Strongco Corporation (TSX:SQP) today released financial results for the fourth
quarter and year ended December 31, 2011.
"We are pleased with Strongco's performance during 2011," said Robert Dryburgh,
President and Chief Executive Officer. "Our results were far ahead of 2010 in
every major category - revenues, margins, EBITDA, net earnings and EPS. In
addition, our acquisition of Chadwick-Baross Inc. in February 2011 plus the new
branches, facility upgrades and brand expansion we announced during the year
position Strongco for continued, sustainable growth."
During 2011 the strengthening Canadian economy increased construction activity
and resulting demand for heavy equipment, plus parts, service and rentals
provided by Strongco at key locations across Canada. The gain was fuelled by the
recovering commercial construction market, infrastructure spending and increased
activity in the oil and gas and mining sectors.
Rising economic activity in Canada fuelled a 35% increase in the heavy equipment
market, other than cranes, in the markets that Strongco serves. Strongco
outperformed the market, with total unit volume up more than 40% during the
year.
"This is the second consecutive year we have increased national market share,"
Mr. Dryburgh noted. "Strongco's order book continued at a strong level
throughout 2011 and remains robust in the first quarter of 2012. This is a solid
leading indicator of demand as we proceed into the main selling season this
year."
Financial Highlights
($ millions except per share amounts)
----------------------------------------------------------------------------
Period ended December 31 3 months 12 months
----------------------------------------------------------------------------
2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues $ 113.2 $ 91.8 $ 423.2 $ 294.7
----------------------------------------------------------------------------
Gross margin 20.8 16.4 80.6 56.7
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EBITDA 12.5 10.3 43.1 24.2
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Net income (loss) 2.1 1.7 9.9 (0.9)
----------------------------------------------------------------------------
Basic and diluted earnings (loss) per share $ 0.15 $ 0.17 $ 0.76 $ (0.08)
----------------------------------------------------------------------------
Fourth Quarter 2011 Review
Revenues in the three months ended December 31, 2011 totalled $113.2 million, an
increase of $21.4 million, or 23% from the fourth quarter of 2010. The
acquisition of Chadwick-BaRoss in February contributed $15.7 million of the
increase. "Strongco's revenues in the fourth quarter reflect continued high
demand in all regions and revenue categories in Canada, combined with a solid
performance from Chadwick-BaRoss in the northeastern U.S.," said David Wood,
Vice President and Chief Financial Officer.
Equipment sales increased by 20% from the fourth quarter of 2010 to $74.5
million. Most of the gain was from Chadwick-BaRoss but revenues were also up in
Canada. The increase in Canada was powered by a significant volume of rental
purchase option ("RPO") contracts being converted to sales in the quarter,
especially in Alberta and Quebec. Rental activity, which has been strong all
year, remained high in the fourth quarter. Strongco's rental revenues were $8.9
million including $1.3 million from Chadwick-BaRoss, which was up 22% from the
fourth quarter of 2010. Product support revenues, comprising parts and service,
gained 33% or $7.4 million to $29.8 million. Product support revenues from
Chadwick-BaRoss were $4.3 million in the quarter.
Gross margin increased to $20.8 million from $16.4 million during the fourth
quarter. As a percentage of revenue, gross margin increased to 18.4% from 17.8%
in the same period of 2010.
Administrative, distribution and selling expenses during the fourth quarter
totalled $17.0 million, compared to $13.5 million in the final quarter of 2010.
Most of the increase relates to expenses of the newly acquired Chadwick-BaRoss
operation, which amounted to $2.2 million in the quarter. In addition, with the
stronger results, $1.6 million was accrued in the fourth quarter for anticipated
payments under the Company's annual incentive plans for a wide range of
employees and the newly approved long-term incentive plan for senior managers.
EBITDA for the fourth quarter increased to $12.5 million from $10.3 million a
year earlier.
Strongco's net income in the fourth quarter of 2011 was $2.1 million ($0.15 per
share), compared to $1.7 million ($0.17 per share) in the fourth quarter of
2010. The difference in EPS is largely accounted for by an increase in
outstanding equity, to 13.1 million shares at December 31, 2011, versus 10.5
million at the same time in 2010.
Fiscal 2011 Financial Review
Revenues for 2011 totalled $423.1 million, including $46.6 million from
Chadwick-BaRoss, which compared to $294.7 million in 2010.
Strongco's equipment sales in 2011 increased by $92.2 million or 50%, to $275.9
million. Chadwick-BaRoss equipment sales were $26.9 million for the 11 months
from the date of acquisition in February. Rental revenues were $29.6 million, an
increase of $7.4 million or 33% from 2010. Chadwick-BaRoss contributed $3.6
million and rental activity in Canada was higher as construction markets gained
momentum, especially rentals under RPO contracts. For the year, Strongco's
product support revenues, comprising sales of parts and service, advanced $28.9
million or 33% to $117.7 million. Product support revenues from Chadwick-BaRoss
were $16.1 million.
Gross margin in 2011 was $80.6 million, up 42.3% or $24.0 million over the prior
year. The acquisition of Chadwick-BaRoss contributed $10.4 million of the
increase, as gross margin in Canada moved up by $13.5 million. Gross margin as a
percentage of revenue was consistent with the prior year at 19.1%.
Administrative, distribution and selling expenses in 2011 increased by 20.9% to
$64.7 million. The change reflects 11 months of costs of the newly acquired
Chadwick-BaRoss unit from its acquisition in February 2011, plus incremental
expenses for annual and long-term incentives and other employee bonuses.
Expenses were 15.3% of revenues, an improvement from 18.2% in 2010.
The Company's enhanced operating profitability is reflected in EBITDA, which
surged to $43.1 million from $24.2 million in 2010.
Strongco ended the year with net income of $9.9 million or $0.76 per share,
compared with a net loss of $0.9 million or $0.08 per share in 2010.
Outlook
The Canadian economy in general and construction markets across Canada are
expected to continue to improve throughout 2012, which should result in strong
demand for heavy equipment.
Mild weather conditions have affected equipment usage in much of the country and
significantly curtailed oilfield activities in northern Alberta. In addition,
the Ontario government has announced a slowdown in infrastructure activity.
These factors have tempered demand for heavy equipment and product support in
the first quarter of 2012. As a result, revenue growth in the first quarter of
2012 may also be moderated, but backlogs in the early part of the year remain
strong and growing.
An important contribution to anticipated growth in 2012 is expected from
Alberta. Oil prices have continued to show strength and stability, which has
powered an ongoing economic upturn in the province. In particular, the outlook
for northern Alberta and the oil sands is for continued significant investment
over the next several years, which bodes well for heavy equipment demand in the
region.
Equipment suppliers are expected to improve product availability and delivery
lead times in 2012. Inventory levels at Strongco were allowed to run slightly
higher than normal at year end to ensure availability of product as the Company
enters the prime selling season. Consequently, product availability is not
expected to affect the Company's sales in 2012. Strongco's significant position
with its equipment suppliers should allow the Company to optimize equipment
deliveries.
Management remains cautiously optimistic that the improving Canadian economy in
2011 will continue in 2012, which is expected to increase revenues. In addition,
while market conditions in the northeastern United States were weak,
Chadwick-BaRoss realized modest growth in 2011 and contributed positively to
Strongco's overall results. Chadwick-BaRoss services a broad range of market
sectors in Maine, New Hampshire and Massachusetts. Demand for equipment in these
regions is expected to show a modest increase in 2012, which should contribute
to improved revenue and profitability in 2012.
Conference Call Details
Strongco will hold a conference call on Thursday, March 22, 2012 at 10 am ET to
discuss fourth quarter and year end results. Analysts and investors can
participate by dialing 416-644-3415 or toll free 1-877-974-0445. An archived
audio recording will be available until midnight on April 5, 2012. To access it,
dial 416-640-1917 and enter passcode 4523113#.
About Strongco Corporation
Strongco Corporation is one of Canada's largest multiline mobile equipment
dealers and operates in the Northeast 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
servicing customers from 25 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's 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 year ended December 31, 2011. This discussion and
analysis should be read in conjunction with the accompanying audited
consolidated financial statements as at and for the year ended December 31,
2011. For additional information and details, readers are referred to the
Company's quarterly unaudited consolidated financial statements and quarterly
MD&A for fiscal 2011 and fiscal 2010 as well as the Company's Notice of Annual
Meeting of Unitholders and Information Circular ("IC") dated April 20, 2011, and
the Company's Annual Information Form ("AIF") dated March 30, 2011, all of which
are published separately and are available on SEDAR at www.sedar.com.
Unless otherwise indicated, all financial information within this discussion and
analysis is in millions of Canadian dollars except per share amounts. The
information in this MD&A is current to March 20, 2012.
FINANCIAL HIGHLIGHTS
-- Revenue increased by 44% to $423.2 million
-- National market share improved year over year
-- Gross margin increased by 42% to $80.6 million
-- EBITDA increased to $43.1 million from $24.2 million
-- Net income totaled $9.9 million vs. net loss of $0.9 million
-- EPS of $0.76 compared to a net loss of $0.08 per share
Income Statement Highlights Year ended December 31
----------------------------------------------------------------------
2009
($ millions, except per share/unit amounts) 2011 2010 (note 1)
----------------------------------------------------------------------
Revenues $ 423.2 $ 294.7 $ 291.8
----------------------------------------------------------------------
Net income (loss) $ 9.9 $ (0.9 ) $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
Basic and diluted earnings (loss) per share $ 0.76 $ (0.08 ) $ -
EBITDA (note 2) 43.1 24.2 18.0
----------------------------------------------------------------------
----------------------------------------------------------------------
Balance Sheet Highlights
----------------------------------------------------------------------
Equipment inventory $ 185.3 $ 142.1 $ 124.5
Total assets 304.6 215.2 190.8
Debt (bank debt and other notes payable) 30.8 13.6 12.3
Equipment notes payable 160.4 118.2 104.8
Total liabilities 248.0 170.2 145.3
----------------------------------------------------------------------
Note 1 -2009 income statement figures reflect Canadian Generally Accepted
Accounting Principles ("GAAP") before the adoption of International Financial
Reporting Standards ("IFRS"); 2009 balance sheet figures include the impact of
changes related to the adoption of IFRS.
Note 2 - "EBITDA" refers to earnings before interest, income taxes, amortization
of capital assets, amortization of equipment inventory on rent, and amortization
of rental fleet. EBITDA is presented as a measure used by many investors to
compare issuers on the basis of ability to generate cash flow from operations.
EBITDA is not a measure of financial performance or earnings recognized under
International Financial Reporting Standards ("IFRS") and therefore has no
standardized meaning prescribed by IFRS and may not be comparable to similar
terms and measures presented by other similar issuers. The Company's management
believes that EBITDA is an important supplemental measure in evaluating the
Company's performance and in determining whether to invest in Shares. Readers of
this information are cautioned that EBITDA should not be construed as an
alternative to net income or loss determined in accordance with IFRS as
indicators of the Company's performance or to cash flows from operating,
investing and financing activities as measures of the Company's liquidity and
cash flows.
COMPANY OVERVIEW
Strongco is one of the largest multi-line mobile equipment distributors in
Canada. In February 2011, Strongco acquired 100% of the shares of
Chadwick-BaRoss, Inc., a multi-line distributor of mobile construction equipment
in the New England region of the United States, (see discussion below under the
heading "Acquisition of Chadwick-BaRoss, Inc."). Strongco sells and rents new
and used equipment and provides after-sale product support (parts and service)
to customers that operate in infrastructure, construction, mining, oil and gas
exploration, forestry and industrial markets. This business distributes numerous
equipment lines in various geographic territories. The primary lines distributed
include those manufactured by:
i. Volvo Construction Equipment North America Inc. ("Volvo"), for which
Strongco has distribution agreements in each of Alberta, Ontario,
Quebec, New Brunswick, Nova Scotia, Prince Edward Island and
Newfoundland in Canada and Maine and New Hampshire in the United
States;
ii. Case Corporation ("Case"), for which Strongco has a distribution
agreement for a substantial portion of Ontario; and
iii. Manitowoc Crane Group ("Manitowoc"), for which Strongco has
distribution agreements for the Manitowoc, Grove and National brands,
covering much of Canada, excluding Nova Scotia, New Brunswick and
Prince Edward Island.
The distribution agreements with Volvo and Case provide exclusive rights to
distribute the products manufactured by these companies in specific regions
and/or provinces. In addition to the above noted primary lines, Strongco also
distributes several other ancillary or complementary equipment lines and
attachments.
CONVERSION TO A CORPORATION
The Fund was an unincorporated, open-ended, limited purpose trust established
under the laws of the Province of Ontario pursuant to a declaration of trust
dated March 21, 2005 as amended and restated on April 28, 2005 and September 1,
2006.
Pursuant to a plan of arrangement approved by the unitholders at the Fund's
Annual and Special Meeting on May 14, 2010, the Fund was converted to a
corporation effective July 1, 2010. The conversion involved the incorporation of
Strongco Corporation, which issued shares to the unitholders in exchange for the
units of the Fund on a one for one basis so that the unitholders became
shareholders in Strongco Corporation, after which the Fund was wound up into
Strongco Corporation.
Following the conversion on July 1, 2010, Strongco Corporation has carried on
the business of the Fund unchanged except that Strongco Corporation is subject
to taxation as a corporation. The results of operations, balance sheet and cash
flow figures presented in the following MD&A for comparative periods prior to
July 1, 2010 reflect those of the Fund. References in this MD&A to shares and
shareholders of the Company are comparable to units and unitholders previously
under the Fund.
Details of the conversion are outlined in the Fund's Management Information
Circular dated April 6, 2010, which contains the Plan of Arrangement, available
on SEDAR at www.sedar.com.
FINANCIAL RESULTS - ANNUAL
Consolidated Results of Operations
----------------------------------------------------------------------------
Year ended December 31
----------------------------------------------------------------------------
($ thousands, except per unit 2009
amounts) 2011 2010 (note 1)
----------------------------------------------------------------------------
Revenues $ 423,153 $ 294,657 $ 291,795
Cost of sales 342,601 237,971 231,847
----------------------------------------------------------------------------
Gross Margin 80,552 56,686 59,948
Admin, distribution and selling
expenses 64,742 53,535 55,822
Other income (1,163) (740) (1,816)
----------------------------------------------------------------------------
Operating income 16,973 3,891 5,942
Interest expense 5,841 4,816 4,433
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Earnings (loss) from continuing
operations before income taxes 11,132 (925) 1,509
Provision for income taxes 1,203 - 775
----------------------------------------------------------------------------
Earnings (loss) from continuing
operations 9,929 (925) 734
Earnings (loss) from discontinued
operations - - (716)
----------------------------------------------------------------------------
Net income (loss) $ 9,929 $ (925) $ 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings (loss) per
share from continuing operations $ 0.76 $ (0.08) $ 0.07
Basic and diluted earnings (loss) per
share 0.76 (0.08) -
Weighted average number of shares
- Basic 13,049,126 11,053,608 10,508,719
- Diluted 13,088,968 11,053,608 10,508,719
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key financial measures:
Gross margin as a percentage of
revenues 19.0% 19.2% 20.5%
Admin, distribution and selling
expenses as percentage of revenues 15.3% 18.2% 19.1%
Operating income as a percentage of
revenues 4.0% 1.3% 2.0%
EBITDA (note 2) $ 43,067 $ 24,189 $ 18,017
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011/2010 2010/2009
----------------------------------------------------------------------------
($ thousands, except per unit $ % $ %
amounts) Change Change Change Change
----------------------------------------------------------------------------
Revenues $ 128,496 44% $ 2,862 1%
Cost of sales 104,630 44% 6,124 3%
----------------------------------------------------------------------------
Gross Margin 23,866 42% -3,262 -5%
Admin, distribution and selling
expenses 11,207 21% -2,287 -4%
Other income (423) 57% 1,076 -59%
----------------------------------------------------------------------------
Operating income 13,082 336% -2,051 -35%
Interest expense 1,025 21% 383 9%
----------------------------------------------------------------------------
Earnings (loss) from continuing
operations before income taxes 12,057 -2,434
Provision for income taxes 1,203 -775
----------------------------------------------------------------------------
Earnings (loss) from continuing
operations 10,854 -1,659
Earnings (loss) from discontinued
operations - 716
----------------------------------------------------------------------------
Net income (loss) $ 10,854 $ (943)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings (loss) per
share from continuing operations $ 0.84 $ (0.15)
Basic and diluted earnings (loss) per
share
Weighted average number of shares
- Basic
- Diluted
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key financial measures:
Gross margin as a percentage of
revenues
Admin, distribution and selling
expenses as percentage of revenues
Operating income as a percentage of
revenues
EBITDA (note 2) $ 18,878 78% $ 6,172 34%
----------------------------------------------------------------------------
Note 1 -2009 income statement figures reflect Canadian GAAP before the adoption
of International Financial Reporting Standards ("IFRS"); 2009 balance sheet
figures include the impact of changes related to the adoption of IFRS.
Note 2 - "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.
Acquisition of Chadwick-BaRoss, Inc.
On February 17, 2011, the Company completed the acquisition of 100% of the
shares of Chadwick -BaRoss, Inc. ("Chadwick-BaRoss") for net proceeds of US$11.1
million. The transaction value was satisfied with net cash proceeds of US$9.2
million and notes issued to the major shareholders of Chadwick-BaRoss totalling
US$1.9 million. Chadwick-BaRoss is a heavy equipment dealer headquartered in
Westbrook, Maine, with three branches in Maine and one in each of New Hampshire
and Massachusetts. The acquisition was effective as of February 1, 2011 and the
results of Chadwick-BaRoss have been included in the consolidated results of
Strongco from that date.
Market Overview
Strongco participates in number of geographic regions and in a wide range of end
use markets that utilize heavy equipment and which may have differing economic
cycles. Construction markets generally follow the cycles of the broader economy,
but typically lag by periods ranging up to 12 months. As construction markets
recover following a recession, demand for heavy equipment normally improves as
construction activity and confidence in construction markets build. In addition,
as the financial resources of customers strengthen, they have historically
replenished and upgraded their equipment fleets after a period of restrained
capital expenditures. Demand in oil and gas and mining markets is affected by
the economy but also tends to be driven by the global demand and pricing of the
relevant commodities. Recovery in equipment markets is normally first evident in
equipment used in earth moving applications and followed by cranes, which are
typically utilized in later phases of construction. Cranes are also extensively
utilized in the oil and gas sector. Rental of heavy equipment is typically
stronger following a recession until confidence is restored and financial
resources of customers improve.
While the economic recession that persisted throughout most of 2009 was
officially over in Canada in 2010, construction markets remained weak in the
first quarter of 2010. With the onset of warmer spring weather and spurred by
government stimulus spending for infrastructure projects, construction activity
began to show signs of improvement in the third quarter of 2010. This
improvement continued in the fourth quarter of 2010 as confidence in the economy
increased. Correspondingly, demand for new heavy equipment was soft in the first
quarter of 2010 but started to improve late in the second quarter and continued
to strengthen in the third and fourth quarters of 2010. While construction
markets and demand for heavy equipment were improving, many customers remained
reluctant or lacked the financial resources following the recession to commit to
purchase new construction equipment and instead rented to meet their equipment
needs in the first half of 2010. That trend continued in the second half of
2010, but with confidence in the economy continuing to rise, construction
activity increasing, and activity in the oil patch in Alberta increasing,
customers were more willing to purchase equipment and exercise purchase options
under rental purchase option contracts ("RPO's") in the fourth quarter of 2010.
Recovery was first evident in the markets for compact and lower priced equipment
while demand for larger higher priced equipment was slower to recover. In
particular, the market for cranes remained weak in the first and second quarters
of 2010 but started to show improvement in the latter half of the year.
Strongco's sales backlogs for all categories of equipment, including cranes,
improved steadily during the first and second quarters of 2010 and remained
strong through the balance of the year and into 2011.
With continuing strength in the Canadian economy, construction activity and
demand for heavy equipment remained strong in 2011. Significant projects for
hydro-electric facilities, road construction and bridge repair and other
infrastructure improvements initiated in 2010 and 2011 also increased demand for
heavy equipment. In addition, with continued strength in the oil sector,
activity in and around Alberta's oil sands has been robust, resulting in
increased demand for heavy equipment. While customer s have been more confident
and willing to purchase equipment in 2011, rental activity, especially under
RPO's, also remained strong. With the increasing demand for heavy equipment,
sales backlogs in Canada continued to show strength in 2011.
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.
In response to the weak global economic conditions and the recession in the
United States in particular, original equipment manufacturers ("OEM's") scaled
back production capacity starting in 2009. As demand in Canada and certain other
countries around the world has been increasing, OEM's have been challenged to
bring production capacity and supply lines back on line at the same pace. This
resulted in longer delivery lead times and reduced availability of equipment in
2011. OEM production levels are improving, but delivery lead times for new
equipment have remained stretched in 2011. This has benefitted dealers carrying
higher levels of older equipment inventories. In addition, the scheduled
transition from tier 3 engines to the new lower-emission tier 4 technology has
affected supply and increased demand for equipment with tier 3 engines.
The tsunami and nuclear disaster in Japan early in 2011 affected production and
supply of certain brands and types of equipment manufactured in Japan. In
addition, supply of certain parts from Japan for equipment manufactured in other
parts of the world has also been affected by the crisis. During 2011, Strongco
was not severely impacted by this disaster as the vast majority of the equipment
it distributes is manufactured outside of Japan. However, parts shortages from
Japan have impacted production schedules and could affect equipment availability
in the future.
Revenues
A breakdown of revenue for the years ended December 31, 2011, 2010 and 2009 is
as follows:
----------------------------------------------------------------------------
2011/ 2010/
Years Ended December 31 2010 2009
----------------------------------------------------------------------------
($ millions) 2011 2010 2009 % Var % Var
----------------------------------------------------------------------------
Eastern Canada (Atlantic and
Quebec)
----------------------------
Equipment Sales $ 90.1 $ 71.2 $ 71.9 27% -1%
Equipment Rentals 11.2 8.3 4.7 35% 78%
Product Support 42.4 36.6 38.0 16% -4%
----------------------------------------------------------------------------
Total Eastern Canada $ 143.7 $ 116.1 $ 114.6 24% 1%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------
Central Canada (Ontario)
----------------------------
Equipment Sales $ 89.2 $ 70.7 $ 79.9 26% -12%
Equipment Rentals 5.1 6.0 5.9 -15% 1%
Product Support 34.3 32.0 36.3 7% -12%
----------------------------------------------------------------------------
Total Central Canada $ 128.6 $ 108.7 $ 122.2 18% -11%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------
Western Canada (Manitoba to
BC)
----------------------------
Equipment Sales $ 69.7 $ 41.8 $ 31.9 67% 31%
Equipment Rentals 9.7 7.9 3.7 23% 112%
Product Support 24.9 20.2 19.4 23% 4%
----------------------------------------------------------------------------
Total Western Canada $ 104.3 $ 69.9 $ 55.1 49% 27%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------
North-eastern United States
----------------------------
Equipment Sales $ 26.9
Equipment Rentals 3.6
Product Support 16.1
----------------------------------------------------------------------------
Total North-eastern United
States $ 46.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------
Total Revenues
----------------------------
Equipment Sales $ 275.9 $ 183.7 $ 183.7 50% 0%
Equipment Rentals 29.6 22.2 14.3 33% 55%
Product Support 117.7 88.8 93.7 33% -5%
----------------------------------------------------------------------------
Total $ 423.2 $ 294.7 $ 291.8 44% 1%
----------------------------------------------------------------------------
Equipment Sales
Strongco's equipment sales for the year ended December 31, 2011 were $275.9
million which was up $92.2 million or 50% from $183.7 million in 2010. The
acquisition of Chadwick-BaRoss in February 2011 accounted for $26.9 million of
the sales increase while sales in Canada increased by $65.3 million or 36% in
the year. Sales were up in all regions of Canada, with the largest increase in
Western Canada.
To view Figure 1, please visit the following link:
http://media3.marketwire.com/docs/sqp0322fig1.pdf.
While the Canadian economy fell into a recession in the early part of 2009 that
lasted for most of the year, sales in the first quarter of 2009 were partially
sustained from the fairly robust backlogs that existed at the end of 2008.
However, as construction markets in Canada declined significantly during the
recession, Strongco's equipment sales concurrently fell in all regions of the
country through the balance of 2009. Total unit volumes in the markets Strongco
serves were estimated to be down on average approximately 50% in 2009 with some
regions experiencing declines of close to 80%. These conditions contributed to a
decline in Strongco's equipment sales of 35% in 2009.
In 2010, as the recession abated, construction markets in Canada slowly began to
recover. However, in the immediate post- recession environment, order backlogs
were low. Demand for heavy equipment remained weak until late in the second
quarter as many customers remained reluctant or lacked financial resources
following the recession to make significant equipment purchases. Recovery in
demand for compact equipment was much faster than for larger, more expensive
units. Strongco's sales pattern in 2010 followed the same recovery trend, with
sales increasing each quarter through the year as construction markets and
demand for heavy equipment recovered following the recession. The traditional
seasonality for equipment sales normally results in sales in the third quarter,
when contractors are typically working on projects, being less than sales in the
second quarter, when customers tend to be buying in anticipation of summer work.
This trend was present in the marketplace in 2010. While Strongco's sales in the
first and second quarters fell short of 2009, sales in the latter half of 2010
were well ahead of the prior year and increased despite the seasonal downturn in
the third quarter. For the full year, Strongco's equipment sales were flat
compared to 2009 at $183.7 million.
Price competition was aggressive in the first and second quarters of 2010 as
many equipment dealers were carrying excess levels of aging inventory and large
amounts of equipment coming off rent following the recession. This contributed
to a decline in Strongco's market share in the first half of the year. As market
demand for equipment increased, excess inventory levels were reduced, and with
improved sales execution, Strongco's market share improved through the latter
half of 2010 and at year end had recovered to levels consistent with the prior
year.
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. While average selling prices in
2010 remained below pre-recession levels, Strongco's average selling prices
increased during the year across most product categories as customer confidence
grew and willingness increased to purchase larger, higher price equipment (such
as cranes, articulated trucks and large loaders). In addition, the ongoing
strength of the Canadian dollar and increased price competition also contributed
to lower average selling prices in 2010.
The recovery evident in the latter half of 2010 continued into 2011. Improving
economic conditions, continued recovery in construction markets, higher
infrastructure spending and increased activity in oil and gas and mining sectors
in Canada all resulted in stronger demand for heavy equipment. Demand for heavy
equipment varied across the country and between product categories. On a
national basis the markets for heavy equipment, other than cranes, that Strongco
serves in Canada were estimated to be an average of 35% higher in 2011. Overall,
Strongco outperformed the market in Canada with total unit volume up more than
40%, which resulted in a larger share of the total market in 2011. Accurate
market data for cranes is not available, but the crane market in Canada has
improved in 2011 as many end users and large crane rental companies that
curtailed purchases during the recession replenished and replaced aging fleets.
Strongco's crane sales in 2011 were more than double the level of 2010. The
largest increase in demand for heavy equipment was in Alberta followed by Quebec
and Ontario.
Average selling prices also continued to improve in 2011 due primarily to a
higher proportion of sales of larger, more expensive equipment and slight
increase in most product categories. While the ongoing strength of the Canadian
dollar and price competition continued to put pressure on selling prices,
increased demand, combined with product availability and delivery issues, helped
support stronger selling prices in 2011.
On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic
regions) totalled $90.1 million in 2011, which was up $18.9 million, or 27%,
from $71.2 million in 2010. The bulk of the increase was in Quebec where
construction markets continued to benefit from a high level of spending on
infrastructure projects and large hydroelectric projects in the northern region
of the province. Most of Strongco's sales increase was in cranes, loaders,
articulated trucks and larger equipment. In addition, the Company's sales of
rock crushing equipment in Quebec were strong in 2011. The markets for heavy
equipment, other than cranes, in which Strongco participates in Eastern Canada,
were estimated to be up by approximately 20% in 2011 over 2010. For the first
three quarters of 2011, Strongco outperformed the market and captured a larger
market share. However, Strongco's share of the market showed a slight decline in
the fourth quarter, as total market volumes in the quarter included higher than
normal increases by dealer owned rental fleets as well as replenishment of
equipment fleets at several independent rental companies, both segments of the
market in which Strongco does not participate. In addition, equipment sales at
auction were very high in the fourth quarter, which inflated the total market
numbers. Excluding the replenishment of rental fleets and auction sales,
Strongco's market share in the fourth quarter in Eastern Canada for heavy
equipment, other than cranes, was consistent with the first three quarters and
for the full year was up over 2010. Market statistics for cranes sold to end use
customers are not readily available but the crane market in Eastern Canada,
which generally remained weak in 2010 following the recession, showed continued
improvement throughout 2011. Some of this growth was the result of certain large
crane rental customers in Quebec upgrading and increasing their fleets. In
addition, a few large cranes that had been on RPO contracts were sold in 2011.
The Company's sales of cranes in Eastern Canada were up 142% in 2011 compared to
2010.
Strongco's equipment sales in Central Canada were $89.2 million, which was up
$18.5 million, or 26%, from 2010. After a slow start to the year as a result of
the cold, snowy winter and very wet spring weather conditions that delayed many
construction and infrastructure projects, activity in Ontario picked up in the
second, third and fourth quarters, which increased demand and spending for heavy
equipment. In the markets that Strongco serves in Central Canada, total unit
volumes of heavy equipment, other than cranes, were approximately 20% higher
than in 2010. In most product categories, Strongco outperformed the market, with
unit volume increases greater than the market, which resulted in higher market
shares. However, product availability and extended supplier delivery lead times,
combined with aggressive price competition from certain dealers, resulted in
lower volumes and a loss of market share in particular product categories and
markets. This was especially evident within the Company's Case Construction
Equipment product lines. Accurate market data is not readily available for
cranes, but demand for cranes in Central Canada was stronger in 2011,
demonstrating continued recovery following the recession. Strongco's crane sales
in Ontario in 2011 were up more than 77% from a year ago as certain crane rental
customers, who refrained from purchasing new cranes during the recession,
replenished their fleets.
Equipment sales in Western Canada during 2011 were $69.7 million, which was up
$27.9 million or 67% over 2010. Strongco's product lines in Alberta serve the
oil sector, primarily in the site preparation phase, as well as natural gas
production, both of which were significantly impacted by weakness in the energy
sector during 2009. In addition, the construction and infrastructure segments
that Strongco serves in the region were also severely impacted by the recession.
With the upward trend and sustainability in oil prices through 2010 and into
2011, economic conditions in Alberta improved significantly. Construction
activity and demand for heavy equipment began to show signs of recovery in 2010,
particularly in Northern Alberta in the latter half of that year, and the
improvement continued in 2011. Total units sold in the markets served by
Strongco in Alberta, excluding cranes, were estimated to be up approximately 80%
relative to 2010 and Strongco's unit sales were up 53% in the region. For the
first three quarters of 2011, Strongco outperformed the market in Western Canada
and captured a larger share of the growing market. However, the Company's market
share showed a decline in the fourth quarter due in part to lack of product
availability and delayed deliveries from the OEM suppliers. In addition, the
market in Western Canada spiked in the fourth quarter due to an unusually high
level of rental fleet replenishment at certain dealers as well as independent
rental companies. Excluding rental fleet replenishment, where Strongco does not
participate, the Company's market share was down slightly in the fourth quarter
and full year. The largest portion of Strongco's increase in sales in Western
Canada was in GPE and larger equipment, but compact and road equipment sales
were also up in 2011. While the sales increase in 2011 was substantial, volumes
in Northern Alberta were hampered by longer delivery lead times and availability
issues with certain products. The market for cranes in Alberta has been
recovering since the recession, but more slowly than other heavy equipment.
Demand for cranes in Western Canada, particularly in Northern Alberta, improved
significantly in 2011. Strongco's crane sales in Alberta were somewhat
constrained in the first half of the year due to delivery delays from the
manufacturer. Benefitting from continued recovery in the market and a catch-up
on OEM deliveries, Strongco's crane sales in Western Canada grew by 75% during
2010. Sales backlog of cranes in Alberta remains strong and RPO activity has
increased, which are positive signs of continued recovery in the crane markets
in Western Canada.
Strongco's equipment sales in the northeastern United States were $26.9 million
in the 11 months from February 1, 2011, the effective date of the acquisition of
Chadwick-BaRoss (see "Acquisition of Chadwick-BaRoss, Inc."), to December 31,
2011. The markets for heavy equipment in New England remained soft in 2011 and
were estimated to be down approximately 40% from pre-recession levels. The
traditional heavy equipment markets for residential construction, forestry and
infrastructure in the region have remained flat year over year, but other
markets for scrap handling and waste management have experienced some increase
in activity. Chadwick-BaRoss' equipment sales for the 11 months were slightly
ahead of the same period in 2010, but market share in this soft market declined
slightly in 2011 due primarily to product shortages and delivery delays from the
manufacturer.
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 specific projects.
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 has proven to be an effective method of building sales revenues
and the field population of equipment.
Rental activity was strong during the recession in 2009, as customers were more
inclined to rent equipment rather than purchase in the uncertain environment. In
2010, the recession was officially over, but customers remained reluctant or
lacked the financial resources to purchase equipment and while construction
markets were recovering, many customers opted to rent equipment under RPO
contracts. Consequently, Strongco decided to commit a higher level of inventory
available for RPO's which resulted in continued strong rental activity in 2010.
Rentals under RPO contracts were particularly strong in Alberta in 2010 as the
economy recovered and activity in the oil sands increased, and in Quebec.
Rental activity, including rentals under RPO contracts, remained strong in 2011.
In addition, Strongco's crane business, which has traditionally not had a
significant rental element, experienced an increase in rental activity in 2011
as customers showed a preference to rent following the recession as the demand
and market for cranes recovered. Strongco's rental revenue in 2011 was $29.6
million, which was up $7.4 million, or 33%, from $22.2 million in 2010. Rental
revenue from the acquisition of Chadwick-BaRoss in February 2011 contributed
$3.6 million of the increase in the year but rental revenue in Canada was up by
$3.8 million, or 18%, in 2011.
On a regional basis in Canada, rental activity was stronger in all regions of
the country with the exception of Ontario where rental revenues declined
slightly to $5.1 million from $6.0 million in 2010. In Eastern Canada, which has
traditionally not been a large rental market, equipment rentals were $11.2
million in 2011, or 35% higher than 2010. Most of the increase in Eastern Canada
was the result of RPO contracts for articulated trucks and loaders in Quebec.
Rental activity was also strong in Alberta in 2011, demonstrating further
evidence of recovery in that province following the significant decline in
rental activity during the recession. Rental revenues in Western Canada in 2011
were $9.7 million compared to $7.9 million in 2010.
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 depend 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 revenues declined in 2009 as a result of the recession but
represented a larger proportion of total revenues as many customers chose to
repair and refurbish existing machines, rather than buy new equipment. That was
particularly true in Eastern and Central Canada while in Alberta, where
significant amounts of equipment in customers' hands were sitting idle, product
support revenues declined further. Product support activity was anticipated to
increase in 2010 as the economy and construction activity increased, but the
mild winter and lack of snow in the first quarter of 2010, particularly in
Eastern and Central Canada, resulted in significantly reduced use of snow
removal equipment through the winter season, which in turn resulted in reduced
parts and service activity. In addition, in the first half of 2010, many
customers, particularly in Ontario, continued to make only critical repairs
necessary to keep their equipment in service. Parts and service activity began
to increase through the second half of the year as construction activity
increased but for the full year product support revenues in Eastern and Central
Canada declined slightly in 2010. In Alberta, as customers began using equipment
that had sat idle through the recession in 2009, product support revenues
increased throughout the year but not enough to offset the decline in Central
and Eastern Canada. As a result, product support overall was down slightly in
2010 to $88.8 million.
The recovery in construction and infrastructure markets evident in the latter
half of 2010 continued in 2011. In addition, the oil and gas sector and other
end use markets for heavy equipment in Canada also showed further improvement in
2011. With the increase in activity, utilization of heavy equipment also
increased, which resulted in continued growth in product support activity in
2011. Strongco's product support revenues in 2011 totalled $117.7 million,
including $16.1 million from the newly acquired Chadwick-BaRoss, which compared
to $88.8 million in 2010. Product support revenues were higher in all regions of
Canada, especially in Western and Eastern Canada. Product support was stronger
in the first quarter of 2011, in particular, due in part to increased snowfall
and use of snow removal equipment, especially in Western and Eastern Canada.
Gross Margin
----------------------------------------------------------------------------
Year Ended December 31
----------------------------------------------------------------------------
2011 2010 2009
---------------------------------------------------------
$ $ $
Gross Margin Millions GM% Millions GM% Millions GM%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment Sales $ 26.8 9.7% $ 17.7 9.6% $ 19.0 10.3%
Equipment Rentals 5.6 18.9% 3.3 14.9% 2.4 16.8%
Product Support 48.1 40.9% 35.7 40.2% 38.5 41.1%
----------------------------------------------------------------------------
Total Gross Margin $ 80.6 19.0% $ 56.7 19.2% $ 59.9 20.5%
----------------------------------------------------------------------------
----------------------------------------------------------
----------------------------------------------------------
2011/2010 2010/2009
---------------------------------------
$ % $ %
Gross Margin Variance Var Variance Var
----------------------------------------------------------
--------------------------------------
Equipment Sales $ 9.1 52% $ (1.3) -7%
Equipment Rentals 2.3 69% 0.9 39%
Product Support 12.4 35% (2.8) -7%
----------------------------------------------------------
Total Gross Margin $ 23.9 42% $ (3.2) -5%
----------------------------------------------------------
With lower revenues in 2009, Strongco's gross margin declined by $5.9 million
from 2008, to $59.9 million. However, as a percentage of revenue, gross margin
improved in 2009 to 20.5% due primarily to the higher proportion of product
support revenue in 2009. Equipment sales typically generate a lower gross margin
percentage than rental revenues and product support activities. During the
recession in 2009, many customers preferred to rent equipment to meet their
equipment needs or to repair/refurbish existing equipment which resulted in
rentals and sales of parts and service being a higher proportion of total
revenues and contributed to an improvement in Strongco's overall gross margin
percentage in 2009.
Gross margin in 2010 was $56.7 million, which was down $3.2 million from 2009.
The decline was due primarily to lower product support revenues in 2010. As a
percentage of revenues gross margin declined to 19.2% compared to 20.5% in 2009
due primarily to revenue mix as product support sales represented a lower
proportion of total revenues in 2010 relative to equipment sales.
With the substantial increase in revenue in 2011, gross margins increased by
$23.9 million, or 42%, from 2010. The acquisition of Chadwick-BaRoss contributed
$10.2 million of the increase in gross margins but the gross margin in Canada
was up by $13.5 million, or 24% from 2010. Revenues from equipment sales,
rentals and product support were all higher in 2011, which led to an increase in
the gross margin from each revenue stream. As a percentage of sales, overall
gross margin was 19.0% compared to 19.2% in 2010. The slight decline was due to
a higher proportion of equipment sales in 2011, which offer lower margin
percentages than product support or rentals.
The gross margin percentage on equipment sales in 2011 was 9.7%, which was
consistent with 9.6% in 2010. While the ongoing strength of the Canadian dollar
and price competition continued to put pressure on margins in 2011, increased
demand, combined with product availability and delivery issues, helped support
sales margins. Gross margins of equipment were also supported by a higher
proportion of sales of larger, more expensive machines in 2011.
The gross margin percentage on rentals in contracts without purchase options is
typically higher than the margin percentage on equipment sales. Gross margins on
rentals under RPO contracts are recorded at margin percentages consistent with
the margin on the anticipated sale under the purchase option which are lower
than margins on straight rental contracts. Following the recession, rental
activity under RPO contracts was particularly strong in 2010, particularly in
Alberta and Quebec, which resulted in a lower overall rental gross margin
percentage in that year. While RPO activity remained strong, rentals under RPO
represented a lower proportion of total rentals in 2011, which contributed to an
increase in the overall rental gross margin percentage in 2011.
Gross margin percentage on product support activities was 40.9% in 2011, which
compared to 40.2% in 2010 and 41.1% in 2009. A slightly higher proportion of
service revenue contributed to the slight improvement in overall product support
margins in 2011.
Administrative, Distribution and Selling Expense
In 2009, in response to the weak recession environment, Strongco implemented
cost controls and reengineered its cost structure to reduce overhead, which
resulted in substantial savings in 2009 and established a lower cost base from
which to operate going forward. Administrative, distribution and selling
expenses in 2009 were down 9% to $55.8 million or 19.1% of revenue. While heavy
equipment markets were improving and revenues growing throughout 2010, expense
levels were generally held at the new operating level established in 2009.
Realizing the full year impact of the cost reduction initiatives implemented in
the prior year, such expenses were down a further 4% in 2010 to $53.5 million,
or 18.2% of revenue. This was achieved, in spite of increased expenses for
training programs and recruiting and one-time costs for the conversion from an
income fund to a corporation and implementation of International Financial
Reporting Standards (IFRS).
Administrative, distribution and selling expenses in 2011 were $64.7 million or
15.3% of revenue. Most of the increase over 2010 relates to administration,
distribution and selling expenses of the newly acquired Chadwick -BaRoss, which
amounted to $8.0 million in 11 months from the date of acquisition in February
2011. Expenses in 2011 also include one-time costs for the acquisition of
Chadwick-BaRoss of $0.4 million. In addition, with the stronger results, $3.9
million was accrued in 2011 for anticipated payments under the Company's annual
and long-term incentive plans and other employee bonuses, while employee
incentive and bonus accruals in 2010 were minimal given the lower earnings.
While certain other variable expenses were higher in 2011 due to the substantial
increase in revenues, administrative, distribution and selling expenses overall
were down year over year by $1.2 million before the incremental expenses of
Chadwick-BaRoss and accrued bonuses.
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, commissions received from third party financing companies for
customer purchase financing Strongco places with such finance companies and
royalties fees received on sales of parts from certain OEM's.
Other income in 2011 amounted to $1.2 million compared to $0.7 million in 2010
and $1.8 million in 2009. The decline in 2010 from 2009 was due primarily to the
termination of a royalty fee on parts distribution when the parts supplier
changed to direct distribution. Other income in 2011 includes a net unrealized
foreign exchange gain of $0.3 million on forward foreign exchange contracts
purchased as a hedge to protect the margin on specific future committed sales.
The unrealized foreign exchange gains arose from mark to market adjustments on
forward foreign exchange contracts as a result of changes in the Canadian/US
dollar exchange rate during the year relative to the exchange rate in the
forward contract.
Interest Expense
Strongco's interest expense was $5.8 million in 2011 compared to $4.8 million in
2010 and $4.4 million in 2009.
Strongco's interest-bearing debt comprises bank indebtedness, interest-bearing
equipment notes, various term loans with the Company's banks and other notes
payable. Strongco typically finances equipment inventory under lines of credit
available from various non-bank finance companies. Most equipment financing has
interest free periods up to 12 months from the date of financing, after which
the equipment notes become interest-bearing. The rate of interest on the
Company's bank indebtedness and interest-bearing equipment notes varies with the
Canadian chartered bank prime rate ("prime rate") and Canadian Bankers
Acceptances Rates ("BA rates"). (See discussion under "Financial Condition and
Liquidity"). Prime rates and BA rates declined during the recession in 2009.
Prime rates rose in 2010 but have remained fairly stable through 2011.
During 2009, in response to the recession, Strongco reduced equipment
inventories and correspondingly reduced equipment notes payable. However, at the
same time, in response to the credit crisis in financial markets and the weak
economy, Strongco's equipment note lenders increased the interest rates charged
on the Company's equipment notes in 2009 which resulted in a slight increase in
interest expense in that year.
During 2010, Strongco increased inventory levels in support of the sales growth,
as well as its commitment to inventory for RPO's. As a consequence the balance
of equipment notes increased in 2010 and resulted in a higher level of
interest-bearing equipment notes outstanding in 2010 compared to 2009.
Strongco's average bank debt levels were also higher in 2010 than in 2009. Prime
lending rates and BA rates also increased in 2010 following the recession, which
resulted in higher rates of interest being charged on the Company's bank debt
and equipment notes in the year. The higher interest rates, combined with the
slightly higher average balance of interest-bearing equipment notes and average
bank debt levels, resulted in a higher interest expense 2010 compared to 2009.
Average interest-bearing debt levels increased further in 2011. The Company
continued to build inventory to support sales growth which led to a higher level
of interest-bearing equipment notes throughout the year. The acquisition of
Chadwick-BaRoss in February 2011 for $11.1 million, was financed with debt from
the operating line and a new $5.0 million term loan from the Company's bank and
US$1.9 million interest-bearing notes issued to the previous shareholders of
Chadwick-BaRoss. In addition, the Company's debt now includes the bank
indebtedness, equipment notes, and mortgage term loans of Chadwick- BaRoss.
Strongco also obtained a construction loan facility from its bank during the
year to finance the construction of a new branch facility in Edmonton, Alberta
which added to the level of interest-bearing debt in 2011. Prime lending rates
and BA rates rose through 2010 but remained fairly consistent through 2011.
However, for the year, the average prime and BA rates were higher in 2011
compared to 2010, which resulted in higher rates of interest being charged on
the Company's bank lines and equipment notes in 2011. The higher
interest-bearing debt levels combined with higher rates of interest resulted in
a higher interest expense in 2011.
Earnings (Loss) Before Income Taxes
Primarily as a result of the substantial increase in revenues during the year,
Strongco achieved earnings before income taxes of $11.1 million in 2011, which
was up from a loss before taxes of $0.9 million in 2010 and profit before tax
from continuing operations in 2009 of $1.5 million.
Provision for Income Tax
Following conversion to a corporation on July 1, 2010, Strongco is now subject
to income tax at corporate tax rates. As a consequence, Strongco was able to
utilize tax losses, including those previously unrecognized from the Fund. In
addition, on the adoption of IFRS, temporary or timing differences between the
tax and accounting values arose resulting in a net deferred income tax asset.
However, given the Company's history of losses, there was no certainty of
realization of the benefit of either the temporary differences or the losses
from the Fund previously unrecognized and a valuation allowance was recorded for
the full amount of the deferred income tax asset of $2.1 million as at December
31, 2010. While Strongco generated taxable income in Canada in 2011, the
valuation allowance at December 31, 2010 was drawn down in full to recognize the
benefit of the tax loss carry forwards and other temporary differences, which
resulted in a provision for income tax in Canada of only $0.7 million.
In addition, the tax provision related to Chadwick-BaRoss in the U.S. amounted
to $0.5 million in 2011.
Net Income (Loss)
Strongco's net income in 2011 was $9.9 million ($0.76 per share) which was
significantly improved from a loss of $0.9 million (loss of $0.08 per share) in
2010 and earnings from continuing operations of $0.7 million ($0.07 per share)
in 2009.
EBITDA
EBITDA (see note 2 below) in 2011 was $43.1 million which compares to $24.2
million in 2010 and $18.0 in 2009. EBITDA was
calculated as follows:
----------------------------------------------------------------------------
Year Ended December 31 Variance
----------------------------------------------------------------------------
2009 2011/ 2010/
EBITDA ($ millions) 2011 2010 (note 1) 2010 2009
----------------------------------------------------------------------------
Net earnings (loss) from
continuing operations $ 9.9 $ (0.9) $ 0.7 $ 10.8 $ (1.6)
Add Back:
Interest 5.8 4.8 4.4 1.0 0.4
Income taxes 1.2 - 0.8 1.2 (0.8)
Amortization of capital
assets 3.0 2.1 0.9 0.9 1.2
Amortization of equipment
inventory on rent 20.7 18.2 11.2 2.5 7.0
Amortization of rental
fleet 2.4 - - 2.4 -
----------------------------------------------------------------------------
EBITDA (note 2) $ 43.1 $ 24.2 $ 18.0 $ 18.9 $ 6.2
----------------------------------------------------------------------------
Note 1 - 2009 income statement figures reflect Canadian GAAP before the adoption
of International Financial Reporting Standards ("IFRS"); 2009 balance sheet
figures include the impact of changes related to the adoption of IFRS.
Note 2 - "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 Operating Activities:
During 2011, Strongco provided $44.4 million of cash from operating activities
before changes in working capital. However, $26.2 million of cash was used to
increase net working capital, $3.0 million to fund future employee benefits,
$5.8 million to pay interest and $0.2 million to pay taxes, resulting in a net
source of cash from operations in the quarter of $9.2 million. By comparison, in
2010, $25.9 million of cash was provided by operating activities before changes
in working capital, $19.3 million was used to increase working capital and $1.4
million to fund future employee benefits and $4.8 million to pay interest,
resulting in a net source of cash from operating activities of $0.4 million.
The components of the cash provided by operating activities were as follows:
----------------------------------------------------------------------------
Twelve Months Ended
December 31
----------------------------------------------------------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) $ 9.9 $ (0.9)
Non-cash items:
Depreciation - equipment inventory on rent 20.7 18.2
Depreciation - capital assets 3.0 2.1
Depreciation - rental fleet 2.4 -
Gain on sale of rental equipment (1.0) -
Share-based payment expense 0.2 0.3
Interest expense 5.8 4.8
Income tax expense (recovery) 1.2 (1.0)
Deferred income tax asset (0.4) -
Deferred income tax liability (1.3) 1.0
Employee future benefit expense 3.9 1.4
Other (0.1) -
----------------------------------------------------------------------------
44.4 25.9
Changes in non-cash working capital balances (26.2) (19.3)
Employee future benefit funding (3.0) (1.4)
Interest paid (5.8) (4.8)
Income taxes paid (0.2) -
----------------------------------------------------------------------------
Cash provided by operating activities $ 9.2 $ 0.4
----------------------------------------------------------------------------
Non-cash items include amortization of equipment inventory on rent of $20.7
million, which compared to $18.2 million in 2010. Higher volumes of equipment
rentals in 2011 resulted in the higher amortization of equipment inventory on
rent.
Components of cash flow from the net change in non-cash working capital for 2011
and 2010 were as follows:
----------------------------------------------------------------------------
Twelve months ended
December 31
----------------------------------------------------------------------------
($ millions) (Increase) / Decrease 2011 2010
----------------------------------------------------------------------------
Trade and other receivables $ (2.4) $ (8.8)
Inventories (60.5) (33.7)
Prepaids 0.1 (0.2)
Other assets 0.0 0.1
----------------------------------------------------------------------------
$ (62.7) $ (42.6)
----------------------------------------------------------------------------
Trade and other payables 2.8 9.2
Deferred revenue & customer deposits (0.4) 0.8
Income taxes payable (0.1) -
Equipment notes payable 34.2 13.3
----------------------------------------------------------------------------
$ 36.5 $ 23.3
----------------------------------------------------------------------------
Net increase in non-cash working capital $ (26.2) $ (19.3)
----------------------------------------------------------------------------
With continued recovery in the markets for heavy equipment in Canada, Strongco's
revenues increased through 2011 and to support this growth, Strongco made a net
investment in working capital of $26.2 million during the year. The largest
investment was in inventory in response to the increase in sales and service
activity. The net increase in inventory in 2011 was $60.5 million, the majority
of which was equipment inventory. By comparison, inventories (mainly equipment)
increased by $33.7 million in 2010.
Following the recession, in 2010 and 2011, OEM's struggled to ramp up production
to meet the increase in demand. This led to product shortages and significantly
extended delivery lead times. In the fourth quarter of 2011 Strongco received a
large quantity of equipment inventory from its major OEM suppliers that had been
ordered for delivery earlier in the year. This, in particular, contributed to a
higher than normal level of inventory at year end. The OEM suppliers have
offered extended interest-free financing on these late delivered inventories and
with markets for heavy equipment continuing to be robust, management is
confident this higher level of inventory will be sold through the season in
2012.
With the increase in equipment inventories, equipment notes also increased. The
net increase in equipment notes in 2011 was $34.2 million. By comparison,
equipment notes increased by $13.3 million in 2010.
Cash Used In Investing Activities:
Investing activities in 2011 include the acquisition of Chadwick-BaRoss Inc. in
February for $9.2 million, net of promissory notes issued by the Company to the
previous shareholders of CBR. CBR maintains a rental fleet of equipment and
during the year it purchased $13.4 million of new rental fleet assets and sold
rental fleet assets for proceeds of $8.3 million. Capital expenditures in 2011
totalled $9.0 million, the majority of which was for the construction of a new
branch in Edmonton, Alberta.
The components of the cash used in investing activities were as follows:
----------------------------------------------------------------------------
Twelve Months Ended
December 31
----------------------------------------------------------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
Acquisition of Chadwick-BaRoss Inc. $ (9.2) $ -
Purchase of rental fleet assets (13.4) -
Proceeds from sale of rental fleet assets 8.3 -
Purchase of capital assets (9.0) (0.3)
----------------------------------------------------------------------------
Cash used in investing activities $ (23.3) $ (0.3)
----------------------------------------------------------------------------
Cash Provided By Financing Activities:
In 2011, net cash of $15.8 million was provided by financing activities compared
to net cash of $0.2 million provided in 2010.
The significant sources and uses of cash from financing activities in 2011 were
as follows:
-- The issue of shares under the rights offering completed in the first
quarter of 2011 provided $7.8 million (see discussion under "Shareholder
Capital").
-- To help finance the purchase of CBR, the Company secured a $5.0 million
term loan from its bank in April (see discussion under "Bank Credit
Facilities" below). Repayments of this term loan amounted to $0.9
million in the year.
-- The Company issued promissory notes to the previous shareholders of CBR
on the acquisition of their company in the first quarter totaling $1.9
million (see discussion under "Acquisition of Chadwick-BaRoss, Inc."
above). Payments against these vendor take-back notes were $0.6 million
in the year.
-- 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 $5.0 million in the year.
-- To finance the increase in rental fleet assets in the United States, the
Company increased borrowing under its equipment note lines of credit by
$2.0 million in the year.
-- Cash of $1.4 million was used to reduce bank indebtedness in 2011.
-- Repayments under finance leases (primarily service vehicles and computer
equipment) amounted to $1.7 million in the year.
-- In March of 2011, Strongco made the final scheduled repayment of $1.3
million of the note issued to Volvo Construction Equipment on the
acquisition of Champion Road Machinery in 2008.
The components of cash provided in financing activities are summarized as follows:
----------------------------------------------------------------------------
Twelve Months Ended
December 31
----------------------------------------------------------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
Proceeds from rights offering $ 7.8 $ -
Term loan - acquisition of Chadwick-BaRoss Inc. 5.0 -
Repayment of term loan - acquisition of Chadwick-
BaRoss Inc. (0.8) -
Repayment acquisition promissory note (0.6)
Construction loan - new Edmonton branch 5.0 -
Increase in long-term equipment notes 2.0 -
Increase (decrease) in bank indebtedness (1.4) 2.4
Repayment of finance lease obligations (1.7) (1.4)
Repayment of Champion note (1.3) (1.1)
----------------------------------------------------------------------------
Cash provided by financing activities $ 14.0 $ (0.1)
----------------------------------------------------------------------------
Bank Credit Facilities
The Company has credit facilities with banks in Canada and United States that
provide 364 -day committed operating lines of credit totaling approximately
$22.5 million that are renewable annually on or about May 31 of each year.
Borrowings under the lines of credit are limited by standard borrowing base
calculations based on accounts receivable and inventory, which are typical of
such bank credit facilities. As collateral, the Company has provided a $50
million debenture and a security interest in accounts receivable, inventories
(subordinated to the collateral provided to the equipment inventory lenders),
capital assets (subordinated to collateral provided to lessors), real estate and
on intangible and other assets. The operating lines bear interest at rates that
range between bank prime rate plus 0.50% and bank prime rate plus 3.00% and
between the one month Canadian BA rates plus 1.50% and BA rates plus 4.00% in
Canada and at LIBOR plus 2.60% in the United States. Under its bank credit
facilities, the Company is able to issue letters of credit up to a maximum of $5
million. Outstanding letters of credit reduce the Company's availability under
its operating lines of credit. For certain customers, Strongco issues letters of
credit as a guarantee of Strongco's performance on the sale of equipment to the
customer. As at December 31, 2011, there were outstanding letters of credit of
$0.1 million and $11.0 million drawn on the Company's bank operating lines of
credit.
In addition to its operating lines of credit, Strongco has a $15 million line
for foreign exchange forward contracts as part of its bank credit facilities
("FX Line") available to hedge foreign currency exposure. Under this FX Line,
the Company can purchase foreign exchange forward contracts up to a maximum of
$15 million. As at December 31, 2011, the Company had outstanding foreign
exchange forward contracts under this facility totaling US$6.2 million at an
average exchange rate of $1.0203 Canadian for each US$1.00 with settlement dates
between January 31, 2012 and May 31, 2012.
The Company's bank credit facilities also include term loans secured by real
estate in the United States. At December 31, 2011 the outstanding balance on
these term loans was US$3.7 million. The term loans bear interest at LIBOR plus
3.05% and require monthly principal payments of US$13,300 plus accrued interest.
The Company has interest rate swap agreements in place that have converted the
variable rate on the term loans to a fixed rate of 5.17%. The term loan and swap
agreements expire in September 2012 at which point a balloon payment from the
balance of the loans is due. It is management's intention to renew the term
loans and interest rate swap agreement prior to their expiry.
In connection with the acquisition of Chadwick-BaRoss, in April 2011, Strongco
secured an additional $5.0 million demand non- revolving term loan from its bank
secured against certain real estate assets in Canada ("Term Loan - Canadian Real
Estate"). This loan is for a term of 60 months to April 2016 and bears interest
at the bank's prime rate plus 2.0%. The Term loan - Canadian Real Estate is
subject to monthly principal payments of $83.3 thousand plus accrued interest.
As at December 31, 2011, there was $4.3 million owing on the Term Loan -
Canadian Real Estate.
In April 2011, Strongco secured an additional construction loan facility with
its bank ("Construction Loan #1") to finance the construction of the Company's
new Edmonton, Alberta branch. Under Construction Loan #1, the Company is able to
borrow 70% of the cost of the land and building construction costs to a maximum
of $6.6 million. Construction of the new branch commenced in June 2011 and is
scheduled to be completed before the end of March 2011. Upon completion,
Construction Loan #1 will be converted to a demand, non-revolving term loan
("Mortgage Loan #1"). Mortgage Loan #1 will be for an amount of $7.1 million and
a term of 60 months. Construction Loan #1 (and Mortgage Loan #1) bears interest
at the bank's prime lending rate plus 2.0%. As at December 31, 2011, there was
$5.0 million drawn on Construction Loan #1.
In addition, in September 2011, Strongco secured an additional construction loan
facility with its bank ("Construction Loan #2") to finance the construction of a
planned new Fort McMurray, Alberta branch. Under Construction Loan #2, the
Company is able to borrow 70% of the cost of the land and building construction
costs to a maximum of $7.9 million. The Company anticipates construction of the
new Fort McMurray branch will commence in the third quarter of 2012 and will be
completed in the second quarter of 2013. Upon completion, Construction Loan #2
will be converted to a demand, non-revolving term loan ("Mortgage Loan #2").
Mortgage Loan #2 will be for an amount of $8.4 million and a term of 60 months.
Construction Loan #2 (and Mortgage Loan #2) bears interest at the bank's prime
rate plus 2.0%. As at December 31, 2011, Construction Loan #2 was undrawn.
Strongco's bank credit facilities contain financial covenants typical of such
credit facilities that require the Company to maintain certain financial ratios
and meet certain financial thresholds. In particular, the credit facilities in
Canada contain covenants that require the Company to maintain a minimum ratio of
total current assets to current liabilities ("Current Ratio covenant") of 1.1:1,
a minimum tangible net worth ("TNW covenant") of $50 million, a maximum ratio of
total debt to tangible net worth ("Debt to TNW Ratio covenant") of 4.0:1 and a
minimum ratio of EBITDA minus cash taxes paid and capital expenditures to total
interest ("Debt Service Coverage Ratio covenant") of 1.3:1. For the purposes of
calculating covenants under the credit facility, debt is defined as total
liabilities less deferred income taxes, trade and other payables, customer
deposits and accrued employee future benefits obligations. The Debt Service
Coverage Ratio is measured at the end of each quarter on a trailing 12-month
basis. Other covenants are measured as at the end of each quarter. The Company
was in compliance with all covenants under its bank credit facilities as at
December 31, 2011.
Equipment Notes
In addition to its bank credit facilities, the Company has lines of credit
available totaling approximately $240 million from various non-bank equipment
lenders in Canada and the United States that are used to finance equipment
inventory and rental fleet. At December 31, 2011, there was approximately $166
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 December 31, 2011, approximately $72 million of these
equipment notes were interest free and $94 million were interest bearing. As
collateral for these equipment notes, the Company has provided liens on the
specific inventories financed and any related accounts receivable. For the
majority of the equipment notes, monthly principal repayments equal to 3% of the
original principal balance of the note commence 12 months from the date of
financing and the remaining balance is due in full at the earlier of 24 months
after financing or when the financed equipment is sold. While financed equipment
is out on rent, monthly curtailments are required equal to the greater of 70% of
the rental revenue and 2.5% of the original value of the note. Any remaining
balance after 24 months is normally refinanced with the lender over an
additional period of up to 24 months. All of the Company's equipment note
facilities are renewable annually.
As indicated above, the interest bearing equipment notes in Canada bear interest
at floating BA rates plus a fixed component or premium over BA rates. In
September 2011, Strongco put interest rate swaps in place that have effectively
fixed the floating BA rate component on $15.0 million of its interest bearing
equipment notes at 1.615% for five years to September 2016. (See discussion
under "Interest Rate Swaps" below).
Certain of the Company's equipment finance credit agreements contain restrictive
financial covenants, including requiring the Company to remain in compliance
with the financial covenants under all of its other lending agreements ("cross
default provisions"). The Company was in compliance with all covenants under its
equipment finance credit facilities as at December 31, 2011.
Interest Rate Swaps
In September of 2011, BA rates were at very low levels. However, there was an
expectation that interest rates would rise in the future. In September, Strongco
secured a Swap Facility with its bank that allows the Company to swap the
floating interest rate component (BA rate) on up to $25.0 million of its
floating interest rate debt to a five-year fixed swap rate of interest. On
September 8, 2011, the Company entered into an interest rate swap agreement
under this facility to fix the floating BA rate on $15.0 million of interest
bearing debt at a fixed interest rate equal to 1.615% for a period of five years
to September 8, 2016. The company has put these swaps in place to effectively
fix the interest rate on $15.0 million of its interest-bearing equipment notes
at 4.615%.
Summary of Outstanding Debt
The balance outstanding under Strongco's debt facilities at December 31, 2011
and 2010 consisted of the following:
----------------------------------------------------------------------------
Debt Facilities As at December 31
----------------------------------------------------------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
Bank indebtedness (including outstanding cheques) $ 11.0 $ 12.4
Equipment notes payable - non interest bearing 72.3 40.1
Equipment notes payable - interest bearing 93.6 78.1
Vendor take back note payable - acquisition of
Chadwick-BaRoss 1.3 -
Construction loan #1 5.0 -
Term loan - Canadian real estate 4.3
Term loans - US real estate 3.7 -
Other notes payable - 1.2
----------------------------------------------------------------------------
$ 191.2 $ 131.8
----------------------------------------------------------------------------
As at December 31, 2011 there was $11.5 million of unused credit available under
the Company's bank credit lines. While availability under the bank lines
fluctuates daily depending on the amount of cash received and cheques and other
disbursements clearing the bank, availability generally ranges between $5.0
million and $15.0 million. Borrowing under the Company's bank lines is typically
highest in the first quarter when cash flows from operations are at the lowest
point of the year, and reduces through to the end of the year as cash flows
increase.
The Company also had $74.2 million available under its equipment finance
facilities at December 31, 2011. Borrowing on these lines typically increases in
the first five months of the year as equipment inventory is purchased for the
season and declines to the end of the year as equipment sales increase,
particularly in the fourth quarter.
With the level of funds available under the Company's bank credit lines, the
current availability under the equipment finance facilities and anticipated
improvement in cash flows from operations, management believes the Company will
have adequate financial resources to fund its operations and make the necessary
investment in equipment inventory and fixed assets to support its operations in
the future.
FINANCIAL RESULTS - FOURTH QUARTER
Consolidated Results of Operations for the Three Months Ended December 31
----------------------------------------------------------------------------
Three months ending
December 31 2011/2010
----------------------------------------------------------------------------
($ thousands, except per
unit amounts) 2011 2010 $ Change % Change
----------------------------------------------------------------------------
Revenues $ 113,213 $ 91,798 $ 21,415 23%
Cost of sales 92,414 75,431 16,983 23%
----------------------------------------------------------------------------
Gross Margin 20,799 16,367 4,432 27%
Admin, distribution and
selling expenses 16,979 13,548 3,431 25%
Other income (650) (273) (377) 138%
----------------------------------------------------------------------------
Operating income 4,470 3,092 1,378 45%
Interest expense 1,592 1,354 238 18%
----------------------------------------------------------------------------
Earnings (loss) before
income taxes 2,878 1,738 1,140 66%
Provision for income taxes 807 - 807
----------------------------------------------------------------------------
Net income $ 2,071 $ 1,738 $ 333 19%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings
per share 0.15 0.17 (0.02) -12%
Weighted average number of
shares
- Basic 13,128,719 10,508,719
- Diluted 13,168,561 10,508,719
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key financial measures:
Gross margin as a
percentage of revenues 18.4% 17.8%
Admin, distribution and
selling expenses as
percentage of revenues 15.0% 14.8%
Operating income as a
percentage of revenues 3.9% 3.4%
EBITDA (note 1) $ 12,505 $ 10,298 $ 2,207 21%
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization
of capital assets, amortization of equipment inventory on rent, and amortization
of rental fleet. EBITDA is presented as a measure used by many investors to
compare issuers on the basis of ability to generate cash flow from operations.
EBITDA is not a measure of financial performance or earnings recognized under
IFRS and therefore has no standardized meaning prescribed by IFRS and may not be
comparable to similar terms and measures presented by other similar issuers. The
Company's management believes that EBITDA is an important supplemental measure
in evaluating the Company's performance and in determining whether to invest in
Shares. Readers of this information are cautioned that EBITDA should not be
construed as an alternative to net income or loss determined in accordance with
IFRS as indicators of the Company's performance or to cash flows from operating,
investing and financing activities as measures of the Company's liquidity and
cash flows.
Revenues
Strongco's revenues for the quarter ended December 31, 2011 were $113.2 million,
which was up $21.4 million or 23% from $91.8 million in fourth quarter 2010. The
acquisition of Chadwick-BaRoss accounted for $15.7 million of the increase while
revenues in Canada increased by $5.7 million or 6% in the quarter. Revenues were
up in all regions of Canada, with the largest increase in Western Canada.
Overall revenues increased in all categories, (sales, rentals and product
support) in the quarter but varied from region to region.
A breakdown of revenue for the three months ended December 31, 2011 and 2010
were as follows:
----------------------------------------------------------------------------
Three Months Ended
December 31 2011/10
-----------------------------------
($ millions) 2011 2010 % Var
----------------------------------------------------------------------------
Eastern Canada (Atlantic and Quebec)
-----------------------------------------
Equipment Sales $ 22.0 $ 23.4 -6%
Equipment Rentals 3.5 2.7 30%
Product Support 10.3 8.8 17%
----------------------------------------------------------------------------
Total Eastern Canada $ 35.8 $ 34.9 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-----------------------------------------
Central Canada (Ontario)
-----------------------------------------
Equipment Sales $ 27.0 $ 23.6 14%
Equipment Rentals 1.5 1.7 -12%
Product Support 8.5 8.5 0%
----------------------------------------------------------------------------
Total Central Canada $ 37.0 $ 33.8 9%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-----------------------------------------
Western Canada (Manitoba to BC)
-----------------------------------------
Equipment Sales $ 15.4 $ 15.1 2%
Equipment Rentals 2.6 2.9 -11%
Product Support 6.7 5.1 31%
----------------------------------------------------------------------------
Total Western Canada $ 24.7 $ 23.1 7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-----------------------------------------
North-eastern United States
-----------------------------------------
Equipment Sales $ 10.1
Equipment Rentals 1.3
Product Support 4.3
----------------------------------------------------------------------------
Total North-eastern United States $ 15.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-----------------------------------------
Total Equipment Distribution
-----------------------------------------
Equipment Sales $ 74.5 $ 62.1 20%
Equipment Rentals 8.9 7.3 22%
Product Support 29.8 22.4 33%
----------------------------------------------------------------------------
Total Equipment Distribution $ 113.2 $ 91.8 23%
----------------------------------------------------------------------------
Equipment Sales
Strongco's equipment sales increased by $12.4 million, or 20%, from the fourth
quarter of 2010. Chadwick-BaRoss contributed $10.1 million of the gain and
equipment sales were up in Canada overall, led by a strong increase in Ontario
in the quarter.
Demand for heavy equipment showed further improvement in the fourth quarter as
the Canadian economy, together with construction and infrastructure markets
continued to recover. Total heavy equipment units sold in the market were up
significantly over the fourth quarter of 2010, which included large increases in
rental fleets at several equipment dealers as well as replenishment of equipment
fleets at several independent rental companies.
On a regional basis, Strongco's equipment sales in Eastern Canada (Quebec and
Atlantic regions) totalled $22.0 million in the fourth quarter, which was down
slightly from $23.4 million in the fourth quarter of 2010. Sales of cranes in
Eastern Canada were up significantly in compared to the fourth quarter of 2010,
but sales of other heavy equipment fell short of the prior year. Sales of cranes
were particularly strong in the fourth quarter due in part to increased spending
on infrastructure projects and large hydroelectric projects in Quebec, as well
as certain large crane rental customers in Quebec upgrading and increasing their
fleets following the recession. In addition, a few large cranes that had been on
RPO contracts were sold in the fourth quarter of 2011. Sales of other heavy
equipment in Eastern Canada fell short of the prior year due in part to the
sales of several units on RPO contracts in Quebec that were deferred to 2012. In
contrast, sales were very strong in the fourth quarter of 2010 as a result of a
high level of RPO contracts in Quebec that were converted to sale. The markets
for heavy equipment, other than cranes, in which Strongco participates in
Eastern Canada, were estimated to increase by approximately 20% in 2011 over
2010. For the first three quarters of 2011, Strongco outperformed the market and
captured a larger market share. However, Strongco's share of the market showed a
slight decline in the fourth quarter. Total market volumes spiked in the fourth
quarter of 2011 due to increases dealer owned rental fleets as well as
replenishment of equipment fleets at several independent rental companies. In
addition, equipment sales at auction were very high in the fourth quarter which
also inflated the total market numbers. Excluding the replenishment of rental
fleets and auction sales, Strongco's market share in the fourth quarter in
Eastern Canada for heavy equipment, other than cranes, was consistent with the
first three quarters and for the full year was up over 2010.
Strongco's equipment sales in Central Canada were $27.0 million, which was up
$3.4 million, or 14%, from the fourth quarter of 2010. Construction and
infrastructure activity in Ontario remained strong relative to the fourth
quarter of 2010, which contributed to stronger demand for heavy equipment. In
the markets that Strongco serves in Central Canada, total unit volumes of heavy
equipment, other than cranes, were approximately 20% higher than in the fourth
quarter of 2010. In most product categories, Strongco outperformed the market,
with unit volume increases greater than the market, which resulted in higher
market shares. However, product availability and extended supplier delivery lead
times, combined with aggressive price competition from certain dealers, resulted
in lower volumes and a loss of market share in particular product categories and
markets. This was especially evident within the Company's Case Construction
Equipment product lines. Accurate market data is not readily available for
cranes, but the demand for cranes in Central Canada was stronger in 2011,
demonstrating continued recovery following the recession. Strongco's crane sales
in Ontario in 2011 were up more than 70% from a year ago as certain crane rental
customers, who refrained from purchasing new cranes during the recession,
replenished their fleets.
Equipment sales in Western Canada during the fourth quarter of 2011 were $15.4
million, which was up from $15.1 million in 2010. With the upward trend and
sustainability in oil prices, economic conditions in Alberta remained strong in
the fourth quarter of 2011. Construction activity and demand for heavy
equipment, particularly in Northern Alberta, remained robust in the fourth
quarter. For the first three quarters of 2011, Strongco outperformed the market
in Western Canada and captured a larger share of the growing market. However,
the Company's market share showed a decline in the fourth quarter due primarily
to a lack of product availability and delayed deliveries from the OEM suppliers.
In addition, several RPO contracts were expected to convert to sale in the
fourth quarter but at the customers' request conversion was delayed to the first
quarter of 2012. The market for cranes in Alberta has been recovering since the
recession but more slowly than other heavy equipment. Demand for cranes in
Western Canada, particularly in Northern Alberta, improved significantly in
2011. Strongco's crane sales in Western Canada in the fourth quarter of 2011
grew by 66% over the same period of 2010 and could have been higher were it not
for delivery delays from the OEM. Sales backlog of cranes in Alberta remains
strong and RPO activity has increased, which are positive signs of continued
recovery in the crane markets in Western Canada.
Strongco's equipment sales in the northeastern United States were $10.1 million
in the fourth quarter of 2011. The markets for heavy equipment in New England
remained soft in 2011 and well below pre-recession levels. The traditional heavy
equipment markets for residential construction, road construction and other
infrastructure improvements in the region have remained weak. However, other
markets for scrap handling and waste management have experienced some increase
in activity and Chadwick-BaRoss' sales in these less traditional markets have
risen. Equipment sales for the fourth quarter were slightly ahead of the same
period in 2010, but market share in this soft market declined slightly in 2011
due primarily to product shortages and delivery delays from the manufacturer.
Equipment Rentals
As heavy equipment markets continued to recover, rental activity, including
rentals under RPO contracts, remained strong in 2011. In addition, Strongco's
crane business, which has traditionally not had a significant rental element,
experienced an increase in rental activity in 2011 as customers showed a
preference to rent following the recession as the demand and market for cranes
recovered. This trend continued in the fourth quarter of the year. Strongco's
rental revenue in the fourth quarter of 2011 was $8.9 million, which was up from
$7.3 million in 2010. Rental revenue from the acquisition of Chadwick-BaRoss in
February 2011 contributed $1.3 million of the increase in the quarter while
rental revenue in Canada was up slightly by $0.3 million.
On a regional basis in Canada, rental revenue was up overall by $0.3 million but
activity varied from region to region. In Eastern Canada, which has
traditionally not been a major rental market, rental revenues were $3.5 million
in the quarter, which was up from $2.7 million a year earlier. Most of the
increase in Eastern Canada was the result of RPO contracts for articulated
trucks and loaders in Quebec. Rental revenue was also strong in Alberta at $2.6
million, down slightly from $2.9 million in the fourth quarter of 2010,
demonstrating further evidence of recovery in that province following the
significant decline in rental activity during the recession. Rental revenues in
Ontario were $1.5 million compared to $1.7 million in 2010.
Product Support
The ongoing recovery in construction and infrastructure markets, the oil and gas
sector and other end use markets for heavy equipment in Canada, resulted in
increased utilization of equipment, which in turn resulted in continued growth
in product support activity in 2011. Strongco's product support revenues in the
fourth quarter of 2011 totalled $29.8 million, including $4.3 million from the
newly acquired Chadwick-BaRoss, compared to $22.4 million in the fourth quarter
of 2010.
Product support revenues were strong in all regions of Canada. Strongco's
operations in Alberta, which experienced a significant drop in product support
revenues during the recession, experienced a steady increase in product support
activities in 2011 as customers continued working their equipment. Parts and
service revenues were $6.7 million in Western Canada, which was up 31% from the
fourth quarter of 2010. In Eastern Canada (Quebec and Atlantic), which was least
affected by the recession, product support revenues in the fourth quarter were
$10.3 million compared to $8.8 million last year. Recovery in construction
markets was slowest in Ontario. As a consequence customers in that province
continued to curtail servicing their equipment, only making critical repairs
when necessary. Product support revenues in Ontario were $8.5 million in the
quarter, unchanged from a year earlier.
Gross Margin
----------------------------------------------------------------------------
Three Months Ended December 31 Variance
---------------------------------------------------------
2011 2010 2011/2010
----------------------------------------------------------------------------
$ $ $ %
Gross Margin millions GM% millions GM% millions Var
----------------------------------------------------------------------------
Equipment Sales $ 6.9 9.3% $ 6.3 10.1% $ 0.6 10%
Equipment Rentals 1.6 18.5% 1.1 15.1% 0.5 49%
Product Support 12.2 41.0% 9.0 40.1% 3.2 36%
----------------------------------------------------------------------------
Total Gross Margin $ 20.8 18.4% $ 16.4 17.8% $ 4.4 27%
----------------------------------------------------------------------------
As a result of the higher revenues, Strongco's gross margin in the fourth
quarter of 2011 increased by $4.4 million, or 27% over the fourth quarter of
2010. As a percentage of revenue, total gross margin in the fourth quarter of
2011 was 18.4%, which was up from 17.8% in the fourth quarter of 2010 due mainly
to sales mix, which included a greater proportion of product support sales in
the fourth quarter of 2011.
The gross margin on equipment sales was $6.9 million dollars compared to the
$6.3 million in the fourth quarter of 2010. As a percentage of sales, gross
margin on equipment sales was 9.3%, down from 10.1% in 2010. This was due
primarily to aggressive price competition and sales of older equipment which, as
a result of the weaker Canadian dollar at the time of purchase, had higher
costs.
The gross margin on rentals in the fourth quarter was $1.6 million, which up
from $1.1 million a year ago. The gross margin percentage on rentals improved in
the fourth quarter of 2011 to 18.5% compared to 15.1% in the same period in
2010.
The gross margin on product support activities improved to $12.2 million from
$9.0 million in the fourth quarter of 2010. As a percentage of revenue, the
gross margin on product support activities was 41.0%, which was slightly higher
than 40.1% in the fourth quarter of 2010 due to a higher proportion of service
revenue which command higher margins than parts sales and a slightly higher
gross margin percentage earned on service in 2011.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the fourth quarter of 2011
were $17.0 million or 15.0% of revenue, which compared to $13.5 million or 14.8%
of revenues in the fourth quarter of 2010. Most of the increase from 2010
relates to administration, distribution and selling expenses of the newly
acquired Chadwick-BaRoss which amounted to $2.2 million in the quarter. In
addition, with the stronger results, $1.6 million was accrued in the fourth
quarter of 2011 for anticipated payments under the Company's annual and
long-term incentive plans and for other employee bonuses. With lower earnings in
2010, the accruals for employee incentives and bonus were much lower in the
fourth quarter of 2010. While certain other variable expenses were higher due to
the increase in revenues in the fourth quarter of 2011, administrative,
distribution and selling expenses for the quarter overall were flat year over
year before the incremental expenses of Chadwick-BaRoss and accrued bonuses.
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 fourth quarter of 2011 was $0.7 million compared to income
of $0.3 million in the fourth quarter of 2010. Other income in 2011 includes a
net unrealized foreign exchange gain of $0.3 million on forward foreign exchange
contracts purchased as a hedge to protect the margin on specific future
committed sales. In the fourth quarter of 2010, Strongco incurred an unrealized
net foreign exchange loss on forward foreign currency contracts of $0.2 million.
The unrealized foreign exchange gains and losses arose from mark to market
adjustments on forward foreign exchange contracts as a result of changes in the
Canadian/US dollar exchange rate during the year relative to the exchange rate
in the forward contract.
Interest Expense
Strongco's interest expense was $1.6 million in the fourth quarter of 2011
compared to $1.4 million in fourth quarter of 2010. The increase is due mainly
to a higher average balance of interest-bearing debt in the fourth quarter of
2011 compared to the fourth quarter of 2010.
Strongco's interest-bearing debt comprises bank indebtedness, interest-bearing
equipment notes, various term loans with the Company's banks and other notes
payable. Strongco typically finances equipment inventory under lines of credit
available from various non-bank finance companies. Most equipment financing has
interest free periods up to 12 months from the date of financing, after which
the equipment notes become interest-bearing. The rate of interest on the
Company's bank indebtedness and interest-bearing equipment notes varies with
prime rates and BA rates. (See discussion under "Financial Condition and
Liquidity"). Prime rates and BA rates declined during the recession in 2009 but
rose in 2010 and have remained fairly stable through 2011.
During 2011, Strongco increased inventory levels in support of sales growth, as
well as its commitment to inventory for RPO's which led to a higher level of
interest-bearing equipment notes throughout the year. The acquisition of
Chadwick-BaRoss in February 2011 for $11.1 million, was financed with debt from
the operating line and a new $5.0 million term loan from the Company's bank and
US$1.9 million interest-bearing promissory notes issued to the previous
shareholders of Chadwick-BaRoss. In addition, the Company's debt now includes
the bank indebtedness, equipment notes, and mortgage term loans of
Chadwick-BaRoss. Strongco also obtained a construction loan facility from its
bank during the year to finance the construction of a new branch facility in
Edmonton, Alberta which added to the level of interest-bearing debt in 2011.
Provision for Income Tax
Following conversion to a corporation on July 1, 2010, Strongco is now subject
to income tax at corporate tax rates. As a consequence, Strongco was able to
utilize tax losses, including those previously unrecognized from the Fund. In
addition, on the adoption of IFRS, temporary or timing differences between the
tax and accounting values arose resulting in a net deferred income tax asset.
However, given the Company's history of losses, there was no certainty of
realization of the benefit of either the temporary differences or the losses
from the Fund previously unrecognized and a valuation allowance was recorded for
the full amount of the deferred income tax asset. While Strongco generated
taxable income in Canada in the fourth quarter of 2011, the valuation allowance
was drawn down by $0.2 million in the quarter to recognize the benefit of the
tax loss carry forwards and other temporary differences, which resulted in a
provision for income tax in Canada of $0.7 million.
In addition, the tax provision related to Chadwick-BaRoss in the U.S. amounted
to $0.1 million in the fourth quarter of 2011.
Net Income (Loss)
Strongco's net income in the fourth quarter of 2011 was $2.1 million ($0.15 per
share) which was in line with net income of $1.7 million ($0.17 per share) in
the fourth quarter of 2010. The difference in EPS is largely accounted for by an
increase in outstanding equity, to 13.1 million shares at December 31, 2011,
versus 10.5 million at the same time in 2010.
EBITDA
EBITDA in the fourth quarter of 2011 was $12.5 million which compares to $10.3
million in the fourth quarter of 2010. EBITDA was calculated as follows:
----------------------------------------------------------------------------
Three Months Ended
December 31 Variance
----------------------------------------------------------------------------
EBITDA ($ millions) 2011 2010 2011/2010
----------------------------------------------------------------------------
Net earnings (loss) from continuing
operations $ 2.1 $ 1.7 $ 0.4
Add Back:
Interest 1.6 1.4 0.2
Income taxes 0.8 - 0.8
Amortization of capital assets 1.0 1.3 (0.3)
Amortization of equipment inventory
on rent 6.1 5.9 0.2
Amortization of rental fleet 0.9 - 0.9
----------------------------------------------------------------------------
EBITDA (note 1) $ 12.5 $ 10.3 $ 2.2
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization
of capital assets, amortization of equipment inventory on rent, and amortization
of rental fleet. EBITDA is presented as a measure used by many investors to
compare issuers on the basis of ability to generate cash flow from operations.
EBITDA is not a measure of financial performance or earnings recognized under
International Financial Reporting Standards ("IFRS") and therefore has no
standardized meaning prescribed by IFRS and may not be comparable to similar
terms and measures presented by other similar issuers. The Company's management
believes that EBITDA is an important supplemental measure in evaluating the
Company's performance and in determining whether to invest in Shares. Readers of
this information are cautioned that EBITDA should not be construed as an
alternative to net income or loss determined in accordance with IFRS as
indicators of the Company's performance or to cash flows from operating,
investing and financing activities as measures of the Company's liquidity and
cash flows.
Cash Flow, Financial Resources and Liquidity
Cash Flow Provided By Operating Activities:
During the fourth quarter of 2011, Strongco provided $13.5 million of cash from
operating activities before changes in working capital. However, $7.1 million of
cash was used to increase net working capital, $1.3 million to fund future
employee benefits, $1.6 million to pay interest and $0.1 million to pay taxes,
resulting in a net source of cash from operations in the quarter of $3.4
million. By comparison, in the fourth quarter of 2010, $11.7 million of cash was
provided by operating activities before changes in working capital, $7.9 million
was used to increase working capital and $1.5 million to fund future employee
benefits and $1.4 million to pay interest, resulting in a net source of cash
from operating activities of $0.9 million.
The components of the cash provided by operating activities were as follows:
----------------------------------------------------------------------------
Three Months Ended
December 31
----------------------------------------------------------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) $ 2.1 $ 1.8
Non-cash items:
Depreciation - equipment inventory on rent 6.1 5.9
Depreciation - capital assets 1.1 1.3
Depreciation - rental fleet 0.9 -
Gain on sale of rental equipment (0.7) -
Interest expense 1.6 1.3
Income tax expense / (recovery) 0.8 (1.0)
Deferred income tax asset (0.4) -
Deferred income tax liability (1.0) 1.0
Employee future benefit expense 3.2 1.4
Other (0.1) -
----------------------------------------------------------------------------
$ 13.5 $ 11.7
Changes in non-cash working capital balances (7.1) (7.9)
Employee future benefit funding (1.3) (1.5)
Interest paid (1.6) (1.4)
Income taxes paid (0.1) -
----------------------------------------------------------------------------
Cash provided by operating activities $ 3.4 $ 0.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-cash items include amortization of equipment inventory on rent of $6.1
million, which compared to $5.9 million in the fourth quarter of 2010. Higher
volumes of equipment rentals in 2011 resulted in the higher amortization of
equipment inventory on rent.
Components of cash flow from the net change in non-cash working capital for the
three month period ending December 31, 2011 and 2010 were as follows:
----------------------------------------------------------------------------
Three months ended
December 31
----------------------------------------------------------------------------
($ millions) (Increase) Decrease 2011 2010
----------------------------------------------------------------------------
Trade and other receivables $ 0.4 $ (3.4)
Inventories (3.7) 5.9
Prepaids 0.3 0.7
Other assets 0.1 0.1
----------------------------------------------------------------------------
$ (2.9) $ 3.3
----------------------------------------------------------------------------
Trade and other payables (4.8) (4.3)
Deferred revenue & customer deposits 0.2 0.4
Equipment notes payable 0.4 (7.3)
----------------------------------------------------------------------------
$ (4.2) $ (11.2)
----------------------------------------------------------------------------
Net (increase) decrease in non-cash working
capital $ (7.1) $ (7.9)
----------------------------------------------------------------------------
Strongco's revenues increased through 2011 and to support this growth, Strongco
made a net investment in working capital of $7.1 million during the fourth
quarter. The largest investment was in inventory in response to the increase in
sales and service activity. In addition, as OEM's struggled to ramp up
production to meet the increase in demand, their delivery performance
deteriorated which led to product shortages and significantly extended delivery
lead times. In the fourth quarter of 2011 Strongco received a large quantity of
equipment inventory from its major OEM suppliers that had been ordered for
delivery earlier in the year. This, in particular, contributed to a higher than
normal investment in inventory in the fourth quarter. The OEM suppliers have
offered extended interest-free financing on these late delivered inventories and
with markets for heavy equipment continuing to be robust, management is
confident this higher level of inventory will be sold through the summer season
in 2012.
The net increase in inventory in the fourth quarter of 2011 was $3.7 million,
the majority of which was equipment inventory. By comparison, inventories
(mainly equipment) decreased by $5.9 million in 2010.
Cash Provided By (Used In) Investing Activities:
Cash used in investing activities in the fourth quarter of 2011 totaled $5.3
million. Chadwick-BaRoss maintains a rental fleet of equipment and during the
quarter it purchased $4.3 million of new rental fleet assets and sold rental
fleet assets for proceeds of $3.0 million. Capital expenditures in the fourth
quarter of 2011 totaled $4.0 million, the majority of which was for the
construction of a new branch in Edmonton, Alberta.
The components of the cash provided by (used in) investing activities were as
follows:
----------------------------------------------------------------------------
Three Months Ended
December 31
----------------------------------------------------------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
Purchase of rental fleet assets $ (4.3) $ -
Proceeds from sale of rental fleet assets 3.0 -
Purchase of capital assets (4.0) 0.2
----------------------------------------------------------------------------
Cash provided by (used in) investing activities $ (5.3) $ 0.2
----------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities:
In the fourth quarter of 2011, net cash of $1.9 million was provided by
financing activities which compared to net cash of $1.1 million used in
financing activities in the fourth quarter of 2010.
The significant sources and uses of cash from financing activities in fourth
quarter of 2011 were as follows:
-- To help finance the purchase of Chadwick-BaRoss, the Company secured a
$5.0 million term loan from its bank in April
(see discussion under "Bank Credit Facilities" below). Repayments of
this term loan amounted to $0.2 million in the quarter.
-- The Company issued promissory notes to the previous shareholders of
Chadwick-BaRoss on the acquisition of their company in the first quarter
totaling $1.9 million (see discussion under "Acquisition of Chadwick-
BaRoss" above).
Payments against these vendor take-back notes were $0.2 million in the
quarter.
-- To support the construction of its new Edmonton branch, the Company
secured a construction loan from its bank (see discussion under "Bank
Credit Facilities" below). Borrowing under this construction loan
amounted to $2.1 million in the quarter.
-- To finance the increase in rental fleet assets in the U.S., the Company
increased borrowing under its equipment note lines of credit by $0.8
million in the quarter.
-- Cash of $0.2 million was provided by increasing the Company's bank
indebtedness in the quarter.
-- Repayments under finance leases (primarily service vehicles and computer
equipment) amounted to $0.8 million in the quarter.
The components of cash provided by (used in) financing activities in the fourth
quarter are summarized as follows:
----------------------------------------------------------------------------
Three Months Ended
December 31
----------------------------------------------------------------------------
($ millions) 2011 2010
----------------------------------------------------------------------------
Repayment of term loan - acquisition of Chadwick-
BaRoss Inc. $ (0.2) $ -
Repayment acquisition promissory notes (0.2) -
Construction loan - new Edmonton branch 2.1 -
Increase in long-term equipment notes 0.8 -
Increase (decrease) in bank indebtedness 0.2 0.2
Repayment of finance lease obligations (0.8) (1.3)
----------------------------------------------------------------------------
Cash provided by (used in) financing activities $ 1.9 $ (1.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUMMARY OF QUARTERLY DATA
In general, business activity follows a weather related pattern of seasonality.
Typically, the first quarter is the weakest of the year as construction and
infrastructure activity is constrained in the winter months. This is followed by
a strong gain in the second quarter as construction and other contracts begin to
be tendered and companies begin to prepare for summer activity. The third
quarter generally tends to be slightly slower from an equipment sales
standpoint, which is partially offset by continued strength in equipment rentals
and customer support activities. Fourth quarter activity generally strengthens
as customers make year-end capital spending decisions and exercise purchase
options on equipment which has previously gone out on RPO's. In addition,
purchases of snow removal equipment are typically made in the fourth quarter.
However, as a result of depressed economic conditions and significantly reduced
construction activity in Canada, the markets for heavy equipment in 2009 were
extremely weak throughout the year. Construction markets and demand for heavy
equipment began to recover in 2010 and continued to improve in 2011.
A summary of quarterly results for the current and previous two years is as follows:
----------------------------------------------------------------------------
2011
($ millions, except per share
amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 113.2 $ 108.4 $ 114.1 $ 87.5
Earnings (loss) from continuing
operations before income taxes 2.9 3.8 3.8 0.7
Net income (loss) 2.1 3.6 3.6 0.6
Basic and diluted earnings
(loss) per share $ 0.15 $ 0.28 $ 0.28 $ 0.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010
($ millions, except per
unit/share amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 91.8 $ 79.6 $ 69.6 $ 53.7
Earnings (loss) from continuing
operations before income taxes 1.7 (0.3) (0.3) (2.1)
Net income (loss) 1.7 (0.3) (0.3) (2.1)
Basic and diluted earnings
(loss) per unit/share $ 0.17 $ (0.03) $ (0.03) $ (0.19)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009
($ millions, except per unit (note 1)
amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 67.5 $ 74.6 $ 76.7 $ 73.0
Earnings (loss) from continuing
operations before income taxes (1.8) 0.1 2.0 1.2
Net income (loss) (2.1) (0.5) 1.4 1.2
Basic and diluted earnings
(loss) per unit $ (0.20) $ (0.05) $ 0.14 $ 0.11
----------------------------------------------------------------------------
Note 1 - 2009 figures do not reflect adjustments necessary to comply with IFRS
A discussion of the Company's previous quarterly results can be found in the
quarterly Management's Discussion and Analysis reports available on SEDAR at
www.sedar.com.
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations for operating lease commitments totaling
$20.4 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 3 to 10 years. The Company's maximum potential losses
pursuant to the majority of these buy back contracts are limited, under an
agreement with the original equipment manufacturer, to 10% of the original sale
amounts. In addition, this agreement provides a financing arrangement in order
to facilitate the buy back of equipment. As at December 31, 2011, outstanding
buy back contracts totaled $13.5 million, which compared to $10.3 million at
December 31, 2010. A reserve of $1.1 million has been accrued in the Company's
accounts as at December 31, 2011 with respect to these commitments, compared to
a reserve of $0.9 million a year ago.
The Company has provided a guarantee of lease payments under the assignment of a
property lease which expires January 31, 2014. Total lease payments from January
1, 2012 to January 31, 2014 are $0.3 million.
Contractual obligations are set out in the following tables. Management believes
that the Company will generate sufficient cash flow from operations to meet its
contractual obligations.
----------------------------------------------------------------------------
Payment due by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 Year years years years
----------------------------------------------------------------------------
Operating leases $ 20.4 $ 4.8 $ 7.8 $ 4.9 $ 2.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingent obligation by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After 5
($ millions) Total 1 Year years years years
----------------------------------------------------------------------------
Buy back contracts $ 13.5 $ 1.9 $ 4.6 $ 7.0 $ 0.0
----------------------------------------------------------------------------
SHAREHOLDER CAPITAL
The Company is authorized to issue an unlimited number of shares. All shares are
of the same class of common shares with equal rights and privileges. Effective
July 1, 2010 Strongco converted from a trust to a corporation and all
outstanding trust units of the Fund were exchanged for shares of Strongco
Corporation on a one for one basis after which the Fund was wound up into
Strongco Corporation (see discussion under heading "Conversion to a
Corporation").
On January 17, 2011, the Company completed a rights offering, under which 2.62
million additional shares were issued pursuant to the rights issued to existing
shareholders for gross proceeds of $7.8 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.
----------------------------------------------------------------------------
Common Shares Issued and Outstanding Shares Number of Shares
----------------------------------------------------------------------------
Common shares outstanding as at December 31, 2010 10,508,719
Common shares issued under rights offering 2,620,000
----------------------------------------------------------------------------
Common shares outstanding as at December 31, 2011 13,128,719
----------------------------------------------------------------------------
OUTLOOK
The Canadian economy in general and construction markets across Canada are
expected to continue to improve throughout 2012, which should result in strong
demand for heavy equipment.
Mild weather conditions have affected equipment usage in much of the country and
significantly curtailed oilfield activities in northern Alberta. In addition,
the Ontario government has announced a slowdown in infrastructure activity.
These factors have tempered demand for heavy equipment and product support in
the first quarter of 2012. As a result, revenue growth in the first quarter of
2012 may also be moderated, but backlogs in the early part of the year remain
strong and growing.
An important contribution to anticipated growth in 2012 is expected from
Alberta. Oil prices have continued to show strength and stability, which has
powered an ongoing economic upturn in the province. In particular, the outlook
for northern Alberta and the oil sands is for continued significant investment
over the next several years, which bodes well for heavy equipment demand in the
region.
Equipment suppliers are expected to improve product availability and delivery
lead times in 2012. Inventory levels at Strongco were allowed to run slightly
higher than normal at year end to ensure availability of product as the Company
enters the prime selling season. Consequently, product availability is not
expected to affect the Company's sales in 2012. Strongco's significant position
with its equipment suppliers should allow the Company to optimize equipment
deliveries.
Management remains cautiously optimistic that the improving Canadian economy in
2011 will continue in 2012, which is expected to increase revenues. In addition,
while market conditions in the northeastern United States were weak,
Chadwick-BaRoss realized modest growth in 2011 and contributed positively to
Strongco's overall results. Chadwick-BaRoss services a broad range of market
sectors in Maine, New Hampshire and Massachusetts. Demand for equipment in these
regions is expected to show a modest increase in 2012, 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 December 31, 2011 with
changes from December 31, 2010 is as follows:
----------------------------------------------------------------------------
Provision for Inventory Obsolescence ($ millions)
----------------------------------------------------------------------------
Provision for inventory obsolescence as at December 31, 2010 $ 3.0
Provision related to business acquisition 1.3
Provision related to inventory disposed of during the year (0.5)
Additional provisions made during the year 1.5
----------------------------------------------------------------------------
Provision for inventory obsolescence as at December 31, 2011 $ 5.3
----------------------------------------------------------------------------
Allowance for Doubtful Accounts
The Company performs credit evaluations of customers and limits the amount of
credit extended to customers as appropriate. The Company is however exposed to
credit risk with respect to accounts receivable and maintains provisions for
possible credit losses based upon historical experience and known circumstances.
The allowance for doubtful accounts as at December 31, 2011 with changes from
December 31, 2010 is as follows:
----------------------------------------------------------------------------
Allowance for Doubtful Accounts ($ millions)
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December 31, 2010 $ 1.2
Provision related to business acquisition 0.3
Accounts written off during the year (0.2)
Additional provisions made during the year 0.5
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December 31, 2011 $ 1.8
----------------------------------------------------------------------------
Post Retirement Obligations
Strongco performs a valuation at least every three years to determine the
actuarial present value of the accrued pension and other non-pension post
retirement obligations. Pension costs are accounted for and disclosed in the
notes to the financial statements on an accrual basis. Strongco records employee
future benefit costs other than pensions on an accrual basis. The accrual costs
are determined by independent actuaries using the projected benefit method
prorated on service and based on assumptions that reflect management's best
estimates. The assumptions were determined by management recognizing the
recommendations of Strongco's actuaries. These key assumptions include the rate
used to discount obligations, the expected rate of return on plan assets, the
rate of compensation increase and the growth rate of per capita health care
costs.
The discount rate is used to determine the present value of future cash flows
that we expect will be required to pay employee benefit obligations.
Management's assumptions of the discount rate are based on current interest
rates on long-term debt of high quality corporate issuers.
The assumed return on pension plan assets of 6.5% per annum is based on
expectations of long-term rates of return at the beginning of the fiscal year
and reflects a pension asset mix consistent with the Company's investment
policy. The costs of employee future benefits other than pension are determined
at the beginning of the year and are based on assumptions for expected claims
experience and future health care cost inflation.
Changes in assumptions will affect the accrued benefit obligation of Strongco's
employee future benefits and the future years' amounts that will be charged to
results of operations.
Future Income Taxes
At each quarter end the Company evaluates the value and timing of the Company's
temporary differences. Future income tax assets and liabilities, measured at
substantively enacted tax rates, are recognized for all temporary differences
caused when the tax bases of assets and liabilities differ from those reported
in the consolidated financial statements.
Changes or differences in these estimates or assumptions may result in changes
to the current or future tax balances on the consolidated balance sheet, a
charge or credit to income tax expense in the consolidated statements of
earnings and may result in cash payments or receipts. Where appropriate, the
provision for future income taxes and future income taxes payable are adjusted
to reflect management's best estimate of the Company's future income tax
accounts.
RISKS AND UNCERTAINTIES
Strongco's financial performance is subject to certain risk factors which may
affect any or all of its business sectors. The following is a summary of risk
factors which are felt to be the most relevant. These risks and uncertainties
are not the only ones facing the Company. Additional risks and uncertainties not
currently known to the Company or which it currently considers immaterial, may
also impair its operations of the Company. If any such risks actually occur, the
business, financial condition, or liquidity and results of operations of the
Company, its ability to make cash dividends to shareholders and the trading
price of the Company's shares could be adversely affected.
BUSINESS AND ECONOMIC CYCLES
Strongco operates in a capital intensive environment. Strongco's customer base
consists of companies operating in the construction and urban infrastructure,
aggregates, forestry, mining, municipal, utility, industrial and resource
sectors which are all affected by trends in general economic conditions within
their respective markets. Changes in interest rates, commodity prices, exchange
rates, availability of capital and general economic prospects may all impact
their businesses by affecting levels of consumer, corporate and government
spending. Strongco's business and financial performance is largely affected by
the impact of such business cycle factors on its customer base. The Company has
endeavored to minimize this risk by: (i) operating in various geographic
territories across Canada with the belief that not all regions are subject to
the same economic factors at the same time, (ii) serving a variety of industries
which respond differently at different points in time to business cycles and
(iii) seeking to increase the Company's focus on customer support (parts and
service) activities which are less subject to changes in the economic cycle.
COMPETITION
Strongco faces strong competition from various distributors of products which
compete with the products it sells. The Company competes with regional and local
distributors of competing product lines. Strongco competes on the basis of: (i)
relationships maintained with customers over many years of service; (ii) prompt
customer service through a network of sales and service facilities in key
locations; (iii) access to products; and (iv) the quality and price of their
products. In most product lines in most geographic areas in which Strongco
operates, their main competitors are distributors of products manufactured by
Caterpillar, John Deere, Komatsu and Hitachi, and other smaller brands.
MANUFACTURER RISK
Most of Strongco's equipment distribution business consists of selling and
servicing mobile equipment products manufactured by others. As such, Strongco's
financial results may be directly impacted by: (i) the ability of the
manufacturers it represents to provide high quality, innovative and widely
accepted products on a timely and cost effective basis and (ii) the continued
independence and financial viability of such manufacturers.
Most of Strongco's equipment distribution business is governed by distribution
agreements with the original equipment manufacturers, including Volvo, Case and
Manitowoc. These agreements grant the right to distribute the manufacturers'
products within defined territories which typically cover an entire province. It
is an industry practice that, within a defined territory, a manufacturer grants
distribution rights to only one distributor. This is true of all the
distribution arrangements entered into by Strongco. Most distribution agreements
are cancelable upon 60 to 90 days notice by either party.
Some of the Strongco's equipment suppliers provide floor plan financing to
assist with the purchase of equipment inventory. In some cases this is done by
the manufacturer, and in other cases the manufacturer engages a third party
lender to provide the financing. Most floor plan arrangements include an
interest-free period of up to seven months.
The termination of one or more of Strongco's distribution agreements with its
original equipment manufacturers, as a result of a change in control of the
manufacturer or otherwise, may have a negative impact on the operations of
Strongco.
In addition, availability of products for sale is dependent upon the absence of
significant constraints on supply of products from original equipment
manufacturers. During times of intense demand or during any disruption of the
production of such equipment, Strongco's equipment manufacturers may find it
necessary to allocate their limited supply of particular products among their
distributors.
The ability of Strongco to maintain and expand its customer base is dependent
upon the ability of Strongco's suppliers to continuously improve and sustain the
high quality of their products at a reasonable cost. The quality and reputation
of their products is not within Strongco's control and there can be no assurance
that Strongco's suppliers will be successful in improving and sustaining the
quality of their products. The failure of Strongco's suppliers to maintain a
market presence could have a material impact upon the earnings of the Company.
The Company believes that this element of risk has been mitigated through the
representation of its equipment manufacturers with demonstrated ability to
produce a competitive, well accepted, high quality product range and by
distributing products of multiple manufacturers.
In addition, distribution agreements with these manufacturers are cancelable by
either party within a relatively short notice period as specified in the
relevant distribution agreement. However, Strongco believes that it has
established strong relationships with its key manufacturers and maintains
significant market share for their product and as a result is at little risk of
distribution agreements being cancelled.
CONTINGENCIES
In the ordinary course of business, the Company may be exposed to contingent
liabilities in varying amounts and for which provisions have been made in the
consolidated financial statements as appropriate. These liabilities could arise
from litigation, environmental matters or other sources.
A statement of claim has been filed naming a division of the Company as one of
several defendants in proceedings under the Superior Court of Quebec. The action
claims errors and omissions in the contractual execution of work entrusted to
the defendants and names the Company as jointly and severally liable for damages
of approximately $5.9 million. The Company's counsel has filed a statement of
defense and discoveries are underway. A trial date has not yet been set.
Although it is impossible to predict the outcome at this time, based on the
opinion of external legal counsel, the Company believes that they have a strong
defense against the claim and that it is without merit.
A statement of claim has been filed naming a former division of the Company as
one of several defendants in proceedings under the Court of Queen's Bench of
Manitoba. The action claims errors and omissions in the contractual execution of
work entrusted to the defendants and names the Company as jointly and severally
liable for damages of approximately $4.9 million. Although the outcome is
indeterminable at this early stage of the proceedings, the Company believes that
they have a strong defence against the claim and that it is without merit. The
Company's insurer has provided conditional coverage for this claim.
DEPENDENCE ON KEY PERSONNEL
The expertise and experience of its senior management is an important factor in
Strongco's success. Strongco's continued success is thus dependent on its
ability to attract and retain experienced management.
INFORMATION SYSTEMS
The Company utilizes a legacy business system which has been successfully in
operation for over 15 years. As with any business system, it is necessary to
evaluate its adequacy and support of current and future business demands. The
system was written and was supported by the Company's Information Systems
Manager who retired on December 31, 2006. The Company is utilizing an outside
consultant to support its current system and is currently evaluating alternative
systems as potential replacements for its current system.
FOREIGN EXCHANGE
While the majority of the Company's sales are in Canadian dollars, significant
portions of its purchases are in U.S. dollars. While the Company believes that
it can maintain margins over the long term, short, sharp fluctuations in
exchange rates may have a short term impact on earnings. In order to minimize
the exposure to fluctuations in exchange rates, the Company enters into foreign
exchange forward contracts on a transaction specific basis.
INTEREST RATE
Interest rate risk arises from potential changes in interest rates which impacts
the cost of borrowing. The majority of the Company's debt is floating rate debt
which exposes the Company to fluctuations in short term interest rates. See
discussion under "Cash Flow, Financial Resources and Liquidity" above.
RISKS RELATING TO THE SHARES
Unpredictability and Volatility of Share Price
A publicly-traded company will not necessarily trade at values determined by
reference to the underlying value of its business. The prices at which the
shares will trade cannot be predicted. The market price of the shares could be
subject to significant fluctuations in response to variations in quarterly
operating results and other factors. The annual yield on the shares as compared
to the annual yield on other financial instruments may also influence the price
of shares in the public trading markets. In addition, the securities markets
have experienced significant price and volume fluctuations from time to time in
recent years that often have been unrelated or disproportionate to the operating
performance of particular issuers. These broad fluctuations may adversely affect
the market price of the shares.
LEVERAGE AND RESTRICTIVE COVENANTS
The existing credit facilities contain restrictive covenants that limit the
discretion of Strongco's management with respect to certain business matters and
may, in certain circumstances, restrict the Company's ability to make dividends,
which could adversely impact cash dividends on the shares. These covenants place
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create other security interests, to complete
amalgamations and acquisitions, make capital expenditures, to pay dividends or
make certain other payments and guarantees and to sell or otherwise dispose of
assets. The existing credit facilities also contain financial covenants
requiring the Company to satisfy financial ratios and tests, (see discussion
under 'Financial Condition and Liquidity' above). A failure of the Company to
comply with its obligations under the existing credit facilities could result in
an event of default which, if not cured or waived, could permit the acceleration
of the relevant indebtedness. The existing credit facilities are secured by
customary security for transactions of this type, including first ranking
security over all present and future personal property of the Company, a
mortgage over the Company's central real property and an assignment of
insurance. If the Company is not able to meet its debt service obligations, it
risks the loss of some or all of its assets to foreclosure or sale. There can be
no assurance that, at any particular time, if the indebtedness under the
existing credit facilities were to be accelerated, the Company's assets would be
sufficient to repay in full that indebtedness.
The existing credit facilities are payable on demand following an event of
default and are renewable annually. If the existing credit facilities are
replaced by new debt that has less favourable terms or if the Company cannot
refinance its debt, funds available for operations may be adversely impacted.
RESTRICTIONS ON POTENTIAL GROWTH
The payout by the Company of a significant portion of its operating cash flow
will make additional capital and operating expenditures dependent on increased
cash flow or additional financing in the future. Lack of those funds could limit
the future growth of the Company and its cash flow.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure Controls
Management is responsible for establishing and maintaining disclosure controls
and procedures in order to provide reasonable assurance that material
information relating to the Company is made known to them in a timely manner and
that information required to be disclosed is reported within time periods
prescribed by applicable securities legislation. There are inherent limitations
to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention or overriding of
the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control
objectives. Based on management's evaluation of the design and effectiveness of
the Company's disclosure controls and procedures, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that these controls and
procedures are designed and operating effectively as of December 31, 2011 to
provide reasonable assurance that the information being disclosed is recorded,
summarized and reported as required.
Internal Controls Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal
controls over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Canadian generally accepted accounting
principles. Internal control systems, no matter how well designed, have inherent
limitations and therefore can only provide reasonable assurance as to the
effectiveness of internal controls over financial reporting, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Management used the Internal Control - Integrated Framework
published by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) as the control framework in designing its internal controls
over financial reporting. Based on management's design and testing of the
effectiveness of the Company's internal controls over financial reporting, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that these controls and procedures are designed and operating effectively as of
December 31, 2011 to provide reasonable assurance that the financial information
being reported is materially accurate. During the fourth quarter ended December
31, 2011, there have been no changes in the design of the Company's internal
controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, its internal controls over financial
reporting.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis contains forward-looking statements
that involve assumptions and estimates that may not be realized and other risks
and uncertainties. These statements relate to future events or future
performance and reflect management's current expectations and assumptions which
are based on information currently available to the Company's management. The
forward-looking statements include but are not limited to: (i) the ability of
the Company to meet contractual obligations through cash flow generated from
operations, (ii) the expectation that customer support revenues will grow
following the warranty period on new machine sales and (iii) the outlook for
2011. There is significant risk that forward-looking statements will not prove
to be accurate. These statements are based on a number of assumptions,
including, but not limited to, continued demand for Strongco's products and
services. A number of factors could cause actual events, performance or results
to differ materially from the events, performance and results discussed in the
forward looking statements. The inclusion of this information should not be
regarded as a representation of the Company or any other person that the
anticipated results will be achieved and investors are cautioned not to place
undue reliance on such information. These forward -looking statements are made
as of the date of this MD&A, or as otherwise stated and the Company does not
assume any obligation to update or revise them to reflect new events or
circumstances.
Additional information, including the Company's Annual Information Form, may be
found on SEDAR at www.sedar.com.
Strongco Corporation
Consolidated Financial Statements
December 31, 2011
Management's Responsibility for Financial Reporting
The accompanying audited consolidated financial statements of Strongco
Corporation ("the Company") were prepared by management in accordance with
International Financial Reporting Standards. Management acknowledges
responsibility for the preparation and presentation of the audited consolidated
financial statements, including responsibility for significant accounting
judgments and estimates and the choice of accounting principles and methods that
are appropriate to the Company's circumstances. The significant accounting
policies of the Company are summarized in note 2 to the audited consolidated
financial statements.
Management has established processes, which are in place to provide them with
sufficient knowledge to support management representations that they have
exercised reasonable diligence that: (i) the audited consolidated financial
statements do not contain any untrue statement of material fact or omit to state
a material fact required to be stated or that is necessary to make a statement
not misleading in light of the circumstances under which it is made, as of the
date of and for the years presented by the audited consolidated financial
statements; and (ii) the audited consolidated financial statements present
fairly in all material respects the financial position, financial performance
and cash flows of the Company, as of the date of and for the years presented by
the audited consolidated financial statements.
The Board of Directors is responsible for reviewing and approving the audited
consolidated financial statements together with other financial information of
the Company and for ensuring that management fulfills its financial reporting
responsibilities. An Audit Committee assists the Board of Directors in
fulfilling this responsibility. The Audit Committee meets with management to
review the financial reporting process and the audited consolidated financial
statements together with other financial information of the Company. The Audit
Committee reports its findings to the Board of Directors for its consideration
in approving the audited consolidated financial statements together with other
financial information of the Company for issuance to the shareholders.
Management recognizes its responsibility for conducting the Company's affairs in
compliance with established financial standards, and applicable laws and
regulations, and for maintaining proper standards of conduct for its activities.
(Signed) (Signed)
Robert H.R. Dryburgh J. David Wood
President and Chief Executive Officer Chief Financial Officer
March 21, 2012 March 21, 2012
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Strongco Corporation:
We have audited the accompanying consolidated financial statements of Strongco
Corporation, which comprise the consolidated statement of financial position as
at December 31, 2011 and 2010, and January 1, 2010, and the consolidated
statements of income (loss), comprehensive income (loss), changes in
shareholders' equity and cash flows for the years ended December 31, 2011 and
2010, and a summary of significant accounting policies and other explanatory
information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditors' responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards. Those standards require that we
comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditors' judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditors consider
internal control relevant to the entity's preparation and fair presentation of
the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Strongco Corporation as at December
31, 2011 and 2010, and January 1, 2010, and its financial performance and its
cash flows for the years ended December 31, 2011 and 2010 in accordance with
International Financial Reporting Standards.
Toronto, Canada Ernst & Young, LLP
March 21, 2012 Chartered Accountants
Licensed Public Accountants
Strongco Corporation
Consolidated Statement of Financial Position
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated)
----------------------------------------------------------------------------
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Assets
Current assets
Trade and other receivables (note
6) $ 42,759 $ 35,884 $ 27,088
Inventories (note 7) 210,128 159,988 144,461
Prepaid expenses and other
deposits 1,420 1,452 1,255
----------------------------------------------------------------------------
254,307 197,324 172,804
----------------------------------------------------------------------------
Non-current assets
Property and equipment (note 8) 31,278 15,849 15,949
Rental fleet (note 8) 15,564 - -
Deferred income tax asset (note
14) 1,541 - -
Intangible asset (note 9) 1,800 1,800 1,800
Other assets 146 188 243
----------------------------------------------------------------------------
50,329 17,837 17,992
----------------------------------------------------------------------------
Total assets $ 304,636 $ 215,161 $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and shareholders'
equity
Current liabilities
Bank indebtedness (note 13 (a)) $ 10,951 $ 12,370 $ 10,014
Trade and other payables (note 11) 34,986 28,829 19,648
Provision for other liabilities
(note 15) 1,198 1,436 1,366
Deferred revenue and customer
deposits 971 1,321 515
Equipment notes payable -
- non-interest bearing (note 12) 72,262 40,097 28,671
- interest bearing (note 12) 88,151 78,063 76,172
Current portion of finance lease
obligations (note 13 (b)) 2,110 959 954
Current portion of notes payable
(note 13 (c)) 6,242 1,233 1,094
----------------------------------------------------------------------------
216,871 164,308 138,434
----------------------------------------------------------------------------
Non-current liabilities
Deferred income tax liability
(note 14) 2,565 - -
Finance lease obligations (note 13
(b)) 3,291 1,502 1,154
Notes payable (note 13 (c)) 13,558 - 1,218
Employee future benefit
obligations (note 10) 11,760 4,374 4,455
----------------------------------------------------------------------------
31,174 5,876 6,827
----------------------------------------------------------------------------
Total liabilities 248,045 170,184 145,261
----------------------------------------------------------------------------
Contingencies, commitments and
guarantees (note 23)
Shareholders' equity
Shareholders' capital (note 16) 64,898 57,089 57,089
Accumulated other comprehensive
income 205 - -
Contributed surplus 498 315 -
Deficit (9,010) (12,427) (11,554)
----------------------------------------------------------------------------
Total shareholders' equity 56,591 44,977 45,535
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 304,636 $ 215,161 $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Approved by the Board of Directors
Robert J. Beutel, Director
Ian Sutherland, Director
Strongco Corporation
Consolidated Statement of Income (Loss)
For the years ended December 31
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated, except share
and per share amounts)
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Revenue (note 17) $ 423,153 $ 294,657
Cost of sales (note 19) 342,601 237,971
----------------------------------------------------------------------------
Gross profit 80,552 56,686
----------------------------------------------------------------------------
Expenses
Administration (notes 6, 10 and 19) 31,383 26,760
Distribution (note 19) 20,057 16,879
Selling (note 19) 13,302 9,896
Other income (note 18) (1,163) (740)
----------------------------------------------------------------------------
Operating income 16,973 3,891
----------------------------------------------------------------------------
Interest expense (note 20) 5,841 4,816
----------------------------------------------------------------------------
Interest expense 5,841 4,816
----------------------------------------------------------------------------
Income (loss) before income taxes 11,132 (925)
Provision for income taxes (note 14) 1,203 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) attributable to shareholders for
the period $ 9,929 $ (925)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per share (note 21)
Basic and diluted $ 0.76 $ (0.08)
----------------------------------------------------------------------------
Weighted average number of shares (note 21)
- basic 13,049,126 11,053,608
----------------------------------------------------------------------------
- diluted 13,088,968 11,053,608
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Consolidated Statement of Comprehensive Income (Loss)
For the years ended December 31
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated, except share
and per share amounts)
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Net income (loss) attributable to shareholders for
the year $ 9,929 $ (925)
Other comprehensive income (loss)
Actuarial gain (loss) on post-employment benefit
obligations (net of tax of $2,244) (6,512) 52
Currency translation adjustment 205 -
----------------------------------------------------------------------------
Comprehensive income (loss) attributable to
shareholders for the year $ 3,622 $ (873)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Consolidated Statement of Changes in Shareholders' Equity
For the years ended December 31, 2011
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated, except share
and per share amounts)
----------------------------------------------------------------------------
Accumulated
other
Number of Shareholders' comprehensive
units capital loss
----------------------------------------------------------------------------
Balance - January 1, 2010 10,508,719 $ 57,089 $ -
Net income (loss) for the
period - -
Other comprehensive loss
Post-employment benefit
obligations (net of tax) - -
Contributed surplus - -
----------------------------------------------------------------------------
Balance - December 31, 2010 10,508,719 $ 57,089 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed
Surplus Deficit Total
----------------------------------------------------------------------------
Balance - January 1, 2010 $ - $ (11,554) $ 45,535
Net income (loss) for the
period - (925) (925)
Other comprehensive loss
Post-employment benefit
obligations (net of tax) - 52 52
Contributed surplus 315 - 315
----------------------------------------------------------------------------
Balance - December 31, 2010 $ 315 $ (12,427) $ 44,977
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
other
Number of Shareholders' comprehensive
shares capital loss
----------------------------------------------------------------------------
Balance - December 31, 2010 10,508,719 $ 57,089 $ -
Net income for the period - -
Other comprehensive loss
Post-employment benefit
obligations (net of tax) - -
Currency translation
adjustment - 205
Issuance of shares (note 16) 2,620,000 7,809 -
Contributed surplus - -
----------------------------------------------------------------------------
Balance - December 31, 2011 13,128,719 $ 64,898 $ 205
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contributed
Surplus Deficit Total
----------------------------------------------------------------------------
Balance - December 31, 2010 $ 315 $ (12,427) $ 44,977
Net income for the period - 9,929 9,929
Other comprehensive loss
Post-employment benefit
obligations (net of tax) - (6,512) (6,512)
Currency translation
adjustment - - 205
Issuance of shares (note 16) - - 7,809
Contributed surplus 183 - 183
----------------------------------------------------------------------------
Balance - December 31, 2011 $ 498 $ (9,010) $ 56,591
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Consolidated Statement of Cash Flows
For the years ended December 31
----------------------------------------------------------------------------
(in thousands of Canadian dollars)
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) for the year $ 9,929 $ (925)
Adjustments for
Depreciation - property and equipment 2,975 2,085
Depreciation - equipment inventory on rent 20,668 18,211
Depreciation - rental fleet 2,447 -
Gain on disposal of property and equipment (40) (3)
Gain on sale of rental fleet (997) -
Contributed surplus 183 315
Interest expense 5,841 4,816
Income tax expense (recovery) 1,203 (1,040)
Deferred income tax asset (400) -
Deferred income tax liability (1,297) 1,040
Employee future benefit expense 3,883 1,437
Foreign exchange gain (10) -
Changes in working capital (note 28) (26,168) (19,349)
Funding of employee future benefit obligations (2,958) (1,466)
Interest paid (5,824) (4,770)
Income taxes paid (190) -
----------------------------------------------------------------------------
Net cash provided by operating activities $ 9,245 $ 351
----------------------------------------------------------------------------
Cash flows from investing activities
Business acquisition net of cash acquired (note 4) (9,248) -
Purchases of rental fleet (13,382) -
Proceeds from sale of rental fleet 8,349 -
Purchases of property and equipment (9,038) (336)
Proceeds from sale of property and equipment 40 74
----------------------------------------------------------------------------
Net cash used in investing activities $ (23,279) $ (262)
----------------------------------------------------------------------------
Cash flows from financing activities
Increase (decrease) in bank indebtedness (1,442) 2,356
Increase in long-term debt 12,063 171
Repayment of long-term debt (2,059) (1,250)
Repayment of finance lease obligations (1,738) (1,366)
Issue of share capital 7,809 -
Repayment of business acquisition purchase
financing (594) -
----------------------------------------------------------------------------
Net cash provided by financing activities $ 14,039 $ (89)
----------------------------------------------------------------------------
Foreign exchange on cash balances (5) -
----------------------------------------------------------------------------
Change in cash and cash equivalents during the
period $ - $ -
----------------------------------------------------------------------------
Cash and cash equivalents - Beginning of period - -
----------------------------------------------------------------------------
Cash and cash equivalents - End of period $ - $ -
----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
Strongco Corporation
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
----------------------------------------------------------------------------
(in thousands of Canadian dollars, unless otherwise indicated)
1. General information
Strongco Corporation ("Strongco" or "the Company") sells and rents new and used
equipment and provides after-sale product support (parts and service) to
customers that operate in infrastructure, construction, mining, oil and gas
exploration, forestry and industrial markets in Canada and the United States.
Prior to July 1, 2010, Strongco was an unincorporated, open-ended, limited
purpose trust operating under the name Strongco Income Fund ("the Fund"),
domiciled and established under the laws of the Province of Ontario pursuant to
a declaration of trust dated March 21, 2005, as amended and restated on April
28, 2005 and September 1, 2006.
On July 1, 2010, the Fund completed the conversion from an income trust to a
corporation (the "Conversion") through the incorporation of Strongco. Pursuant
to a plan of arrangement under the Business Corporations Act (Ontario), the
Company issued shares to the unitholders of the Fund in exchange for units of
the Fund on a one-for-one basis. The Company's Board of Directors and management
team are the former Board of Trustees and management team of the Fund.
Immediately subsequent to the Conversion, the Fund was wound up into the
Company. The Company has carried on the business of the Fund unchanged except
that the Company is subject to tax as a corporation. References to the Company
in these consolidated financial statements for periods prior to July 1, 2010,
refer to the Fund and for periods on or after July 1, 2010, refer to the
Company. Additionally, references to shares and shareholders of the Company are
comparable to units and unitholders previously under the Fund. The conversion
was accounted for as a continuity of interests. Transaction costs of $463
related to the conversion were expensed on conversion.
The Company is a public entity, incorporated and domiciled in Canada, and listed
on the Toronto Stock Exchange. The address of its registered office is 1640
Enterprise Road, Mississauga, Ontario L4W 4L4.
2. Summary of significant accounting policies
Statement of Compliance
The consolidated financial statements represent the first annual financial
statements of the Company prepared in accordance with International Financial
Reporting Standards ("IFRS") as issued by the International Accounting Standards
Board and are in compliance therewith. The Company adopted IFRS in accordance
with IFRS 1, "First-time Adoption of International Financial Reporting Standards
("IFRS 1") as discussed in Note 5.
The consolidated financial statements were approved and authorized for issue by
the board of directors on March 21, 2012. The principal accounting policies
applied in the preparation of these consolidated financial statements are set
out below.
Basis of presentation and adoption of International Financial Reporting Standards
The Company prepares its consolidated financial statements in accordance with
International Financial Reporting Standards ("IFRS"), as issued by the
International Accounting Standards ("IAS") Board. In these consolidated
financial statements, the term "Canadian GAAP" refers to Canadian generally
accepted accounting principles before the adoption of IFRS.
The consolidated financial statements of Strongco have been prepared by
management in accordance with IFRS and International Financial Reporting
Interpretations Committee ("IFRIC") Interpretations, including IFRS 1,
First-Time Adoption of IFRS. Subject to certain transition elections disclosed
in note 5, the Company has consistently applied the same accounting policies in
its opening IFRS consolidated statement of financial position as at January 1,
2010 and throughout all periods presented, as if these policies had always been
in effect. Note 5 discloses the impact of the transition to IFRS on the
Company's reported financial position, financial performance and cash flows,
including the nature and effect of significant changes in accounting policies
from those used in the Company's consolidated financial statements for the year
ended December 31, 2010. Comparative figures for 2010 in these consolidated
financial statements have been restated to give effect to these changes.
The consolidated financial statements have been prepared on a going concern
basis and the historical cost convention, as modified by the revaluation of
financial assets and liabilities at fair value.
Basis of consolidation
The consolidated financial statements include the financial statements of
Strongco and its subsidiaries as at December 31, 2011. Subsidiaries are fully
consolidated from the date of acquisition, being the date on which Strongco
gains control, and continue to be consolidated until the date when such control
ceases. All intercompany transactions, balances, unrealized gains and losses
from intercompany transactions and dividends are eliminated on consolidation.
Segment reporting
Operating segments are reported in a manner consistent with the internal
reporting provided to the chief operating decision maker. The chief operating
decision maker is the President and Chief Executive Officer and is responsible
for allocating resources, assessing performance of the operating segments and
making key strategic decisions. The Company has determined it has one operating
segment, Equipment Distribution, which is located in Canada and the United
States.
Revenue recognition
Revenue is recognized when there is a written arrangement in the form of a
contract or purchase order with the customer, a fixed or determinable sales
price is established with the customer, performance requirements are achieved,
ultimate collection of the revenue is reasonably assured and when specific
criteria have been met for each of the Company's activities as described below.
a) Revenue from equipment sales is recognized at the time title to the equipment
and significant risks of ownership passes to the customer, which is generally at
the time of shipment of the product to the customer. From time to time, the
Company agrees to buy back equipment from certain customers at the option of the
customer for a specified price at future dates. The Company's maximum potential
losses pursuant to the majority of these buy-back contracts are limited, under
an agreement with a third party, to 10% of the original sale amounts. These
transactions are accounted for as finance leases under IAS 17 - Leases. In
accordance with the standard, these types of transactions are accounted for as a
sale.
b) Revenue from equipment rentals is recognized in accordance with the terms of
the relevant agreement with the customer, either evenly over the term of that
agreement or on a usage basis such as the number of hours that the equipment is
used. Certain rental contracts contain an option for the customer to purchase
the equipment at the end of the rental period. Should the customer exercise this
option to purchase, revenue from the sale of the equipment is recognized as in
(a) above.
c) Product support services include sales of parts and servicing of equipment.
For the sale of parts, revenue is recognized when the part is shipped to the
customer. For servicing of equipment, revenue related to the service performed
and parts consumed is recognized as the service work is completed.
Foreign currency translation
a) Functional and presentational currency
The Company's consolidated financial statements are presented in Canadian
dollars, which is also the Company's functional currency.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of foreign currency transactions
and from the translation at year-end exchange rates of monetary assets and
liabilities denominated in currencies other than an operation's functional
currency are recognized as other income in the consolidated statement of income
(loss).
The financial statements of entities that have a functional currency different
from that of Strongco (foreign operations) are translated into Canadian dollars
as follows: assets and liabilities - at the closing rate at the date of the
consolidated statement of financial position; income and expenses - at the
average rate of the period (as this is considered a reasonable approximation to
actual rates). All resulting changes are recognized in other comprehensive
income (loss) as currency translation adjustments.
Employee benefit obligations
a) Pension obligations
Employees of the Company have entitlements under Company pension plans, which
are either defined contribution or defined benefit plans.
The liability recognized in the consolidated statement of financial position in
respect of defined benefit pension plans is the present value of the defined
benefit obligation at the end of the reporting period less the fair value of
plan assets, together with adjustments for unrecognized past-service costs. The
defined benefit obligation is calculated annually by independent actuaries using
the projected unit credit method. Actuarial valuations for defined benefit plans
are carried out annually. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using interest
rates of high-quality corporate bonds that are denominated in the currency in
which the benefits will be paid and that have terms to maturity approximating
the terms of the related pension liability.
Actuarial gains (losses) arise from the difference between the actual long-term
rate of return on plan assets for a period and the expected long-term rate of
return on plan assets for that period, and from changes in actuarial assumptions
used to determine the accrued benefit obligation. Actuarial gains and losses are
charged or credited to the statement of other comprehensive income (loss) in the
period in which they arise.
Past-service costs are recognized immediately within operating expenses in the
consolidated statement of income (loss), unless the changes to the pension plan
are conditional on the employees remaining in service for a specified period of
time (the vesting period). In this case, the past-service costs are amortized on
a straight-line basis over the vesting period.
For defined contribution plans, contributions are recognized as post-employment
benefit expense when they are due. Prepaid contributions are recognized as an
asset to the extent that a cash refund or a reduction in the future payments is
available.
b) Other employee future obligations
The Company also has other employee future obligations, including an unfunded
retiring allowance plan and a non-contributory dental and health-care plan. The
expected costs of these benefits are accrued over the period of employment using
the same accounting methodology as used for defined benefit pension plans. These
obligations are valued annually by independent qualified actuaries.
Contributed surplus
The Company operates an equity-settled, share-based compensation plan, under
which the Company receives services from employees as consideration for equity
instruments (options) of the Company. The options vest over a period of time.
The fair value of the services received in exchange for the grant of the options
is recognized as an expense. Awards under the share-based compensation plan are
made in tranches. Each tranche is considered a separate award with its own
vesting period and grant date value. The fair value of each tranche is measured
at the date of grant using the Black-Scholes option pricing model. The expense
is recognized over the tranche's vesting period based on the number of awards
expected to vest, by increasing contributed surplus, a component within
shareholders' equity. The number of awards expected to vest is reviewed at least
annually, with any impact being recognized immediately. For expired and
cancelled options, contributed surplus expense is not reversed and the related
credit remains in contributed surplus. When options are exercised, the Company
issues new shares. The proceeds received are credited to shareholders' capital,
together with the related amounts previously added to contributed surplus.
Shareholders' capital
Shareholders' capital is classified as equity. Incremental costs directly
attributable to the issue of new shares or options are shown in equity as a
deduction from proceeds.
Inventories
Inventories are recorded at the lower of cost and net realizable value. The cost
of equipment inventories is determined on a specific item basis. The cost of
parts is determined on a weighted average cost basis. Net realizable value is
the estimated selling price in the ordinary course of business, less applicable
selling expenses. Equipment inventory on rent is amortized based on expected
usage during the rental period, which is generally at a rate of 60% of rental
revenue, which approximates the usage.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation and any
impairment. Cost includes expenditures that are directly attributable to the
acquisition of the assets. When parts of an item of property and equipment have
different useful lives, they are accounted for as separate items (major
components) of property and equipment and each component is depreciated
separately. Subsequent costs are included in the asset's carrying amount or
recognized as a separate asset, as appropriate, only when it is probable that
future economic benefits associated with the item will flow to the Company and
the cost can be measured reliably. Repairs and maintenance costs are charged to
operating expenses in the consolidated statement of income (loss) during the
period in which they are incurred. Assets' residual values, useful lives and
methods of depreciation are reviewed, and adjusted, if appropriate, at each
financial period -end. Land is not depreciated. Depreciation is provided on
other assets at rates that approximate the estimated useful life on a
diminishing balance method as follows:
Buildings 3% to 5%
Machinery and equipment 10% to 30%
Vehicles 25% to 30%
Computer equipment 30%
Computer equipment under capital lease and leasehold improvements are amortized
on a straight-line basis over the remaining term of the lease.
An asset's carrying amount is immediately written down to its recoverable amount
if the asset's carrying amount is greater than its estimated fair value. Gains
and losses on disposal are determined by comparing the proceeds with the
carrying amount and are recognized within operating expenses in the consolidated
statement of income (loss).
Rental fleet
The Company's rental fleet is stated at cost, less accumulated depreciation. For
financial statement purposes, depreciation is computed on a percentage of rent
basis, generally at a rate of 60% of rental revenue, which approximates the
usage. Cost includes expenditures that are directly attributable to the
acquisition of the assets, as well as charges that increase the useful life of
the asset. Routine repair and maintenance costs are charged to operating
expenses in the consolidated statement of income (loss) during the period in
which they are incurred.
Intangible asset
The intangible asset is comprised of a distribution right acquired in a business
combination that was recognized at fair value at the acquisition date. The
distribution right has an indefinite life and is not subject to amortization but
is subject to an annual review for impairment, or more frequently if events or
changes in circumstances indicate that the asset may be impaired.
Borrowing costs
Borrowing costs attributable to the acquisition, construction or production of
qualifying assets are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use. All other borrowing costs
are recognized as interest expense in the consolidated statement of income
(loss) in the period in which they are incurred.
Income taxes
The provision for (recovery of) income taxes for the period comprises current
and deferred income taxes. Income taxes are recognized as an expense in the
consolidated statement of income (loss), except to the extent that it relates to
items recognized in other comprehensive income (loss) or directly in equity. For
items recognized in other comprehensive income (loss) or directly in equity, any
applicable income taxes are also recognized in other comprehensive income (loss)
or directly in equity.
The current income tax charge is calculated on the basis of the tax laws enacted
or substantively enacted at the consolidated statement of financial position
date. Management periodically evaluates positions taken in tax returns with
respect to situations in which applicable tax regulation is subject to
interpretation. It establishes provisions, where appropriate, on the basis of
amounts expected to be paid to the tax authorities.
Deferred income tax is recognized, using the liability method, on temporary
differences arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. However, deferred
income tax is not accounted for if it arises from initial recognition of an
asset or liability in a transaction other than a business combination that, at
the time of the transaction, affects neither accounting nor taxable profit or
loss. Deferred income tax is determined using tax rates and laws that have been
enacted or substantively enacted by the consolidated statement of financial
position date and that are expected to apply when the related deferred income
tax asset is realized or the deferred income tax liability is settled.
Deferred income tax assets are recognized only to the extent it is probable that
future taxable profit will be available against which the temporary differences
can be utilized.
Deferred income tax is provided on temporary differences arising on investments
in subsidiaries and associates, except where the timing of the reversal of the
temporary difference is controlled by the Company and it is probable that the
temporary difference will not reverse in the foreseeable future.
Deferred income tax assets and liabilities are offset when there is a legally
enforceable right to offset current tax assets against current tax liabilities
and when the deferred income tax assets and liabilities relate to income taxes
levied by the same taxation authority on either the taxable entity or different
taxable entities where there is an intention to settle the balances on a net
basis.
For the period from January 1, 2010 to June 30, 2010, Strongco operated as an
income trust and, under the terms of the Income Tax Act (Canada), was not
subject to income taxes to the extent that its taxable income in a period was
paid or payable to unitholders. Strongco distributed to its unitholders all or
virtually all of its taxable income and taxable capital gains that would
otherwise have been taxable in the Company and met the requirements under the
Income Tax Act (Canada) applicable to such trusts. Accordingly, no provision for
current income taxes for the Company was made during this period.
Deferred income tax assets and liabilities are presented as non-current.
Provisions
Provisions for restructuring costs, legal claims, equipment buybacks and certain
other obligations are recognized when the Company has a present legal or
constructive obligation as a result of past events; it is probable that an
outflow of resources will be required to settle the obligation; and the amount
can be reliably estimated.
Equipment notes payable
Equipment notes payable are used to finance the purchase of equipment inventory.
The equipment notes payable are recognized initially at fair value and are
subsequently measured at amortized cost; any difference between the proceeds and
redemption value is recognized as interest expense in the consolidated statement
of income (loss) over the term of the equipment notes payable using the
effective interest rate method.
Debt
Debt comprises bank indebtedness under the Company's operating line of credit,
finance lease obligations and notes payable. Debt is recognized initially at
fair value, net of transaction costs incurred. Debt is subsequently measured at
amortized cost Any difference between the proceeds and redemption value is
recognized as interest expense in the consolidated statement of income (loss)
over the term of the borrowings using the effective interest rate method.
Impairment of non-financial assets
Property and equipment and the Company's rental fleet are tested for impairment
when events or changes in circumstances indicate that the carrying amount may
not be recoverable. Long-lived assets that are not amortized, comprising the
Company's distribution right intangible asset, are subject to an annual
impairment test. For the purpose of measuring recoverable amounts, assets are
grouped into the lowest levels for which there are separately identifiable cash
inflows ("cash-generating units" or "CGUs"). The recoverable amount is the
higher of an asset's fair value less costs to sell and value in use (being the
present value of the expected future cash flows of the relevant asset or CGU).
An impairment loss is recognized for the amount by which the asset's carrying
amount exceeds its recoverable amount.
The Company evaluates potential reversals on previously recorded impairment
losses when events or circumstances warrant such consideration.
Leases
Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) are charged to
operating expenses in the consolidated statement of income (loss) on a
straight-line basis over the period of the lease.
Leases of property and equipment, where the Company has substantially all the
risks and rewards of ownership, are classified as finance leases. Finance leases
are capitalized at the lease commencement date at the lower of the fair value of
the leased asset and the present value of the minimum lease payments.
Finance lease payments are allocated between their liability and finance
components so as to achieve a constant rate on their outstanding obligations.
The interest element of the finance cost is charged to the consolidated
statement of income (loss) over the lease period so as to produce a constant
periodic rate of interest on the remaining balance of the liability for each
period. The property and equipment acquired under finance leases are depreciated
over the shorter of the useful life of the asset and the lease term.
Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party
to the contractual provisions of the instrument. Financial assets are
derecognized when the rights to receive cash flows from the assets have expired
or have been transferred and the Company has transferred substantially all risks
and rewards of ownership.
Financial assets and liabilities are offset and the net amount reported in the
consolidated statement of financial position when there is a legally enforceable
right to offset the recognized amounts and there is an intention to settle on a
net basis, or realize the asset and settle the liability simultaneously.
At initial recognition, the Company classifies its financial instruments in the
following categories depending on the purpose for which the instruments were
acquired:
i) Financial assets and liabilities at fair value through profit or loss: a
financial asset or liability is classified in this category if acquired
principally for the purpose of selling or repurchasing in the short-term.
Derivatives are also included in this category unless they are designated as
hedges. The only instruments held by the Company classified in this category are
foreign currency forward contracts and interest rate swaps.
Financial instruments in this category are recognized initially and subsequently
at fair value. Transaction costs are recorded as an expense in the consolidated
statement of income (loss). Gains and losses arising from changes in fair value
are presented in the consolidated statement of income (loss) within other income
in the period in which they arise. Financial assets and liabilities at fair
value through profit or loss are classified as current except for the portion
expected to be realized or paid beyond 12 months of the consolidated statement
of financial position date, which is classified as non-current.
ii) Loans and receivables: loans and receivables are non-derivative financial
assets with fixed or determinable payments that are not quoted in an active
market. The Company's loans and receivables are comprised of trade and other
receivables, and are included in current assets due to their short-term nature.
Loans and receivables are initially recognized at the amount expected to be
received less, when material, a discount to reduce the loans and receivables to
fair value. Subsequently, loans and receivables are measured at amortized cost
using the effective interest method less a provision for impairment.
iii) Financial liabilities at amortized cost: financial liabilities at amortized
cost include bank indebtedness, trade and other payables, provisions, income
taxes payable, interest bearing and non-interest bearing equipment notes
payable, finance lease obligations and notes payable.
iv) Derivative financial instruments: the Company uses derivatives in the form
of foreign currency forward contracts to reduce the impact of currency
fluctuations on the cost of equipment ordered for future delivery to customers.
The Company also uses interest rate swaps to reduce the impact of interest rate
fluctuations on their borrowings. Derivatives have been classified as
held-for-trading and are included in the balance within trade and other
payables.
Impairment of financial assets
The Company assesses at the end of each reporting period whether there is
objective evidence that a financial asset or group of financial assets is
impaired. A financial asset or a group of financial assets is impaired and
impairment losses are incurred only if there is objective evidence of impairment
as a result of one or more loss events that occurred after the initial
recognition of the asset, and that loss event, or events, has an impact on the
estimated future cash flows of the financial asset or group of financial assets
that can be reliably estimated.
The amount of the loss is measured as the difference between the asset's
carrying amount and the present value of estimated future cash flows, excluding
future credit losses that have not been incurred, discounted at the financial
asset's original effective interest rate. The carrying amount of the asset is
reduced and the amount of the loss is recognized within operating expenses in
the consolidated statement of income (loss).
If, in a subsequent period, the amount of the impairment loss decreases and the
decrease can be related objectively to an event occurring after the impairment
was recognized, such as an improvement in a customer's credit rating, the
reversal of the previously recognized impairment loss is recognized as a
reduction in expense in the consolidated statement of income (loss).
Earnings (loss) per share
Basic earnings (loss) per share ("EPS") is calculated by dividing the net income
(loss) for the period attributable to shareholders of Strongco by the weighted
average number of common shares outstanding during the period.
Diluted EPS is calculated by adjusting the weighted average number of common
shares outstanding for dilutive instruments. The number of shares included with
respect to options, warrants and similar instruments is computed using the
treasury stock method. Strongco's potentially dilutive common shares comprise
options granted to employees.
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 include
additional disclosure requirements in the reporting of transfer transactions and
risk exposures relating to transfers of financial assets and the effect of those
risks on an entity's financial position, particularly those involving
securitization of financial assets. The amendment is applicable for annual
periods beginning on or after July 1, 2011, with earlier application permitted.
IFRS 9, Financial Instruments, was issued in November 2009 and contains
requirements for financial assets. This standard addresses classification and
measurement of financial assets and replaces the multiple category and
measurement models in IAS 39, Financial Instruments - Recognition and
Measurement ("IAS 39"), for debt instruments with a new mixed measurement model
having only two categories: amortized cost and fair value through profit or
loss. IFRS 9 also replaces the models for measuring equity instruments and such
instruments are either recognized at fair value through profit or loss, or at
fair value through comprehensive income (loss), dividends are recognized in
income in the consolidated statement of comprehensive income (loss); however,
other gains and losses (including impairments) associated with such instruments
remain in accumulated other comprehensive income (loss) indefinitely.
Requirements for financial liabilities were added in October 2010 and they
largely carried forward existing requirements in IAS 39 except that fair value
changes due to credit risk for liabilities designated at fair value through
profit or loss would generally be recorded in the consolidated statement of
comprehensive income (loss).
IFRS 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 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 consolidated financial statements. The
Company bases its estimates and assumptions on past experience and various other
assumptions that are believed to be reasonable in the circumstances. This
involves varying degrees of judgment and uncertainty, which may result in a
difference in actual results from these estimates. The more significant
estimates are as follows:
Allowance for doubtful accounts
The Company performs credit evaluations of customers and limits the amount of
credit extended to customers as appropriate. The Company is, however, exposed to
credit risk with respect to trade receivables and maintains provisions for
possible credit losses based upon historical experience and known circumstances.
The allowance for doubtful accounts as at December 31, 2011 with changes from
January 1, 2011 is disclosed in note 6.
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.
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. The key assumptions used to determine the recoverable amount for the
different CGUs, including a sensitivity analysis, are further explained in note
9.
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 consolidated financial statements.
Changes or differences in these estimates or assumptions may result in changes
to the current or deferred income tax balance on the consolidated statement of
financial position and a charge or credit to income tax expense in the
consolidated statement of income (loss), and may result in cash payments or
receipts. Where appropriate, the provisions for deferred income taxes and
deferred income taxes payable are adjusted to reflect management's best estimate
of the Company's income tax accounts.
Judgment is also required in determining whether deferred income tax assets are
recognized on the consolidated statement of financial position. Deferred income
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 income tax
assets. Estimates of future taxable income are based on forecast cash flows from
operations and the application of existing tax laws in each jurisdiction. To the
extent that future cash flows and taxable income differ significantly from
estimates, the ability of the Company to realize the net deferred income 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. Additional information is disclosed in note 10.
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. The assumptions and models used for estimating fair value for share-based
payment transactions are disclosed in note 22.
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 equipment dealer headquartered in Westbrook, Maine, with
three branches in Maine and one in each of New Hampshire and Massachusetts. CBR
sells, rents and services equipment used in sectors such as construction,
infrastructure, utilities, municipalities, waste management and forestry. CBR
represents such brands as Volvo, Terex Finlay and Link-Belt, as well as many
others.
The acquisition of all of the issued and outstanding shares of CBR was completed
for a purchase price of US$11.1 million, net of US$0.4 million in cash acquired.
The purchase price was satisfied with cash of US$9.2 million and three
promissory notes totalling US$1.9 million. The three promissory notes mature on
February 17, 2013 and bear interest at the US Prime rate. Principal payments of
US$0.2 million are made quarterly commencing on May 17, 2011. Costs of $0.4
million related to the acquisition were expensed as period costs within
operating expenses in the consolidated statement of income (loss) for the year
ended December 31, 2011.
The acquisition date fair value for each major class of asset acquired and
liabilities assumed:
----------------------------------------------------------------------------
(in thousands of Canadian dollars)
----------------------------------------------------------------------------
Trade and other receivables $ 4,388
Inventories 9,960
Property 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 year ended December 31, 2011, effective February 17, 2011.
Revenues of $46.6 million and net income of $1.2 million for CBR have been
included in the Company's consolidated statement of income (loss) for the year
ended December 31, 2011.
Had the results of CBR been incorporated into the Company's consolidated
statement of comprehensive income (loss) as though the acquisition had been
completed on January 1, 2011, the revenue and net income of the combined entity
for 2011 would have been $426.2 million and $9.5 million, respectively.
5. Transition to IFRS
The date of transition to IFRS for the Company was January 1, 2010. IFRS 1 sets
forth guidance for the initial adoption of IFRS. IFRS 1 requires first-time
adopters to retrospectively apply all effective IFRS standards as of the
transition date, except that IFRS 1 also provides for certain optional
exemptions and certain mandatory exceptions to the general requirements of
retrospective application. The effect of the Company's transition to IFRS is
summarized in this note as follows:
i) Optional exemptions and mandatory exceptions;
ii) Reconciliation of shareholders' equity and comprehensive income (loss) as
previously reported under Canadian GAAP to IFRS; and
iii) Adjustments to the consolidated statement of cash flows;
i) Optional exemptions
The Company has applied the optional exemptions to full retrospective
application of IFRS for employee future benefits - treatment of actuarial gains
and losses and business combinations. A description of the exemptions and impact
to the Company is further described in (ii) below.
Mandatory exceptions
The Company has complied with all mandatory exceptions to full retrospective
application of IFRS. The estimates previously made by the Company under Canadian
GAAP were not revised for application of IFRS.
ii) Reconciliation of shareholders' equity and comprehensive income (loss) as
previously reported under Canadian GAAP to IFRS
----------------------------------------------------------------------------
As at December 31, 2010
----------------------------------------------------------------------------
Canadian
GAAP Adjustment Note IFRS
----------------------------------------------------------------------------
Assets
Current assets
Trade and other
receivables $ 35,884 $ - $ 35,884
Inventories 159,988 - 159,988
Prepaid expenses and
other deposits 1,452 - 1,452
----------------------------------------------------------------------------
197,324 - 197,324
----------------------------------------------------------------------------
Non-current assets
Property and equipment 13,768 2,081 f) 15,849
Intangible assets 1,800 - 1,800
Accrued benefit asset 6,275 (6,275) a) -
Other assets 188 - 188
----------------------------------------------------------------------------
22,031 (4,194) 17,837
----------------------------------------------------------------------------
Total assets $ 219,355 $ (4,194) $ 215,161
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
shareholders' equity
Current liabilities
Bank indebtedness $ 12,370 $ - $ 12,370
Trade and other
payables 30,265 (1,436) b) 28,829
Provision for other
liabilities - 1,436 b) 1,436
Deferred revenue and
customer deposits 1,321 - 1,321
Equipment notes
payable 118,160 - 118,160
Current portion of
finance lease
obligations 173 786 f) 959
Current portion of
notes payable 1,233 - 1,233
----------------------------------------------------------------------------
163,522 786 164,308
----------------------------------------------------------------------------
Non-current
liabilities
Deferred income tax
liabilities 389 (389) d) -
Finance lease
obligations 114 1,388 f) 1,502
Employee future
benefit obligations 819 3,555 a) 4,374
----------------------------------------------------------------------------
1,322 4,554 5,876
----------------------------------------------------------------------------
Total liabilities 164,844 5,340 170,184
----------------------------------------------------------------------------
Shareholders' equity
Shareholders' capital 57,089 - 57,089
Accumulated other
comprehensive income - - a) -
Deferred compensation 360 (45) c) 315
Deficit (2,938) (9,489) a), c), d), f) (12,427)
----------------------------------------------------------------------------
Total shareholders'
equity 54,511 (9,534) 44,977
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 219,355 $ (4,194) $ 215,161
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at January 1, 2010
----------------------------------------------------------------------------
Canadian
GAAP Adjustment Note IFRS
----------------------------------------------------------------------------
Assets
Current assets
Trade and other
receivables $ 27,088 $ - $ 27,088
Inventories 144,461 - 144,461
Prepaid expenses and
other deposits 1,255 - 1,255
----------------------------------------------------------------------------
172,804 - 172,804
----------------------------------------------------------------------------
Non-current assets
Property and equipment 14,133 1,816 f) 15,949
Intangible assets 1,800 - 1,800
Accrued benefit asset 6,607 (6,607) a) -
Other assets 243 - 243
----------------------------------------------------------------------------
22,783 (4,791) 17,992
----------------------------------------------------------------------------
Total assets $ 195,587 $ (4,791) $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
shareholders' equity
Current liabilities
Bank indebtedness $ 10,014 $ - $ 10,014
Trade and other
payables 20,866 (1,218) b) 19,648
Provision for other
liabilities 1,366 b) 1,366
Deferred revenue and
customer deposits 515 - 515
Equipment notes
payable 104,843 - 104,843
Current portion of
finance lease
obligations 92 862 f) 954
Current portion of
notes payable 1,094 - 1,094
----------------------------------------------------------------------------
137,424 1,010 138,434
----------------------------------------------------------------------------
Non-current
liabilities
Deferred income tax
liabilities 1,424 (1,424) d) -
Notes payable 1,218 - 1,218
Finance lease
obligations 104 1,050 f) 1,154
Employee future
benefit obligations 769 3,686 a) 4,455
----------------------------------------------------------------------------
3,515 3,312 6,827
----------------------------------------------------------------------------
Total liabilities 140,939 4,322 145,261
----------------------------------------------------------------------------
Shareholders' equity
Shareholders' capital 57,089 - 57,089
Accumulated other
comprehensive income - - -
Deferred compensation 80 (80) c) -
Deficit (2,521) (9,033) a), c), d), f) (11,554)
----------------------------------------------------------------------------
Total shareholders'
equity 54,648 (9,113) 45,535
----------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 195,587 $ (4,791) $ 190,796
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year ended December 31, 2010
----------------------------------------------------------------------------
Canadian
GAAP Adjustment Note IFRS
----------------------------------------------------------------------------
Revenue $ 294,657 $ - $ 294,657
Cost of sales 237,971 - 237,971
----------------------------------------------------------------------------
Gross Profit 56,686 - 56,686
----------------------------------------------------------------------------
Expenses
Administration 27,292 (532) a), c), g) 26,760
Distribution 16,879 - g) 16,879
Selling 9,896 - g) 9,896
Other income (740) - (740)
----------------------------------------------------------------------------
Expenses 53,327 (532) 52,795
----------------------------------------------------------------------------
Operating income $ 3,359 $ 532 $ 3,891
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest expense $ 4,816 $ - $ 4,816
----------------------------------------------------------------------------
Loss before taxes (1,457) 532 (925)
Provision for income
taxes (1,040) 1,040 d) -
----------------------------------------------------------------------------
Net loss attributable
to shareholders (417) (508) (925)
----------------------------------------------------------------------------
Other comprehensive
income
Post-employment
benefit obligations - 52 d) 52
----------------------------------------------------------------------------
Comprehensive loss
attributable to
shareholders $ (417) $ (456) $ (873)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanatory notes
a) Employee future benefits
In accordance with the IFRS transitional provisions, the Company has chosen to
recognize unamortized actuarial gains and losses arising from the re-measurement
of employee future benefit obligations as an adjustment to retained earnings as
at January 1, 2010. Under Canadian GAAP, the Company applied the corridor method
of accounting for such gains and losses. Under this method, gains and losses are
recognized only if they exceed specified thresholds and are amortized over the
expected average remaining service life of active employees. The carrying value
of the net asset for employee future benefit obligations at January 1, 2010 is
lower by $8,791 ($4,712 after tax) and at December 31, 2010 is lower by $9,733
($7,239 after tax) under IFRS as a result of the Company's decision to recognize
unamortized net actuarial losses as at January 1, 2010.
Under IFRS, the Company recognizes actuarial gains and losses arising from the
re-measurement of employee future benefit obligations in other comprehensive
income (loss) as they arise. The Company has reflected a decrease in expense
associated with its defined benefit employee benefit plans under IFRS of $411
($306 after tax) for the year ended December 31, 2010.
In addition, on January 1, 2010, the Company completed the calculation with
respect to the limitation of the defined benefit asset under IFRIC 14, The Limit
on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction,
and recorded a liability of $1,503 ($1,118 after tax) as at January 1, 2010. As
at December 31, 2010, the liability decreased to $97 ($72 after tax).
The Company recognized actuarial losses of $1,354 and a reduction in the IFRIC
14 liability of $1,406 through other comprehensive income (loss) for the year
ended December 31, 2010 in accordance with the Company's policy decision under
IFRS.
b) Provisions
The Company reclassified liabilities related to equipment buybacks, legal
matters and certain other items totalling $1,218 at January 1, 2010 and $1,436
at December 31, 2010 from trade and other payables to provisions.
c) Stock-based compensation
Under IFRS, the Company recognizes the cost of employee share options over the
vesting period using the graded method of amortization rather than the
straight-line method, which was the Company's policy under Canadian GAAP. In
addition, under IFRS the recognition of compensation expense can occur prior to
the grant date when services have commenced whereas under Canadian GAAP,
compensation expense is not recognized prior to the grant date. Further, the
Company adjusted for forfeitures under Canadian GAAP as they occurred where IFRS
requires an estimate of the forfeitures on initial recognition.
These changes increased provisions and reduced retained earnings at January 1,
2010 by $68. In addition, these changes decreased share-based compensation
expense and contributed surplus by $114 for the year ended December 31, 2010.
Pursuant to the guidance under IAS 32, Financial Instruments: Preparation, the
Fund units, which were outstanding in the comparative period from January 1,
2010 to June 30, 2010 while the Company operated as an income trust, are only
allowed to be classified as equity for the purpose of assessing the
classification under this standard. Consequently, the share options issued under
the Company's equity incentive plan were not accounted for in accordance with
IFRS 2, Share-based Payments, and as a result, the Company had reclassified
compensation expense of $80 at January 1, 2010 from contributed surplus to
provisions. With the Company's conversion to a corporation on July 1, 2010, the
Company reclassified these amounts to contributed surplus.
d) Deferred income taxes
Deferred income tax liabilities have been adjusted as follows:
i) As at January 1, 2010 and for the six-month period ended June 30, 2010,
Strongco operated as an income trust that qualified for special tax treatment
permitting a tax deduction by the trust for distributions paid to the trust's
unitholders. The change in tax legislation in 2007 effectively imposed an income
tax for income trusts for taxation years beginning in 2011. As a result,
Strongco had recorded future income taxes under Canadian GAAP during this period
using the enacted (or substantively enacted) income tax rates that, at the
consolidated statement of financial position date, were expected to apply when
the temporary differences reverse in years 2011 and beyond.
Although IFRS recognizes that in some jurisdictions income taxes may be payable
at a higher or lower rate or be refundable or payable if part, or all, of the
net profit or retained earnings is paid out as a dividend to shareholders of the
entity, there is a general requirement that income taxes be measured at the tax
rate applicable to undistributed profits. As a result, deferred income taxes
were re -measured at the tax rate of approximately 46.4% applicable to
undistributed profits, which resulted in an increase to the Company's deferred
income tax liability of $1,247 at January 1, 2010. The deferred income taxes
were subsequently re-measured at the applicable corporate rates effective July
1, 2010, the date the Company converted to a corporation. This resulted in an
adjustment to the deferred income tax balance with a corresponding adjustment to
deferred income tax expense.
ii) In addition, following the adjustments made to the opening balance at
January 1, 2010 on the adoption of IFRS the Company assessed the recoverability
of its deferred income tax asset and determined that it did not meet the
recognition criteria under IAS 12, Income Taxes. As a result, the Company
recorded an adjustment to reduce the deferred income tax assets to $nil on
January 1, 2010 and December 31, 2010.
The above adjustments and the impact on the deferred income tax asset and
expense related to the IFRIC 14 adjustment itemized in a) above increased income
tax expense recognized in the consolidated statement of income (loss) by $1,040
for the year ended December 31, 2010.
e) In accordance with the IFRS transitional provisions, the Company elected not
to apply IFRS 3, Business Combinations retrospectively to business combinations
that occurred before the date of transition to IFRS. As such, Canadian GAAP
balances relating to business combinations entered into before the date of
transition have been carried forward without adjustment.
f) It was determined that certain vehicle and equipment leases that were
accounted for as operating leases met the criteria of a finance lease. This
resulted in an increase of $1,816 to property and equipment and $1,912 to
finance lease obligations at January 1, 2010 and $2,081 to property and
equipment and $2,175 to finance lease obligations at December 31, 2010. This
also resulted in a reclassification of lease costs from rent expense to
depreciation expense and interest expense. The net impact on the consolidated
statement of income (loss) was not significant.
g) Pursuant to the guidance under IAS 1, Presentation of Financial Statements,
the Company has presented expenses by function and accordingly has reclassified
administration, distribution and selling expenses under Canadian GAAP to its
respective function under IFRS.
iii) Adjustments to the consolidated statement of cash flows
The transition from Canadian GAAP to IFRS had no significant impact on cash
flows generated by the Company, except that cash flows related to interest are
classified as financing activities. Under Canadian GAAP, cash flows relating to
interest payments were classified as operating activities.
6. Trade and other receivables
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Trade receivables $ 39,656 $ 33,517 $ 24,329
Less: Provision for impairment of
trade receivables 1,774 1,196 1,362
----------------------------------------------------------------------------
Trade receivables, net $ 37,882 $ 32,321 $ 22,967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other receivables 4,877 3,563 4,121
----------------------------------------------------------------------------
Total trade and other receivables $ 42,759 $ 35,884 $ 27,088
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Due to their short term nature, the fair value of trade and other receivables is
not materially different from their carrying value.
As at December 31, 2011, trade receivables of $14,485 (December 31, 2010 -
$9,002) were past due but not impaired. These relate to a number of customers
for whom there is no recent history of default. The aging of these receivables
is as follows:
----------------------------------------------------------------------------
As at December 31 2011 2010
----------------------------------------------------------------------------
Up to 3 months $ 13,493 $ 8,496
3 to 6 months 860 441
Over 6 months 132 65
----------------------------------------------------------------------------
$ 14,485 $ 9,002
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at December 31, 2011, trade receivables of $4,288 (2010 - $1,855) were
impaired. The amount of provision was $1,774 as at December 31, 2011 (December
31, 2010 - $1,196). The individually impaired receivables mainly relate to parts
and service invoices. It was assessed that a portion of the receivables is
expected to be recovered. The aging of these receivables is as follows:
----------------------------------------------------------------------------
As at December 31 2011 2010
----------------------------------------------------------------------------
Up to 3 months $ 2,429 $ 334
3 to 6 months 69 277
Over 6 months 1,790 1,244
----------------------------------------------------------------------------
$ 4,288 $ 1,855
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Movements on the Company's provision for impairment of trade receivables are as
follows:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
As at January 1 $ 1,196 $ 1,362
Provision related to business acquisition 273 -
Provisions for impairment 461 402
Amounts written off as uncollectible (156) (568)
----------------------------------------------------------------------------
As at December 31 $ 1,774 $ 1,196
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The provision for impaired receivables is recognized in the consolidated
statement of income (loss) within administrative expenses in the period of
provision. When a balance is considered uncollectible, it is written off against
the provision. Subsequent recoveries of amounts previously written off are
credited to administrative expenses in the consolidated statement of income
(loss).
Other receivables within trade and other receivables do not contain impaired
amounts.
The maximum exposure to credit risk at the reporting date is the carrying value
of each class of receivable mentioned above. The Company does not hold any
collateral as security.
7. Inventories
Inventory components as at December 31 (net of writedowns and provisions) are as
follows:
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Equipment $ 185,335 $ 142,080 $ 124,518
Parts 21,148 15,401 17,679
Work-in-process 3,645 2,507 2,264
----------------------------------------------------------------------------
$ 210,128 $ 159,988 $ 144,461
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The value of the Company's new and used equipment is evaluated by management
throughout each year. Where appropriate, a write-down is recorded against the
book value of specific pieces of equipment to ensure that inventory values
reflect the lower of cost or estimated net realizable value. For the year ended
December 31, 2011, the Company recorded $1,256 of equipment write-downs
(December 31, 2010 - $440).
Throughout the year, Company management identifies slow-moving or obsolete parts
inventory and estimates appropriate obsolescence provisions by aging the
inventory. The changes in the inventory provision as at December 31, 2011 and
December 31, 2010 are as follows:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Inventory obsolescence as at January 1 $ 3,045 $ 3,139
Provision related to business acquisition 1,298 -
Inventory disposed of during the year (451) (746)
Reversal of provision - (230)
Additional provision made during the year 1,505 882
----------------------------------------------------------------------------
Inventory obsolescence as at December 31 $ 5,397 $ 3,045
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Inventory costs recognized as an expense and reflected in cost of sales in the
consolidated statement of income (loss) amounted to $306,048 (December 31, 2010
- 211,230). Cost of sales also includes amortization of equipment inventory on
rent of $20,668 (December 31, 2010 - $18,211). The carrying value of equipment
inventory on rent as at December 31, 2011 was $50,959 (December 31, 2010 -
$49,783 and January 1, 2010 - $33,919). In 2011, the Company reversed $nil
(December 31, 2010 - $230) of a previously recorded inventory write-down.
8. Property and equipment and rental fleet
----------------------------------------------------------------------------
Computers and
Buildings and Machinery, equipment
leasehold equipment and under capital
Land improvements vehicles lease
----------------------------------------------------------------------------
As at January 1, 2010
Cost $ 2,883 $ 13,052 $ 14,154 $ 2,052
Accumulated
Depreciation - (5,481) (10,669) (42)
----------------------------------------------------------------------------
Net book value 2,883 7,571 3,485 2,010
----------------------------------------------------------------------------
Year ended December
31, 2010
Opening net book
value 2,883 7,571 3,485 2,010
Additions - 19 317 1,720
Disposals - - (71) -
Depreciation - (336) (382) (1,367)
----------------------------------------------------------------------------
Closing net book
value 2,883 7,254 3,349 2,363
----------------------------------------------------------------------------
As at December 31,
2010
Cost 2,883 13,071 14,400 3,772
Accumulated
Depreciation - (5,817) (11,051) (1,409)
----------------------------------------------------------------------------
Net book value 2,883 7,254 3,349 2,363
----------------------------------------------------------------------------
Year ended December
31, 2011
Opening net book
value 2,883 7,254 3,349 2,363
Acquired on business
combination (note 4) 417 3,850 369 422
Additions 2,573 5,784 681 4,308
Disposals - - - -
Depreciation - (517) (585) (1,873)
----------------------------------------------------------------------------
Closing net book
value 5,873 16,371 3,814 5,220
----------------------------------------------------------------------------
As at December 31,
2011
Cost 5,873 22,705 15,450 8,502
Accumulated
Depreciation - (6,334) (11,636) (3,282)
----------------------------------------------------------------------------
Net book value $ 5,873 16,371 3,814 5,220
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------------------------------
Total
Total property and
property and equipment and
equipment Rental fleet rental fleet
---------------------------------------------------------------
As at January 1, 2010
Cost $ 32,141 $ - $ 32,141
Accumulated
Depreciation (16,192) - (16,192)
---------------------------------------------------------------
Net book value 15,949 - 15,949
---------------------------------------------------------------
Year ended December
31, 2010
Opening net book
value 15,949 - 15,949
Additions 2,056 - 2,056
Disposals (71) - (71)
Depreciation (2,085) - (2,085)
---------------------------------------------------------------
Closing net book
value 15,849 - 15,849
---------------------------------------------------------------
As at December 31,
2010
Cost 34,126 - 34,126
Accumulated
Depreciation (18,277) - (18,277)
---------------------------------------------------------------
Net book value 15,849 - 15,849
---------------------------------------------------------------
Year ended December
31, 2011
Opening net book
value 15,849 - 15,849
Acquired on business
combination (note 4) 5,058 11,722 16,780
Additions 13,346 13,382 26,728
Disposals - (7,093) (7,093)
Depreciation (2,975) (2,447) (5,422)
---------------------------------------------------------------
Closing net book
value 31,278 15,564 46,842
---------------------------------------------------------------
As at December 31,
2011
Cost 52,530 18,011 70,541
Accumulated
Depreciation (21,252) (2,447) (23,699)
---------------------------------------------------------------
Net book value 31,278 15,564 46,842
---------------------------------------------------------------
---------------------------------------------------------------
Building and leasehold improvements include $5,254 of assets under construction
related to the new branch in Edmonton, Alberta. The Company expects to complete
construction and begin depreciation of the facility in fiscal 2012.
All trade accounts receivables related to the rental fleet at December 31, 2011
have maturities of less than one year.
The Company leases various computers and equipment under non-cancellable finance
lease agreements. The lease terms are between 1 and 8 years.
9. Intangible asset
As at December 31, 2011 and 2010, the intangible asset is comprised of a
distribution right with an indefinite life that was acquired as part of the
acquisition of the Champion Road Machinery division of Volvo Group Canada Inc.
("Champion") in 2008. The distribution right does not contain an expiry date and
management believes that the benefits to the Company of the distribution rights
are ongoing. As a result, the distribution rights have an indefinite useful
life.
Impairment test for indefinite-life intangible asset
The distribution right intangible asset was tested for impairment at the Ontario
region cash-generating unit ("CGU") level and it was determined that, as at
December 31, 2011, no impairment existed.
The recoverable amount of the Ontario region CGU is determined based on
value-in-use calculations. These calculations use pre-tax cash flow projections
based on financial budgets and forecasts approved by management covering a
five-year period. Cash flows beyond five years are extrapolated using the
estimated growth rates stated below.
The key assumptions used for value-in-use are as follows:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Revenue growth 5% to 14% 5% to 26%
Gross margin percentage 21% 21% to 23%
Expense growth 3% 3%
Discount rate 9% to 15% 9% to 15%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The discount rates used are pre-tax and reflect specific risks relating to
relevant operations. Management determined forecasted revenue growth rates,
gross margin percentage and expense growth rates based on past performance and
its expectations of market development.
Discount rates represent the current market assessment of the risks specific to
the Ontario region CGU, taking into consideration the time value of money and
individual risks of the underlying assets that have not been incorporated in the
cash flow estimates. The discount rate calculation is based on the specific
circumstances of the Ontario region CGU and is derived from the Company's
weighted average cost of capital ("WACC"). A sensitivity analysis included
adjusting key assumptions for a variety of scenarios and applying a range to the
discount rate.
10. Employee benefit obligations
----------------------------------------------------------------------------
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Balance sheet obligations for:
Pension benefits $ 10,653 $ 3,267 $ 2,907
Dental, health and other post-
employment benefits 1,107 1,107 1,548
----------------------------------------------------------------------------
$ 11,760 $ 4,374 $ 4,455
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income statement charge for:
Pension benefits $ 1,511 $ 1,388
Dental, health and other post-
employment benefits 48 82
--------------------------------------------------------------
$ 1,559 $ 1,470
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total cash payments for employee future benefits for 2011 consisting of cash
contributed by the Company to its funded defined benefit plans, cash payments
directly to beneficiaries for its unfunded other benefit plans and cash
contributed to its funded defined contribution plan were $2,958 (2010 - $1,466).
The history and experience adjustments in respect of post-employment benefit
obligations are as follows:
----------------------------------------------------------------------------
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Present value of benefit
obligations $ 38,082 $ 32,458 $ 30,543
Fair value of plan assets 26,322 28,084 26,088
----------------------------------------------------------------------------
Deficit in the plan 11,760 4,374 4,455
----------------------------------------------------------------------------
Experience adjustments in plan
liabilities (4,492) (2,533) -
----------------------------------------------------------------------------
Experience adjustments in plan
assets $ (4,361) $ 1,179 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
a) Pension benefits
The Company has a number of funded and unfunded benefit plans that provide
pension, as well as other retirement benefits, to some of its employees.
i) Defined contribution plans
The Company maintains a defined contribution plan available only to certain
employees (approximately 9% of the workforce (2010 - 11%)). In 2011, the
Company's contributions were $191 (2010 - $172). The Company also maintains a
group RSP/LIRA available only to certain employees (approximately 10% of the
workforce (2010 - 12%)) under the terms of a collective bargaining agreement. In
2011, the Company's contributions were $177 (2010 - $192).
The Company maintains defined contribution retirement savings plans for
executive officers and general managers. The expense related to these plans for
the year ended December 31, 2011 was $247 (2010 - $241).
CBR, which was acquired in February 2011, has a defined contribution retirement
savings program for U.S. employees, the 401(k). The expense related to the
401(k) for the year ended December 31, 2011 was $46. Employees receiving the
401(k) benefit make up approximately 11% of the workforce in 2011.
ii) Defined benefit pension plans
The amounts recognized in the consolidated statement of financial position are
determined as follows:
----------------------------------------------------------------------------
December 31, 2011 December 31, 2010 January 1, 2010
----------------------------------------------------------------------------
Employee Executive Employee Executive Employee Executive
plan plan plan plan plan plan
----------------------------------------------------------------------------
Fair value of plan
assets $ 25,245 $ 1,077 $ 26,772 $ 1,312 $ 24,751 $ 1,337
Present value of
funded obligations 35,113 1,862 29,434 1,820 25,662 1,830
----------------------------------------------------------------------------
$ 9,868 $ 785 $ 2,662 $ 508 $ 911 $ 493
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Impact of asset
ceiling - - - 97 1,360 143
----------------------------------------------------------------------------
Deficit of plan and
liability in the
balance sheet $ 9,868 $ 785 $ 2,692 $ 605 $ 2,271 $ 636
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The movement in the deferred benefit obligation over the year is as follows:
----------------------------------------------------------------------------
December 31, 2011 December 31, 2010
----------------------------------------------------------------------------
Employee Executive Employee Executive
plan plan plan plan
----------------------------------------------------------------------------
Accrued benefit obligation as at
January 1 $ 29,434 $ 1,820 $ 25,661 $ 1,831
Current service cost 1,600 - 1,419 -
Interest cost 1,650 82 1,625 87
Benefits paid (1,909) (170) (2,159) (170)
Actuarial loss 4,338 130 2,888 72
----------------------------------------------------------------------------
Accrued benefit obligation as at
December 31 $ 35,113 $ 1,862 $ 29,434 $ 1,820
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The movement in the fair value of plan assets over the year is as follows:
----------------------------------------------------------------------------
December 31, 2011 December 31, 2010
----------------------------------------------------------------------------
Employee Executive Employee Executive
plan plan plan plan
----------------------------------------------------------------------------
Fair value of plan assets as at
January 1 $ 26,772 $ 1,312 $ 24,751 $ 1,337
Actual return on plan assets (2,382) (133) 2,699 132
Employer contributions 2,128 68 785 13
Employee contributions 636 - 696 -
Benefits paid (1,909) (170) (2,159) (170)
----------------------------------------------------------------------------
Fair value of plan assets as at
December 31 $ 25,245 $ 1,077 $ 26,772 $ 1,312
----------------------------------------------------------------------------
Plan assets consist of:
----------------------------------------------------------------------------
December 31, 2011 December 31, 2010 January 1, 2010
----------------------------------------------------------------------------
Employee Executive Employee Executive Employee Executive
plan plan plan plan plan plan
----------------------------------------------------------------------------
Asset category % % % % % %
Equity securities 67.7 68.0 68.5 68.5 67.2 69.5
Debt securities 31.6 31.3 30.9 31.0 29.2 30.4
Other 0.7 0.7 0.6 0.5 3.6 0.1
----------------------------------------------------------------------------
100.0 100.0 100.0 100.0 100.0 100.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The amounts recognized in the consolidated statement of income (loss) and
comprehensive income (loss) are as follows:
----------------------------------------------------------------------------
Statement of income (loss)
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Employee Executive Employee Executive
plan plan plan plan
Employer current service costs $ (964) $ - $ (723) $ -
Interest on accrued benefits (1,650) (82) (1,625) (87)
Expected return on plan assets 1,764 82 1,570 82
----------------------------------------------------------------------------
Sub total $ (850) $ - $ (778) $ (5)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Statement of comprehensive income
(loss)
----------------------------------------------------------------------------
Gain (loss) for the year on
obligation $ (4,338) $ (130) $ (2,888) $ (72)
Gain (loss) for the year on asset (4,146) (215) 1,129 49
Effect of asset ceiling - 97 1,360 45
----------------------------------------------------------------------------
Sub total (8,484) (248) (399) 22
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total $ (9,334) $ (248) $ (1,177) $ 17
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Expected contributions to the defined benefit pension plan for employees and
executives for the year ending December 31, 2012 are $2,316 and $68,
respectively.
The Company measures its accrued benefit obligations and the fair value of plan
assets for accounting purposes as of December 31 of each year. For the employee
pension plan, the most recent actuarial valuation for funding purposes was
performed as of August 31, 2011 and the next required valuation will be due no
later than August 31, 2012.
For the executive pension plan, the most recent actuarial valuation for funding
purposes was performed as at June 30, 2009 and the next required valuation will
be due no later than June 30, 2012.
The principal actuarial assumptions used are as follows:
----------------------------------------------------------------------------
December 31, 2011 December 31, 2010 January 1, 2010
----------------------------------------------------------------------------
Employee Executive Employee Executive Employee Executive
plan plan plan plan plan plan
----------------------------------------------------------------------------
Discount rate 4.50% 4.00% 5.50% 4.75% 6.25% 5.00%
Expected
return on
plan assets 6.50% 6.50% 6.50% 6.50% 6.50% 6.50%
Future salary
increases 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%
Mortality
table Note 1 Note 1 Note 1 Note 1 Note 1 Note 1
Average life
expectancy
greater than
Male aged
45 39.2 - 39.1 - 37.5 -
greater than
Female aged
45 41.4 - 41.4 - 40.4 -
greater than
Male aged
65 19.6 19.6 19.5 19.5 19.4 19.4
greater than
Female aged
65 22.0 22.0 22.0 22.0 21.8 21.8
----------------------------------------------------------------------------
Note 1: UP 94 Projected generationally, sex distinct
The sensitivity of the overall pension liability to changes in assumptions are
as follows:
----------------------------------------------------------------------------
Change in
Valuation Percentage overall
assumption change liability
----------------------------------------------------------------------------
Employee plan
Discount rate 4.50% 1.00% $ 4,643
Salary growth rate 3.00% 1.00% 829
----------------------------------------------------------------------------
Executive plan
Discount rate 4.00% 1.00% $ 133
----------------------------------------------------------------------------
----------------------------------------------------------------------------
b) Post-employment health and dental benefits and retiring allowance
The Company has other post-employment benefit obligations, which include an
unfunded retiring allowance and a non-contributory dental and health-care plan.
The amounts recognized in the consolidated statement of financial position are
determined as follows:
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Present value of obligation $ 1,107 $ 1,107 $ 1,548
Unamortized past service costs - - -
----------------------------------------------------------------------------
Accrued benefit obligation in the
consolidated statement of
financial position $ 1,107 $ 1,107 $ 1,548
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The movement in the accrued benefit obligation over the year is as follows:
----------------------------------------------------------------------------
As at December 31, December 31,
2011 2010
----------------------------------------------------------------------------
Accrued benefit obligations as at January 1 $ 1,107 $ 1,548
Current service cost - -
Interest cost 47 82
Benefits paid (71) (95)
Actuarial gain (loss) 24 (428)
----------------------------------------------------------------------------
Accrued benefit obligations as at December 31 $ 1,107 $ 1,107
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The assumed health-care cost trend rate is 7% in 2012, declining by 0.5% per
annum to 5% per annum in 2016 and thereafter. The assumed dental cost rate is 4%
per annum.
Assumed health-care and dental-care cost trend rates have a significant effect
on the amounts reported for the health-care and dental-care plans. A 1% change
in assumed health - and dental care cost trend rates would have the following
effects for 2011:
----------------------------------------------------------------------------
Increase Decrease
----------------------------------------------------------------------------
Total service and interest cost (at 5%) 5 (4)
----------------------------------------------------------------------------
Accrued benefit obligations as at December 31, 2011 126 (103)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Trade and other payables
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Trade payables $ 9,664 $ 9,890 $ 6,852
Accrued expenses 25,322 18,939 12,796
----------------------------------------------------------------------------
$ 34,986 $ 28,829 $ 19,648
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. Equipment notes payable
In addition to its bank credit facilities, the Company has lines of credit
available totalling approximately $240 million from various non-bank equipment
lenders in Canada and the United States, which are used to finance equipment
inventory (December 31, 2010 - $200 and January 1, 2010 - $149). As at December
31, 2011, there was approximately $160 million borrowed on these equipment
finance lines (December 31, 2010 - $118 million and January 1, 2010 - $105
million).
Typically, these equipment notes are interest free for periods up to 12 months
from the date of financing, after which they bear interest in Canada at rates
ranging from 4.00% to 5.50% over the one month Bankers' Acceptance rate ("BA
rate") and 3.25% to 4.25% over the prime rate of a Canadian chartered bank, and
from 2.50% to 5.50% over one month LIBOR rate and between prime and prime plus
3.00% 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. In the normal course of business, these liens cover substantially
all of the inventories. Monthly principal repayments equal to 3.00% of the
original principal balance of the note commence 12 months from the date of
financing and the remaining balance is due in full at the earlier of 24 months
after financing or when the financed equipment is sold. While financed equipment
is out on rent, monthly curtailments are required equal to the greater of 70% of
the rental revenue and 2.5% of the original value of the note. Any remaining
balance after 24 months, which is due in full, is normally refinanced with the
lender over an additional period of up to 24 months. All of the Company's
equipment notes facilities are renewable annually.
Certain of the Company's equipment finance credit agreements contain restrictive
financial covenants, including requiring the Company to remain in compliance
with the financial covenants under all of its other lending agreements ("cross
default provisions"). As at December 31, 2011 the Company was in compliance with
these covenants.
The equipment notes are payable on demand and therefore have been classified as
current liabilities. The carrying amount of equipment notes payable are as
follows:
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Equipment notes payable - non-
interest bearing $ 72,262 $ 40,097 $ 28,671
Equipment notes payable - interest
bearing 88,151 78,063 76,172
----------------------------------------------------------------------------
$ 160,413 $ 118,160 $ 104,843
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Due to the short-term nature of equipment notes payable, management has
determined that the fair value does not differ materially from the carrying
value.
13. Debt
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Current
Bank indebtedness (a) $ 10,951 $ 12,370 $ 10,014
Finance lease obligations (b) 2,110 960 954
Notes payable (c) 6,242 1,233 1,094
----------------------------------------------------------------------------
$ 19,303 $ 14,563 $ 12,062
----------------------------------------------------------------------------
Non-current
Finance lease obligations (b) $ 3,291 $ 1,502 $ 1,154
Notes payable (c) 13,558 - 1,218
----------------------------------------------------------------------------
Total Debt $ 36,152 $ 16,065 $ 14,434
----------------------------------------------------------------------------
----------------------------------------------------------------------------
a) Bank indebtedness
The Company has credit facilities with banks in Canada and United States which
provide 364-Day committed operating lines of credit totalling approximately
$22.5 million which are renewable annually. As at December 31, 2011, the Company
had utilized $11.0 million (December 31, 2010 - $12.4 million and January 1,
2010 - $10.0 million) of the operating line of credit.
Borrowings under the lines of credit are limited by standard borrowing base
calculations based on trade receivables and inventories, which is typical of
such lines of credit. As collateral in Canada, the Company has provided a $50
million debenture and a security interest in trade receivables, inventories
(subordinated to the collateral provided to the equipment inventory lenders),
property and equipment (subordinated to collateral provided to lessors), real
estate and on intangible and other assets.
The operating lines bear interest at rates that range between the bank's prime
rate plus 0.50% and the bank's prime rate plus 3.00% and between the one month
Canadian BA rates plus 1.50% and BA rates plus 4.00% in Canada and at LIBOR plus
2.60% in the United States. Under its bank credit facilities, the Company is
able to issue letters of credit up to a maximum of $5 million. Outstanding
letters of credit reduce the Company's availability under its operating lines of
credit. For certain customers, Strongco issues letters of credit as a guarantee
of Strongco's performance on the sale of equipment to the customer. As at
December 31, 2011, there were outstanding letters of credit of $113 (December
31, 2010 - $74 and January 1, 2010 - $74).
b) Finance lease obligations
As at December 31, 2011, the Company had vehicles and computer equipment under
finance leases. The weighted average effective interest rate is 6.6% (December
31, 2010 - 4.8%). The future minimum annual payments, interest and balance of
obligations are as follows:
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
No later than 1 year $ 2,110 $ 960 $ 954
Later than 1 year but no later
than 5 years 3,475 1,589 1,245
Later than 5 years - - -
----------------------------------------------------------------------------
Total minimum lease payments $ 5,585 $ 2,549 $ 2,199
Future finance charges on
finance leases (184) (87) (91)
----------------------------------------------------------------------------
Present value of finance lease
liabilities $ 5,401 $ 2,462 $ 2,108
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The present value of financial lease liabilities is as follows:
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
No later than 1 year $ 2,020 $ 924 $ 954
Later than 1 year but no later
than 5 years 3,381 1,538 1,154
Later than 5 years - - -
----------------------------------------------------------------------------
$ 5,401 $ 2,462 $ 2,108
----------------------------------------------------------------------------
----------------------------------------------------------------------------
c) Notes payable
Notes payable are comprised of the following:
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Champion acquisition note (i) $ - $ 1,233 $ 2,312
Promissory notes (ii) 1,301 - -
Equipment plan notes payable -
rental fleet (iii) 5,455 - -
Term note - United States (iv) 3,702 - -
Term note - Canada (v) 4,333 - -
Construction facility (vi) 4,987 - -
Other 22 - -
----------------------------------------------------------------------------
$ 19,800 $ 1,233 $ 2,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current portion 6,242 1,233 1,094
----------------------------------------------------------------------------
Long-term portion $ 13,558 $ - $ 1,218
----------------------------------------------------------------------------
----------------------------------------------------------------------------
i) On March 20, 2008, the Company purchased substantially all of the assets
(excluding real property) of Champion for a total consideration of $24,984
including deal-related costs of $190. The consideration included a non-interest
bearing note payable in favour of Volvo Group Canada Inc. of $2,500 with
instalment payments of $1,250 due in March 2010 and March 2011. The note was
secured with certain assets of Champion. The note had been discounted at 6.0%
using the effective interest rate method, resulting in a discount of $346 that
was amortized to interest expense over the three-year period to March 2011.
During the year, the final principal payment on the non-interest bearing note
was made.
ii) As part of the acquisition of CBR, the Company issued, through a wholly
owned subsidiary, three promissory notes totalling US$1,863. The three
promissory notes mature on February 17, 2013 and bear interest at the US Prime
rate. Quarterly principal payments of US$195 commenced in May 2011. At December
31, 2011, US$139 of the outstanding promissory notes was owed to a former
shareholder and current employee of CBR, which is recorded at the exchange
amount.
iii) In addition to equipment notes payable as described in note 12, CBR also
utilizes equipment 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. As collateral for these equipment notes, the Company has
provided liens on substantially all of the inventories financed and any related
accounts receivable.
iv) 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
September 2012 and bears interest at a rate of LIBOR plus 3.05%. Monthly
payments of principal of US$13 plus accrued interest are required under the
terms of the note. The Company has interest rate swap agreements in place
related to the term note which have converted the variable rate on the term
loans to a fixed rate of 5.17%. The term loans and swap agreements expire in
September 2012 at which point a balloon payment for the balance of the loans is
due.
v) In April 2011, the Company's bank credit facilities were amended to add a
$5,000 demand, non-revolving term loan ("Term note - Canada"). The Term note -
Canada is for a term of 60 months and bears interest at the bank's prime lending
rate plus 2.0%. Monthly principal payments of $83 plus accrued interest
commenced in May 2011. As collateral, the Term note - Canada is secured against
the Company's Mississauga, Ontario facility and land, which had a carrying value
of $7,361 as at December 31, 2011.
vi) In May 2011, the bank credit facilities were further amended to add a
construction loan facility ("Construction Loan") to finance the construction of
the Company's new Edmonton, Alberta branch. Under the Construction Loan, the
Company is able to borrow 70% of the cost of the land and building construction
costs to a maximum of $7,100. The Company purchased the property in March 2011
and commenced construction in June 2011. The construction is scheduled to be
completed during fiscal 2012. As at December 31, 2011, the Company has drawn
$4,987 against the construction loan facility. Interest costs for the period
ended December 31, 2011 was $97. Upon completion, the Construction Loan will be
converted to a demand, non-revolving term loan ("Mortgage Loan"). The Mortgage
Loan will be for a term of 60 months. The Construction Loan and Mortgage Loan
bear interest at the bank's prime lending rate plus 2%. As collateral, the
Construction Loan is secured against the Company's Edmonton, Alberta facility
and land, which had a carrying value of $7,820 as at December 31, 2011.
d) The carrying amount and fair value of the debt is as follows:
----------------------------------------------------------------------------
Carrying amount
----------------------------------------------------------------------------
December 31, December 31, January 31,
2011 2010 2010
----------------------------------------------------------------------------
Bank indebtedness $ 10,951 $ 12,370 $ 10,014
Notes payable 19,800 1,233 2,312
Finance lease obligations 5,401 2,462 2,108
----------------------------------------------------------------------------
$ 36,152 $ 16,065 $ 14,434
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair Value
----------------------------------------------------------------------------
December 31, December 31, January 31,
2011 2010 2010
----------------------------------------------------------------------------
Bank indebtedness $ 10,951 $ 12,370 $ 10,014
Notes payable 19,140 1,233 2,391
Finance lease obligations 5,401 2,462 2,108
----------------------------------------------------------------------------
$ 35,492 $ 16,065 $ 14,513
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The fair values were determined using a discount rate equivalent to the interest
charged against the relevant debt item. Notes payable at December 31, 2010 were
classified as short term, with a carrying value that approximated the fair
value. The fair value of finance lease obligations does not differ materially
from their carrying value.
14. Income taxes
Significant components of the provision for (recovery of) income taxes are as
follows:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Components of current income tax expense:
Relating to current year income taxes $ 196 $ -
Adjustment in respect of current income tax of
acquired business (468)
----------------------------------------------------------------------------
Total current income tax expense (272)
----------------------------------------------------------------------------
Components of deferred income tax expense: -
Origination and reversal of temporary differences 3,620 (203)
Tax attributes not benefited - 203
Benefit of previously unrecognized tax attributes (2,145) -
----------------------------------------------------------------------------
Total deferred income tax expense 1,475 -
----------------------------------------------------------------------------
Total income tax expense $ 1,203 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The tax on the profit before tax differs from that which would be obtained by
applying the statutory tax rate as a result of the following:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Earnings (loss) before taxes $ 11,132 $ (925)
Statutory tax rate 27.90% 30.07%
----------------------------------------------------------------------------
Provision for income taxes at statutory tax rate $ 3,106 $ (278)
Adjustments thereon for the effect of:
Permanent differences 288 157
Tax attributes not benefited - 203
Benefit of previously unrecognized tax attributes (2,145) -
Rate differences (172)
Foreign rate differential 146
Other (20) (82)
----------------------------------------------------------------------------
Total income tax expense $ 1,203 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The analysis of deferred income tax assets and liabilities is as follows:
----------------------------------------------------------------------------
Deferred income tax assets and liabilities
----------------------------------------------------------------------------
As at December 31 2011 2010
----------------------------------------------------------------------------
Eligible capital expenditures and other reserves $ 2,708 $ 220
Pension 2,732 145
Loss carryforward 990 67
----------------------------------------------------------------------------
Deferred income tax assets 6,430 432
----------------------------------------------------------------------------
Capital and other assets (4,886) (432)
----------------------------------------------------------------------------
Partnership income taxes payable in 2012 (2,568) -
----------------------------------------------------------------------------
Deferred income tax liabilities (7,454) (432)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net deferred income tax liability $ (1,024) $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The above is presented on the balance sheet as follows:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Deferred income tax asset $ 1,541 $ -
Deferred income tax liability $ (2,565) $ -
----------------------------------------------------------------------------
The recognition of deductible temporary differences represented by the deferred
income tax asset above is dependent on taxable profits in the future that arise
in the same taxation periods in which those deductible temporary differences are
to be utilized.
The gross movement on deferred tax is as follows:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
As at January 1 $ - $ -
Acquisition of a business (1,707) -
Other (86)
Income statement charge (Deferred tax) (1,475) -
----------------------------------------------------------------------------
Tax charges relating to components of other
comprehensive income 2,244 -
----------------------------------------------------------------------------
As at December 31 $ (1,024) $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The movement in deferred income tax assets and liabilities during the year,
without taking into account offsetting, is as follows:
----------------------------------------------------------------------------
Partnership
Property and income taxes
Deferred income equipment and payable in the
tax liabilities other assets following year Other Total
----------------------------------------------------------------------------
As at January 1,
2010 $ (765) $ - $ - $ (765)
Charged to
income
statement 333 - - 333
Charged to other
comprehensive
income - - - -
----------------------------------------------------------------------------
As at December
31, 2010 $ (432) $ - $ - $ (432)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Acquisition of a
business (2,849) (2,849)
Charged to
income
statement (1,605) (2,568) - (4,173)
Charged to other
comprehensive
income - - - -
----------------------------------------------------------------------------
As at December
31, 2011 $ (4,886) $ (2,568) $ - $ (7,454)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Eligible capital
Deferred income expenditures and Employee Unused tax
tax assets other reserves Benefits losses Total
----------------------------------------------------------------------------
As at January 1,
2010 $ 589 $ 176 $ - $ 765
Charged to
income
statement (368) (31) 66 (333)
Charged to other
comprehensive
income - - - -
----------------------------------------------------------------------------
As at December
31, 2010 $ 221 $ 145 $ 66 $ 432
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Acquisition of a
business 1,142 1,142
Other (86) (86)
Charged to
income
statement 1,431 343 924 2,698
Charged to other
comprehensive
income - 2,244 - 2,244
----------------------------------------------------------------------------
As at December
31, 2011 $ 2,708 $ 2,732 $ 990 $ 6,430
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deductible temporary differences for which no deferred tax asset is recognized
include:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Eligible capital expenditures and other reserves $ - $ 4,257
Employee benefits - 2,744
Unused tax losses $ - $ 1,276
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Gross unused tax losses of $951 and $673 in Canada will expire in 2029 and 2030
respectively. Gross unused tax losses of $1,432 in the US will expire in 2032.
15. Provision for other liabilities
----------------------------------------------------------------------------
Equipment
buy-back Legal
obligation matters
(a) (b) Total
----------------------------------------------------------------------------
At as January 1, 2011 $ 860 576 $ 1,436
Charged (credited) to the income
statement -
Additional provision 326 - 326
Unused amounts reversed - (493) (493)
Used during the year (71) - (71)
----------------------------------------------------------------------------
As at December 31, 2011 $ 1,115 83 $ 1,198
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment
buy-back Legal
obligation matters
(a) (b) Total
----------------------------------------------------------------------------
At as January 1, 2010 $ 700 666 $ 1,366
Charged (credited) to the income
statement -
Additional provision 160 100 260
Unused amounts reversed - (190) (190)
Used during the year - - -
----------------------------------------------------------------------------
As at December 31, 2010 $ 860 576 $ 1,436
----------------------------------------------------------------------------
----------------------------------------------------------------------------
a) Equipment buy-back obligation
The Company has agreed to buy back equipment from certain customers at the
option of the customer for a specified price at future dates (buy-back
contracts). These contracts are subject to certain conditions being met by the
customer and range in term from three to ten years. As at December 31, 2011, the
total obligation under these contracts was $13,512 (December 31, 2010 - $10,279
and January 1, 2010 - $9,769). 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 $1,115
(December 31, 2010 - $860 and January 1, 2010 - $699) has been accrued in the
Company's accounts with respect to these commitments.
b) Legal matters
The Company has set up provisions for certain legal matters based on
management's assessment and support from external legal counsel. As at December
31, 2011, these provisions totalled $83 (December 31, 2010 - $576 and January 1,
2010 - $519).
16. Shareholders' equity
Authorized:
Unlimited number of shares
Issued:
As at December 31, 2011, a total of 13,128,719 shares (2010 -
10,508,719) with a stated valued of $64,898 (December 31, 2010 and
January 1, 2010 - $57,089) were issued and outstanding.
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 were required to subscribe for
one Common Share. Each Common Share was issued at a price of $3.
17. Segment information
Management has determined that the Company has one reportable operating segment,
Equipment Distribution based on reports reviewed by the President and Chief
Executive Officer. 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:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Analysis of revenue by category:
Equipment sales $ 275,654 $ 183,744
Equipment rental 29,834 22,093
Product support 117,665 88,820
----------------------------------------------------------------------------
$ 423,153 $ 294,657
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Geographical information for the year ended and as at:
----------------------------------------------------------------------------
December 31, 2011 Canada US Total
----------------------------------------------------------------------------
Revenue $ 376,561 $ 46,592 $ 423,153
Property and equipment 26,381 4,896 31,277
Rental fleet - 15,564 15,564
Intangible asset 1,800 - 1,800
Other assets $ 219,032 $ 36,963 $ 255,995
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, 2010 Canada US Total
----------------------------------------------------------------------------
Revenue $ 294,657 $ - $ 294,657
Property and equipment 15,849 - 15,849
Rental fleet - - -
Intangible asset 1,800 - 1,800
Other assets $ 197,512 $ - $ 197,512
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
January 1, 2010 Canada US Total
----------------------------------------------------------------------------
Revenue $ 291,795 $ - $ 291,795
Property and equipment 15,949 - 15,949
Rental fleet - - -
Intangible asset 1,800 - 1,800
Other assets $ 173,047 $ - $ 173,047
----------------------------------------------------------------------------
----------------------------------------------------------------------------
18. Other income
Other income for the year ended December 31, 2011 of $1,163 (December 31, 2010 -
$740) included gains relating to the reversal of certain legal and other
provisions no longer required, foreign currency gains, gains on mark-to-market
adjustments for foreign currency swaps and interest rate swaps and miscellaneous
commission income from suppliers.
19. Expenses by nature
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Changes in inventories of equipment, parts and work-
in-process $ 317,230 $ 220,126
Raw materials and consumables used 549 1,038
Depreciation 5,422 2,085
Utilities 1,374 1,093
Operating lease expenses 6,687 7,038
Transportation expenses 3,082 2,516
Advertising expenses 1,151 563
Salaries and commissions (a) 55,000 45,571
Telephone, fax and office supplies 2,716 2,454
Other 14,132 9,022
----------------------------------------------------------------------------
Total cost of sales, administration, distribution
and selling expenses $ 407,343 $ 291,506
----------------------------------------------------------------------------
----------------------------------------------------------------------------
a) Salaries and commission expense comprises the following:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Wages $ 52,418 $ 43,973
Commissions 2,286 1,354
Employee future benefits 296 244
----------------------------------------------------------------------------
$ 55,000 $ 45,571
----------------------------------------------------------------------------
----------------------------------------------------------------------------
20. Interest expense
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Bank indebtedness $ 1,052 $ 516
Equipment notes payable - interest bearing 4,619 4,202
Notes payable 160 84
Finance lease obligations 10 14
----------------------------------------------------------------------------
$ 5,841 $ 4,816
----------------------------------------------------------------------------
----------------------------------------------------------------------------
21. Earnings (loss) per share
Basic earnings (loss) per share is calculated by dividing the income (loss)
attributable to shareholders of the Company by the weighted average number of
shares outstanding during the year. Diluted earnings (loss) per share is
calculated by adjusting the weighted average number of shares outstanding to
assume conversion of all potentially dilutive shares.
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Weighted average number of shares for basic
earnings (loss) per share calculation 13,049,126 11,053,608
Effect of dilutive options outstanding 39,842 -
----------------------------------------------------------------------------
Weighted average number of shares for dilutive
earnings (loss) per share calculation 13,088,968 11,053,608
----------------------------------------------------------------------------
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
rights 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 (loss) per share has been
adjusted for a factor related to the bonus element, impacting the calculation
for the years ended December 31, 2011 and 2010.
The computation of dilutive options outstanding only includes those options
having exercise prices below the average market price of the shares during the
period. A total of 445,000 options were excluded due to their anti-dilutive
effect for the year ended December 31, 2010.
22. Share-based compensation
On May 26, 2011, the shareholders of the Company approved a stock option plan
(the "Plan"), under which options may be granted to any officer or member of
senior management of the Company by the Directors. Options are non-assignable
and non-transferrable. The aggregate number of shares reserved for issuance upon
the exercise of all options granted under the Plan shall not exceed 850,000. The
strike price for an option is equal to the volume weighted average trading price
of the shares on the Toronto Stock Exchange for the five trading days
immediately preceding the date that the option was granted by the Directors of
the Company. Each option holder will have 10 years from the date of grant to
exercise the options. Options vest 33 and 1/3% on each of the fourth, fifth and
sixth anniversary of the date of grant. As of December 31, 2011, no options have
been granted under the Plan.
On August 11, 2008, the Company issued irrevocable options to the then newly
appointed Chief Executive Officer to purchase 100,000 units in the capital of
the Company. These options have an exercise price of $2.98 per unit, which is
equal to the average trading price of the Company's units over the five days
immediately following August 11, 2008. Fifty percent of the options vested and
became exercisable 12 months from the grant date and the balance vested and
became exercisable 24 months from the grant date. The options expire five years
from the issue date on August 11, 2013. The options were approved by the
shareholders at the annual meeting of the unitholders on April 30, 2009. The
stock-based compensation expense of these options is based upon the estimated
fair value of the options at the grant date, which was determined using the
Black- Scholes option pricing model, amortized over the two-year vesting period
of the options. The following assumptions were used in determining the fair
value of the options using the Black-Scholes model:
Risk-free interest rate 3%
Option life 5 years
Expected volatility 60%
Estimated forfeiture rate 5%
On October 28, 2009, the Company issued irrevocable options to certain members
of senior management to purchase 375,000 units of the Company. These options
have an exercise price of $4.50 per unit, which is equal to the average trading
price of the Company's units over the five days immediately preceding October
28, 2009. A third of the options vest and become exercisable after 36 months
from the grant date, third of the options vest and become exercisable after 48
months from the grant date and the balance vest and become exercisable after 60
months from the grant date. The options expire seven years from the issue date,
on October 28, 2016. The options were approved by the shareholders at the annual
meeting of the shareholders on May 14, 2010. The stock-based compensation
expense of these options is based upon the estimated fair value of the options
at the grant date, which was determined using the Black-Scholes option pricing
model, amortized over their five-year vesting period of the options. The
following assumptions were used in determining the fair value of the options
using the Black-Scholes model:
Risk-free interest rate 3%
Option life 7 years
Expected volatility 64%
Estimated forfeiture rate 5%
On December 16, 2010, the Company issued irrevocable options to certain members
of senior management to purchase 15,000 units of the Company. These options have
an exercise price of $3.71 per unit, which is equal to the average trading price
of the Company's units over the five days immediately preceding December 16,
2010. A third of the options vest and become exercisable after 36 months from
the grant date, third of the options vest and become exercisable after 48 months
from the grant date and the balance vest and become exercisable after 60 months
from the grant date. The options expire seven years from the issue date, on
December 16, 2017. The options were approved by the shareholders at the annual
meeting of the shareholders on May 26, 2011. The stock-based compensation
expense of these options is based upon the estimated fair value of the options
at the grant date, which was determined using the Black-Scholes option pricing
model, amortized over their five-year vesting period of the options. The
following assumptions were used in determining the fair value of the options
using the Black-Scholes model:
Risk-free interest rate 3%
Option life 7 years
Expected volatility 64%
Estimated forfeiture rate 5%
The expected volatility reflects the assumption that the historical volatility
over a period similar to the life of the options is indicative of future trends,
which may not necessarily be the actual outcome. At December 31, 2011, the
weighted average remaining contractual life of the outstanding stock options was
50.7 months (2010 - 62.7) and the weighted average exercise price was $4.14
(2010 - $4.18). The stock-based compensation expense related to stock options
for 2011 was $131 (2010 - $166). A summary of the activity in the year is as
follows:
----------------------------------------------------------------------------
As at December 31, 2011 2010
----------------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
----------------------------------------------------------------------------
Options outstanding -
beginning of year 460,000 $ 4.02 475,000 $ 4.18
Granted - - 15,000 -
Exercised - - - -
Forfeited - - (30,000) -
----------------------------------------------------------------------------
Options outstanding -
end of year 460,000 $ 4.14 460,000 $ 4.02
----------------------------------------------------------------------------
Options vested and
exercisable - end of
year 100,000 $ 2.98 100,000 $ 2.98
----------------------------------------------------------------------------
----------------------------------------------------------------------------
23. Contingencies, commitments and guarantees
a) In the ordinary course of business, the Company may be contingently liable
for litigation. On an ongoing basis, the Company assesses the likelihood of any
adverse judgments or outcomes, as well as potential ranges of probable costs or
losses. A determination of the provision required, if any, is made after
analysis of each individual matter. The required provision may change in the
future due to new developments in each matter or changes in approach such as a
change in settlement strategy dealing with these matters.
A statement of claim has been filed naming a former division of the Company as
one of several defendants in proceedings under the Superior Court of Quebec. The
action claims errors and omissions in the contractual execution of work
entrusted to the defendants and names the Company as jointly and severally
liable for damages of approximately $5.9 million. Management believes that the
Company has a strong defence against this claim and that it is without merit.
The Company's insurer has provided conditional coverage for this claim.
A statement of claim has been filed naming a former division of the Company as
one of several defendants in proceedings under the Court of Queen's Bench of
Manitoba. The action claims errors and omissions in the contractual execution of
work entrusted to the defendants and names the Company as jointly and severally
liable for damages of approximately $4.8 million. Management believes that the
Company has a strong defence against this claim and that it is without merit.
The Company's insurer has provided conditional coverage for this claim.
b) The Company has entered into various operating leases for its premises,
certain vehicles, furniture and fixtures and equipment. The lease terms are
between 1 and 8 years, and the majority of lease agreements are renewable at the
end of the lease period at market rates. Approximate future minimum annual
payments under these operating leases are as follows:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
No later than 1 year $ 4,656 $ 5,241
Later than 1 year but no later than 5 years 12,755 12,787
Later than 5 years 2,949 4,291
$ 20,360 $ 22,319
----------------------------------------------------------------------------
----------------------------------------------------------------------------
c) 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
December 31, 2011 to January 31, 2014 are $311 (December 31, 2010 - $461 and
January 1, 2010 - $610).
24. Categories of financial assets and liabilities
Financial instruments are classified into one of the five categories: assets and
liabilities held at fair value through profit or loss, held-to-maturity
investments, loans and receivables, available-for-sale financial assets and
other financial liabilities. The carrying values of the Company's financial
instruments are classified into the following categories:
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Loans and receivables (1) $ 42,759 $ 35,884 $ 27,088
Liabilities (2) 231,551 $ 163,053 138,925
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes trade and other receivables
(2) Includes bank indebtedness, trade and other payables, finance lease
obligations, equipment and other notes payable
Fair value estimation
The Company applies the following fair value measurement hierarchy to assets and
liabilities in the consolidated statement of financial position that are carried
at fair value:
Level 1: quoted (unadjusted) prices in active markets for identical assets or
liabilities
Level 2: other techniques for which all inputs that have a significant effect on
the recorded fair value are observable, either directly or indirectly
Level 3: techniques that use inputs that have a significant effect on the
recorded fair value that are not based on observable market data
This fair value measurement hierarchy applies to the Company's derivative
instruments consisting of foreign exchange forward contracts and interest rate
swap contracts, which are all considered Level 2 inputs. The Company enters into
derivative financial instruments with various counterparties, principally
financial institutions with investment grade credit ratings. Derivatives valued
using valuation techniques with market observable inputs are interest rate swaps
and foreign exchange forward contracts. The most frequently applied valuation
techniques include forward pricing and swap models, using present value
calculations. The models incorporate various inputs including the credit quality
of counterparties, foreign exchange spot and forward rates, interest rate curves
and forward rate curves of the underlying commodity.
The fair value of the Company's foreign exchange forward contracts and interest
rate swap contracts as at December 31, 2011 and 2010 are as follows:
----------------------------------------------------------------------------
December 31,
2011 Level 1 Level 2 Level 3
----------------------------------------------------------------------------
Liabilities measured
at fair value
Foreign exchange
forward contracts $ (16) $ - $ (16) $ -
Interest rate swap
contracts $ (306) $ - $ (306) $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31,
2010 Level 1 Level 2 Level 3
----------------------------------------------------------------------------
Assets measured at
fair value
Foreign exchange
forward contracts $ 239 $ - $ 239 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The maturity of the carrying value of the Company's non-derivative debt and
contractual obligations relating to outstanding derivative instruments as at
December 31, 2011 are as follows:
----------------------------------------------------------------------------
Between
Less than 1 and 5
1 year years Total
----------------------------------------------------------------------------
Non-derivatives
Bank indebtedness $ 10,951 $ - $ 10,951
Equipment notes 160,413 - 160,413
Notes payable 6,242 13,558 19,800
----------------------------------------------------------------------------
Derivatives
Foreign exchange forward contracts 6,340 - 6,340
Interest rate swap contracts $ 49 $ 15,000 $ 15,049
----------------------------------------------------------------------------
----------------------------------------------------------------------------
25. Financial risk management
The Company's activities expose it to a variety of financial risks: market risk
(including foreign exchange and interest rate risk), credit risk and liquidity
risk. The Company's overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse
effects on the Company's financial performance. The Company does not purchase
any derivative financial instruments for speculative purposes.
Financial risk management is the responsibility of the corporate finance
function. The Company's operations, along with the corporate finance function,
identify, evaluate and, where appropriate, hedge financial risks. Material risks
are monitored and are regularly discussed with the Audit Committee of the Board
of Directors.
Market risk
a) Foreign exchange risk
The Company operates in Canada and the north eastern United States. Foreign
exchange risk arises because of varying currency exposure, primarily to the US
dollar, and impacts receivables or payables on transactions denominated in
foreign currencies, which vary due to changes in exchange rates (transaction
exposures). The consolidated statement of financial position includes US dollar
denominated trade payables and trade receivables. These amounts are translated
into Canadian dollars at each period end, with resulting gains and losses
recorded in the consolidated statement of income (loss).
The objective of the Company's foreign exchange risk management activities is to
minimize transaction exposures. The Company manages this risk by entering into
foreign exchange forward contracts on a transaction-specific basis. The Company
does not currently hedge translation exposures. Substantially all of the
Company's purchases are translated into Canadian dollars at the date of receipt.
As at December 31, 2011, the Company carried $26,532 in US dollar denominated
liabilities net of US dollar denominated trade receivables (December 31, 2010 -
$3,836 and January 1, 2010 - $2,487). A $0.10 change in the exchange rate
between Canadian and US currencies would have an effect of approximately $2,781
on net income for the year ended December 31, 2011 (December 31, 2010 - $384 and
January 1, 2010 - $249).
Foreign exchange forward contracts
On a transaction-specific basis, the Company utilizes financial instruments to
manage the risk associated with fluctuations in foreign exchange.
The Company enters into foreign exchange forward contracts to reduce the impact
of currency fluctuations on the cost of certain pieces of equipment ordered for
future delivery to customers. The Company has a $15,000 line for foreign
exchange forward contracts ("FX Line") as part of its Canadian facility,
available to hedge foreign currency exposure. Under the FX Line, Strongco can
purchase foreign exchange forward contracts up to a maximum of $15,000 with
terms not to expire beyond the remaining term of the operating line of credit.
As at December 31, 2011, the Company had outstanding foreign exchange forward
contracts under this facility totalling US$6,206 at an average exchange rate of
$1.0203 Canadian for each US $1.00 with settlement dates between January 31,
2012 and the end of May 2012 (December 31, 2010 - US$7,447 and January 1, 2010 -
$2,438). Foreign currency forward contracts are classified as a derivative
financial instrument and are recorded at fair value using an observable market.
The fair value of foreign currency forward contracts are based on the settlement
rates on those contracts compared to the current forward exchange rate. Strongco
has not adopted hedge accounting for these foreign currency forward contracts
and, accordingly the change in the fair value of the contracts is recorded in
Other Income. As at December 31, 2011, the unrealized loss associated with
foreign currency forward contracts is $16 (December 31, 2010 - $239 and January
1, 2010 - $45).
Interest rate swap contracts
In September 2011, the Company secured a Swap Facility with its bank which
allows the Company to swap the floating interest rate component ("BA rates") on
up to $25 million of the Company's debt for a five-year fixed swap rate of
interest. On September 8, 2011, the Company entered into an interest rate swap
to fix the floating rate of interest component on $15 million of interest rate
debt at a fixed interest rate equal to 1.615% for a period of five years to
September 8, 2016. The interest rate swap is classified as a derivative
financial instrument and is recorded at fair value using an observable market.
Interest rate swaps are valued using the notional amount of the interest rate
swaps multiplied by the observable inputs of time to maturity, interest rates
and credit spreads. Strongco has not adopted hedge accounting for the interest
rate swap and, accordingly the change in the fair value of the swap is recorded
in interest expense. As at December 31, 2011, the unrealized loss associated
with the swap is $257.
The Company has interest rate swap agreements in place related to the term loans
secured by real estate in the United States which have converted the variable
rate on the term loans to a fixed rate of 5.17%. The term loans and swap
agreements expire in September 2012 at which point a balloon payment for the
balance of the loans is due. Strongco has not adopted hedge accounting for the
interest rate swap and, accordingly the change in the fair value of the swap is
recorded in interest expense.
b) Interest rate risk
The Company's interest rate risk primarily arises from its floating rate debt,
in particular its bank operating line of credit and its interest bearing
equipment notes payable. As at December 31, 2011, a portion of the Company's
interest bearing debt is subject to movements in floating interest rates.
The Company analyzes its interest rate exposure on a dynamic basis. Various
scenarios are simulated, taking into consideration refinancing, renewal of
existing positions, alternative financing and hedging. Based on these scenarios,
the Company calculates the impact on the consolidated statement of income (loss)
of a defined interest rate shift.
As at December 31, 2011, the Company had $100,200 in interest bearing floating
rate debt (December 31, 2010 - $91,666 and January 1, 2010 - $88,498). A 1.0%
change in interest rates would have an effect of approximately $1,002 on net
income for the year ended December 31, 2011 (December 31, 2010 - $917 and
January 1, 2010 - $885).
Credit risk
Credit risk arises from cash and cash equivalents held with banks and financial
institutions, derivative financial instruments (foreign exchange forward
contracts and interest rate swap contracts), as well as credit exposure to
customers, including outstanding trade receivables. The maximum exposure to
credit risk is equal to the carrying value of the financial assets.
The objective of managing counterparty credit risk is to prevent losses in
financial assets. The Company's management continuously 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. In certain circumstances, the
Company registers liens, priority agreements and other security documents to
further reduce the risk of credit losses. From time to time the Company requires
deposits before certain services are provided or contracts undertaken. As at
December 31, 2011, the Company held customer deposits of $756 (December 31, 2010
- $560 and January 1, 2010 - $515).
Liquidity risk
Liquidity risk arises through an excess of financial obligations over available
financial assets due at any point in time. The Company's objective in managing
liquidity risk is to maintain sufficient readily available reserves in order to
meet its liquidity requirements at any point in time. The Company achieves this
by maintaining sufficient availability of funding from committed credit
facilities. As at December 31, 2011, the Company had undrawn lines of credit
available to it of $11.5 million (December 31, 2010 - $7.6 million and January
1, 2010 - $9.9 million).
26. Management of capital
The Company defines capital that it manages as shareholders' equity and total
managed debt instruments consisting of equipment notes payable (both interest
bearing and non-interest bearing) and other interest bearing debt.
The Company's objectives when managing capital are to ensure that the Company
has adequate financial resources to maintain liquidity necessary to fund its
operations and provide returns to its shareholders.
Equipment notes payable comprise a significant portion of the Company's capital.
Increases and decreases in equipment notes payable can be significant from
period to period and are dependent upon multiple factors including: availability
of supply from manufacturers, seasonal market conditions, local market
conditions and date of receipt of inventories from the manufacturer.
The Company manages its capital structure in a manner to ensure that its ratio
of total managed debt instruments to shareholders' equity does not exceed 4.5.
As at December 31, 2011 and 2010, the above capital management criteria can be
illustrated as follows:
----------------------------------------------------------------------------
As at December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Interest bearing debt $ 10,951 $ 12,370 $ 10,014
Equipment notes payable 160,413 118,160 104,843
Other debt 19,800 1,233 2,312
----------------------------------------------------------------------------
Total managed debt instruments $ 191,164 $ 131,763 117,169
----------------------------------------------------------------------------
Shareholders' equity $ 56,591 $ 44,977 45,535
----------------------------------------------------------------------------
Ratio of total managed debt
instruments to shareholders'
equity 3.4 2.9 2.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company has credit facilities with a Canadian bank and US bank, which
provides an operating line of credit (refer to note 13).
The Company's bank credit facilities contain financial covenants that require
the Company to maintain certain financial ratios and meet certain financial
thresholds. In particular, the facility contains covenants that require the
Company to maintain a minimum ratio of total current assets to current
liabilities (Current Ratio covenant) of 1.1:1, a minimum tangible net worth (TNW
covenant) of $50 million, a maximum ratio of total debt to tangible net worth
(Debt to TNW Ratio covenant) of 4.0:1 and a minimum ratio of earnings before
interest, taxes, depreciation and amortization minus capital expenditures to
total interest (Debt Service Coverage Ratio covenant) of 1.3:1. For the purposes
of calculating covenants under the credit facility, debt is defined as total
liabilities less future income tax amounts and subordinated debt. The Debt
Service Coverage Ratio is measured at the end of each quarter on a trailing
12-month basis. Other covenants are measured as at the end of each quarter.
The Company was in compliance with all covenants under its bank credit facility
and all equipment finance lines as at December 31, 2011.
27. Key management compensation
Key management is comprised of the Chief Executive Officer, Chief Financial
Officer, external directors and vice-presidents of the Company. The compensation
paid or payable to key management for employee services is shown below:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Salaries and short-term benefits $ 1,583 $ 1,539
Employee future benefits 125 172
Share-based payments 115 146
----------------------------------------------------------------------------
$ 1,823 $ 1,857
----------------------------------------------------------------------------
----------------------------------------------------------------------------
28. Changes in non-cash working capital
The components of the changes in non-cash working capital are detailed below:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Changes in working capital
Trade and other receivables $ (2,366) $ (8,796)
Inventories (60,519) (33,739)
Prepaid expense and other deposits 133 (197)
Other assets 42 55
Trade and other payables 3,017 9,135
Provision for other liabilities (238) 70
Deferred revenue and customer deposits (355) 806
Income taxes recoverable/payable (55) -
Equipment notes payable 34,173 13,317
----------------------------------------------------------------------------
$ (26,168) $ (19,349)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
29. Seasonality
Historically, the Company's revenues and earnings throughout the year 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.
30. Economic relationship
The Company sells and services 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 the Company's operations. The Company has had a strong, ongoing relationship
with Volvo since 1991.
Orecap Invest (TSXV:OCI)
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