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Share Name | Share Symbol | Market | Type |
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Orecap Invest Corp | TSXV:OCI | TSX Venture | Common Stock |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
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0.00 | 0.00% | 0.06 | 0.055 | 0.06 | 0.06 | 0.06 | 0.06 | 119,000 | 17:36:43 |
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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