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Strongco Corporation (TSX:SQP) today reported financial results for the three
and six months ended June 30, 2012.
Highlights(i)
-- Total revenues increased by 16% to $132.2 million
-- Gross margin percentage of 18.0% compared to 18.6%
-- EBITDA increased by 20% to $12.7 million
-- Earnings before income taxes of $4.4 million compared to $3.8 million
-- Net income of $3.2 million compared to $3.6 million
-- Earnings per share of $0.25 compared to $0.28
(i) Comparisons are between second quarter 2012 and second quarter 2011
"We are pleased with the continued growth in revenues and operating profits
evident in Strongco's results for the second quarter of 2012," said Robert
Dryburgh, President and Chief Executive Officer of Strongco. "In the quarter,
the Company achieved increases in all major revenue streams year-over-year and,
simultaneously improved gross margins on equipment sales in competitive markets.
Revenues in all regions were up from the prior period. Revenues were
significantly higher in Alberta, in particular, where we are making substantial
investment to enhance our market position."
Financial Highlights(i)
Three-Month Periods Ended June 30
($ millions except per share amounts) 2012 2011
Revenues $132.2 $114.1
EBITDA $12.7 $10.5
Earnings before income taxes $4.4 $3.8
Net income $3.2 $3.6
Basic and diluted net income per share $0.25 $0.28
Equipment in inventory $244.0 $171.9
Equipment notes payable $213.4 $152.8
(i) All financial information conforms to International Financial Reporting
Standards.
Second Quarter 2012 Review
Total revenues in the three months ended June 30, 2012 were up 16% from the
second quarter of 2011. Equipment sales increased by 20% from last year to $92.4
million; product support revenues gained 8% to $33.4 million; and rental
revenues were $6.4 million, up 5% from the year-earlier period.
Gross margin increased by 12% to $23.8 million during the second quarter. As a
percentage of revenue, the sales mix slightly reduced the overall gross margin
to 18.0% from 18.6% in the same period of 2011.
Administrative, distribution and selling expenses during the second quarter
totalled $18.5 million, compared to $16.3 million in 2011. As a percentage of
revenue administrative, distribution and selling expenses were 14.0% compared to
14.3% in the second quarter of 2011.
EBITDA for the second quarter increased to $12.7 million from $10.5 million a
year earlier and earnings before income taxes were $4.4 million, up from $3.8
million in the second quarter of 2011.
Strongco is now taxable whereas the company was able to utilize loss carry
forwards to offset tax expenses in 2011. Consequently, Strongco's net income in
the second quarter of 2012 was $3.2 million ($0.25 per share), down from $3.6
million ($0.28 per share) in the second quarter of 2011. The second quarter of
2012 included $1.1 million of provision for income taxes, compared to $0.1
million in 2011.
Outlook
"We are optimistic about the economic outlook in regions across the country and
in particular in Alberta, where we have expanded our branch capacity and
anticipate construction to begin in the third quarter of 2012 for our new Fort
McMurray branch," said Mr. Dryburgh.
The Canadian economy in general and the markets for construction equipment and
cranes across Canada are expected to continue the improvement the Company has
seen in the first half throughout 2012. Strongco's sales backlogs grew during
the first quarter and have remained at robust levels through the second quarter
as Strongco moved into its prime selling season, a positive indication of the
increasing demand for heavy equipment.
Equipment suppliers are expected to continue to improve production capability
and delivery lead times throughout the balance of 2012. Inventory levels at
Strongco were allowed to run higher than normal at year end and through the
first half of the year to ensure availability of product for the Company through
the prime selling season. While availability of certain product lines did impact
sales in the first half of 2012, current inventory and improving product
availability is expected to support sales through the balance of the year.
Management remains cautiously optimistic that the improving Canadian economy
will continue through the balance of the year, and lead to increased revenues.
In addition, while market conditions in the northeastern United States remain
weak, Chadwick-BaRoss realized modest growth in the first half of 2012 and
contributed positively to Strongco's overall results. While demand for equipment
from its traditional markets is expected to remain flat, Chadwick-BaRoss expects
to continue to show a modest increase in revenues from sales to other
non-traditional markets and strong product support sales throughout 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, August 2, 2012 at 10 am ET to
discuss second quarter results. Analysts and investors can participate by
dialing 416-644-3414 or toll free 1-800-814-4859. An archived audio recording
will be available until midnight on August 16, 2012. To access it, dial
416-640-1917 and enter passcode 4545438#.
About Strongco Corporation
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 27 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.
Information Contact
J. David Wood
Vice-President and Chief Financial Officer
Telephone: 905.565.3808
Email: jdwood@strongco.com
www.strongco.com
Strongco Corporation
Management's Discussion and Analysis
The following management discussion and analysis ("MD&A") provides a review of
the consolidated financial condition and results of operations of Strongco
Corporation, formerly Strongco Income Fund ("the Fund"), Strongco GP Inc. and
Strongco Limited Partnership collectively referred to as "Strongco" or "the
Company", as at and for the three months and six months ended June 30, 2012.
This discussion and analysis should be read in conjunction with the accompanying
unaudited consolidated financial statements as at and for the three months and
six months ended June 30, 2012. For additional information and details, readers
are referred to the Company's audited consolidated financial statements and
accompanying MD&A as at and for the year ended December 31, 2011 contained in
the Company's annual report for the year ended December 31, 2011, the Company's
unaudited consolidated financial statements and accompanying MD&A as at and for
the three months ended March 31, 2012, 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 August 1, 2012.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------
Three months ended Six months ended
Income Statement Highlights June 30 June 30
----------------------------------------------------------------------------
($ millions, except per unit
amounts) 2012 2011 2012 2011
----------------------------------------------------------------------------
Revenues $ 132.2 $ 114.1 $ 229.0 $ 201.6
----------------------------------------------------------------------------
Income before income taxes $ 4.3 $ 3.8 $ 6.1 $ 4.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings per
share $ 0.25 $ 0.28 $ 0.34 $ 0.33
EBITDA (note 1) $ 12.7 $ 10.5 $ 20.7 $ 17.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance Sheet Highlights
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment inventory $ 244.0 $ 171.9
Total assets 380.4 290.0
Debt (bank debt and other notes
payable) 28.7 30.3
Equipment notes payable 213.4 152.8
Total liabilities $ 319.2 $ 233.2
----------------------------------------------------------------------------
Note 1 - EBITDA is a non-IFRS measure. See explanation under the heading
"Non-IFRS Measures" below.
COMPANY OVERVIEW
Strongco is one of the largest multi-line mobile equipment distributors in
Canada. In February 2011, Strongco acquired 100% of the shares of
Chadwick-BaRoss, Inc., a multi-line distributor of mobile construction equipment
in the New England region of the United States, (see discussion below under the
heading "Acquisition of Chadwick-BaRoss, Inc."). Strongco sells and rents new
and used equipment and provides after-sale product support (parts and service)
to customers that operate in infrastructure, construction, mining, oil and gas
exploration, forestry and industrial markets. This business distributes numerous
equipment lines in various geographic territories. The primary lines distributed
include those manufactured by:
i. Volvo Construction Equipment North America Inc. ("Volvo"), for which
Strongco has distribution agreements in each of Alberta, Ontario,
Quebec, New Brunswick, Nova Scotia, Prince Edward Island and
Newfoundland in Canada and Maine and New Hampshire in the United States;
ii. Case Corporation ("Case"), for which Strongco has a distribution
agreement for a substantial portion of Ontario; and
iii.Manitowoc Crane Group ("Manitowoc"), for which Strongco has distribution
agreements for the Manitowoc, Grove and National brands, covering much
of Canada.
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 AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
Consolidated Results of Operations
----------------------------------------------------------------------------
Three months ended June Six Months Ended June
30 30
----------------------------------------------------------------------------
($ millions, except per
share amounts) 2012 2011 2012 2011
----------------------------------------------------------------------------
Revenues $ 132,220 $ 114,050 $ 229,034 $ 201,545
Cost of sales 108,419 92,812 185,822 163,323
----------------------------------------------------------------------------
Gross Margin 23,801 21,238 43,212 38,222
Administration,
distribution and
selling expenses 18,452 16,267 35,196 31,508
Other income (1,079) (179) (1,512) (453)
----------------------------------------------------------------------------
Operating income 6,428 5,150 9,528 7,167
Interest expense 2,082 1,398 3,435 2,754
----------------------------------------------------------------------------
Earnings before income
taxes 4,346 3,752 6,093 4,413
Provision for income
taxes 1,125 120 1,630 183
----------------------------------------------------------------------------
Net income $ 3,221 $ 3,632 $ 4,463 $ 4,230
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted
earnings per share $ 0.25 $ 0.28 $ 0.34 $ 0.33
Weighted average number
of shares
- Basic 13,128,719 13,128,719 13,128,719 12,933,819
- Diluted 13,176,655 13,167,347 13,176,655 12,972,447
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key financial measures:
Gross margin as a
percentage of revenues 18.0% 18.6% 18.9% 19.0%
Admin, distribution and
selling expenses as a
percentage of revenues 14.0% 14.3% 15.4% 15.6%
Operating income as a
percentage of revenues 4.9% 4.5% 4.2% 3.6%
EBITDA (note 1) $ 12,638 $ 10,454 $ 20,662 $ 17,276
----------------------------------------------------------------------------
Note 1 - EBITDA is a non-IFRS measure. See explanation under the heading
"Non-IFRS Measures" below.
Acquisition of Chadwick-BaRoss, Inc.
On February 17, 2011, the Company completed the acquisition of 100% of the
shares of Chadwick-BaRoss, Inc. ("Chadwick-BaRoss") for net transaction price 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 a number of geographic regions and in a wide range of
end-use markets that utilize heavy equipment and which may have differing
economic cycles. Construction markets generally follow the cycles of the broader
economy, but typically lag by periods ranging up to 12 months. As construction
markets recover following a recession, demand for heavy equipment normally
improves as construction activity and confidence in construction markets build.
In addition, as the financial resources of customers strengthen, they have
historically replenished and upgraded their equipment fleets after a period of
restrained capital expenditures. Demand in oil and gas and mining markets is
affected by the economy but also tends to be driven by 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
and the first half of 2012, a positive indication of the continuing recovery.
The improving trend in construction markets continued across Canada in the first
half of 2012. Ongoing activity in the Alberta oil sands, large hydro-electric
projects and continuing spending on infrastructure projects contributed to
strong demand for both heavy equipment and cranes. In the first quarter of 2012,
generally mild winter weather conditions across most of the country resulted in
customers delaying the buying decisions and reduced parts consumption. However,
the early onset of warm spring weather brought an advanced start to the summer
construction season which contributed to stronger equipment sales in the latter
part of the first quarter and through the second quarter. In Northern Alberta,
higher than normal winter temperatures curtailed oilfield activities in the
early part of the first quarter of 2012, which tempered purchases of heavy
equipment and product support. 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. Heavy rains in April and May reduced
construction activity and caused customers to delay equipment purchases.
However, demand for heavy equipment in the region remained strong and with
improving weather conditions and increased construction activity, customers
firmed up their buying decisions for heavy equipment which led to increased
sales in the latter part of the second quarter. Strongco's sales backlog rose
through the first quarter and remained at consistent high levels through the
second quarter, a positive indication of continued strong demand.
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 and six months ended June 30, 2012 and
2011 is as follows:
----------------------------------------------------------------------------
Three months ended Six Months Ended
June 30 June 30
----------------------------------------------------------------------------
($ millions) 2012 2011 2012 2011
----------------------------------------------------------------------------
Eastern Canada (Atlantic and
Quebec)
Equipment Sales $ 30.8 $ 27.2 $ 47.9 $ 47.3
Equipment Rentals 2.6 1.9 4.3 3.4
Product Support 12.8 11.4 22.9 20.7
----------------------------------------------------------------------------
Total Eastern Canada $ 46.2 $ 40.5 $ 75.1 $ 71.4
----------------------------------------------------------------------------
Central Canada (Ontario)
Equipment Sales $ 29.4 $ 25.8 $ 46.1 $ 44.0
Equipment Rentals 1.2 1.0 2.2 2.3
Product Support 9.4 8.8 18.3 16.9
----------------------------------------------------------------------------
Total Central Canada $ 40.0 $ 35.6 $ 66.6 $ 63.2
----------------------------------------------------------------------------
Western Canada (Manitoba to BC)
Equipment Sales $ 22.6 $ 17.2 $ 44.5 $ 32.2
Equipment Rentals 1.4 2.4 3.0 4.8
Product Support 6.8 6.4 13.3 12.0
----------------------------------------------------------------------------
Total Western Canada $ 30.8 $ 26.0 $ 60.8 $ 49.0
----------------------------------------------------------------------------
Northeastern United States
Equipment Sales $ 9.6 $ 6.9 $ 16.0 $ 9.6
Equipment Rentals 1.2 0.8 2.0 1.1
Product Support 4.4 4.3 8.5 7.3
----------------------------------------------------------------------------
Total Northeastern United States $ 15.2 $ 12.0 $ 26.5 $ 18.0
----------------------------------------------------------------------------
Strongco Corporation
Equipment Sales $ 92.4 $ 77.1 $ 154.5 $ 133.1
Equipment Rentals 6.4 6.1 11.5 11.6
Product Support 33.4 30.9 63.0 56.9
----------------------------------------------------------------------------
Total Strongco Corporation $ 132.2 $ 114.1 $ 229.0 $ 201.6
----------------------------------------------------------------------------
Equipment Sales
Strongco's equipment sales in the three months ended June 30, 2012 were $92.4
million which was up $15.3 million or 20% from $77.1 million in the second
quarter of 2011. Sales in Canada were up $12.6 million or 18% in the quarter
with all regions of the country reporting an increase. Equipment sales in the
quarter were also up in Northeastern U.S. despite continued weak construction
markets. For the six months ended June 30, 2012, total sales were $154.5 million
compared to $133.1 million in the first half of 2011. Sales in Canada were up
$15.0 million or 12% compared to the first six months of 2011 led by a
significant year-over-year increase in Western Canada due to the strong ongoing
activity in the oil sands. Equipment sales in the Northeastern U.S. for the
first six months of the year were also significantly ahead of the same period in
2011 due to stronger sales of forestry and scrap handling products, and improved
market share in this region.
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 half of 2012 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,
Original Equipment Manufacturers ("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
first half of 2012 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 through the market quickly
which should ease competition and pricing.
On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic
regions) were $30.8 million in the second quarter, which was up $3.6 million or
13% from the second quarter of 2011. For the six months to June, equipment sales
in Eastern Canada totalled $47.9 million, which was up slightly from $47.3
million in the first half of 2011. Construction markets in Quebec continued to
benefit from significant infrastructure activity in the province and large
hydro-electric projects in northern Quebec, while construction activity in the
Atlantic Provinces declined in the quarter. Strongco's sales of cranes in
Eastern Canada were up significantly over the first half of 2011 due to strong
demand for cranes in Quebec and deliveries of several large cranes to crane
rental companies to replenish and increase their fleets. Excluding cranes, the
heavy equipment markets in Eastern Canada where Strongco participates were
estimated to be up approximately 3% over the second quarter of 2011 and for the
first half of the year were up roughly 10% over the same period in 2011.
Strongco's sales and market share declined in Eastern Canada in the first
quarter as a result of aggressive price competition, as well as a high level of
sales by certain competitors, of equipment that were on RPO's carried over from
2011. Strongco's sales and market share in the region recovered slightly in the
second quarter, but for the six months to June 30, 2012, was down from a year
ago.
Strongco's equipment sales in the second quarter in Central Canada were $29.4
million, which was up $3.6 million or 14% from the second quarter of 2011. For
the six months to June 30, 2012, total sales in the region were $46.1 million,
$2.1 million or 5% higher than the same period in 2011. Crane sales were strong
in the quarter and the first six months of the year due to sales of several
cranes to crane rental companies who were replenishing and increasing their
fleets, and sales of two large crawler cranes for use on infrastructure projects
in the region. Sales of heavy equipment other than cranes in the region were
down in the quarter and first six months of the year. While construction markets
in Ontario have shown recovery from the depths of the recession in 2009,
uncertainty still remains which has caused customers to curtail spending on
heavy equipment and take a wait-and-see attitude toward the marketplace in
general. In addition, price competition has remained aggressive in 2012 in
particular product categories and from dealers carrying high levels of product
with the old tier 3 engine. Overall, for the first six months of the year, the
markets for heavy equipment in Central Canada where Strongco participates were
estimated to be up approximately 20% over the first half of 2011, with the
biggest growth in compact equipment. Strongco's unit volumes in the region were
up approximately 7% in the first six months of the year, resulting in a small
decrease in overall market share. Strongco's sales backlogs in Ontario have been
building in 2012, which is a positive sign of increasing demand.
Equipment sales in Western Canada during the second quarter were $22.6 million,
which was up $5.4 million or 31% over the second quarter of 2011. For the six
months to June 30, 2012, the total was $44.5 million, $12.3 million or 38%
higher than the same period in 2011. Economic conditions in Alberta have
improved from the recession, fueled to a large extent by robust activity in the
oil sands, which has resulted in strong demand for heavy equipment and cranes in
the region. However, the milder than normal and very wet winter weather
conditions curtailed activity in the early part of the year, particularly in
Northern Alberta, which tempered purchases of heavy equipment and product
support. While the early onset of warm spring weather brought an advanced start
to the summer construction season, heavy rains in the second quarter also
hampered construction activity and caused some customers to delay equipment
purchases. Crane sales in Western Canada have been very strong in 2012 driven by
sales of truck mounted cranes to customers who provide service to the energy
sector as well as sales of several large cranes to crane rental companies.
Strongco's sales of heavy equipment, other than cranes, while up year-over-year,
have been negatively impacted by the poor weather conditions, as well as delayed
deliveries and lack of availability of equipment from the OEM, particularly
articulated trucks which are in high demand for the Alberta market. The market
served by Strongco in Alberta, excluding cranes, was estimated to be up
approximately 40% relative to the first half of 2011 but Strongco's unit volumes
were up 30% year to date which resulted in a slight reduction in market share.
Product availability and delivery performance from the OEM is improving and
additional articulated trucks are expected in the third quarter which should
support stronger sales and improved market share in the balance of the year.
Demand for heavy equipment overall in the region remains strong and with
improving weather conditions and increased construction activity, customers have
firmed up their buying decisions for heavy equipment which led to increased
sales backlogs in the region.
Strongco's equipment sales in the northeastern United States were $9.6 million
in the second quarter and $16.0 million for the first half of 2012, compared to
$6.9 million and $9.6 million, respectively, in the same periods of 2011.
As Strongco acquired Chadwick-BaRoss in February 2011, results for the first
half of 2011 include the results of Chadwick-BaRoss for the five months from
February to June, which accounts for a portion of the year-over-year increase.
The markets for heavy equipment in New England remained soft in 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 Chadwick-BaRoss has been successful in penetrating other
markets for heavy equipment in scrap handling and waste management.
Chadwick-BaRoss' equipment sales for the first half were ahead of the same
period in 2011 due in part to stronger sales to the forestry and scrap handling
sectors, which contributed to an improvement in Strongco's market share in this
region.
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 2009 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,
remained strong. As markets were recovering, Strongco made a commitment to
participate to a larger extent in the RPO market which has resulted in growth in
Strongco's rental activity and revenues.
Strongco's rental revenue in the second quarter was $6.4 million, which was up
$0.3 million, or 5%, over the second quarter of 2011. For the six months to
date, rental revenues totalled $11.5 million, which was essentially unchanged
from $11.6 million in the same period in 2011. On a regional basis, Strongco's
rental revenue was strong in the quarter and first six months of the year 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
Western Canada, rental revenues were off from the same period last year, as many
customers chose to purchase equipment through RPO contracts during the first
half of the year. 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 half 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 in the second quarter of 2012 were $33.4
million, up 8% from $30.9 million in the second quarter of 2011. For the six
months to the end of June, product support revenues totalled $63.0 million, up
from $56.9 million in the first six months 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 which 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 later part of the
first quarter. Product support activities continued strong in the second
quarter, although heavy rains in Alberta caused lower use of equipment which
impacted parts and service activity. 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 June 30
----------------------------------------------------------------------------
2012 2011
Gross Margin $ millions GM% $ millions GM%
----------------------------------------------------------------------------
Equipment Sales $ 9.5 10.3% $ 7.5 9.7%
Equipment Rentals 1.0 15.7% 1.3 21.3%
Product Support 13.3 39.8% 12.4 40.1%
----------------------------------------------------------------------------
Total Gross Margin $ 23.8 18.0% $ 21.2 18.6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months Ended June 30
----------------------------------------------------------------------------
2012 2011
Gross Margin $ millions GM% $ millions GM%
----------------------------------------------------------------------------
Equipment Sales $ 15.9 10.3% $ 12.7 9.5%
Equipment Rentals 1.8 15.6% 2.5 21.5%
Product Support 25.5 40.5% 23.0 40.4%
----------------------------------------------------------------------------
Total Gross Margin $ 43.2 18.9% $ 38.2 18.9%
----------------------------------------------------------------------------
As a result of the higher revenues, Strongco's gross margin was higher in the
second quarter and first six months of 2012. As a percentage of revenue,
Strongco's overall gross margin has remained fairly consistent year-over-year.
The slight decline in the gross margin percentage in the second quarter was due
to the increased level of equipment sales in second quarter of 2012, which
generate a lower margin percentage compared to rentals and product support.
Higher sales of equipment in the quarter and first six months of the year
contributed to higher sales gross margins. In addition, despite aggressive price
competition, especially from dealers carrying higher amounts of equipment with
tier 3 engines, Strongco was able to increase its gross margin percentage of
sales in the second quarter and first six months of 2012 compared to the same
periods in 2011 due in part to a higher proportion of sales of cranes and
articulated trucks, which command higher margins compared to other equipment.
The gross margin on rentals in the second quarter and first six months of the
year was down from a year ago. The decrease was due to lower overall gross
margin percentage on rentals in 2012 as a result of an increase in rentals under
RPO contracts. The gross margin percentage on rentals under RPO contracts
reflects the margin anticipated on the sale on exercise of the purchase option
which is typically lower than the margin on rentals with no purchase option.
The gross margin on product support activities improved in the second quarter
and the six months of the year compared to the same periods in 2011. As a
percentage of revenue, the gross margin on product support remained strong
around 40% in the second quarter and first six-months of 2012 consistent with
the prior year.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the second quarter of 2012
were $18.5 million or 14.0% of revenue, which compared to $16.3 million or 14.3%
of revenues in the second quarter of 2011. For the six months ended June 30,
2012, administrative, distribution and selling expenses were $35.2 million or
15.4% of revenue, which compared to $31.5 million or 15.6% of revenues in the
first half of 2011. Certain variable distribution and selling expenses were
higher in 2012 as a result of the increase in revenues. In addition, expenses in
2012 were higher as a result of incremental operating expenses of the new
branches in Orillia, Ontario and Edmonton, Alberta and one-time relocation and
moving costs for the new branch in Edmonton. Most of the increase in expenses
was in support of revenue growth. Annual salary and wage increases plus
additional sales and customer service reps and sales/service managers at
Canadian operations also contributed to the higher expense levels. Expenses of
Chadwick-BaRoss, which was acquired in February 2011, were higher in 2012 due to
the inclusion of one additional month of expenses and due to annual salary and
wage increases and additional sales personnel hired to support revenue growth.
In addition, the accrual for incentive bonuses was higher in 2012 by $0.2
million due primarily to the introduction of a new long-term incentive program.
Other Income
Other income and expense is primarily comprised of gains or losses on
disposition of fixed assets, foreign exchange gains or losses, service fees
received by Strongco as compensation for sales of new equipment by other third
parties into the regions where Strongco has distribution rights for that
equipment and commissions received from third party financing companies for
customer purchase financing Strongco places with such finance companies. Other
income in the second quarter of 2012 was $1.1 million, compared to $0.2 million
in the second quarter of 2011. For the first six months of 2012, other income
was $1.5 million compared to $0.5 million in the first half of 2011. Other
income was higher in the second quarter and first half of 2012 primarily due to
higher service fees related to sales made by other distributors within the
Company's territories.
Interest Expense
Strongco's interest-bearing debt comprises interest bearing equipment notes,
bank indebtedness and various other bank term loans and mortgages. Strongco
typically finances equipment inventory under floor plan lines of credit
available from the captive finance affiliate of its OEM suppliers and various
other non-bank finance companies. Most equipment financing has interest free
periods for between three and eight months and in limited cases up to twelve
months, from the date of financing after which the equipment notes become
interest bearing. The rate of interest on the Company's interest bearing
equipment notes, bank indebtedness and other bank loans 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 second quarter and first six months of 2012
was $2.1 million and $3.4 million, respectively, compared to $1.4 million and
$2.8 million, respectively, in the same periods in 2011. The increase was due to
a higher average amount of interest-bearing debt in the first half of 2012
compared to the prior year. During 2011 and into 2012, Strongco increased its
equipment inventories to support higher revenues and the increasing demand for
heavy equipment as construction markets recovered. This resulted in a higher
average level of interest-bearing equipment notes in the first six months of
2012 compared to the first half of 2011 (see discussion under "Financial
Condition and Liquidity"). In addition, Strongco has taken on additional term
loan debt to finance the purchase and construction of its new Edmonton, Alberta
branch. Interest expense in second quarter of 2012 also includes a $0.2 million
loss from the mark-to-market adjustment on $25 million of interest rate swaps
which fix the interest rate on a portion of the Company's variable interest rate
debt. In the first quarter of 2012, there was a mark-to-market gain of $0.3
million on these swaps.
Earnings before Income Taxes
Strongco's earnings before income taxes in the second quarter and first six
months of 2012 were $4.3 million and $6.1 million, respectively, which were
significantly improved from earnings before income taxes of $3.8 million and
$4.4 million, respectively, in the same periods of 2011. The increase was due to
the stronger revenue performance in 2012.
Provision for Income Taxes
The provision for income taxes in the second quarter and first six months of
2012 were $1.1 million and $1.6 million, respectively, which reflects a combined
average effective tax rate on the Company's income in Canada and the United
States of 26.25% for the period. The recognition of tax loss carry forwards
resulted in no provision for income taxes in the first half of 2011 for Strongco
in Canada. All tax loss carry forwards were utilized in 2011.
Net Income
Strongco's net income in the second quarter was $3.2 million ($0.25 per share),
which compared to net income of $3.6 million ($0.28 per share) in the second
quarter of 2011. Net income for the first six months of 2012 was $4.5 million
($0.34 per share), compared to $4.2 million ($0.33 per share) in the first half
of 2011.
EBITDA
EBITDA in the second quarter of 2012 was $12.6 million (9.6% of revenue), up
from $10.5 million (9.2% of revenue) in the second quarter of 2011. For the six
months to date, EBITDA increased to $20.7 million (9.0% of revenue) from $17.3
million (8.6% of revenue) in the first half of 2011.
EBITDA was calculated as follows:
----------------------------------------------------------------------------
Three months ended Six Months Ended
June 30 June 30
----------------------------------------------------------------------------
($ millions) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 3.2 $ 3.6 $ 4.5 $ 4.2
Add Back:
Interest 2.1 1.4 3.4 2.8
Income taxes 1.1 0.1 1.6 0.2
Amortization of capital assets 1.0 0.5 1.8 1.3
Amortization of equipment
inventory on rent 4.4 4.3 8.0 8.1
Amortization of rental fleet 0.8 0.6 1.4 0.7
----------------------------------------------------------------------------
EBITDA (note 1) $ 12.6 $ 10.5 $ 20.7 $ 17.3
----------------------------------------------------------------------------
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 second quarter of 2012, Strongco provided $12.7 million of cash from
operating activities before changes in working capital. This compares to $11.3
million of cash provided from operating activities before changes in working
capital in the second quarter of 2011. After working capital changes and
payments of interest, income taxes and pension funding, cash provided by
operating activities amounted to $10.0 million, which compared to cash used in
operating activities of $0.9 million in the second quarter of 2011.
For the six months ended June 30, 2012, Strongco provided $21.1 million of cash
from operating activities before changes in working capital. By comparison, in
the first six months of 2011, $17.8 million of cash was provided by operating
activities before changes in working capital. After working capital changes and
payments of interest, income taxes and pension funding, cash provided by
operating activities amounted to $10.4 million which compared to cash used in
operating activities of $1.6 million in the first half of 2011.
The components of the cash used in and provided by operating activities were as
follows:
----------------------------------------------------------------------------
Three months ended June Six Months Ended June
30 30
----------------------------------------------------------------------------
($ millions) 2012 2011 2012 2011
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings $ 3.3 $ 3.6 $ 4.5 $ 4.2
Non-cash items:
Depreciation - capital
assets 1.0 0.6 1.8 1.3
Depreciation - equipment
inventory on rent 4.4 4.2 8.0 8.1
Depreciation - rental
fleet 0.8 0.5 1.3 0.7
(Gain) loss on sale of
rental fleet (0.3) 0.4 (0.2) (0.1)
Deferred compensation 0.1 0.1 0.1 0.1
Interest expense 2.0 1.4 3.4 2.8
Income tax expense
(recovery) 1.1 0.1 1.6 0.2
Employee future benefit
expense 0.3 0.4 0.6 0.5
----------------------------------------------------------------------------
12.7 11.3 21.1 17.8
Changes in non-cash working
capital balances 0.1 (10.1) (5.9) (15.7)
Employee future benefit
funding (0.6) (0.7) (1.2) (0.9)
Interest paid (2.1) (1.4) (3.4) (2.8)
Income taxes paid (0.1) - (0.2) -
----------------------------------------------------------------------------
Cash provided by (used in)
operating activities $ 10.0 $ (0.9) $ 10.4 $ (1.6)
----------------------------------------------------------------------------
Non-cash items include amortization of equipment inventory on rent of $4.4
million and $8.0 million in the three and six months ended June 30, 2012,
respectively, which compares to $4.2 million and $8.1 million in the second
quarter and the first half of 2011. Higher volumes of equipment rentals in 2012
resulted in the higher amortization of equipment inventory on rent.
During the second quarter of 2012, the net decrease in non-cash working capital
was $0.1 million. By comparison, during the first six months of 2012, there was
a net increase in non-cash working capital of $5.9 million, which compares to an
increase in non-cash working capital of $10.1 million and $15.7 million,
respectively, in the same periods of 2011. Components of cash flow from the net
change in non-cash working capital for the three month and six month period
ending June 30, 2012 and 2011 were as follows:
----------------------------------------------------------------------------
Three months ended June Six Months Ended June
30 30
----------------------------------------------------------------------------
($ millions) (Increase) /
Decrease 2012 2011 2012 2011
----------------------------------------------------------------------------
Accounts receivable $ (8.9) $ (11.6) $ (6.5) $ (13.8)
Inventories (32.0) (25.7) (69.5) (34.5)
Prepaids - 0.4 (0.3) (0.2)
Other asset - - (0.1) -
----------------------------------------------------------------------------
$ (40.9) $ (36.9) $ (76.4) $ (48.5)
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities 8.3 3.7 18.1 6.3
Deferred revenue & customer
deposits (0.6) (1.0) (0.4) (0.6)
Income taxes payable
(recoverable) - (0.1) - (0.1)
Equipment notes payable 33.3 24.2 52.8 27.2
----------------------------------------------------------------------------
$ 41.0 $ 26.8 $ 70.5 $ 32.8
----------------------------------------------------------------------------
Net change in non-cash
working capital $ 0.1 $ (10.1) $ (5.9) $ (15.7)
----------------------------------------------------------------------------
With an increase in parts and service revenue, accounts receivable increased in
the second quarter and first six months of 2012 to $8.9 million and $6.5 million
respectively. The average age of receivables outstanding at the end of the June
30, 2012 was approximately 31 days, improved from December 2011 at approximately
38 days and 33 days a year ago.
Given the seasonality of construction and the buying patterns of customers, the
majority of Strongco's inventory purchases is ordered in the fourth quarter for
delivery the first half of the year to support the anticipated sales level of
equipment and parts during the summer and fall selling season. During the second
quarter of 2012, there was a net increase in inventory of $32.0 million which
compares to a net increase of $25.7 million in the second quarter of 2011. In
the first six months of 2012, there was a net increase in inventory of $69.5
million compared to a net increase of $34.5 million in the first half of 2011.
More inventories were ordered for delivery in 2012 to support higher anticipated
sales levels. As mentioned above under the discussion of equipment sales, 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
delivery lead times and reduced availability of certain types of equipment.
Delayed deliveries have not only hampered sales efforts, but have also played
havoc with inventory levels. In the fourth quarter of 2011, Strongco accepted a
large amount of equipment inventory from its OEM suppliers that had been
scheduled for delivery much earlier in the year, most of it in April and May.
Even though it was delivered late and well beyond the prime selling season,
Strongco accepted this inventory to ensure it had adequate amounts of equipment
to sell in the upcoming 2012 season, which inflated inventory levels entering
2012. OEM delivery performance has been improving but is not yet at an
acceptable level. Strongco's equipment inventory at June 30, 2012 was $244
million compared to $185 million a year earlier. While this is a higher level of
inventory than the Company would normally carry at this point in the year,
management feels it is prudent given the less than adequate OEM delivery
performance and is confident given continued strong demand in the market, that
the higher level of inventory will be sold through the summer/fall season in
2012.
To finance the increase in equipment inventory, the Company's equipment notes
payable increased to $33.3 million during the second quarter and $52.8 million
during the first six months of the year. This compares to an increase in
equipment notes of $24.2 million and $27.2 million in the second quarter and
first six months, respectively, of 2011. Floor plan debt levels are expected to
decline throughout the balance of the year in line with the anticipated
reduction in inventory described above.
Cash Used In Investing Activities:
Net cash used in investing activities amounted to $4.2 million in the second
quarter of 2012. Chadwick-BaRoss sold rental fleet assets for proceeds of $3.0
million and added new equipment to its rental fleet at a cost of $5.4 million
during the quarter. Capital expenditures totalled $1.8 million in the quarter
and related to the construction of the new Edmonton branch as well as facilities
upgrades and miscellaneous shop equipment purchases. Investing activities in the
second quarter of 2011 amounted to $2.0 million related mainly to the purchase
of rental fleet equipment.
For the six months ended June 30, 2012, Strongco used net cash of $6.4 million
in investing activities primarily related to the purchase and sale of rental
fleet equipment. Capital expenditures in the first six months of 2012 were $3.7
million which included the completion of the construction of the new Edmonton
facility. Chadwick-BaRoss sold part of its rental fleet for proceeds of $4.4
million and made new additions to the rental fleet totalling $7.1 million.
Investing activities in the first half of 2011 amounted to $13.4 million which
included $9.2 million for the acquisition of Chadwick-BaRoss, $3.1 million for
capital expenditures relating mainly to the construction of the new Edmonton
branch and net additions to rental fleet of Chadwick-BaRoss of $1.1 million.
The components of the cash used in investing activities were as follows:
----------------------------------------------------------------------------
Three months ended June Six Months Ended June
30 30
----------------------------------------------------------------------------
($ millions) 2012 2011 2012 2011
----------------------------------------------------------------------------
Acquisition of Chadwick-
BaRoss, Inc. $ - $ $ - $ (9.2)
Purchase of rental fleet
equipment (5.4) (4.0) (7.1) (4.5)
Proceeds on the sale of
rental fleet equipment 3.0 2.3 4.4 3.4
Purchase of capital assets (1.8) (0.3) (3.7) (3.1)
----------------------------------------------------------------------------
Cash used in investing
activities $ (4.2) $ (2.0) $ (6.4) $ (13.4)
----------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities:
In the second quarter of 2012, Strongco used $5.0 million of cash in financing
activities which compared to cash of $2.9 million provided from financing
activities in the second quarter of 2011.
For the six months ended June 30, 2012, Strongco used $3.2 million of cash in
financing activities which compared to cash of $15.0 million provided from
financing activities in the same period of 2011.
To help finance the purchase of Chadwick-BaRoss, the Company secured a $5.0
million term loan from its bank in April 2011 and issued $1.9 million of
promissory notes to the previous shareholders of Chadwick-BaRoss. In the first
half of 2012, $0.5 million was repaid on the term loan and $0.4 million of the
vendor take back notes were repaid.
In addition, 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 $3.6
million in the first half of 2012. During the second quarter of 2012, upon
completion of the branch, the construction loan was converted to a term loan.
Principal repayments of the term loan will commence in Q3 2012.
Cash of $4.8 million was used to reduce the Company's bank indebtedness in the
first half of 2012 and $1.1 million was used to repay finance leases (primarily
service vehicles and computer equipment).
The components of the cash provided by (used in) financing activities were as
follows:
----------------------------------------------------------------------------
Three months ended Six Months Ended June
June 30 30
----------------------------------------------------------------------------
($ millions) 2012 2011 2012 2011
----------------------------------------------------------------------------
Proceeds from rights
offering $ - $ - $ - $ 7.8
Term loan - acquisition of
Chadwick-BaRoss Inc. - 5.0 5.0
Repayment of term loan -
acquisition of Chadwick-
BaRoss Inc. (0.2) (0.2) (0.5) (0.2)
Repayment of vendor take
back note (0.2) (0.2) (0.4) (0.2)
Construction loan - new
Edmonton branch 2.6 1.8 3.6 1.8
Increase (decrease) in bank
indebtedness (6.6) (2.9) (4.8) 2.6
Repayment of finance lease
obligations (0.6) (0.6) (1.1) (0.6)
Repayment of Champion note - - - (1.2)
----------------------------------------------------------------------------
Cash provided by (used in)
financing activities $ (5.0) $ 2.9 $ (3.2) $ 15.0
----------------------------------------------------------------------------
Bank Credit Facilities
The Company has credit facilities with banks in Canada and United States that
provide operating lines of credit of $20 million in Canada and $US2.5 million in
the United States. During the second quarter of 2012, the Company renewed and
amended its bank credit facilities in Canada. The renewed facility provides a
three-year committed facility, improved from the previous one year committed
facility and the $20 million limit is now allowed to increase up to $35 million,
provided the borrowing base assets support the level of debt.
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
in intangible and other assets. The operating lines bear interest at rates in
Canada 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%, and in the United States at LIBOR plus 2.60%. 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.
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 June 30, 2012, the Company had outstanding foreign exchange
forward contracts under this facility totalling US$4.4 million at an average
exchange rate of $1.007 Canadian for each US$1.00 with settlement dates between
July 1, 2012 and October 31, 2012.
The Company's U.S. bank credit facilities also include term loans secured by
real estate in the United States. These loans require monthly principal payments
of US$13,300 plus accrued interest. During the quarter, the Company renegotiated
these term loans to reduce the interest to LIBOR plus 2.75% and to extend the
term of the loans to May 2017, at which point a balloon payment for the balance
of the loans is due. The Company has interest rate swap agreements in place that
have converted the variable rate on the term loans to a fixed rate. During the
quarter, the swap agreements were also renegotiated to reduce the fixed swap
rate to 4.13%, effective September 2012. The new swap agreements are set to
expire in May 2017, coincident with the term loan. It is management's intention
to renew the term loans and interest rate swap agreement prior to their expiry.
At June 30, 2012, the outstanding balance on these term loans was US$3.6
million.
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%. In the second quarter of 2012, the Company
entered into interest rate swap agreements that have converted the variable rate
on the term loans to a fixed rate of 5.29%. The Term loan - Canadian Real Estate
is subject to monthly principal payments of $83.3 thousand plus accrued
interest. As at June 30, 2012, there was $3.8 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 was 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 now complete. Upon completion of the branch, in the second quarter the
Construction Loan #1 converted to a demand, non-revolving term loan ("Mortgage
Loan #1"). Mortgage Loan #1 was for an amount of $7.1 million and a term of 60
months. Construction Loan #1 bore interest and Mortgage Loan #1 bears interest
at the bank's prime lending rate plus 2.0%. The Company has interest rate swap
agreements in place that have converted the variable rate on the Mortgage Loan
#1 to a fixed rate of 5.15%. As at June 30, 2012, there was $7.1 million drawn
on Mortgage 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. With the renewal of the bank credit facility in the second quarter of
2012, the maximum limit for Construction Loan #2 was increased to $13.9 million
from $8.9 million. The Company anticipates construction of the new Fort McMurray
branch will commence in the third quarter of 2012 with expected 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 June
30, 2012, Construction Loan #2 was undrawn.
The bank credit facilities contain financial covenants typical of such credit
facilities that require the Company to maintain certain financial ratios and
meet certain financial thresholds. The financial covenants were amended on
renewal of the facility in the second quarter of 2012 to allow for the higher
level of borrowing on Construction Loan #2 and Mortgage Loan #2 to finance the
construction of the Company's proposed new Fort McMurray branch.
A summary of these financial covenants is as follows:
-- Minimum ratio of total current assets to current liabilities ("Current
Ratio covenant") of 1.1:1,
-- Minimum tangible net worth ("TNW covenant") of $54 million,
-- Maximum ratio of total debt to tangible net worth ("Debt to TNW Ratio
covenant") of 4.5:1, reducing to 4.25:1 at December 31, 2012 and 4.0:1
at March 31, 2013 and thereafter, and
-- Minimum ratio of EBITDA minus cash taxes paid and capital expenditures
to total interest ("Debt Service Coverage Ratio covenant") of 1.3:1.
(Note: 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 June 30, 2012.
Equipment Notes
In addition to its bank credit facilities, the Company has lines of credit
available totalling approximately $270 million from various non-bank equipment
lenders in Canada and the United States that are used to finance equipment
inventory and rental fleet. At June 30, 2012, there was approximately $220.4
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 June 30, 2012, approximately $90.3 million of these
equipment notes were interest free and $130.1 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 variable rate of interest on $25.0 million of its interest bearing
equipment notes at approximately 4.6% 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 June 30, 2012.
Interest Rate Swaps
In September 2011, 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. On June 8, 2012, the Company entered
into an additional interest rate swap agreement under this facility to fix the
floating BA rate on an additional $10.0 million of interest bearing debt at a
fixed interest rate equal to 1.58% for a period of five years to June 8, 2017.
The company has put these swaps in place to effectively fix the interest rate on
$25.0 million of its interest-bearing equipment notes at approximately 4.61%.
In the second quarter, the Company entered into an interest rate swap agreements
that converted the variable interest rate components on the Term Loan - Canadian
Real Estate and Mortgage Loan #1 to a fixed rate of 5.29% and 5.15%,
respectively.
The Company also has interest rate swap agreements in place in the US that have
converted the variable rate on its US term loans to a fixed rate of 4.14%. The
term loan and swap agreements expire in May 2017 at which point a balloon
payment from the balance of the loans is due. It is management's intention to
renew the term loans and interest rate swap agreement prior to their expiry.
Summary of Outstanding Debt
The balance outstanding under Strongco's debt facilities at June 30, 2012 and
2011 consisted of the following:
----------------------------------------------------------------------------
Debt Facilities Three months ended June 30
----------------------------------------------------------------------------
($ millions) 2012 2011
----------------------------------------------------------------------------
Bank indebtedness (including outstanding
cheques) $ 6.2 $ 15.2
Equipment notes payable - non interest
bearing 90.3 79.5
Equipment notes payable - interest bearing 130.1 76.5
Acquisition term loan 0.9 1.6
Construction loan - 1.8
Term notes - Canadian real estate 10.9 4.8
Term notes - US real estate 3.6 3.6
----------------------------------------------------------------------------
$ 242.0 $ 183.0
----------------------------------------------------------------------------
As at June 30, 2012, there was approximately $16 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 normally 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 approximately $49.6 million available under its equipment
finance facilities at June 30, 2012. Borrowing on these lines typically
increases in the first six months of the year as equipment inventory is
purchased for the season and declines to the end of the year as equipment sales
increase, particularly in the fourth quarter.
With the level of funds available under the Company's bank credit lines, the
current availability under the equipment finance facilities and anticipated
improvement in cash flows from operations, management believes the Company will
have adequate financial resources to fund its operations and make the necessary
investment in equipment inventory and fixed assets to support its operations in
the future.
SUMMARY OF QUARTERLY DATA
In general, business activity follows a weather related pattern of seasonality.
Typically, the first quarter is the weakest quarter as construction and
infrastructure activity is constrained in the winter months. This is followed by
a strong gain in the second quarter as construction and other contracts begin to
be tendered and companies prepare for summer activity. The third quarter
generally tends to be slightly slower from an equipment sales standpoint, which
is partially offset by continued strength in equipment rentals and customer
support activities. Fourth quarter activity generally strengthens as customers
make year-end capital spending decisions and exercise purchase options on
equipment which has previously gone out on RPO's. In addition, purchases of snow
removal equipment are typically made in the fourth quarter.
A summary of quarterly results for the current and previous two years is as follows:
----------------------------------------------------------------------------
2012
($ millions, except per share
amounts) Q2 Q1
----------------------------------------------------------------------------
Revenue $ 132.2 $ 96.8
Earnings before income taxes 4.3 1.7
Net income 3.3 1.2
Basic and diluted earnings per share $ 0.25 $ 0.09
2011
($ millions, except per unit/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
unit/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
totalling $20.9 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 OEM, 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 June 30, 2012, the total buy back
contracts outstanding were $13.3 million. A reserve of $1.1 million has been
accrued in the Company's accounts as at June 30, 2012 with respect to these
commitments.
The Company has provided a guarantee of lease payments under the assignment of a
property lease that expires January 31, 2014. Total lease payments from July 1,
2012 to January 31, 2014 are $0.2 million.
Contractual obligations are set out in the following tables. Management believes
that the Company will generate sufficient cash flow from operations to meet its
contractual obligations.
----------------------------------------------------------------------------
Payment due by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 Year years years years
----------------------------------------------------------------------------
Operating leases $20.9 $7.8 $6.7 $4.4 $2.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingent obligation by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 Year years years years
----------------------------------------------------------------------------
Buy back contracts $13.3 $0.9 $4.8 $7.5 $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 $7.8 million (refer to the Company's Rights
Offering Circular filed on SEDAR for details). The total shares outstanding
following completion of the rights offering was 13,128,719. There were no
changes in the issued and outstanding shares during the first half 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 June 30, 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
continued strong demand for heavy equipment. Strongco's sales backlogs grew
significantly during the first quarter and have remained at high levels through
the second quarter as Strongco moved into its strong selling season. This is a
positive indication of the increasing demand for heavy equipment.
Equipment suppliers are expected to continue to improve production capacity and
delivery lead times throughout the balance of 2012. Inventory levels at Strongco
were allowed to run slightly higher than normal at year end and through the
first half of the year to ensure availability of product for the Company through
the prime selling season. While availability of certain product lines did impact
sales in the first half of 2012, current inventory and improving product
availability are expected to support sales through the balance of the year.
Management remains cautiously optimistic that the improved Canadian economy will
continue through the balance of the year, which should lead to increased
revenues compared to the same period in 2011. In addition, while market
conditions in the northeastern United States remain weak, Chadwick-BaRoss
realized modest growth in the first half 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. While demand for equipment
from its traditional markets is expected to remain flat, Chadwick-BaRoss expects
to continue to show a modest increase in revenues from sales to other
non-traditional markets and strong product support sales 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 June 30, 2012 with changes
from March 31, 2012 is as follows:
----------------------------------------------------------------------------
Provision for Inventory Obsolescence ($ millions)
----------------------------------------------------------------------------
Provision for inventory obsolescence as at March 31, 2012 $ 5.1
Provision related to inventory disposed of during the quarter (0.6)
Additional provisions made during the quarter 0.2
----------------------------------------------------------------------------
Provision for inventory obsolescence as at June 30, 2012 $ 4.7
----------------------------------------------------------------------------
Allowance for Doubtful Accounts
The Company performs credit evaluations of customers and limits the amount of
credit extended to customers as appropriate. The Company is however exposed to
credit risk with respect to accounts receivable and maintains provisions for
possible credit losses based upon historical experience and known circumstances.
The allowance for doubtful accounts as at June 30, 2012 with changes from March
31, 2012 is as follows:
----------------------------------------------------------------------------
Allowance for Doubtful Accounts ($ millions)
----------------------------------------------------------------------------
Allowance for doubtful accounts as at March 31, 2012 $ 2.0
Accounts written off during the quarter (0.3)
Additional provisions made during the quarter 0.1
----------------------------------------------------------------------------
Allowance for doubtful accounts as at June 30, 2012 $ 1.8
----------------------------------------------------------------------------
Employee Future Benefit 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
pro-rated 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
June 30, 2012 and 2011
Strongco Corporation
Unaudited Consolidated Statement of Financial Position
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated)
----------------------------------------------------------------------------
June 30 December 31
2012 2011
----------------------------------------------------------------------------
Assets
Current assets
Cash $ 774 $ -
Trade and other receivables 49,215 42,759
Inventories (note 5) 272,240 210,128
Prepaid expenses and other deposits 1,721 1,420
----------------------------------------------------------------------------
323,950 254,307
----------------------------------------------------------------------------
Non-current assets
Property and equipment (note 6) 36,334 31,278
Rental fleet 16,759 15,564
Deferred income tax asset 1,298 1,541
Intangible asset 1,800 1,800
Other assets 250 146
----------------------------------------------------------------------------
56,441 50,329
----------------------------------------------------------------------------
Total assets $ 380,391 $ 304,636
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and shareholders' equity
Current liabilities
Bank indebtedness $ 6,201 $ 10,951
Trade and other payables 54,023 34,986
Provisions for other liabilities (note 7) 1,208 1,198
Deferred revenue and customer deposits 513 971
Equipment notes payable
- non-interest bearing (note 8) 88,133 72,262
- interest bearing (note 8) 125,250 88,151
Current portion of finance lease
obligations 2,780 2,110
Current portion of notes payable (note 9) 3,377 6,242
----------------------------------------------------------------------------
281,485 216,871
----------------------------------------------------------------------------
Non-current liabilities
Deferred income tax liability 2,813 2,565
Finance lease obligations 4,679 3,291
Notes payable (note 9) 19,123 13,558
Employee future benefit obligations 11,144 11,760
----------------------------------------------------------------------------
37,759 31,174
----------------------------------------------------------------------------
Total liabilities 319,244 248,045
----------------------------------------------------------------------------
Contingencies, commitments and guarantees
(note 11)
Shareholders' equity
Shareholders' capital (note 12) 64,898 64,898
Accumulated other comprehensive income 232 205
Contributed surplus 564 498
Deficit (4,547) (9,010)
----------------------------------------------------------------------------
Total shareholders' equity 61,147 56,591
----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 380,391 $ 304,636
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Income
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated, except share
and per share amounts)
----------------------------------------------------------------------------
Three-month period ended Six-month period ended
June 30 June 30
----------------------------------------------------------------------------
2012 2011 2012 2011
----------------------------------------------------------------------------
Revenue (note 14) $ 132,220 $ 114,050 $ 229,034 $ 201,545
Cost of sales 108,419 92,812 185,822 163,323
----------------------------------------------------------------------------
Gross profit 23,801 21,238 43,212 38,222
----------------------------------------------------------------------------
Expenses
Administration 9,344 7,778 17,686 15,046
Distribution 5,670 5,046 10,708 9,588
Selling 3,438 3,443 6,802 6,874
Other income (1,079) (179) (1,512) (453)
----------------------------------------------------------------------------
Operating income 6,428 5,150 9,528 7,167
----------------------------------------------------------------------------
Interest expense 2,082 1,398 3,435 2,754
----------------------------------------------------------------------------
Income before income
taxes 4,346 3,752 6,093 4,413
----------------------------------------------------------------------------
Provision for income
taxes (note 10) 1,125 120 1,630 183
----------------------------------------------------------------------------
Net income
attributable to
shareholders for the
period $ 3,221 $ 3,632 $ 4,463 $ 4,230
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share
Basic and diluted $ 0.25 $ 0.28 $ 0.34 $ 0.33
----------------------------------------------------------------------------
Weighted average
number of shares
(note 13)
- basic 13,128,719 13,128,719 13,128,719 12,933,819
- diluted 13,176,655 13,167,347 13,176,655 12,972,447
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Comprehensive Income
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated)
----------------------------------------------------------------------------
Three-month period Six-month period
ended ended
June 30 June 30
----------------------------------------------------------------------------
2012 2011 2012 2011
----------------------------------------------------------------------------
Net income attributable to
shareholders for the period $ 3,221 $ 3,632 $ 4,463 $ 4,230
Other comprehensive income
Actuarial gain on post-
employment benefit
obligations - 144 - 144
Currency translation
adjustment 251 (90) 27 (444)
----------------------------------------------------------------------------
Comprehensive income
attributable to shareholders
for the period $ 3,472 $ 3,686 $ 4,490 $ 3,930
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Changes in Shareholders' Equity
----------------------------------------------------------------------------
(in thousands of dollars, unless otherwise indicated)
The comparative figures have been reclassified to conform to the 2012
presentation.
----------------------------------------------------------------------------
Accum-
ulated
other
Share- compre- Contri-
Number of holders' hensive buted
shares capital loss Surplus Deficit Total
----------------------------------------------------------------------------
Balance -
December 31,
2010 10,508,719 $ 57,089 $ - $ 315 $ (12,427) $ 44,977
Net income for
the period - - - - 4,230 4,230
Other
comprehensive
income
(loss):
Actuarial gain
on post-
employment
benefit
obligations - - - - 144 144
Currency
translation
adjustment - - (444) - - (444)
Issuance of
shares (note
12) 2,620,000 7,809 - - - 7,809
Deferred
compensation - - - 65 - 65
----------------------------------------------------------------------------
Balance - June
30, 2011 13,128,719 $ 64,898 $ (444) $ 380 $ (8,053) $ 56,781
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accum-
ulated
other
Share- compre- Contri-
Number of holders' hensive buted
shares capital income Surplus Deficit Total
----------------------------------------------------------------------------
Balance -
December 31,
2011 13,128,719 $ 64,898 $ 205 $ 498 $ (9,010) $ 56,591
Net income for
the period - - - - 4,463 4,463
Other
comprehensive
income:
Currency
translation
adjustment - - 27 - - 27
Issuance of
shares (note
12) - - - - - -
Deferred
compensation - - - 66 - 66
----------------------------------------------------------------------------
Balance - June
30, 2012 13,128,719 $ 64,898 $ 232 $ 564 $ (4,547) $ 61,147
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Unaudited Consolidated Statement of Cash Flows
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated)
----------------------------------------------------------------------------
For the six-month period ended June 30 2012 2011
----------------------------------------------------------------------------
Cash flows from operating activities
Net income for the period $ 4,463 $ 4,230
Adjustments for
Depreciation - property and equipment 1,829 1,261
Depreciation - equipment inventory on rent 7,961 8,090
Depreciation - rental fleet 1,343 758
Gain on disposal of property and equipment - (20)
Gain on sale of rental fleet (186) (75)
Contributed surplus 66 65
Interest expense 3,435 2,754
Income tax expense 1,630 183
Employee future benefit expense 616 450
Foreign exchange gain (6) -
Changes in non-cash working capital (note
15) (5,860) (15,680)
Funding of employee future benefit
obligations (1,232) (918)
Interest paid (3,424) (2,778)
Income taxes recovered (paid) (225) 44
----------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $ 10,410 $ (1,636)
----------------------------------------------------------------------------
Cash flows from investing activities
Business acquisition, net of cash acquired
(note 4) - (9,248)
Purchases of rental fleet (7,096) (4,498)
Proceeds from sale of rental fleet 4,383 3,445
Purchases of property and equipment (3,727) (3,134)
Proceeds from sale of property and equipment - 20
----------------------------------------------------------------------------
Net cash used in investing activities $ (6,440) $ (13,415)
----------------------------------------------------------------------------
Cash flows from financing activities
Increase (decrease) in bank indebtedness (4,750) 2,058
Increase in long-term debt 3,643 7,509
Repayment of long-term debt (578) (1,400)
Repayment of finance lease obligations (1,124) (724)
Issue of share capital - 7,809
Repayment of notes payable (397) (188)
----------------------------------------------------------------------------
Net cash provided by (used in) financing
activities $ (3,206) $ 15,064
----------------------------------------------------------------------------
Foreign exchange on cash balances 10 (13)
----------------------------------------------------------------------------
Change in cash and cash equivalents during
the period $ 774 $ -
----------------------------------------------------------------------------
Cash and cash equivalents - Beginning of
period - -
----------------------------------------------------------------------------
Cash and cash equivalents - End of period $ 774 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Notes to Unaudited Consolidated Financial Statements
For the six-month periods ended June 30, 2012 and June 30, 2011
----------------------------------------------------------------------------
(in thousands of dollars, unless otherwise indicated)
1 General information
Strongco Corporation ("Strongco" or the "Company") sells and rents new and used
equipment and provides after-sale product support (parts and service) to
customers that operate in infrastructure, construction, mining, oil and gas
exploration, forestry and industrial markets in Canada and the United States.
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 August 1, 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), and dividends are recognized in
income in the consolidated statement of comprehensive income (loss); however,
other gains and losses (including impairments) associated with such instruments
remain in accumulated other comprehensive income (loss) indefinitely.
Requirements for financial liabilities were added in October 2010 and they
largely carried forward existing requirements in IAS 39 except that fair value
changes due to credit risk for liabilities designated at fair value through
profit or loss would generally be recorded in the consolidated statement of
comprehensive income (loss). IFRS 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,
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 statement of financial position. 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 expenses in the consolidated statement of income for the six-month period
ended June 30, 2011.
The acquisition date fair value for each major class of asset acquired and
liabilities assumed:
----------------------------------------------------------------------------
(in thousands of Canadian dollars)
----------------------------------------------------------------------------
Trade and other receivables $ 4,388
Inventories 9,960
Property, plant and equipment 5,058
Rental fleet 11,722
Deferred income tax asset 1,125
Other assets 95
----------------------------------------------------------------------------
Total assets $ 32,348
----------------------------------------------------------------------------
Trade and other payables $ 3,077
Deferred income tax liabilities 2,807
Equipment notes payable 11,135
Finance lease obligations 419
Notes payable 3,795
----------------------------------------------------------------------------
Total liabilities $ 21,233
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net assets acquired $ 11,115
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The results of operations of CBR have been consolidated into the Company's
results for the six-month period ended June 30, 2011, effective February 17,
2011. Revenues of $17,953 and net income from operations of $345 for CBR have
been included in the Company's consolidated financial statements for the
six-month period ended June 30, 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 six-month period
ended June 30, 2011 would have been $204,584 and $4,248, respectively.
5 Inventories
Inventory components, net of write-downs and provisions are as follows:
----------------------------------------------------------------------------
As at June 30, 2012 December 31, 2011
----------------------------------------------------------------------------
Equipment $ 243,954 $ 185,335
Parts 23,267 21,148
Work in process 5,019 3,645
----------------------------------------------------------------------------
$ 272,240 $ 210,128
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At June 30, 2012, provisions against inventory totalled $4,743 (December 31,
2011 - $5,397). During the six-month period ended June 30, 2012, the Company
reduced its inventory write-downs by $375.
6 Property and equipment
Capital expenditures were $3,727 for the six-month period ended June 30, 2012
(2011 - $3,134), the majority of which related to construction of the new
Edmonton, Alberta branch.
In 2011, the Company began construction on a new Edmonton, Alberta branch. The
project was completed during the second quarter of 2012 and the carrying amount
at June 30, 2012 was $9,920 (2011 - $2,594). The amount of borrowing costs
capitalized during the six month period ended June 30, 2012 was $150 (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.
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 June 30, 2012, the total
obligation under these contracts was $13,289 (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 $1,108 (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 $270 million from various non-bank equipment
lenders in Canada and the United States, which are used to finance equipment
inventory. At June 30, 2012, there was approximately $220.4 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 notes
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 notes. 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 June 30, 2012, the Company was in compliance with
these covenants.
9 Notes payable
Notes payable is comprised of the following:
----------------------------------------------------------------------------
June 30, 2012 December 31, 2011
----------------------------------------------------------------------------
Promissory notes (i) $ 907 $ 1,301
Equipment plan notes payable - rental
fleet (ii) 7,032 5,455
Term note - United States (iii) 3,628 3,702
Term note - Mississauga (iv) 3,833 4,333
Term note - Edmonton / Construction
facility (v) 7,100 4,987
Other - 22
----------------------------------------------------------------------------
22,500 19,800
----------------------------------------------------------------------------
Current portion 3,377 6,242
----------------------------------------------------------------------------
Long-term portion $ 19,123 $ 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 June 30, 2012, US$97
(June 30, 2011 - US$181) 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 8, CBR
utilizes floor plan notes payable to finance its rental fleet. Payment
is required at the earlier of the sale of items or per contractual
schedule ranging from 12 to 24 months. Effective interest rates range
from 2.01% to 5.80% with various maturity dates.
(iii) The Company's bank credit facilities in the United States include a
term note secured by real estate and cross-collateralized with the
Company's revolving line of credit in the United States. The term note
matures in May 2017 and bears interest at a rate of LIBOR plus 2.75%.
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 4.87%. During
the quarter, the swap agreements were also renegotiated to reduce the
fixed swap rate to 4.13%, starting September 1st 2012. The term loans
and swap agreements expire in May 2017 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 -
Mississauga"). The Term note - Mississauga 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 was completed June 2012.
As at June 30, 2012, the Company has drawn $7,100 against the
construction loan facility. On June 6, 2012, the Construction Loan was
converted to a demand, non-revolving term loan ("Term note -
Edmonton") with a term of 60 months. The Construction Loan and Term
note - Edmonton 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 ("Construction Loan #2"). 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. During the second quarter of 2012 the Company renewed and
amended its bank credit facilities in Canada. The renewed facility provides a
three-year committed facility, improved from the previous one year committed
facility and increased the maximum available under Construction Loan #2 to $13.9
million from $8.9 million. All other credit amounts under the facility remained
unchanged with the renewal. As at June 30, 2012, no amount has been drawn
against the Construction Loan #2.
10 Income taxes
The major components of the provision for income taxes in the interim
consolidated statement of income are:
----------------------------------------------------------------------------
Six-month period ended June 30 2012 2011
----------------------------------------------------------------------------
Current income tax expense $ 1,143 $ 183
Deferred tax expense 487 -
----------------------------------------------------------------------------
$ 1,630 $ 183
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 previously divested 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 previously divested 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
July 1, 2012 to January 31, 2014 are $237 (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
Company's common shares as of December 17, 2010 received one right for each
common share held. Four rights plus the sum of $3.00 were required to subscribe
for one common share. Each common share was issued at a price of $3.00.
Authorized:
Unlimited number of common shares
Issued:
As at June 30, 2012, a total of 13,128,719 common 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 Six-month period ended
June 30 June 30
----------------------------------------------------------------------------
2012 2011 2012 2011
----------------------------------------------------------------------------
Weighted average number of
shares for basic earnings
per share calculation 13,128,719 13,128,719 13,128,719 12,933,819
Effect of dilutive options
outstanding 47,936 38,628 47,936 38,628
----------------------------------------------------------------------------
Weighted average number of
shares for diluted earnings
per share calculation 13,176,655 13,167,347 13,176,655 12,972,447
----------------------------------------------------------------------------
On January 17, 2011, the Company completed a rights offering for a total of
9,941,964 rights being exercised for 2,485,491 common shares and 134,509 common
shares being issued pursuant to the additional subscription privilege. The
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 six-month period ended June 30, 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:
----------------------------------------------------------------------------
Three-months ended Six-months ended
June 30 June 30
----------------------------------------------------------------------------
2012 2011 2012 2011
----------------------------------------------------------------------------
Equipment sales $ 92,422 $ 77,076 $ 154,474 $ 133,060
Equipment rentals 6,363 6,080 11,523 11,550
Product support 33,435 30,894 63,037 56,935
----------------------------------------------------------------------------
Total Equipment Distribution $ 132,220 $ 114,050 $ 229,034 $ 201,545
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15 Changes in non-cash working capital
The components of the changes in non-cash working capital are detailed below:
----------------------------------------------------------------------------
For the six-month period ended June 30 2012 2011
----------------------------------------------------------------------------
Changes in working capital
Trade and other receivables $ (6,454) $ (13,798)
Inventories (69,478) (34,423)
Prepaid expenses and other deposits (298) (213)
Other assets (104) -
Trade and other payables 18,105 6,077
Provisions for other liabilities 10 188
Deferred revenue and customer deposits (459) (647)
Income taxes payable - (55)
Equipment notes payable 52,818 27,191
----------------------------------------------------------------------------
$ (5,860) $ (15,680)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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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