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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| TSXV:GPE | TSX Venture | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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Strongco Corporation (TSX:SQP) today reported financial results for the three
months ended March 31, 2012.
Summary (i)
-- Total revenues increased by 11% to $96.8 million
-- Gross margin percentage of 20.0% compared to 19.4%
-- EBITDA increased by 18% to $8.0 million
-- Earnings before income taxes of $1.7 million compared to $661,000
-- Net income of $1.2 million compared to $598,000
-- Earnings per share of $0.09 compared to $0.05
(i) Comparisons are between first quarter 2012 and first quarter 2011
"The improvement in construction markets that gathered momentum during 2011
continued into the first quarter of 2012," said Robert Dryburgh, President and
Chief Executive Officer of Strongco. "Strongco benefited from higher end-use
markets, better sales execution and one additional month of contributions from
Chadwick-BaRoss, which we acquired in February of last year."
"As a result, we posted gains in all major metrics - revenues, margins, EBITDA,
net earnings and EPS. As we move through 2012, we see demand continuing to rise
in all of our markets and that's reflected in the strongest order book we've had
in several years."
First Quarter 2012 Review
Total revenues in the three months ended March 31, 2012 were $96.8 million, an
increase of 11% from the first quarter of 2011.
Equipment sales increased by 11% from last year to $62.0 million. Product
support revenues gained 14% to $29.6 million. Rental revenues were $5.2 million,
down 5% from the year-earlier period.
Gross margin increased by 14% to $19.4 million during the first quarter. As a
percentage of revenue, gross margin moved up to 20.0% from 19.4% in the same
period of 2011. "The improvement in gross margin percentage was primarily due to
a higher sales mix of larger equipment such as cranes and articulated trucks,
which offer higher gross margins," said David Wood, Vice President and Chief
Financial Officer.
Financial Highlights (i)
Three-Month Periods Ended March 31
($ millions except per share amounts) 2012 2011
Revenues $96.8 $87.5
EBITDA $8.0 $6.8
Earnings before income taxes $1.7 $0.7
Net income $1.2 $0.6
Basic and diluted net income per share $0.09 $0.05
Equipment in inventory $216.9 $174.4
Equipment notes payable $179.7 $128.8
(i) All financial information conforms to International Financial Reporting
Standards.
Administrative, distribution and selling expenses during the first quarter
totalled $16.7 million, compared to $15.2 million in 2011. Expenses for the
period just ended were higher because it included one additional month of
operations by Chadwick-BaRoss, which was acquired in February 2011. As a
percentage of revenue administrative, distribution and selling expenses were
17.3% compared to 17.4% in the first quarter of 2011.
EBITDA for the first quarter increased to $8.0 million from $6.8 million a year
earlier and earnings before income taxes were $1.7 million, up from $0.7 million
in the first quarter of 2011.
As a result of the strong revenue performance, Strongco's net income in the
first quarter of 2012 was $1.2 million ($0.09 per share), up from 0.6 million
($0.05 per share) in the first quarter of 2011.
Outlook
The Canadian economy in general and construction markets across Canada are
expected to continue to improve throughout 2012, which should result in strong
demand for heavy equipment.
Mild weather conditions and lack of snow affected equipment usage in much of
Canada and the northeastern United States and significantly curtailed oilfield
activities in northern Alberta in the first quarter and delayed the buying
decisions of customers across the country. This tempered demand for heavy
equipment and product support in the first quarter of 2012. However, the early
onset of warm spring weather brought an advanced start to the summer
construction season which contributed to stronger equipment sales in March.
Strongco's sales backlogs continued to rise during the quarter and by mid-April
2012 had topped $100 million, more than double the level of a year ago and the
highest level in several years. This is a positive indication of the increasing
demand for heavy equipment.
An important contribution to anticipated growth in 2012 is expected from
Alberta. Oil prices have continued to show strength and stability, which has
powered an ongoing economic upturn in the province. In particular, the outlook
for northern Alberta and the oil sands is for continued significant investment
over the next several years, which bodes well for heavy equipment demand in the
region.
Equipment suppliers are expected to improve product availability and delivery
lead times in 2012. Inventory levels at Strongco were allowed to run slightly
higher than normal at year end to ensure availability of product as the Company
enters the prime selling season. Consequently, product availability is not
expected to affect the Company's sales in 2012. Strongco's significant position
with its equipment suppliers should allow the Company to optimize equipment
deliveries.
Management remains cautiously optimistic that the improving Canadian economy
will continue in 2012, which is expected to increase revenues. In addition,
while market conditions in the northeastern United States remain weak,
Chadwick-BaRoss realized modest growth in the first quarter of 2012 and
contributed positively to Strongco's overall results. Chadwick-BaRoss serves a
broad range of market sectors in Maine, New Hampshire and Massachusetts. Demand
for equipment in these regions is expected to continue to show a modest increase
through the balance of the year, which should contribute to improved revenue and
profitability in 2012.
Conference Call Details
Strongco will hold a conference call on Thursday, May 10, 2012 at 10 am ET to
discuss first quarter results. Analysts and investors can participate by dialing
416-644-3421 or toll free 1-866-250-4877. An archived audio recording will be
available until midnight on June 11, 2012. To access it, dial 416-640-1917 and
enter passcode 4534925#.
About Strongco
Strongco Corporation is one of Canada's largest multiline mobile equipment
dealers and operates in the northeastern United States through Chadwick-BaRoss,
Inc. Strongco sells, rents and services equipment used in sectors such as
construction, infrastructure, mining, oil and gas, utilities, municipalities,
waste management and forestry. Strongco has approximately 640 employees serving
customers from 26 branches in Canada and five in the United States. Strongco
represents leading equipment manufacturers with globally recognized brands,
including Volvo Construction Equipment, Case Construction, Manitowoc Crane,
National, Grove, Terex Cedarapids, Terex Finlay, Ponsse, Fassi, Allied
Construction, Taylor, ESCO, Dressta, Sennebogen, Jekko, Takeuchi, Doppstadt,
Link-Belt and Kawasaki. Strongco is listed on the Toronto Stock Exchange under
the symbol SQP.
Forward-Looking Statements
This news release contains "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. This news
release contains forward-looking statements relating to the expected trading of
common shares of Strongco on the TSX, and such statements are based upon the
expectations of management.
Strongco Corporation
Management's Discussion and Analysis
The following management discussion and analysis ("MD&A") provides a review of
the consolidated financial condition and results of operations of Strongco
Corporation, formerly Strongco Income Fund ("the Fund"), Strongco GP Inc. and
Strongco Limited Partnership collectively referred to as "Strongco" or "the
Company", as at and for the three months ended March 31, 2012. This discussion
and analysis should be read in conjunction with the accompanying unaudited
consolidated financial statements as at and for the three months ended March 31,
2012. For additional information and details, readers are referred to the
Company's audited consolidated financial statements and accompanying notes as at
and for the year ended December 31, 2011 contained in the Company's annual
report for the year ended December 31, 2011. For additional information and
details, readers are referred to the Company's Notice of Annual Meeting of
Shareholders and Management Information Circular ("MIC") dated March 26, 2012,
and the Company's Annual Information Form ("AIF") dated March 22, 2012, 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 May 9, 2012.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------
Three months
Income Statement Highlights ended March 31 2012/2011
----------------------------------------------------------------------------
($ millions, except per share amounts) 2012 2011 $ Change % Change
----------------------------------------------------------------------------
Revenues $ 96.8 $ 87.5 $ 9.3 11%
----------------------------------------------------------------------------
Income before income taxes $ 1.7 $ 0.7 $ 1.0 143%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings per share $ 0.09 $ 0.05 $ 0.04 80%
EBITDA (note 1) 8.0 6.8 1.2 18%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance Sheet Highlights
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment inventory $ 216.9 $ 174.4 $ 42.5 24%
Total assets 338.5 255.9 82.6 32%
Debt (bank debt and other notes
payable) 32.9 26.9 6.0 22%
Equipment notes payable 179.7 128.8 50.9 40%
Total liabilities 280.9 202.8 78.1 39%
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization
of capital assets, amortization of equipment inventory on rent, and amortization
of rental fleet. EBITDA is presented as a measure used by many investors to
compare issuers on the basis of ability to generate cash flow from operations.
EBITDA is not a measure of financial performance or earnings recognized under
International Financial Reporting Standards ("IFRS") and therefore has no
standardized meaning prescribed by IFRS and may not be comparable to similar
terms and measures presented by other similar issuers. The Company's management
believes that EBITDA is an important supplemental measure in evaluating the
Company's performance and in determining whether to invest in Shares. Readers of
this information are cautioned that EBITDA should not be construed as an
alternative to net income or loss determined in accordance with IFRS as
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.
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 complementary equipment lines and attachments.
FINANCIAL RESULTS - THREE MONTHS ENDED MARCH 31, 2012 AND 2011
Consolidated Results of Operations
----------------------------------------------------------------------------
Three months ending March 31 2012/2011
----------------------------------------------------------------------------
($ thousands, except per
share amounts) 2012 2011 $ Change % Change
----------------------------------------------------------------------------
Revenues $ 96,814 $ 87,495 $ 9,319 11%
Cost of sales 77,403 70,511 6,892 10%
----------------------------------------------------------------------------
Gross Margin 19,411 16,984 2,427 14%
Admin, distribution and
selling expenses 16,744 15,241 1,503 10%
Other income (433) (274) (159) 58%
----------------------------------------------------------------------------
Operating income 3,100 2,017 1,083 54%
Interest expense 1,353 1,356 (3) 0%
----------------------------------------------------------------------------
Earnings before income
taxes 1,747 661 1,086 164%
Provision for income
taxes 505 63 442
----------------------------------------------------------------------------
Net income $ 1,242 $ 598 $ 644 108%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted
earnings per share 0.09 0.05 0.04 80%
Weighted average number
of shares
- Basic 13,128,719 12,736,681
- Diluted 13,178,356 12,767,927
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key financial measures:
Gross margin as a
percentage of revenues 20.0% 19.4%
Admin, distribution and
selling expenses as
percentage of revenues 17.3% 17.4%
Operating income as a
percentage of revenues 3.2% 2.3%
EBITDA (note1) $ 8,024 $ 6,822 $ 1,202 18%
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization
of capital assets, amortization of equipment inventory on rent, and amortization
of rental fleet. EBITDA is presented as a measure used by many investors to
compare issuers on the basis of ability to generate cash flow from operations.
EBITDA is not a measure of financial performance or earnings recognized under
IFRS and therefore has no standardized meaning prescribed by IFRS and may not be
comparable to similar terms and measures presented by other similar issuers. The
Company's management believes that EBITDA is an important supplemental measure
in evaluating the Company's performance and in determining whether to invest in
Shares. Readers of this information are cautioned that EBITDA should not be
construed as an alternative to net income or loss determined in accordance with
IFRS as 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.
Acquisition of Chadwick-BaRoss, Inc.
On February 17, 2011, the Company completed the acquisition of 100% of the
shares of Chadwick-BaRoss, Inc. ("Chadwick-BaRoss") for net proceeds of US$11.1
million. The transaction value was satisfied with net cash proceeds of US$9.2
million and notes issued to the major shareholders of Chadwick-BaRoss totalling
US$1.9 million. Chadwick-BaRoss is a heavy equipment dealer headquartered in
Westbrook, Maine, with three branches in Maine and one in each of New Hampshire
and Massachusetts. The acquisition was effective as of February 1, 2011 and the
results of Chadwick-BaRoss have been included in the consolidated results of
Strongco from that date.
Market Overview
Strongco participates in number of geographic regions and in a wide range of end
use markets that utilize heavy equipment and which may have differing economic
cycles. Construction markets generally follow the cycles of the broader economy,
but typically lag by periods ranging up to 12 months. As construction markets
recover following a recession, demand for heavy equipment normally improves as
construction activity and confidence in construction markets build. In addition,
as the financial resources of customers strengthen, they have historically
replenished and upgraded their equipment fleets after a period of restrained
capital expenditures. Demand in oil and gas and mining markets is affected by
the economy but also tends to be driven by the global demand and pricing of the
relevant commodities. Recovery in equipment markets is normally first evident in
equipment used in earth moving applications and followed by cranes, which are
typically utilized in later phases of construction. Cranes are also extensively
utilized in the oil and gas sector. Rental of heavy equipment is typically
stronger following a recession until confidence is restored and financial
resources of customers improve.
With the economic recovery in Canada following the recession construction
markets began to show signs of improvement in the latter half of 2010. Spurred
by government stimulus spending for infrastructure projects, construction
activity in Canada continued to increase in 2011. Correspondingly, demand for
new heavy equipment strengthened throughout 2011. Initially, 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. Rental activity, especially under contracts with purchase options ("RPO"
- see discussion under Equipment Rentals below), remained strong in 2011, and as
confidence in the economy grew, customers were more willing to purchase
equipment and exercise purchase options under RPO contracts. Strongco's sales
backlogs for all categories of equipment, including cranes, improved steadily
throughout the latter half of 2010 and continued to strengthen throughout 2011,
a positive indication of the continuing recovery.
The improving trend in construction markets continued across Canada in the first
quarter of 2012. Ongoing activity in the Alberta oil sands, large hydro-electric
projects and continuing spending on infrastructure projects contributed to
strong demand for heavy equipment and cranes. In the first quarter, customers
delayed the buying decisions and reduced parts consumption as a result of the
generally mild winter weather conditions across most of the country. In Northern
Alberta, these higher than normal winter temperatures curtailed oilfield
activities. This tempered demand for heavy equipment and product support in the
early part of the first quarter. However, the early onset of warm spring weather
brought an advanced start to the summer construction season which contributed to
stronger equipment sales in March. Strongco's sales backlogs continued to rise
during the quarter and by mid-April had topped $100 million, more than double
the level of a year ago and the highest level in several years, a positive
indication of the increasing demand for heavy equipment.
While the economy and demand for equipment have been improving in Canada, there
has been little recovery in heavy equipment markets in the United States due to
continued weak economic conditions. Residential construction has been a major
driver of the US economy and heavy equipment markets in the past. However,
current housing activity in most states remains depressed and this situation
continues to negatively affect demand for heavy equipment. Certain market
segments, however, such as waste management and scrap handling, have experienced
continued activity and generated demand for heavy equipment in the northeastern
US. In addition, while sales of new equipment have not shown significant growth,
parts and service activity in New England has remained fairly strong as
customers repaired rather than replaced their fleets.
Revenues
A breakdown of revenue for the quarter ended March 31, 2012 and 2011 by type
within each geographic region is as follows:
----------------------------------------------------------------------------
Three Months Ended
March 31 2012/2011
-------------------------------------------
($ millions) 2012 2011 $ Change % Change
----------------------------------------------------------------------------
Eastern Canada (Atlantic and
Quebec)
---------------------------------
Equipment Sales $ 17.1 $ 20.1 $ (3.0) -15%
Equipment Rentals 1.8 1.5 $ 0.3 20%
Product Support 10.1 9.3 $ 0.8 9%
----------------------------------------------------------------------------
Total Eastern Canada $ 29.0 $ 30.9 $ (1.9) -6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------
Central Canada (Ontario)
---------------------------------
Equipment Sales $ 16.8 $ 18.3 $ (1.5) -8%
Equipment Rentals 1.0 1.3 $ (0.3) -23%
Product Support 9.0 8.0 $ 1.0 13%
----------------------------------------------------------------------------
Total Central Canada $ 26.8 $ 27.6 $ (0.8) -3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------
Western Canada (Manitoba to BC)
---------------------------------
Equipment Sales $ 21.8 $ 14.9 $ 6.9 46%
Equipment Rentals 1.5 2.4 $ (0.9) -38%
Product Support 6.5 5.7 $ 0.8 14%
----------------------------------------------------------------------------
Total Western Canada $ 29.8 $ 23.0 $ 6.8 30%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------
North-eastern United States
---------------------------------
Equipment Sales $ 6.3 $ 2.7 $ 3.6 133%
Equipment Rentals 0.9 0.3 $ 0.6 200%
Product Support 4.0 3.0 $ 1.0 33%
----------------------------------------------------------------------------
Total North-eastern United States $ 11.2 $ 6.0 $ 5.2 87%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------
Total Equipment Distribution
---------------------------------
Equipment Sales $ 62.0 $ 56.0 $ 6.0 11%
Equipment Rentals 5.2 5.5 $ (0.3) -5%
Product Support 29.6 26.0 $ 3.6 14%
----------------------------------------------------------------------------
Total Equipment Distribution $ 96.8 $ 87.5 $ 9.3 11%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment Sales
Strongco's equipment sales in the first quarter of 2012 were $62.0 million which
was up 11% from $56.0 million in the first quarter of 2011. Sales were strongest
in western Canada and New England. Sales of cranes were particularly strong,
especially in Alberta due to the ongoing activity in the oil sands and in Quebec
due to hydro-electric and infrastructure projects in the province. The markets
for new heavy equipment other than cranes in which Strongco operates in Canada
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 Canada, while demand for compact equipment was up a lesser amount.
Average selling prices vary from period to period depending on sales mix between
product categories, model mix within product categories and features and
attachments included in equipment being sold. Strongco's average selling prices
in the first quarter were up slightly from a year ago due primarily to a higher
proportion of sales of larger, more expensive equipment (especially cranes and
articulated trucks). After scaling back during the recession, OEM's have been
challenged to ramp up production in response to the increasing demand, which has
resulted in longer lead times and reduced availability of certain types of
equipment. OEM deliveries have been improving but with the increasing demand,
shortages of certain types of equipment still exist. While average selling
prices in most product categories remained fairly consistent year over year, the
introduction of new tier 4 engine technology resulted in higher costs and
selling prices in certain product categories. Price competition was particularly
aggressive in the quarter from certain dealers who were able to increase their
inventories of equipment with old tier 3 engines in 2011. High inventory levels
of equipment with old tier 3 engines at certain dealers will continue to put
pressure on selling prices in the near future but with the strong demand for
equipment, the tier 3 product is expected to be sold though the market quickly
which should ease competition and pricing.
On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic
regions) were $17.1 million, which compared to $20.1 million in the first
quarter of 2011. Crane sales were higher in the first quarter of 2012 while
sales of other heavy equipment were below the prior year. Construction markets
in Quebec continued to benefit from the hydro-electric and infrastructure
projects in that province, while construction activity in the Atlantic provinces
declined. Overall, the markets for GPE in Eastern Canada where Strongco
participates were estimated to be up approximately 20% over first quarter of
2011. However, aggressive price competition, as well as a high level of sales of
equipment on RPO's carried over from 2011 at certain competitors resulted in a
decline in Strongco GPE sales, particularly in the first two months of the
quarter. Sales volumes recovered in March but for the quarter unit volumes were
down approximately 20% from a year ago and as a result, Strongco's market share
in GPE declined in the quarter. Strongco's sales of cranes in Eastern Canada
were up significantly over the first quarter of 2011 due to strong demand for
hydro-electric and other infrastructure projects in Quebec and as crane rental
companies continued to replenish and increase their fleets.
Strongco's equipment sales in Central Canada were $16.8 million, which was down
from $18.3 million in the first quarter of 2011. Sales of both GPE and compact
equipment were higher in the quarter while sales of cranes were lower. The lack
of snow and very wet weather condition early in the quarter caused many
customers to delay buying decisions, but with the onset of warm spring weather,
equipment sales increased significantly in March. Crane sales in Ontario, while
quite strong, fell short of the very strong sales level achieved in the first
quarter of 2011 when Strongco's crane rental customers, started to replenish
their fleets following the recession. Price competition in Ontario, for GPE and
compact equipment remained aggressive in the first quarter, especially from
certain dealers attempting to capture market share in particular product
categories and dealers carrying high levels of product with the old tier 3
engine. However, Strongco's unit volume increases outperformed the market
overall in both categories, resulting in increased market share in the quarter.
At the same time, sales backlogs increased in the quarter which is an indication
of continued strong demand for heavy equipment in the province.
Equipment sales in Western Canada during the first quarter were $21.8 million,
which was up 46% from $14.9 million in the first quarter of 2011. With the
upward trend and sustainability in oil prices, economic conditions in Alberta
have improved from the recession. The milder than normal and very wet winter
weather conditions curtailed activity in the early part of the first quarter,
particularly in Northern Alberta, which caused customers to delay heavy
equipment buying decisions. Construction activity and demand for heavy equipment
improved significantly in the latter part of the quarter resulting in stronger
equipment sales in March. Total units sold in the markets served by Strongco in
Alberta, excluding cranes, were estimated to be up approximately 45% relative to
the first quarter of 2011. Strongco outperformed the market with total unit
volume growth in the first quarter greater than 60% and captured a larger share
of the market. The increase was in sales of both GPE and compact equipment.
Crane sales were also very strong in the quarter, growing by more than 150% over
the first quarter of 2011 as crane rental customers continued to replenish and
increase fleets.
Equipment sales in the North-eastern United States were $6.3 million, which was
up from $2.7 million in the first quarter of 2011. As Strongco acquired
Chadwick-BaRoss in February 2011, results for the first quarter of 2011 include
the results of Chadwick-BaRoss for February and March only, which accounts for a
portion of the year over year increase. The markets for heavy equipment in New
England remained soft in the first quarter of 2012 and below pre-recession
levels. The traditional heavy equipment markets for residential construction,
forestry and infrastructure in the region have remained flat year over year, but
other markets for scrap handling and waste management have experienced some
increase in activity. Chadwick-BaRoss' equipment sales for the quarter were
ahead of the same period in 2011 due to stronger sales of forestry and scrap
handling products, and as a result, Strongco's market share in this region
improved slightly.
Equipment Rentals
It is common industry practice for certain customers to rent to meet their heavy
equipment needs rather than commit to a purchase. In some cases this is in
response to the seasonal demands of the customer, as in the case of municipal
snow removal contracts, or to meet the customers' needs for a specific project.
In other cases, certain customers prefer to enter into short-term rental
contracts with an option to purchase after a period of time or hours of machine
usage. This latter type of contract is referred to as a rental purchase option
contract ("RPO"). Under an RPO, a portion of the rental revenue is applied
toward the purchase price of the equipment should the customer exercise the
purchase option. This provides flexibility to the customer and results in a more
affordable purchase price after the rental period. Normally, the significant
majority of RPO's are converted to sales within a six month period and this
market practice is a method of building sales revenues and the field population
of equipment.
Initially, as construction markets were recovering following the recession,
rental activity was robust as many customers lacked the confidence or financial
resources to commit to purchase equipment and preferred instead to rent to meet
their equipment needs. As heavy equipment markets continued to recover, sales of
equipment increased, but at the same time rental activity, including RPOs, has
remained strong. At the same time markets were recovering, Strongco made a
commitment to participate to a larger extent in the RPO market. This has
resulted in growth in Strongco's rental activity and revenues.
Strongco's rental revenue was $5.2 million in the quarter which was fairly
consistent with the level of rental revenue in the first quarter of 2011 of $5.5
million and significantly higher than in prior years. On a regional basis,
Strongco's rental revenue was strong in Eastern Canada, which historically has
not been a major rental market, due to RPO contracts for articulated trucks and
loaders in Quebec for hydro-electric and infrastructure projects in the
province. Rental activity was also stronger at Chadwick-BaRoss as given the
continued weak economy in the Northeastern United States, customers preferred to
rent to meet their equipment needs. In addition, Strongco's crane business,
which has traditionally not had a significant rental element, experienced an
increase in rental activity since the recession as construction markets and
demand for cranes improved. Crane rental revenues were up slightly in the first
quarter of 2012 compared to the prior year due to RPO contracts in Ontario.
Product Support
Sales of new equipment usually carry the warranty from the manufacturer for a
defined term. Product support revenues from the sales of parts and service are
therefore not impacted until the warranty period expires. Warranty periods vary
from manufacturer to manufacturer and depending on customer purchases of
extended warranties. Product support activities (sales of parts and service
outside of warranty), therefore, tend to increase at a slower rate and lag
equipment sales by three to five years. The increasing equipment population in
the field leads to increased product support activities over time. Product
support activities are normally strongest in 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.
Strongco's product support revenues were higher in the first quarter of 2012 at
$29.6 million compared to $26.0 million in the first quarter of 2011. Product
support activities were up across all regions in Canada and in New England. As
construction markets and other end use markets for heavy equipment have been
improving since the recession, utilization of equipment has increased, which, in
turn, has resulted in an increase in product support activity generally. In
addition, while the first quarter of 2012 saw lower than normal amounts of snow
in most regions in Canada and the North-eastern United States and resulted in
lower utilization of equipment for snow removal, the early onset of warm spring
weather had many customers using or preparing their equipment for the summer
season, which resulted in an increase in product support activity in the
quarter. In New England, where weak economic conditions persist, many customers
are repairing existing machines rather than buying new, which has also lead to
higher product support revenues.
Gross Margin
----------------------------------------------------------------------------
Three Months Ended March 31
-------------------------------------------------------
2012 2011 Variance
----------------------------------------------------------------------------
Gross Margin $ millions GM% $ millions GM% $ millions % Var
----------------------------------------------------------------------------
Equipment Sales $ 8.3 13.3% $ 6.6 11.7% $ 1.6 25%
Equipment Rentals 0.6 12.3% 1.0 18.9% (0.4) -36%
Product Support 10.5 35.6% 9.4 36.2% 1.1 12%
----------------------------------------------------------------------------
Total Gross Margin $ 19.4 20.0% $ 17.0 19.4% $ 2.4 14%
----------------------------------------------------------------------------
As a result of the higher revenues in the first quarter of 2012, Strongco's
gross margin increased to $19.4 million from $17.0 million in the first quarter
of 2011. As a percentage of revenue, gross margin improved to 20.0% in the first
quarter of 2012 from 19.4% in the first quarter of 2011. This was due primarily
to a higher gross margin achieved on equipment sales in 2012.
The gross margin on equipment sales was $8.3 million compared to the $6.6
million in the first quarter of 2011 due to higher sales and a higher gross
margin percentage in 2012. Sales were particularly strong in Alberta, with a
large proportion or articulated trucks and cranes being sold in the quarter. As
a percentage of sales, gross margin on equipment sales improved to 13.3%, from
11.7% in 2011 due primarily to the higher sales mix of larger equipment (cranes
and articulated trucks),which offer higher gross margins.
The gross margin on rentals in the first quarter was $0.6 million, which down
from $1.0 million a year ago. The gross margin percentage on rentals declined to
12.3% from 18.9% in the first quarter of 2011 due to a higher proportion of RPO
rentals in 2012. The margin on rental under RPO contracts reflects the
anticipated margin on the ultimate sale on conversion at the end of the rental
which is typically lower than the margin on rentals with no purchase option.
The gross margin on product support activities improved to $10.5 million from
$9.4 million in the first quarter of 2011. As a percentage of revenue, the gross
margin on product support activities was 35.6%, which was consistent with 36.2%
in the first quarter of 2011.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the first quarter of 2012
were $16.7 million, which compared to $15.2 million in the first quarter of
2011. Certain variable distribution and selling expenses were higher in 2012 as
a result of the increase in revenues. In addition, expenses of Chadwick-BaRoss,
which was acquired in February 2011, were higher in 2012 due to the inclusion of
one additional month of expenses plus annual salary and wage increases and
higher headcounts. Annual salary and wage increases and higher headcounts at
Canadian operations, plus a larger accrual for annual and long-term incentive
plans and other employee incentives also contributed to the higher expense
levels in 2012. Expenses in the first quarter of 2012 include $0.1 million of
relocation and moving costs of the new branch in Edmonton. As a percent of
revenue, administration, distribution and selling expenses were 17.3%, down
slightly from 17.4% in the first quarter of 2011.
Other Income
Other income and expense is primarily comprised of gains or losses on
disposition of fixed assets, foreign exchange gains or losses, service fees
received by Strongco as compensation for sales of new equipment by other third
parties into the regions where Strongco has distribution rights for that
equipment and commissions received from third party financing companies for
customer purchase financing Strongco places with such finance companies. Other
income in the first quarter of 2012 was $0.4 million compared to $0.3 million in
the first quarter of 2011.
Interest Expense
Strongco's interest bearing debt comprises bank indebtedness and interest
bearing equipment notes. Strongco typically finances equipment inventory under
floor plan lines of credit available from various non-bank finance companies.
Most equipment financing has interest free periods for up to eight months from
the date of financing after which the equipment notes become interest bearing.
The rate of interest on the Company's bank indebtedness and interest bearing
equipment notes varies with the bank prime rate ("prime rate") in Canada and the
United States, Canadian Bankers Acceptances Rates ("BA rates") and LIBOR rates.
Strongco's interest expense in the quarter was $1.4 million, which compared to
$1.4 million in the first quarter of 2011. Interest expense in first quarter of
2012 includes a $0.3 million interest gain from the mark to market adjustment on
$15 million of interest rate swaps put in place in 2011 to fix the interest rate
on a portion of the Company's variable interest rate debt. Excluding this
favorable adjustment interest in the first quarter of 2012 was higher than the
prior year due to a higher level of interest bearing debt.
During 2011 and into 2012, Strongco's equipment inventories increased to the
support the increasing demand for heavy equipment as construction markets
recovered. This resulted in a higher level of interest-bearing equipment notes
in the first quarter of 2012 compared to the first quarter of 2011. Financing
the acquisition of Chadwick-BaRoss in February 2011 increased Strongco's
interest bearing debt. In addition, the bank indebtedness, equipment notes, and
mortgage term loans of Chadwick-BaRoss are now included in the Company's debt.
Interest on the construction loan facility to finance the construction of the
Company's new branch facility in Edmonton, Alberta was capitalized in the cost
of the building during construction. With the completion of construction in
April of 2012, interest on this loan facility will now be expensed.
Earnings before Income Taxes
Strongco's earnings before income taxes in the first quarter of 2012 were $1.7
million, which was improved from $0.7 million in the first quarter of 2011. The
increase was due to the strong revenue performance in the quarter.
Provision for Income Taxes
The provision for income taxes in the first quarter of 2012 was $0.5 million
which reflects a combined average effective tax rate on the Company's income in
Canada and the United States of 28.9%. For the first quarter of 2011, the
provision for income taxes was $0.1 million which represents a tax provision for
the Company's earnings from Chadwick-BaRoss in the United States. The
recognition of tax loss carry forwards resulted in no provision for income taxes
in the first quarter of 2011 for Strongco in Canada. All tax loss carry forwards
were utilized in 2011.
Net Income
Strongco's net income in the first quarter of 2012 was $1.2 million ($0.09 per
share), which was improved from $0.6 million ($0.05 per share) in the first
quarter of 2011.
EBITDA
EBITDA in the first quarter of 2012 was $8.0 million which was up from $6.8
million in the first quarter of 2011. EBITDA was calculated as follows:
----------------------------------------------------------------------------
Three Months Ended
March 31 Variance
----------------------------------------------------------------------------
EBITDA ($ millions) 2012 2011 2012/2011
----------------------------------------------------------------------------
Net earnings from continuing
operations $ 1.2 $ 0.6 $ 0.6
Add Back:
Interest 1.4 1.3 0.1
Income taxes 0.5 0.1 0.4
Amortization of capital assets 0.8 0.7 0.1
Amortization of equipment inventory
on rent 3.6 3.9 (0.3)
Amortization of rental fleet 0.5 0.2 0.3
----------------------------------------------------------------------------
EBITDA (note 1) $ 8.0 $ 6.8 $ 1.2
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization
of capital assets, amortization of equipment inventory on rent, and amortization
of rental fleet. EBITDA is presented as a measure used by many investors to
compare issuers on the basis of ability to generate cash flow from operations.
EBITDA is not a measure of financial performance or earnings recognized under
International Financial Reporting Standards ("IFRS") and therefore has no
standardized meaning prescribed by IFRS and may not be comparable to similar
terms and measures presented by other similar issuers. The Company's management
believes that EBITDA is an important supplemental measure in evaluating the
Company's performance and in determining whether to invest in Shares. Readers of
this information are cautioned that EBITDA should not be construed as an
alternative to net income or loss determined in accordance with IFRS as
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.
Cash Flow, Financial Resources and Liquidity
Cash Flow Provided By (Used In) Operating Activities:
During the first quarter of 2012, Strongco provided $8.4 million of cash from
operating activities before changes in working capital. This compares to $6.5
million of cash provided from operating activities before changes in working
capital in the first quarter of 2011. After working capital changes and payments
of interest, income taxes and pension funding cash provided by operating
activities amounted to $0.4 million which compared to cash used in operating
activities of $0.7 million in the first quarter of 2011.
The components of the cash provided by (used in) operating activities can be
summarized as follows:
----------------------------------------------------------------------------
Three Months Ended
March 31
----------------------------------------------------------------------------
($ millions) 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 1.2 $ 0.6
Non-cash items:
Depreciation - equipment inventory on rent 3.6 3.9
Depreciation - capital assets 0.8 0.7
Depreciation - rental fleet 0.5 0.2
(Gain) loss on sale of rental fleet 0.1 (0.5)
Interest expense 1.4 1.4
Income tax expense / (recovery) 0.5 0.1
Employee future benefit expense 0.3 0.1
----------------------------------------------------------------------------
$ 8.4 $ 6.5
Changes in non-cash working capital balances (6.0) (5.6)
Employee future benefit funding (0.6) (0.2)
Interest paid (1.3) (1.4)
Income taxes paid (0.1) -
----------------------------------------------------------------------------
Cash provided by (used in) operating activities $ 0.4 $ (0.7)
----------------------------------------------------------------------------
Non-cash items include amortization of equipment inventory on rent of $3.6
million, which compared to $3.9 million in the first quarter of 2011. A slightly
lower volume of equipment rentals in 2012 resulted in lower amortization of
equipment inventory on rent.
Components of cash flow from the net change in non-cash working capital for the
three month period ending March 31, 2012 and 2011 were as follows:
----------------------------------------------------------------------------
Three months ended
March 31
----------------------------------------------------------------------------
($ millions) (Increase) / Decrease 2012 2011
----------------------------------------------------------------------------
Trade and other receivables $ 2.4 $ (2.2)
Inventories (37.5) (8.8)
Prepaids (0.3) (0.6)
Other assets (0.1) -
----------------------------------------------------------------------------
$ (35.5) $ (11.6)
----------------------------------------------------------------------------
Trade and other payables 9.8 2.6
Deferred revenue & customer deposits 0.2 0.4
Equipment notes payable 19.5 3.0
----------------------------------------------------------------------------
$ 29.5 $ 6.0
----------------------------------------------------------------------------
Net increase in non-cash working capital $ (6.0) $ (5.6)
----------------------------------------------------------------------------
During the first quarter of 2012, Strongco made a net investment in working
capital of $6.0 million to support its growth. By comparison, the working
capital investment in the first quarter of 2011 was $5.6 million. Most of the
investment in working capital was for equipment inventory and the related
equipment note financing. In the first quarter of 2012, Strongco invested $37.5
million in inventory, including $31.6 million of equipment inventory, in
anticipation of the summer selling season. By comparison, in the first quarter
of 2011, the Company increased inventory by $8.8 million. To finance the
increase in inventory, the Company borrowed more on its equipment notes
facilities. Equipment notes payable increased by $19.5 million in the quarter of
2012 and $3.0 million in the first quarter of 2011.
Given the seasonality of construction and the buying patterns of customers, the
majority of Strongco's purchases of equipment inventory occur in the first
quarter which is then sold through the summer season. That purchasing pattern
was impacted by the recession and increase in demand as markets recovered. After
scaling back during the recession, OEM's struggled to ramp up production to meet
the increase in demand. As a result, supplier delivery performance deteriorated
which led to product shortages and significantly extended delivery lead times.
In the fourth quarter of 2011 Strongco received a large quantity of equipment
inventory from its major OEM suppliers that had been ordered for delivery
earlier in the year which contributed to a higher than normal level of inventory
entering 2012. Equipment inventory at March 31, 2012 was $216.9 million compared
to $174.4 million a year earlier. With markets for heavy equipment continuing to
be robust, management is confident this higher level of inventory will be sold
through the summer season in 2012.
Cash Used In Investing Activities:
In the first quarter of 2012, net cash of $2.2 million was used in financing
activities which compared to net cash of $11.4 million used in financing
activities in the first quarter of 2011. The components of the cash used in
investing activities are summarized as follows:
----------------------------------------------------------------------------
Three months ended
March 31
----------------------------------------------------------------------------
($ millions) 2012 2011
----------------------------------------------------------------------------
Acquisition of Chadwick-BaRoss $ - $ (9.2)
Purchase of rental fleet assets (1.7) (0.5)
Proceeds from sale of rental fleet assets 1.4 1.1
Purchase of capital assets (1.9) (2.8)
----------------------------------------------------------------------------
Cash used in investing activities $ (2.2) $ (11.4)
----------------------------------------------------------------------------
In the first quarter of 2011, Strongco acquired Chadwick-BaRoss for cash
proceeds of $9.2 million.
In the first quarter of 2012, Chadwick-BaRoss invested a net $0.3 million in
rental fleet assets. By comparison, rental fleet assets were reduced by $0.5
million in the first quarter of 2011
Capital expenditures were $1.9 million in the first quarter of 2012 and $2.8
million in the first quarter of 2011, the majority of which related to
construction of the new Edmonton, Alberta branch.
Cash Provided By Financing Activities:
In the first quarter of 2012, net cash of $1.8 million was provided by financing
activities which compared to net cash of $12.1 million provided from financing
activities in the first quarter of 2011.
The components of cash provided by financing activities in the first quarter are
summarized as follows:
----------------------------------------------------------------------------
Three months ended
March 31
----------------------------------------------------------------------------
($ millions) 2012 2011
----------------------------------------------------------------------------
Proceeds from rights offering $ - $ 7.8
Repayment of term loan - acquisition of Chadwick-
BaRoss Inc. (0.3) -
Repayment acquisition promissory notes (0.2) -
Construction loan - new Edmonton branch 1.0 -
Increase (decrease) in bank indebtedness 1.8 5.5
Repayment of finance lease obligations (0.5) -
Repayment of Champion acquisition note (1.2)
----------------------------------------------------------------------------
Cash provided by financing activities $ 1.8 $ 12.1
----------------------------------------------------------------------------
The significant sources and uses of cash from financing activities in first
quarter of 2012 were as follows:
-- To help finance the purchase of Chadwick-BaRoss, the Company secured a
$5.0 million term loan from its bank in April 2011. In the first quarter
of 2012, $0.3 million was repaid on that loan.
-- The Company issued promissory notes to the previous shareholders of
Chadwick-BaRoss on the acquisition of their company in the first quarter
totaling $1.9 million. In the first quarter of 2012, $0.2 million of
these notes was repaid.
-- 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 $1.0 million in the first quarter of 2012.
-- Cash of $1.8 million was provided by increasing the Company's bank
indebtedness in the first quarter of 2012.
-- Repayments under finance leases (primarily service vehicles and computer
equipment) amounted to $0.5 million in the quarter.
Bank Credit Facilities
The Company has credit facilities with banks in Canada and United States that
provide 364-day committed operating lines of credit totaling approximately $22.5
million. Borrowings under the lines of credit are limited by standard borrowing
base calculations based on accounts receivable and inventory, which are typical
of such bank credit facilities. As collateral, the Company has provided a $50
million debenture and a security interest in accounts receivable, inventories
(subordinated to the collateral provided to the equipment inventory lenders),
capital assets (subordinated to collateral provided to lessors), real estate and
on intangible and other assets. The operating lines bear interest at rates that
range between bank prime rate plus 0.50% and bank prime rate plus 3.00% and
between the one month Canadian BA rates plus 1.50% and BA rates plus 4.00% in
Canada and at LIBOR plus 2.60% in the United States. Under its bank credit
facilities, the Company is able to issue letters of credit up to a maximum of $5
million. Outstanding letters of credit reduce the Company's availability under
its operating lines of credit. For certain customers, Strongco issues letters of
credit as a guarantee of Strongco's performance on the sale of equipment to the
customer. As at March 31, 2012, there were outstanding letters of credit of $0.1
million and $10.1 million drawn on the Company's bank operating lines of credit.
In addition to its operating lines of credit, Strongco has a $15 million line
for foreign exchange forward contracts as part of its bank credit facilities
("FX Line") available to hedge foreign currency exposure. Under this FX Line,
the Company can purchase foreign exchange forward contracts up to a maximum of
$15 million. As at March 31, 2012, the Company had outstanding foreign exchange
forward contracts under this facility totaling US$5.2 million at an average
exchange rate of $1.0181 Canadian for each US$1.00 with settlement dates between
April 1, 2012 and September 30, 2012.
The Company's bank credit facilities also include term loans secured by real
estate in the United States. At March 31, 2012 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$13,300 plus accrued interest. The
Company has interest rate swap agreements in place that have converted the
variable rate on the term loans to a fixed rate of 5.17%. The term loan and swap
agreements expire in September 2012 at which point a balloon payment from the
balance of the loans is due. It is management's intention to renew the term
loans and interest rate swap agreement prior to their expiry.
In connection with the acquisition of Chadwick-BaRoss, in April 2011, Strongco
secured an additional $5.0 million demand non-revolving term loan from its bank
secured against certain real estate assets in Canada ("Term Loan - Canadian Real
Estate"). This loan is for a term of 60 months to April 2016 and bears interest
at the bank's prime rate plus 2.0%. The Term loan - Canadian Real Estate is
subject to monthly principal payments of $83.3 thousand plus accrued interest.
As at March 31, 2012, there was $4.1 million owing on the Term Loan - Canadian
Real Estate.
In April 2011, Strongco secured an additional construction loan facility with
its bank ("Construction Loan #1") to finance the construction of the Company's
new Edmonton, Alberta branch. Under Construction Loan #1, the Company is able to
borrow 70% of the cost of the land and building construction costs to a maximum
of $7.1 million. Construction of the new branch commenced in June 2011 and is
scheduled to be completed in April 2011. Upon completion, Construction Loan #1
will be converted to a demand, non-revolving term loan ("Mortgage Loan #1").
Mortgage Loan #1 will be for an amount of $7.1 million and a term of 60 months.
Construction Loan #1 (and Mortgage Loan #1) bears interest at the bank's prime
lending rate plus 2.0%. As at March 31, 2012, there was $6.2 million drawn on
Construction Loan #1.
In addition, in September 2011, Strongco secured an additional construction loan
facility with its bank ("Construction Loan #2") to finance the construction of a
planned new Fort McMurray, Alberta branch. Under Construction Loan #2, the
Company is able to borrow 70% of the cost of the land and building construction
costs. The Company anticipates construction of the new Fort McMurray branch will
commence in the third quarter of 2012 with completion in the first quarter of
2013. Upon completion, Construction Loan #2 will be converted to a demand,
non-revolving term loan ("Mortgage Loan #2"). As at March 31, 2012, Construction
Loan #2 was undrawn.
Strongco's bank credit facilities contain financial covenants typical of such
credit facilities that require the Company to maintain certain financial ratios
and meet certain financial thresholds. In particular, the credit facilities in
Canada contain covenants that require the Company to maintain a minimum ratio of
total current assets to current liabilities ("Current Ratio covenant") of 1.1:1,
a minimum tangible net worth ("TNW covenant") of $50 million, a maximum ratio of
total debt to tangible net worth ("Debt to TNW Ratio covenant") of 4.0:1 and a
minimum ratio of EBITDA minus cash taxes paid and capital expenditures to total
interest ("Debt Service Coverage Ratio covenant") of 1.3:1. For the purposes of
calculating covenants under the credit facility, debt is defined as total
liabilities less deferred income taxes, trade and other payables, customer
deposits and accrued employee future benefits obligations. The Debt Service
Coverage Ratio is measured at the end of each quarter on a trailing 12-month
basis. Other covenants are measured as at the end of each quarter. The Company
was in compliance with all covenants under its bank credit facilities as at
March 31, 2012.
Equipment Notes
In addition to its bank credit facilities, the Company has lines of credit
available totaling approximately $240 million from various non-bank equipment
lenders in Canada and the United States that are used to finance equipment
inventory and rental fleet. At March 31, 2012, there was approximately $185
million borrowed on these equipment finance lines.
Typically, these equipment notes are interest free for periods up to 12 months
from the date of financing, after which they bear interest at rates ranging, in
Canada, from 4.00% to 5.50% over the one-month BA rate and 3.25% to 4.25% over
the prime rate of a Canadian chartered bank, and in the United States, from 2.5%
to 5.5% over the one-month LIBOR rate and between the U.S. bank prime rate and
prime rate plus 4.00%. At March 31, 2012, approximately $76 million of these
equipment notes were interest free and $104 million were interest bearing. As
collateral for these equipment notes, the Company has provided liens on the
specific inventories financed and any related accounts receivable. For the
majority of the equipment notes, monthly principal repayments equal to 3% of the
original principal balance of the note commence 12 months from the date of
financing and the remaining balance is due in full at the earlier of 24 months
after financing or when the financed equipment is sold. While financed equipment
is out on rent, monthly curtailments are required equal to the greater of 70% of
the rental revenue and 2.5% of the original value of the note. Any remaining
balance after 24 months is normally refinanced with the lender over an
additional period of up to 24 months. All of the Company's equipment note
facilities are renewable annually.
As indicated above, the interest bearing equipment notes in Canada bear interest
at floating BA rates plus a fixed component or premium over BA rates. In
September 2011, Strongco put interest rate swaps in place that have effectively
fixed the floating BA rate component on $15.0 million of its interest bearing
equipment notes at 4.615% for five years to September 2016. (See discussion
under "Interest Rate Swaps" below).
Certain of the Company's equipment finance credit agreements contain restrictive
financial covenants, including requiring the Company to remain in compliance
with the financial covenants under all of its other lending agreements ("cross
default provisions"). The Company was in compliance with all covenants under its
equipment finance credit facilities as at March 31, 2012.
Interest Rate Swaps
In September of 2011, BA rates were at very low levels. However, there was an
expectation that interest rates would rise in the future. In September, Strongco
secured a Swap Facility in Canada with its bank that allows the Company to swap
the floating interest rate component (BA rate) on up to $25.0 million of its
floating interest rate debt to a five-year fixed swap rate of interest. On
September 8, 2011, the Company entered into an interest rate swap agreement
under this facility to fix the floating BA rate on $15.0 million of interest
bearing debt at a fixed interest rate equal to 1.615% for a period of five years
to September 8, 2016. The company has put these swaps in place to effectively
fix the interest rate on $15.0 million of its interest-bearing equipment notes.
The Company also has interest rate swap agreements in place in the US that have
converted the variable rate on its US term loans to a fixed rate of 5.17%. The
term loan and swap agreements expire in September 2012 at which point a balloon
payment from the balance of the loans is due. It is management's intention to
renew the term loans and interest rate swap agreement prior to their expiry.
Summary of Outstanding Debt
The balance outstanding under Strongco's debt facilities at March 31, 2012 and
2011 consisted of the following:
----------------------------------------------------------------------------
Debt Facilities As at March 31
----------------------------------------------------------------------------
($ millions) 2012 2011
----------------------------------------------------------------------------
Bank indebtedness (including outstanding cheques) $ 12.7 $ 17.9
Equipment notes payable - non interest bearing 76.2 44.2
Equipment notes payable - interest bearing 108.7 88.0
Vendor take back note payable - acquisition of
Chadwick-BaRoss 1.1 1.8
Construction loan #1 6.2 -
Term loan - Canadian real estate 4.1 -
Term loans - US real estate 3.6 3.7
----------------------------------------------------------------------------
$ 212.6 $ 155.6
----------------------------------------------------------------------------
As at March 31, 2012 there was $12.5 million of unused credit available under
the Company's bank credit lines. While availability under the bank lines
fluctuates daily depending on the amount of cash received and cheques and other
disbursements clearing the bank, availability generally ranges between $5.0
million and $15.0 million. Borrowing under the Company's bank lines is typically
highest in the first quarter when cash flows from operations are at the lowest
point of the year, and reduces through to the end of the year as cash flows
increase.
The Company also had $55 million available under its equipment finance
facilities at March 31, 2012. Borrowing on these lines typically increases in
the first five months of the year as equipment inventory is purchased for the
season and declines to the end of the year as equipment sales increase,
particularly in the fourth quarter.
With the level of funds available under the Company's bank credit lines, the
current availability under the equipment finance facilities and anticipated
improvement in cash flows from operations, management believes the Company will
have adequate financial resources to fund its operations and make the necessary
investment in equipment inventory and fixed assets to support its operations in
the future.
SUMMARY OF QUARTERLY DATA
In general, business activity in the Equipment Distribution segment follows a
weather related pattern of seasonality. Typically, the first quarter is the
weakest quarter as construction and infrastructure activity is constrained in
the winter months. This is followed by a strong gain in the second quarter as
construction and other contracts begin to be tendered and companies begin to
prepare for summer activity. The third quarter generally tends to be slightly
slower from an equipment sales standpoint, which is partially offset by
continued strength in equipment rentals and customer support activities. Fourth
quarter activity generally strengthens as customers make year-end capital
spending decisions and exercise purchase options on equipment which has
previously gone out on RPO's. In addition, purchases of snow removal equipment
are typically made in the fourth quarter.
A summary of quarterly results for the current and previous two years is as follows:
----------------------------------------------------------------------------
2012
($ millions, except per share
amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 96.8
Earnings (loss) from continuing
operations before income taxes 1.7
Net income (loss) 1.2
Basic and diluted earnings (loss)
per share $ 0.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011
($ millions, except per share
amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 113.2 $ 108.4 $ 114.1 $ 87.5
Earnings (loss) from continuing
operations before income taxes 2.9 3.8 3.8 0.7
Net income (loss) 2.1 3.6 3.6 0.6
Basic and diluted earnings (loss)
per share $ 0.15 $ 0.28 $ 0.28 $ 0.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010
($ millions, except per
unit/share amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 91.8 $ 79.6 $ 69.6 $ 53.7
Earnings (loss) from continuing
operations before income taxes 1.8 (0.3) (0.3) (2.1)
Net income (loss) 1.8 (0.3) (0.3) (2.1)
Basic and diluted earnings (loss)
per unit/share $ 0.17 $ (0.03) $ (0.03) $ (0.19)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
$21.1 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, 2012, the total buy back
contracts outstanding were $14.0 million. A reserve of $1.1 million has been
accrued in the Company's accounts as at March 31, 2012 with respect to these
commitments.
The Company has provided a guarantee of lease payments under the assignment of a
property lease which expires January 31, 2014. Total lease payments from April
1, 2012 to January 31, 2014 are $0.3 million.
Contractual obligations are set out in the following tables. Management believes
that the Company will generate sufficient cash flow from operations to meet its
contractual obligations.
----------------------------------------------------------------------------
Payment due by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 Year years years years
----------------------------------------------------------------------------
Operating leases $21.1 $10.5 $7.3 $2.4 $0.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingent obligation by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 Year years years years
----------------------------------------------------------------------------
Buy back contracts $14.0 $2.0 $5.1 $6.8 $0.1
----------------------------------------------------------------------------
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.
On January 17, 2011, the Company completed a rights offering, under which 2.6
million additional shares were issued pursuant to the rights issued to existing
shareholders for gross proceeds of $7.9 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. There were no
changes in the issued and outstanding shares during the first quarter of 2012.
----------------------------------------------------------------------------
Number of
Common Shares Issued and Outstanding Shares Shares
----------------------------------------------------------------------------
Common shares outstanding as at December 31, 2011 13,128,719
Common shares issued (redeemed) -
----------------------------------------------------------------------------
Common shares outstanding as at March 31, 2012 13,128,719
----------------------------------------------------------------------------
OUTLOOK
The Canadian economy in general and construction markets across Canada are
expected to continue to improve throughout 2012, which should result in strong
demand for heavy equipment.
Mild weather conditions and lack of snow affected equipment usage in much of
Canada and the northeastern United States and significantly curtailed oilfield
activities in northern Alberta in the first quarter and delayed the buying
decisions of customers across the country. This tempered demand for heavy
equipment and product support in the first quarter of 2012. However, the early
onset of warm spring weather brought an advanced start to the summer
construction season which contributed to stronger equipment sales in March.
Strongco's sales backlogs continued to rise during the quarter and by mid-April
2012 had topped $100 million, more than double the level of a year ago and the
highest level in several years. This is a positive indication of the increasing
demand for heavy equipment.
An important contribution to anticipated growth in 2012 is expected from
Alberta. Oil prices have continued to show strength and stability, which has
powered an ongoing economic upturn in the province. In particular, the outlook
for northern Alberta and the oil sands is for continued significant investment
over the next several years, which bodes well for heavy equipment demand in the
region.
Equipment suppliers are expected to improve product availability and delivery
lead times in 2012. Inventory levels at Strongco were allowed to run slightly
higher than normal at year end to ensure availability of product as the Company
enters the prime selling season. Consequently, product availability is not
expected to affect the Company's sales in 2012. Strongco's significant position
with its equipment suppliers should allow the Company to optimize equipment
deliveries.
Management remains cautiously optimistic that the improving Canadian economy
will continue in 2012, which is expected to increase revenues. In addition,
while market conditions in the northeastern United States remain weak,
Chadwick-BaRoss realized modest growth in the first quarter of 2012 and
contributed positively to Strongco's overall results. Chadwick-BaRoss services a
broad range of market sectors in Maine, New Hampshire and Massachusetts. Demand
for equipment in these regions is expected to continue to show a modest increase
throughout the balance of the year, which should contribute to improved revenue
and profitability in 2012.
NON-IFRS MEASURES
"EBITDA" refers to earnings before interest, income taxes, amortization of
capital assets, amortization of equipment inventory on rent, and amortization of
rental fleet. EBITDA is presented as a measure used by many investors to compare
issuers on the basis of ability to generate cash flow from operations. EBITDA is
not a measure of financial performance or earnings recognized under
International Financial Reporting Standards ("IFRS") and therefore has no
standardized meaning prescribed by IFRS and may not be comparable to similar
terms and measures presented by other similar issuers. The Company's management
believes that EBITDA is an important supplemental measure in evaluating the
Company's performance and in determining whether to invest in Shares. Readers of
this information are cautioned that EBITDA should not be construed as an
alternative to net income or loss determined in accordance with IFRS as
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.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with IFRS requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities in the financial statements. The Company bases its
estimates and assumptions on past experience and various other assumptions that
are believed to be reasonable in the circumstances. This involves varying
degrees of judgment and uncertainty which may result in a difference in actual
results from these estimates. The more significant estimates are as follows:
Inventory Valuation
The value of the Company's new and used equipment is evaluated by management
throughout each year. Where appropriate, a provision is recorded against the
book value of specific pieces of equipment to ensure that inventory values
reflect the lower of cost and estimated net realizable value. The Company
identifies slow moving or obsolete parts inventory and estimates appropriate
obsolescence provisions by aging the inventory. The Company takes advantage of
supplier programs that allow for the return of eligible parts for credit within
specified time periods. The inventory provision as at March 31, 2012 with
changes from December 31, 2011 is as follows:
----------------------------------------------------------------------------
Provision for Inventory Obsolescence ($ millions)
----------------------------------------------------------------------------
Provision for inventory obsolescence as at
December 31, 2011 $ 5.3
Provision related to inventory disposed of
during the quarter (0.6)
Additional provisions made during the quarter 0.4
----------------------------------------------------------------------------
Provision for inventory obsolescence as at March
31, 2012 $ 5.1
----------------------------------------------------------------------------
Allowance for Doubtful Accounts
The Company performs credit evaluations of customers and limits the amount of
credit extended to customers as appropriate. The Company is however exposed to
credit risk with respect to accounts receivable and maintains provisions for
possible credit losses based upon historical experience and known circumstances.
The allowance for doubtful accounts as at March 31, 2012 with changes from
December 31, 2011 is as follows:
----------------------------------------------------------------------------
Allowance for Doubtful Accounts ($ millions)
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December
31, 2011 $ 1.8
Accounts written off during the quarter -
Additional provisions made during the quarter 0.2
----------------------------------------------------------------------------
Allowance for doubtful accounts as at March 31,
2012 $ 2.0
----------------------------------------------------------------------------
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
2012. There is significant risk that forward-looking statements will not prove
to be accurate. These statements are based on a number of assumptions,
including, but not limited to, continued demand for Strongco's products and
services. A number of factors could cause actual events, performance or results
to differ materially from the events, performance and results discussed in the
forward looking statements. The inclusion of this information should not be
regarded as a representation of the Company or any other person that the
anticipated results will be achieved and investors are cautioned not to place
undue reliance on such information. These forward-looking statements are made as
of the date of this MD&A, or as otherwise stated and the Company does not assume
any obligation to update or revise them to reflect new events or circumstances.
Additional information, including the Company's Annual Information Form, may be
found on SEDAR at www.sedar.com.
Strongco Corporation
Unaudited Interim Consolidated Financial Statements
March 31, 2012 and 2011
Strongco Corporation
Unaudited Consolidated Statement of Financial Position
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated)
----------------------------------------------------------------------------
March 31 December 31
2012 2011
----------------------------------------------------------------------------
Assets
Current assets
Trade and other receivables $ 40,227 $ 42,759
Inventories (note 5) 244,038 210,128
Prepaid expenses and other deposits 1,675 1,420
----------------------------------------------------------------------------
285,940 254,307
----------------------------------------------------------------------------
Non-current assets
Property and equipment (note 6) 34,460 31,278
Rental fleet 14,704 15,564
Deferred income tax asset (note 10) 1,357 1,541
Intangible asset 1,800 1,800
Other assets 250 146
----------------------------------------------------------------------------
52,571 50,329
----------------------------------------------------------------------------
Total assets $ 338,511 $ 304,636
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness $ 12,724 $ 10,951
Trade and other payables 44,917 34,986
Provision for other liabilities (note 7) 1,238 1,198
Deferred revenue and customer deposits 1,132 971
Equipment notes payable
- non-interest bearing (note 8) 75,757 72,262
- interest bearing (note 8) 103,893 88,151
Current portion of finance lease
obligations 2,544 2,110
Current portion of notes payable (note
9) 6,184 6,242
----------------------------------------------------------------------------
248,389 216,871
----------------------------------------------------------------------------
Non-current liabilities
Deferred income tax liability (note 10) 2,520 2,565
Finance lease obligations 4,527 3,291
Notes payable (note 9) 13,979 13,558
Employee future benefit obligations 11,454 11,760
----------------------------------------------------------------------------
32,480 31,174
----------------------------------------------------------------------------
Total liabilities 280,869 248,045
----------------------------------------------------------------------------
Contingencies, commitments and
guarantees (note 11)
Shareholders' equity
Shareholders' capital (note 12) 64,898 64,898
Accumulated other comprehensive income (19) 205
Contributed surplus 531 498
Deficit (7,768) (9,010)
----------------------------------------------------------------------------
Total shareholders' equity 57,642 56,591
----------------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 338,511 $ 304,636
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Approved by the Board of Directors
Director Director
----------------- -----------------
Strongco Corporation
Unaudited Consolidated Statement of Income
For the three month periods ended March 31
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated, except share
and per share amounts)
----------------------------------------------------------------------------
2012 2011
----------------------------------------------------------------------------
Revenue (note 14) $ 96,814 $ 87,495
Cost of sales 77,403 70,511
----------------------------------------------------------------------------
Gross profit 19,411 16,984
----------------------------------------------------------------------------
Expenses
Administration 8,342 7,268
Distribution 5,038 4,542
Selling 3,364 3,431
Other income (433) (274)
----------------------------------------------------------------------------
Operating income 3,100 2,017
----------------------------------------------------------------------------
Interest expense 1,353 1,356
----------------------------------------------------------------------------
Income before income taxes 1,747 661
Provision for income taxes (note 10) 505 63
----------------------------------------------------------------------------
Net income attributable to shareholders
for the period $ 1,242 $ 598
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share (note 13)
Basic and diluted $ 0.09 $ 0.05
----------------------------------------------------------------------------
Weighted average number of shares (note
13)
- basic 13,128,719 12,736,681
----------------------------------------------------------------------------
- diluted 13,178,356 12,767,927
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Comprehensive Income
For the three month periods ended March 31
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated)
----------------------------------------------------------------------------
2012 2011
----------------------------------------------------------------------------
Net income attributable to shareholders for
the year $ 1,242 $ 598
Other comprehensive income
Currency translation adjustment 224 (354)
----------------------------------------------------------------------------
Comprehensive income attributable to
shareholders for the year $ 1,466 $ 244
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Changes in Shareholders' Equity
For the three month periods ended
----------------------------------------------------------------------------
(in thousands of dollars, unless otherwise indicated)
----------------------------------------------------------------------------
Accumulated
other
Number of Shareholders' comprehensive
units capital loss
----------------------------------------------------------------------------
Balance - December 31,
2010 10,508,719 $ 57,089 $ -
Net loss for the period
Other comprehensive
loss:
Currency translation
adjustment (354)
Issuance of shares 2,620,000 7,809
Contributed surplus
----------------------------------------------------------------------------
Balance - March 31, 2011 13,128,719 $ 64,898 $ (354)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed
Surplus Deficit Total
----------------------------------------------------------------------------
Balance - December 31,
2010 $ 315 $ (12,427) $ 44,977
Net loss for the period 598 598
Other comprehensive
loss:
Currency translation
adjustment (354)
Issuance of shares 7,809
Contributed surplus 32 32
----------------------------------------------------------------------------
Balance - March 31, 2011 $ 347 $ (11,829) $ 53,062
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
other
Number of Shareholders' comprehensive
units capital loss
----------------------------------------------------------------------------
Balance - December 31, 2011 13,128,719 $ 64,898 $ 205
Net income for the period - -
Other comprehensive income:
Currency translation
adjustment - (224)
Contributed Surplus - 33
----------------------------------------------------------------------------
Balance - March 31, 2012 13,128,719 $ 64,898 $ (19)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed
Surplus Deficit Total
----------------------------------------------------------------------------
Balance - December 31, 2011 $ 498 $ (9,010) $ 56,591
Net income for the period - 1,242 1,242
Other comprehensive income:
Currency translation
adjustment - - (224)
Contributed Surplus 33 - 33
----------------------------------------------------------------------------
Balance - March 31, 2012 $ 531 $ (7,768) $ 57,642
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Cash Flows
For the three month periods ended March 31
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated)
----------------------------------------------------------------------------
2012 2011
----------------------------------------------------------------------------
Cash flows from operating activities
Net income for the period $ 1,242 $ 598
Adjustments for
Depreciation - property and equipment 838 731
Depreciation - equipment inventory on rent 3,562 3,876
Depreciation - rental fleet 523 202
(Gain) loss on sale of rental fleet 76 (547)
Contributed surplus 33 32
Interest expense 1,353 1,356
Income tax expense 505 63
Employee future benefit expense 308 143
Foreign exchange gain (20) -
Changes in working capital (note 15) (6,040) (5,553)
Funding of employee future benefit
obligations (614) (224)
Interest paid (1,311) (1,348)
Income taxes paid (83) -
----------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $ 372 $ (671)
----------------------------------------------------------------------------
Cash flows from investing activities
Business acquisition net of cash acquired
(note 4) - (9,248)
Purchases of rental fleet (1,718) (473)
Proceeds from sale of rental fleet 1,444 1,124
Purchases of property and equipment (1,915) (2,850)
----------------------------------------------------------------------------
Net cash used in investing activities $ (2,189) $ (11,447)
----------------------------------------------------------------------------
Cash flows from financing activities
Increase in bank indebtedness 1,786 5,535
Increase in long-term debt 1,028 383
Repayment of long-term debt (289) (1,233)
Repayment of finance lease obligations (513) (367)
Issue of share capital - 7,809
Repayment of business acquisition purchase
financing (195) -
----------------------------------------------------------------------------
Net cash provided by financing activities $ 1,817 $ 12,127
----------------------------------------------------------------------------
Foreign exchange on cash balances - (9)
Change 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.
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.
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
These interim consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards ("IFRS") applicable to interim
financial statements, including International Accounting Standards ("IAS") 34,
Interim Financial Reporting. The accounting policies followed in these interim
consolidated financial statements are the same as those applied in the Company's
consolidated financial statements for the year ended December 31, 2011.
The policies applied in these interim consolidated financial statements are
based on IFRS issued as of May 9, 2012, the date the Directors approved the
interim consolidated financial statements. These interim consolidated financial
statements should be read in conjunction with the Company's annual consolidated
financial statements for the year ended December 31, 2011
Changes in accounting policy and disclosure
Unless otherwise noted, the following standards and amendments are effective for
accounting periods beginning on or after January 1, 2013, with earlier adoption
permitted. The Company has not yet assessed the impact of these standards or
determined whether it will adopt these standards early.
IAS 1, Presentation of Financial Statements, has been amended to require
entities to separate items presented in other comprehensive income ("OCI") into
two groups, based on whether or not items may be recycled in the future.
Entities that choose to present OCI items before tax will be required to show
the amount of tax related to the two groups separately. The amendment is
effective for annual periods beginning on or after July 1, 2012 with earlier
application permitted.
IAS 19, Employee Benefits, has been amended to make significant changes to the
recognition and measurement of defined benefit pension expense and termination
benefits and to enhance the disclosure of all employee benefits. The amended
standard requires immediate recognition of actuarial gains and losses in other
comprehensive income (loss) as they arise, without subsequent recycling to net
income. This is consistent with the Company's current accounting policy.
Past-service cost (which will now include curtailment gains and losses) will no
longer be recognized over a service period but instead will be recognized
immediately in the period of a plan amendment. Pension benefit cost will be
split between (i) the cost of benefits accrued in the current period (service
cost) and benefit changes (past-service cost, settlements and curtailments); and
(ii) finance expense or income. The finance expense or income component will be
calculated based on the net defined benefit asset or liability. A number of
other amendments have been made to recognition, measurement and classification
including redefining short-term and other long-term benefits, guidance on the
treatment of taxes related to benefit plans, guidance on risk/cost sharing
features, and expanded disclosures.
IFRS 7, Financial Instruments: Disclosures, has been amended to enhance
disclosure requirements related to offsetting of financial assets and
liabilities.
IFRS 9, Financial Instruments, was issued in November 2009 and contains
requirements for financial assets. This standard addresses classification and
measurement of financial assets and replaces the multiple category and
measurement models in IAS 39, Financial Instruments - Recognition and
Measurement ("IAS 39"), for debt instruments with a new mixed measurement model
having only two categories: amortized cost and fair value through profit or
loss. IFRS 9 also replaces the models for measuring equity instruments and such
instruments are either recognized at fair value through profit or loss, or at
fair value through comprehensive income (loss), dividends are recognized in
income in the consolidated statement of comprehensive income (loss); however,
other gains and losses (including impairments) associated with such instruments
remain in accumulated other comprehensive income (loss) indefinitely.
Requirements for financial liabilities were added in October 2010 and they
largely carried forward existing requirements in IAS 39 except that fair value
changes due to credit risk for liabilities designated at fair value through
profit or loss would generally be recorded in the consolidated statement of
comprehensive income (loss). IFRS 9 was originally published with an effective
date for years beginning on or after January 1, 2013. IFRS 9 was approved for
amendment in March 2012 to defer the effective date to years beginning on or
after January 1, 2015.
IFRS 10, Consolidation requires an entity to consolidate an investee when it is
exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the
investee. Under existing IFRS, consolidation is required when an entity has the
power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. IFRS 10 replaces SIC-12
Consolidation-Special Purpose Entities and parts of IAS 27 Consolidated and
Separate Financial Statements.
IFRS 13, Fair Value Measurement is a comprehensive standard for fair value
measurement and disclosure requirements for use across all IFRS standards. The
new standard clarifies that fair value is the price that would be received to
sell an asset, or paid to transfer a liability in an orderly transaction between
market participants, at the measurement date. It also establishes disclosures
about fair value measurement. Under existing IFRS, guidance on measuring and
disclosing fair value is dispersed among the specific standards requiring fair
value measurements and in many cases does not reflect a clear measurement basis
or consistent disclosures.
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 and judgments 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.
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.
Intangible asset
An impairment exists when the carrying value of an asset or CGU exceeds its
recoverable amount, which is the higher of its fair value less costs to sell and
its value in use. The fair value less costs to sell calculation is based on
available data from binding sales transactions in arm's length transactions of
similar assets or observable market prices less incremental costs for disposing
of the asset. The value in use calculation is based on a discounted cash flow
model. The cash flows are derived from the budget and forecast for the next five
years and do not include restructuring activities that the Company is not yet
committed to or significant future investments that will enhance the asset's
performance of the CGU being tested. The recoverable amount is most sensitive to
the discount rate used for the discounted cash flow model as well as the
expected future cash-inflows and the growth rate used for extrapolation
purposes.
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.
Share-based payment transactions
The Company measures the cost of equity-settled transactions with employees by
reference to the fair value of the equity instruments at the date at which they
are granted. Estimating fair value for share-based payment transactions requires
determining the most appropriate valuation model, which is dependent on the
terms and conditions of the grant. This estimate also requires determining the
most appropriate inputs to the valuation model including the expected life of
the share option, volatility and dividend yield and making assumptions about
them.
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 are 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
three month period ended March 31, 2011.
The acquisition date fair value for each major class of asset acquired and
liabilities assumed:
--------------------------------------------------
(in thousands of Canadian dollars)
--------------------------------------------------
Trade and other receivables $ 4,388
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 results of operations of CBR have been consolidated into the Company's
results for the three month period ended March 31, 2011, effective February 17,
2011. Revenues of $6.0 million and net income from operations of $0.2 million
for CBR have been included in the Company's consolidated financial statements
for the three month period ended March 31, 2011.
Had the results of CBR been incorporated into the Company's consolidated
statement of income as though the acquisition had been completed on January 1,
2011, the revenue and net income of the combined entity for the three month
period ended March 31, 2011 would have been $90.6 million and $0.6 million,
respectively.
5. Inventories
Inventory components, net of write-downs and provisions are as follows:
----------------------------------------------------------------------------
As at March 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Equipment $ 216,914 $ 185,335
Parts 22,627 21,148
Work in process 4,497 3,645
----------------------------------------------------------------------------
$ 244,038 $ 210,128
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At March 31, 2012, provisions against inventory totalled $5,118 (December 31,
2011 - $5,397). During the period, the Company reduced its inventory write downs
by $279.
6. Property and equipment
During the three months ended March 31, 2012, the Company acquired property and
equipment, excluding property under construction, of $688 (2011 - $140).
In 2011, the Company began construction on a new Edmonton, Alberta branch. The
project is expected to be completed during the second quarter of 2012 and the
carrying amount at March 31, 2012 was $9,023. The amount of borrowing costs
capitalized during the three months ended March 31, 2012 was $84 (2011 - $nil).
The weighted-average interest rate used to determine the amount of borrowing
costs eligible for capitalization was 5%, which is the effective rate of the
specific borrowing. See note 9 (v) regarding the construction facility. Capital
expenditures were $1,914 in the first quarter of 2012 and $2,850 in the first
quarter of 2011, the majority of which related to construction of the new
Edmonton, Alberta branch.
7. Provisions for other liabilities
The Company has agreed to buy back equipment from certain customers at the
option of the customer for a specified price at future dates ("buy back
contracts"). These contracts are subject to certain conditions being met by the
customer and range in term from three to ten years. At March 31, 2012, the total
obligation under these contracts was $13,974 (December 31, 2011 - $13,512). The
Company's maximum potential losses pursuant to the majority of these buy back
contracts are limited, under an agreement with a third party, to 10% of the
original sale amounts. A reserve of $1,138 (December 31, 2011 - $1,115) has been
accrued in the Company's accounts with respect to these commitments.
8. Equipment notes payable
In addition to its bank credit facilities, the Company has lines of credit
available totalling approximately $240 million from various non-bank equipment
lenders in Canada and the United States, which are used to finance equipment
inventory. At March 31, 2012, there was approximately $185 million borrowed on
these equipment finance lines (December 31, 2011 - approximately $160 million).
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
4.00% to 5.50% over the one month BA rate and 3.25% to 4.25% over the prime rate
of a Canadian chartered bank in Canada, and from 2.50% to 5.50% over one month
Libor rate and between prime and prime plus 4.00% in the United States. As
collateral for these equipment notes, the Company has provided liens on the
specific inventories financed and any related accounts receivable. Monthly
principal repayments equal to 3% of the original principal balance of the note
commence 12 months from the date of financing and the remaining balance is due
in full at the earlier of 24 months after financing or when the financed
equipment is sold. While financed equipment is out on rent, monthly curtailments
are required equal to the greater of 70% of the rental revenue and 2.5% of the
original value of the note. Any remaining balance after 24 months, which is due
in full, is normally refinanced with the lender over an additional period of up
to 24 months. All of the Company's equipment notes facilities are renewable
annually.
Certain of the Company's equipment finance credit agreements contain restrictive
financial covenants, including requiring the Company to remain in compliance
with the financial covenants under all of its other lending agreements ("cross
default provisions"). As at March 31, 2012, the Company was in compliance with
these covenants.
9. Notes payable
Notes payable is comprised of the following:
----------------------------------------------------------------------------
March 31, 2012 December 31, 2011
----------------------------------------------------------------------------
Promissory notes (i) $ 1,083 $ 1,301
Equipment plan notes payable -
rental fleet (ii) 5,226 5,455
Term note - United States (iii) 3,597 3,702
Term note - Canada (iv) 4,083 4,333
Construction facility (v) 6,174 4,987
Other - 22
----------------------------------------------------------------------------
20,163 19,800
----------------------------------------------------------------------------
Current portion 6,184 6,242
----------------------------------------------------------------------------
Long-term portion $ 13,979 $ 13,558
----------------------------------------------------------------------------
----------------------------------------------------------------------------
i. As part of the acquisition of CBR, the Company issued, through a wholly
owned subsidiary, three promissory notes totalling US$1,863 (as
discussed in note 4). 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. At March 31, 2012, US$118
(March 31, 2011 - US$203) of the outstanding promissory notes was owed
to a former shareholder and current employee of CBR, which is recorded
at the exchange amount.
ii. In addition to equipment notes payable as described in note 7, 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.
iii.The Company's bank credit facilities in the United Sates include a term
note secured by real estate and cross-collateralized with the Company's
revolving line of credit in the United States. The term note matures in
September 2012 and bears interest at a rate of LIBOR plus 3.05%. Monthly
payments of principal of US$13 plus accrued interest are required under
the terms of the note. The Company has interest rate swap agreements in
place related to the term note which have converted the variable rate on
the term loans to a fixed rate of 5.17%. The term loans and swap
agreements expire in September 2012 at which point a balloon payment for
the balance of the loans is due.
iv. In April 2011, the Company's bank credit facilities were amended to add
a $5,000 demand, non-revolving term loan ("Term note - Canada"). The
Term note - Canada is for a term of 60 months and bears interest at the
bank's prime lending rate plus 2.0%. Monthly principal payments of $83
plus accrued interest commenced in May 2011.
v. In May 2011, the bank credit facilities were further amended to add a
construction loan facility ("Construction Loan") to finance the
construction of the Company's new Edmonton, Alberta branch. Under
the Construction Loan, the Company is able to borrow 70% of the cost of
the land and building construction costs to a maximum of $7,100. The
Company purchased the property in March 2011 and commenced construction
in June 2011. The construction is scheduled to be completed during the
second quarter of 2012. As at March 31, 2012, the Company has drawn
$6,174 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%.
In September 2011, the Company secured an additional construction loan facility
with its bank to finance the construction of a new planned Fort McMurray,
Alberta branch. Under this facility, the Company is able to borrow 70% of the
cost of the land and building construction costs to a maximum of $7,900. As at
March 31, 2012, no amount has been drawn against this facility.
10. Income taxes
The major components of the income tax expense in the interim consolidated
statement of income are:
----------------------------------------------------------------------------
Three month period ended March 31 2012 2011
----------------------------------------------------------------------------
Current income tax expense $ 187 $ 63
Deferred tax expense (recovery) related to
origination and reversal of deferred taxes 318 -
----------------------------------------------------------------------------
$ 505 $ 63
----------------------------------------------------------------------------
11. Contingencies, commitments 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. Management believes that the
Company has a strong defence against this claim and that it is without merit.
The Company's insurer has provided conditional coverage for this claim.
A statement of claim has been filed naming a former division of the Company as
one of several defendants in proceedings under the Court of Queen's Bench of
Manitoba. The action claims errors and omissions in the contractual execution of
work entrusted to the defendants and names the Company as jointly and severally
liable for damages of approximately $4.8 million. Management believes that the
Company has a strong defence against this claim and that it is without merit.
The Company's insurer has provided conditional coverage for this claim.
b) The Company has provided a guarantee of lease payments under the assignment
of a property lease, which expires January 31, 2014. Total lease payments from
April 1, 2012 to January 31, 2014 are $274 (December 31, 2011 - $311).
12. 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 March 31, 2012, a total of 13,128,719 shares (December 31, 2011 -
13,128,719) with a stated valued of $64,898 (December 31, 2011 - $64,898)
were issued and outstanding.
13. Earnings per share
----------------------------------------------------------------------------
Three-month period ended March 31, 2012 2011
----------------------------------------------------------------------------
Weighted average number of shares for basic
earnings (loss) per share calculation 13,128,719 12,736,681
Effect of dilutive options outstanding 49,637 31,246
----------------------------------------------------------------------------
Weighted average number of shares for dilutive
earnings (loss) per share calculation 13,178,356 12,767,927
----------------------------------------------------------------------------
On January 17, 2011, the Company completed a rights offering for a total of
9,941,964 rights being exercised for 2,485,491 common shares and 134,419 common
shares being issued pursuant to the additional subscription privilege. The
shares issued pursuant to the rights offering were issued at a discount to the
market price at the date of issue, resulting in a bonus element related to this
discount. The calculation of the weighted average number of shares for basic
earnings per share has been adjusted for a factor related to the bonus element,
impacting the calculation for the three-month period ended March 31, 2011.
The computation of dilutive options outstanding only includes those options
having exercise prices below the average market price of the shares during the
period.
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:
----------------------------------------------------------------------------
For the three-month period ended March 31 2012 2011
----------------------------------------------------------------------------
Equipment sales $ 62,052 $ 55,984
Equipment rentals 5,160 5,470
Product support 29,602 26,041
----------------------------------------------------------------------------
Total Equipment Distribution $ 96,814 $ 87,495
----------------------------------------------------------------------------
15. Changes in non-cash working capital
The components of the changes in non-cash working capital are detailed below:
----------------------------------------------------------------------------
For the three-month period ended March 31 2012 2011
----------------------------------------------------------------------------
Changes in working capital
Trade and other receivables $ 2,422 $ (2,173)
Inventories (37,494) (8,948)
Prepaid expense and other deposits (257) (578)
Other assets (104) -
Trade and other payables 9,711 2,575
Provisions 40 147
Deferred revenue and customer deposits 164 432
Equipment notes payable 19,478 2,992
----------------------------------------------------------------------------
$ (6,040) $ (5,553)
----------------------------------------------------------------------------
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.
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