 1,415 (1,415) d) -
Finance lease obligations 193 1,276 f) 1,469
Employee future benefit
obligations 809 3,656 a) 4,465
---------------------------------------------------------------------------
2,417 3,517 5,934
---------------------------------------------------------------------------
Total liabilities 168,932 4,677 173,609
---------------------------------------------------------------------------
Shareholders' equity
Shareholders' capital 57,089 - 57,089
Deferred compensation 206 (206) c) -
Deficit (5,127) (8,795) a), c), (13,922)
d), f)
---------------------------------------------------------------------------
Total shareholders' equity 52,168 (9,001) 43,167
---------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 221,100 $ (4,324) $ 216,776
---------------------------------------------------------------------------
ii) Reconciliation of comprehensive income (loss) as previously reported under
Canadian GAAP to IFRS
---------------------------------------------------------------------------
(in thousands of Canadian dollars) Three-month period ended June 30, 2010
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Canadian
GAAP Adjustment Note IFRS
---------------------------------------------------------------------------
Revenue $ 69,591 $ - $ 69,591
Cost of sales 55,496 - 55,496
---------------------------------------------------------------------------
Gross Margin 14,095 - 14,095
---------------------------------------------------------------------------
Expenses
Administration 6,951 (165) a), 6,786
c), g)
Distribution 4,273 - g) 4,273
Selling 2,525 - g) 2,525
Other income (322) - (322)
---------------------------------------------------------------------------
Expenses 13,427 (165) 13,262
---------------------------------------------------------------------------
Operating income (loss) $ 668 $ 165 $ 833
---------------------------------------------------------------------------
Interest expense $ 1,128 $ - $ 1,128
---------------------------------------------------------------------------
Income (loss) before taxes (460) 165 (295)
Income tax (recovery) expense 31 (31) -
---------------------------------------------------------------------------
Net income (loss)
attributable to shareholders (491) 196 (295)
---------------------------------------------------------------------------
Other comprehensive loss
Actuarial loss on
post-employment benefit
obligations - - -
Comprehensive income
(loss) attributable to
shareholders $ (491) $ 196 $ (295)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(in thousands of Canadian dollars) Six-month period ended June 30, 2010
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Canadian
GAAP Adjustment Note IFRS
---------------------------------------------------------------------------
Revenue $ 123,271 $ - $ 123,271
Cost of sales 97,759 - 97,759
---------------------------------------------------------------------------
Gross Margin 25,512 - 25,512
---------------------------------------------------------------------------
Expenses
Administration 13,252 (248) a), 13,004
c), g)
Distribution 8,523 - g) 8,523
Selling 4,715 - g) 4,715
Other income (590) - (590)
---------------------------------------------------------------------------
Expenses 25,900 (248) 25,652
---------------------------------------------------------------------------
Operating income (loss) $ (388) $ 248 $ (140)
---------------------------------------------------------------------------
Interest expense $ 2,228 $ - $ 2,228
---------------------------------------------------------------------------
Income (loss) before taxes (2,616) 248 (2,368)
Income tax (recovery) expense (10) 10 a), d) -
---------------------------------------------------------------------------
Net income (loss)
attributable to shareholders (2,606) 238 (2,368)
---------------------------------------------------------------------------
Other comprehensive loss
Actuarial loss on
post-employment benefit
obligations - - a) -
Comprehensive income (loss)
attributable to shareholders $ (2,606) $ 238 $ (2,368)
---------------------------------------------------------------------------
Explanatory notes
a. Employee future benefits
In accordance with the IFRS transitional provisions, the Company has chosen to
recognize unamortized actuarial gains and losses arising from the re-measurement
of employee future benefit obligations as an adjustment to retained earnings as
at January 1, 2010. Under Canadian GAAP, the Company applied the corridor method
of accounting for such gains and losses. Under this method, gains and losses are
recognized only if they exceed specified thresholds and are amortized over the
expected average remaining service life of active employees. The carrying value
of the net asset for employee future benefit obligations at June 30, 2010 is
lower by $8,565 ($4,591 after tax) under IFRS as a result of the Company's
decision to recognize unamortized net actuarial losses as at January 1, 2010.
Under IFRS, the Company recognizes actuarial gains and losses arising from the
re-measurement of employee future benefit obligations in other comprehensive
income as they arise. Under Canadian GAAP, the Company applied the corridor
method of accounting for such gains and losses. As a result, the Company has
reflected a decrease in expense associated with its defined benefit employee
benefit plans under IFRS of $120 ($64 after tax) and $223 ($120 after tax) for
the three and six month periods ended June 30, 2010.
In addition, on January 1, 2010, the Company completed the calculation with
respect to the limitation of the defined benefit asset under IFRIC 14, The Limit
on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction,
(IFRIC 14) and recorded a liability of $1,503 ($805, after tax) at January 1,
2010 which remains at June 30, 2010.
b. Provisions
The Company reclassified liabilities related to equipment buybacks, legal
matters and certain other items totalling $1,214 at June 30, 2010 from trade and
other payables to provisions.
c. Stock-based compensation
Under IFRS, the Company recognizes the cost of employee share options over the
vesting period using the graded method of amortization rather than the
straight-line method, which was the Company's policy under Canadian GAAP. In
addition, under IFRS the recognition of compensation expense can occur prior to
the grant date when services have commenced whereas under Canadian GAAP,
compensation expense is not recognized prior to the grant date. Further, the
Company adjusted for forfeitures under Canadian GAAP as they occurred where IFRS
requires an estimate of the forfeitures on initial recognition.
These changes decreased share-based compensation expense and provisions by $45
and $25 for the three and six month periods ended June 30, 2010, respectively.
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 $206 at June 30, 2010, from contributed surplus to
provisions.
d. Deferred income taxes
Deferred income tax liabilities have been adjusted as follows:
(i) As at January 1, 2010 and for the six-month period ended June 30, 2010,
Strongco operated as an income trust that qualified for special tax treatment
permitting a tax deduction by the trust for distributions paid to the trust's
unitholders. The change in tax legislation in 2007 effectively imposed an income
tax for income trusts for taxation years beginning in 2011. As a result,
Strongco has recorded future income taxes under Canadian GAAP during this period
using the enacted (or substantively enacted) income tax rates that, at the
consolidated balance sheet date, are expected to apply when the temporary
differences reverse in years 2011 and beyond.
Although IFRS recognizes that in some jurisdictions income taxes may be payable
at a higher or lower rate or be refundable or payable if part, or all, of the
net profit or retained earnings is paid out as a dividend to shareholders of the
entity, there is a general requirement that income taxes be measured at the tax
rate applicable to undistributed profits. As a result, deferred income taxes
were re-measured at the tax rate of approximately 46.4% applicable to
undistributed profits, which resulted in an increase to the Company's deferred
tax liability of $1,177 at June 30, 2010.
(ii) As described in (a) above, the Company adjusted the deferred income balance
by $4,672 at June 30, 2010 as a result of the Company's decision to recognize
unamortized net actuarial losses as at January 1, 2010 and to recognize the tax
impacts related to the IFRIC 14 liability recorded on January 1, 2010.
(iii) In addition, following the adjustments made to the opening balance at
January 1, 2010 on the adoption of IFRS the Company assessed the recoverability
of its deferred tax asset and determined that it did not meet the recognition
criteria under International Accounting Standards ("IAS") 12, Income Taxes. As a
result, the Company recorded an adjustment of $2,080 to reduce the deferred
income tax assets on June 30, 2010.
The above adjustments (decreased) increased income tax expense recognized in the
consolidated statement of income (loss) by ($31) and $10 for the three and
six-month periods ended June 30, 2010, respectively.
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 $2,088 to property and equipment and $2,187 to finance lease
obligations at June 30, 2010. This also resulted in a reclassification of lease
costs from rent expense to depreciation expense and interest expense. The net
impact on the consolidated statement of income (loss) was not significant.
g) Pursuant to the guidance under IAS 1, Presentation of Financial Statements,
the Company has presented expenses by function and accordingly has reclassified
administration, distribution and selling expenses under Canadian GAAP to its
respective function under IFRS.
iii) Adjustments to the consolidated statement of cash flows
The transition from Canadian GAAP to IFRS had no significant impact on cash
flows generated by the Company, except that cash flows related to interest are
classified as financing activities. Under Canadian GAAP, cash flows relating to
interest payments were classified as operating activities.
6. Inventories
Inventory components, net of write-downs and provisions are as follows:
---------------------------------------------------------------------------
As at June 30, 2011 December 31, 2010
---------------------------------------------------------------------------
Equipment $ 171,897 $ 142,080
Parts 19,164 15,401
Work in process 4,778 2,507
---------------------------------------------------------------------------
$ 195,839 $ 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 totalling approximately
$22.4 million which are renewable annually. Borrowings under the lines of credit
are limited by standard borrowing base calculations based on trade receivables
and inventories, which is typical of such lines of credit. As collateral, the
Company has provided a $50 million debenture and a security interest in trade
receivables, inventories (subordinated to the collateral provided to the
equipment inventory lenders), property, plant and equipment (subordinated to
collateral provided to lessors), real estate and on intangible and other assets.
The operating lines bear Interest at rates that range between bank prime rate
plus 0.50% and bank prime rate plus 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 June 30, 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 June 30, 2011, the Company had outstanding foreign exchange
forward contracts under this facility totalling US$3.0 million at an average
exchange rate of $0.9832 Canadian for each US $1.00 with settlement dates
between July 15, 2011 and September 15, 2011. The foreign exchange forward
contracts are not treated as a hedge for accounting purposes and, accordingly,
the change in fair value of the swaps is recorded in trade and other payables in
the consolidated balance sheet.
The Company's bank credit facilities also include term loans secured by real
estate in the United States. At June 30, 2011 the outstanding balance on these
term loans was US$3.6 million. The term loans bear interest at LIBOR plus 3.05%
and require 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 loans to a fixed rate of 5.17%. The term loans and
swap agreements expire in September 2012 at which point a balloon payment for
the balance of the loans is due. The interest rate swaps are not treated as a
hedge for accounting purposes and, accordingly, the change in fair value of the
swaps is recorded in trade and other payables in the consolidated balance sheet.
The Company's bank credit facilities contain financial covenants typical of such
credit facilities that require the Company to maintain certain financial ratios
and meet certain financial thresholds. The Company's bank has agreed to amend
covenants for the accounting changes under IFRS.
8. Equipment Notes Payable
In addition to its bank credit facilities, the Company has lines of credit
available totalling approximately $221 million from various non-bank equipment
lenders in Canada and the United States, which are used to finance equipment
inventory. At June 30, 2011, there was approximately $156 million borrowed on
these equipment finance lines.
Typically, these equipment notes are interest free for periods up to 12 months
from the date of financing, after which they bear interest at rates ranging from
4.25% to 5.85% over the one month BA rate and 3.25% to 4.9% over the prime rate
of a Canadian chartered bank in Canada, and from 2.5% to 5.5% over on month
Libor rate and between prime and prime plus 3% in the United States. As
collateral for these equipment notes, the Company has provided liens on the
specific inventories financed and any related accounts receivable. Monthly
principal repayments 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.
9. Notes Payable
Notes payable is comprised of the following:
---------------------------------------------------------------------------
June 30, 2011 December 31, 2010
---------------------------------------------------------------------------
Champion acquisition note (i) $ - $ 1,233
Promissory notes (ii) 1,609 -
Equipment plan notes payable -
rental fleet (iii) 3,311 -
Term note - United States (iv) 3,587 -
Term note - Canada (v) 4,833 -
Construction facility (vi) 1,797 -
Line-of-credit - Chadwick-BaRoss (vii) 779 -
---------------------------------------------------------------------------
15,916 1,233
---------------------------------------------------------------------------
Current portion 1,905 1,233
---------------------------------------------------------------------------
Long-term portion $ 14,011 $ -
---------------------------------------------------------------------------
(i) On March 20, 2008, the Company purchased substantially all of the assets
(excluding real property) of the Champion Road Machinery division of Volvo Group
Canada Inc. ("Champion") for a total consideration of $24,984 including
deal-related costs of $190. The consideration included a non-interest bearing
note payable in favour of Volvo Group Canada Inc. of $2,500 with instalment
payments of $1,250 due in March 2010 and March 2011. The note was secured with
certain assets of Champion. The note had been discounted at 6.0% using the
effective interest rate method, resulting in a discount of $346 that was
amortized to interest expense over the three-year period to March 2011. During
the six month period ended June 30, 2011, the final principal payment on the
non-interest bearing note was made.
(ii) As part of the acquisition of CBR, the Company issued, through a wholly
owned subsidiary, three promissory notes totalling US$1,863. The three
promissory notes mature on February 17, 2013 and bear interest at the US Prime
rate. Quarterly principal payments of US$195 commenced in May 2011.
(iii) In addition to equipment notes payable as described in note 8, CBR
utilizes floor plan notes payable to finance its rental fleet. Payment is
required at the earlier of the sale of items or per contractual schedule ranging
from 12 to 24 months. Effective interest rates range from 2.01% to 5.80% with
various maturity dates.
(iv) As part of the acquisition of CBR, the Company assumed a US$3,787 term note
secured by real estate and cross-collateralized with CBR's revolving line of
credit. The term note is interest bearing at a rate of LIBOR plus 3.05% and
matures in September 2012.
(v) In April 2011, the Company's credit facilities were amended to add a $5,000
demand, non-revolving term loan ("Term note - Canada"). The Term note - Canada
is for a term of 60 months and bears interest at the bank's prime lending rate
plus 2.0%. Monthly principal payments of $83 plus accrued interest commenced in
May 2011.
(vi) In May 2011, the bank credit facilities were further amended to add a
construction loan facility ("Construction Loan") to finance the construction of
the Company's new Edmonton, Alberta branch. Under the Construction Loan, the
Company is able to borrow 70% of the cost of the land and building construction
costs to a maximum of $7,100. The Company purchased the property in March 2011
and commenced construction in June 2011. The construction is scheduled to be
completed before the end of 2011. As at June 30, 2011, the Company has drawn
$1,797 against the construction loan facility. Upon completion, the Construction
Loan will be converted to a demand, non-revolving term loan ("Mortgage Loan").
The Mortgage Loan will be for a term of 60 months. The Construction Loan and
Mortgage Loan bear interest at the bank's prime lending rate plus 2%.
(vii) CBR utilizes a bank line-of-credit with availability of US$2,500. The
line-of-credit bears interest at LIBOR plus 2.6% and is accounted for as
long-term, as repayment is not required until the completion of the current
banking agreement in September 2012.
10. Shareholders' Capital
On January 17, 2011, the Company completed a rights offering for aggregate
proceeds of $7,809, net of transaction costs of $51. The offering was virtually
fully subscribed, with a total of 9,941,964 rights being exercised for 2,485,491
common shares and 134,509 common shares being issued pursuant to the additional
subscription privilege. Under the offering, each registered holder of the
Corporation's Common Shares as of December 17, 2010 received one Right for each
Common Share held. Four Rights plus the sum of $3.00 were required to subscribe
for one Common Share. Each common share was issued at a price of $3.00.
Authorized:
Unlimited number of shares
Issued:
As at June 30, 2011, a total of 13,128,719 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 Six-month
period ended period ended
---------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2011 2010 2011 2010
---------------------------------------------------------------------------
Weighted average number of
shares for basic earnings
per share calculation 13,128,719 10,508,719 12,882,642 10,508,719
Effect of dilutive options
outstanding 38,628 - 38,628 -
---------------------------------------------------------------------------
Weighted average number of
shares for diluted
earnings per share
calculation 13,167,347 10,508,719 12,921,270 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 for the three-month and six-month periods ended June
30, 2011 and June 30, 2010, respectively.
12. Income Taxes
Significant components of the provision for income taxes are as follows:
---------------------------------------------------------------------------
For the six-month period ended June 30 2011 2010
---------------------------------------------------------------------------
Current tax $ 183 $ -
Deferred tax - -
---------------------------------------------------------------------------
Total income tax expense $ 183 $ -
---------------------------------------------------------------------------
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 June 30 2011 2010
---------------------------------------------------------------------------
Earnings (loss) before taxes $ 4,414 $ (2,616)
Statutory tax rate 27.93% 46.40%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Provision for income taxes at
statutory tax rate $ 1,232 $ (1,214)
Adjustments thereon for the effect of:
Permanent and other differences 61 120
Benefit of temporary and other differences
unrecognized (1,045) -
Company's loss for tax purposes for which
benefit is not recognized - 1,094
Utilization of losses previously unrecognized (65) -
---------------------------------------------------------------------------
Total income tax expense $ 183 $ -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Eligible capital expenditures and other
reserves $ 604 $ 537
Pension 344 157
Deferred income tax assets 948 694
---------------------------------------------------------------------------
Capital and other assets (397) (694)
---------------------------------------------------------------------------
Partnership income taxes payable in 2012 (551) -
---------------------------------------------------------------------------
Deferred income tax liabilities $ (948) $ (694)
---------------------------------------------------------------------------
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 June 30, 2011
was 27.93% (June 30, 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 matter. The required provision may
change in the future due to new developments in each matter or changes in
approach such as a change in settlement strategy dealing with these matters.
A statement of claim has been filed naming a former division of the Company as
one of several defendants in proceedings under the Superior Court of Quebec. The
action claims errors and omissions in the contractual execution of work
entrusted to the defendants and names the Company as jointly and severally
liable for damages of approximately $5.9 million. Although the Company cannot
predict the outcome at this time, based on the opinion of external legal
counsel, management believes that the Company has a strong defence against the
claim and that it is without merit. The Company's insurer has provided
conditional coverage for this claim.
A statement of claim has been filed naming a former division of the Company as
one of several defendants in proceedings under the Court of Queen's Bench of
Manitoba. The action claims errors and omissions in the contractual execution of
work entrusted to the defendants and names the Company as jointly and severally
liable for damages of approximately $4,800. Although the outcome is
indeterminable at this early stage of the proceedings, the Company believes that
they have a strong defence against this claim and that it is without merit. The
Company's insurer has provided conditional coverage for this claim.
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
July 1, 2011 to January 31, 2014 are $386 (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 Six-months ended
June 30 June 30
---------------------------------------------------------------------------
2011 2010 2011 2010
---------------------------------------------------------------------------
Equipment sales $ 77,076 $ 41,679 $ 133,060 $ 71,547
Equipment rentals 6,080 4,122 11,550 7,856
Product support 30,894 23,790 56,935 43,868
---------------------------------------------------------------------------
Total Equipment Distribution $ 114,050 $ 69,591 $ 201,545 $ 123,271
---------------------------------------------------------------------------
Geographical information:
---------------------------------------------------------------------------
As at June 30, 2011 December 31, 2010
---------------------------------------------------------------------------
Canada US Total Canada US Total
---------------------------------------------------------------------------
Total
assets $ 250,749 $ 39,259 $ 290,008 $ 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 six-month period ended June 30 2011 2010
---------------------------------------------------------------------------
Changes in working capital
Trade and other receivables $ (13,798) $ (5,873)
Inventories (34,423) (25,150)
Prepaid expense and other deposits (213) (1,230)
Trade and other payables 6,304 11,926
Provisions 188 97
Deferred revenue and customer deposits (647) 963
Income taxes recoverable/payable (55) -
Equipment notes payable 27,191 10,138
---------------------------------------------------------------------------
$ (15,453) $ (9,129)
---------------------------------------------------------------------------
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.
1 Year Great Prairie Energy Services Chart |
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