Strongco Corporation (TSX:SQP) today released financial results for the fourth
quarter ended December 31, 2010.
"Revenues in the fourth quarter, once again, improved over the preceding quarter
and were substantially ahead of the fourth quarter last year," said Robert
Dryburgh, President and Chief Executive Officer. "Importantly, we improved our
national market share over both the third quarter this year and the fourth
quarter of 2009. Equipment sales were up 47% over the fourth quarter of 2009,
benefitting from our commitment to rental product and the resultant large volume
of rental purchase option conversions in the quarter. Our order intake level is
being sustained after steadily increasing through the first half of the year and
we enter 2011 with this encouraging indication of strong demand."
"The substantial increase in revenues resulted in stronger margin dollars this
year," added Mr. Dryburgh. "These increases, combined with operational
improvements and cost reductions that we put in place during 2009, generated
EBITDA of $9.3 million in the fourth quarter, up from $2.9 million last year. As
a result, we ended the quarter with net earnings of $1.5 million, compared to a
loss of $2.1 million in the same period in 2009."
Financial Highlights (i)
($ millions except per share amounts)
----------------------------------------------------------------------------
Period ended December 31 3 months 12 months
----------------------------------------------------------------------------
2010 2009 2010 2009
----------------------------------------------------------------------------
Revenues $ 91.8 $ 67.6 $ 294.7 $ 291.8
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Earnings (loss) from
continuing operations 1.5 (2.1) (0.4) 0.7
----------------------------------------------------------------------------
Loss from discontinued
operations - - - (0.7)
----------------------------------------------------------------------------
Net income (loss) 1.5 (2.1) (0.4) -
----------------------------------------------------------------------------
EBITDA 9.3 2.9 22.5 18.0
----------------------------------------------------------------------------
Basic and diluted earnings
(loss) from continuing
operations per share $ 0.14 $ (0.20) $ (0.04) $ 0.07
----------------------------------------------------------------------------
Basic and diluted net income
(loss) per share $ 0.14 $ (0.20) $ (0.04) $ (0.0)
----------------------------------------------------------------------------
Total assets - - $ 219.4 $ 195.6
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Total debt - - $ 164.8 $ 140.9
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(i) Strongco's Engineered Systems division was sold during the second
quarter of 2009 and is considered a Discontinued Operation.
Fourth Quarter 2010 Review
Total revenues in the three months ended December 31, 2010 were $91.8 million,
an increase of 36% from the fourth quarter of 2009. "As expected, Strongco's
revenues in the first quarter were soft following the recession, but increased
each quarter thereafter and finished the year with a very strong fourth quarter
in all regions and revenue categories," said David Wood, Vice President and
Chief Financial Officer. "While the markets Strongco serves improved by
approximately 15% from the fourth quarter of 2009, Strongco outperformed the
market with total unit growth of greater than 45%."
Equipment sales increased by 47% from the fourth quarter of 2009 to $62.1
million. The gain was fuelled 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 as construction
markets recovered from the recession, remained high in the fourth quarter.
Strongco's rental revenues in the fourth quarter were $7.3 million, up 74% from
fourth quarter of 2009. Product support revenues in the fourth quarter gained 7%
from a year ago to $22.4 million.
Gross margin increased to $16.4 million from $13.1 million during the fourth
quarter. As a percentage of revenue, gross margin declined slightly to 17.8%
from 19.4% in the same period of 2009. This was primarily due to the large
increase and resulting higher proportion of equipment sales, which offer lower
margins than product support and rentals.
Administrative, distribution and selling expenses during the fourth quarter were
$13.5 million, which compared favourably to $14.4 million in the final quarter
of 2009. Operating expenses reflected cost reductions implemented during 2009.
As a result of the strong revenue performance, Strongco's net income in the
fourth quarter of 2010 was $1.5 million ($0.14 per share), a significant
improvement from a net loss of $2.1 million (loss of $0.20 per unit) in the
fourth quarter of 2009.
EBITDA for the fourth quarter increased to $9.3 million from $2.9 million a year
earlier.
Fiscal 2010 Financial Review
Total revenues for 2010 were $294.7 million compared to $291.8 million in 2009.
While this was modest annual growth of 1%, revenues increased each quarter
through the year as construction markets and demand for heavy equipment
recovered following the recession. As a result, revenues in the first and second
quarters were below 2009, while sales in the latter half of 2010 were well ahead
of the prior year.
Strongco's equipment sales were flat compared to 2009 at $183.7 million but
increased each quarter through the year. Rental revenues in 2010 were $22.2
million, an increase of 55% from 2009. Rental activity was higher as markets
recovered from the recession, especially rentals under RPO contracts. For the
year, Strongco's product support revenues, comprising business from parts and
service, totalled $88.8 million. This was 5% less than in 2009 but it increased
each quarter through the year.
Gross margin in 2010 was $56.7 million, which was down $3.2 million from 2009.
The decline was due to slightly lower margins on equipment sales, which
increased in volume during the year at the expense of product support sales,
which feature broader margins. The smaller proportion of product support sales
resulted in a lower overall gross margin percentage of 19.2%, compared to 20.5%
in 2009.
Administrative, distribution and selling expenses in 2010 moved down by 4% to
$53.6 million as the full year impact of the cost reduction initiatives
implemented in the prior year were realized.
Effective July 1, 2010, Strongco Income Fund converted from a trust to a
corporation. The changed involved one-time legal and other regulatory costs
totalling $0.5 million.
As a result of the lower gross margin for the year and the one-time conversion
costs, Strongco incurred a net loss for the year of $0.4 million, compared to
earnings from continuing operations totalling $0.7 million in 2009. After
discontinued operations, 2009 was at breakeven.
EBITDA from continuing operations was $22.5 million compared to $18.0 million in
2009.
Financial Position
Strongco continues to have access to a $20.0 million operating line of bank
credit, of which $12.4 million was drawn at December 31, 2010. In addition,
Strongco makes use of lines of credit from equipment manufacturers and other
third party lenders on an as-needed basis to finance its equipment purchases. A
total of $200 million is available under these lines, of which Strongco had
drawn $118 million at December 31, 2010.
Outlook
The economy and construction markets across Canada are expected to continue to
improve throughout 2011 which, in turn, will lead to increased demand for heavy
equipment and increased willingness of customers to purchase. Strongco's order
intake level, which rose during the first half of 2010 from the very low levels
that existed at the end of 2009, remained strong through the balance of the year
and into 2011, a positive sign that demand for heavy equipment is improving.
An important contribution to the anticipated growth in 2011 is expected from
Alberta. Oil prices have continued to show strength and stability and with that,
the economy in Alberta has continued to improve. In addition, there has been an
increase in construction activity in general throughout the province, especially
in the latter half of 2010 and Strongco's sales backlogs have increased. There
has also been an increase in equipment rental activity in Alberta. Consequently,
management is cautiously optimistic that heavy equipment markets in Alberta will
continue to improve in 2011.
During 2009 and 2010, most original equipment manufacturers (OEMs) scaled back
production and reduced capacity in response to the weak North American economy.
This resulted in increased delivery times and shortages of certain types of
equipment. A welcome upturn in the sales of equipment in the United States in
the fourth quarter of 2010 has OEMs striving to increase production capacity and
improve lead time and availability. There are indications of improvement but the
transition to the new tier 4 engine technology in 2011 is an added complication
that may lead to longer lead times and reduced supply. Management is optimistic
that Strongco's significant position with its OEMs will offset the impact of
equipment shortages.
Management remains cautiously optimistic that the improving economy in Canada in
the latter half of 2010 will continue in 2011 and expects demand for heavy
equipment will lead to increased revenues in 2011. In addition, the acquisition
of Chadwick- BaRoss, effective February 1, 2011 will contribute to improved
sales levels for Strongco in 2011. Chadwick-BaRoss services a broad range of
market sectors in Maine, New Hampshire and Massachusetts, similar to Strongco in
Canada. Management expects the demand for equipment in these regions will show a
modest increase from recent depressed levels at which Chadwick-BaRoss has been
profitable.
Conference Call Details
Strongco will hold a conference call on Wednesday, March 30, 2011 at 10 am ET to
discuss fourth quarter and year end results. Analysts and investors can
participate by dialing 416-644-3417 or toll free 1-866-250-4877. An archived
audio recording will be available until midnight on April 13, 2011. To access
it, dial 416-640-1917 and enter passcode 4429332#.
About Strongco Corporation
Strongco Corporation is one of Canada's largest multiline mobile equipment
dealers and operates in the northeastern U.S. through Chadwick-BaRoss, Inc.
Strongco sells, rents and services equipment used in sectors such as
construction, infrastructure, mining, oil and gas, utilities, municipalities,
waste management and forestry. Strongco has approximately 600 employees
servicing customers from 24 branches in Canada and five in the U.S. Strongco
represents leading equipment manufacturers with globally recognized brands,
including Volvo Construction Equipment, Case Construction, Manitowoc Crane,
Terex Cedarapids, Ponsse, Powerscreen, Skyjack, Fassi, Allied, Taylor, ESCO,
Dressta, Sennebogen, Takeuchi, Link-Belt and Kawasaki. Strongco is listed on the
Toronto Stock Exchange under the symbol SQP.
Forward-Looking Statements
This news release 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.
Forward-looking statements involve numerous assumptions and should not be read
as guarantees of future performance or results. Such statements will not
necessarily be accurate indications of whether or not such future performance or
results will be achieved. You should not unduly rely on forward-looking
statements as a number of factors, many of which are beyond the control of
Strongco, could cause actual performance or results to differ materially from
the performance or results discussed in the forward-looking statements,
including, inability to obtain requisite approvals; general economic conditions;
business cyclicality, relationships with manufacturers; access to products;
competition with existing business; reliance on key personnel; litigation and
product liability claims; inventory obsolescence; sufficiency of credit
availability; credit risks of customers; warranty claims; technology
interpretations; and labour relations. Although the forward-looking statements
contained in this news release are based upon what management of Strongco
believes are reasonable assumptions, Strongco cannot assure investors that
actual performance or results will be consistent with these forward-looking
statements. These statements reflect current expectations regarding future
events and operating performance and are based on information currently
available to Strongco's management. There can be no assurance that the plans,
intentions or expectations upon which these forward-looking statements are based
will occur. All forward-looking statements in this news release are qualified by
these cautionary statements. These forward-looking statements and outlook are
made as of the date of this news release and, except as required by applicable
law, Strongco assumes no obligation to update or revise them to reflect new
events or circumstances.
Information Contact
J. David Wood
Vice-President and Chief Financial Officer
Telephone: 905.565.3808
Email: jdwood@strongco.com
www.strongco.com
Strongco Corporation
Management's Discussion and Analysis
The following management discussion and analysis ("MD&A") provides a review of
the consolidated financial condition and results of operations of Strongco
Corporation, formerly Strongco Income Fund ("the Fund"), Strongco GP Inc. and
Strongco Limited Partnership collectively referred to as "Strongco" or "the
Company", as at and for the year ended December 31, 2010. 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,
2010. For additional information and details, readers are referred to the
Company's quarterly financial statements and quarterly MD&A for fiscal 2010 and
fiscal 2009 as well as the Company's Notice of Annual Meeting of Unitholders and
Information Circular ("IC") dated April 6, 2010, and the Company's Annual
Information Form ("AIF") dated March 30, 2010, 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/unit amounts. The
information in this MD&A is current to March 29, 2011.
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.
On October 31, 2006, the Minister of Finance of Canada ("the Minister")
announced the Federal government's proposal to change the tax treatment of
publicly traded income funds such as the Fund ("SIFT Rules"). The SIFT Rules
were subsequently enacted in the Income Tax Act. The SIFT Rules result in a tax
being applied at the trust level on distributions of certain income from
publicly traded mutual fund trusts at rates of tax comparable to the combined
federal and provincial corporate tax and to treat such distributions as
dividends to unitholders. Publicly traded income funds which were in existence
on October 31, 2006 have a four year transition period and generally are not
subject to the SIFT Rules until 2011, provided such trusts experienced only
"normal growth" and no "undue expansion" before then.
As a result of the changes in tax legislation and after consideration of the
benefits of conversion, the Board of Trustees of the Fund decided to recommend
to the unitholders conversion of the Fund from an income fund to a corporation.
A plan of arrangement for conversion was approved by the unitholders at the
Fund's Annual General Meeting on May 14, 2010, and 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, including its benefits, were outlined in the Fund's
Management Information Circular dated April 6, 2010, which contains the Plan of
Arrangement, and was provided to the unitholders prior to Annual General Meeting
on May 14, 2010 and is available on SEDAR at www.sedar.com.
FINANCIAL HIGHLIGHTS
-- Strongco's total revenues were $294.7 million, up slightly from $291.8
million in 2009.
-- Net loss for the year of $0.4 million, compared to income from
continuing operations of $0.7 million in 2009.
-- Before Plan of Arrangement costs of converting to a corporation, net
income for the year was at break even.
-- EBITDA from continuing operations for the year increased to $22.5
million from $18.0 million in 2009.
Income Statement Highlights Year ended December 31,
----------------------------------------------------------------------------
----------------------------------------------------------------------------
($ millions, except per share/unit
amounts) 2010 2009 2008
----------------------------------------------------------------------------
Revenues $ 294.7 $ 291.8 $ 398.3
Earnings from continuing operations $ (0.4) $ 0.7 $ (0.4)
Earnings (loss) from discontinued
operations $ - $ (0.7) $ -
----------------------------------------------------------------------------
Net income (loss) $ (0.4) $ - $ (0.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings (loss)
per share/unit from continuing
operations $ (0.04) $ 0.07 $ (0.04)
Basic and diluted earnings (loss)
per share/unit $ (0.04) $ - $ (0.04)
Distributions per share/unit $ - $ - $ 0.70
EBITDA (note 1) $ 22.5 $ 18.0 $ 20.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance Sheet Highlights
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment inventory $ 142.1 $ 124.5 $ 137.8
Total assets $ 219.4 $ 195.6 $ 240.9
Debt (bank debt and other notes
payable) $ 13.6 $ 12.3 $ 15.1
Equipment notes payable $ 118.2 $ 104.8 $ 118.9
Total liabilities $ 164.8 $ 140.9 $ 186.3
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes,
amortization of capital assets, amortization of intangible assets,
amortization of equipment inventory on rent, and goodwill impairment. EBITDA
is 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 under Canadian Generally Accepted
Accounting Principles ("GAAP") and therefore has no standardized meaning
prescribed by GAAP and may not be comparable to similar terms and measures
presented by other similar issuers. EBITDA is intended to provide additional
information on the Company's performance and should not be considered in
isolation, seen as a measure of cash flow from operations or as a substitute
for measures of performance prepared in accordance with GAAP.
COMPANY OVERVIEW
In May of 2009, Strongco disposed of the net assets of its Engineered Systems
business and now operates in one business segment, Equipment Distribution. The
comparative figures for 2009 have been restated to reflect the Engineered
Systems business as a discontinued operation. The results of operations
discussed in this MD&A refers to the Equipment Distribution business only.
Strongco is one of the largest multi-line mobile equipment distributors in
Canada. 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. 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;
ii. Case Corporation ("Case"), for which Strongco has a distribution
agreement for a substantial portion of Ontario; and
iii. Manitowoc Crane Group ("Manitowoc"), for which Strongco has
distribution agreements for the Manitowoc, Grove and National brands,
covering much of Canada, excluding Nova Scotia, New Brunswick and
Prince Edward Island.
The distribution agreements with Volvo and Case provide exclusive rights to
distribute the products manufactured by these manufacturers in specific regions
and/or provinces.
In addition to the above noted primary lines, Strongco also distributes several
other secondary or ancillary equipment lines and attachments.
FINANCIAL RESULTS - ANNUAL
Consolidated Results of Operations
Year ended December 31,
---------------------------------------------------
($ thousands, except per
unit amounts) 2010 2009 2008
----------------------------------------------------------------------------
Revenues $ 294,657 $ 291,795 $ 398,289
Cost of sales 237,971 231,847 332,463
----------------------------------------------------------------------------
Gross Margin 56,686 59,948 65,826
Admin, distribution and
selling expenses 53,604 55,822 61,062
Goodwill impairment - - 848
Amortization of
intangible assets - - 544
Plan of Arrangement 463 - -
Other income (740) (1,816) (690)
----------------------------------------------------------------------------
Operating income 3,359 5,942 4,062
Interest expense 4,816 4,433 4,143
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations
before income taxes (1,457) 1,509 (81)
Provision for income
taxes (1,040) 775 276
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations (417) 734 (357)
Earnings (loss) from
discontinued operations - (716) (41)
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) (417) 18 (398)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
share/unit from
continuing operations (0.04) 0.07 (0.04)
Basic and diluted
earnings (loss) per
share/unit (0.04) - (0.04)
Number of shares/units
issued 10,508,719 10,508,719 10,508,719
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key financial measures:
Gross margin as a
percentage of revenues 19.2% 20.5% 16.5%
Admin, distribution and
selling expenses as
percentage of revenues 18.2% 19.1% 15.3%
Operating income as a
percentage of revenues 1.1% 2.0% 1.0%
EBITDA (note 1) 22,500 18,017 20,520
2010/2009 2009/2008
---------------------------------------------------
($ thousands, except per
unit amounts) $ Change % Change $ Change % Change
----------------------------------------------------------------------------
Revenues $ 2,862 1.0% $ (106,494) -26.7%
Cost of sales 6,124 2.6% -100,616 -30.3%
----------------------------------------------------------------------------
Gross Margin -3,262 -5.4% -5,878 -8.9%
Admin, distribution and
selling expenses -2,218 -4.0% -5,240 -8.6%
Goodwill impairment - - -848 -100.0%
Amortization of
intangible assets - - -544 -100.0%
Plan of Arrangement 463 - - -
Other income 1,076 -59.3% -1,126 163.2%
----------------------------------------------------------------------------
Operating income -2,583 -43.5% 1,880 46.3%
Interest expense 383 8.6% 290 7.0%
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations
before income taxes -2,966 196.6% 1,590 -1963.0%
Provision for income
taxes -1,815 -234.2% 499 180.8%
----------------------------------------------------------------------------
Earnings (loss) from
continuing operations -1,151 156.8% 1,091 -305.6%
Earnings (loss) from
discontinued operations 716 -100.0% -675 1646.3%
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) -435 2416.7% 416 -104.5%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted
earnings (loss) per
share/unit from
continuing operations (0.11) 0.11
Basic and diluted
earnings (loss) per
share/unit (0.04) 0.04
Number of shares/units
issued
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 1)
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes,
amortization of capital assets, amortization of intangible assets,
amortization of equipment inventory on rent, and goodwill impairment. EBITDA
is 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 under Canadian Generally Accepted
Accounting Principles ("GAAP") and therefore has no standardized meaning
prescribed by GAAP and may not be comparable to similar terms and measures
presented by other similar issuers. EBITDA is intended to provide additional
information on the Company's performance and should not be considered in
isolation, seen as a measure of cash flow from operations or as a substitute
for measures of performance prepared in accordance with GAAP.
Market Overview
Economic activity in North America slowed considerably in the second half of
2008 as a result of the crisis in global financial markets, brought on by the
sub-prime mortgage collapse, which culminated in the near collapse of the U.S.
banking system in September 2008. This was followed by a rapid and substantial
decline in oil prices which led to the Canadian economy and the value of the
Canadian dollar falling sharply in the fourth quarter of 2008. This weakness
continued into 2009 with the economy slipping into a recession early in the
year. The recession in Canada lasted throughout most of 2009, but with improving
confidence, fueled in part by government stimulus spending, improving demand for
resource commodities and a strengthening Canadian dollar, economic growth,
although modest, resumed late in the year. The Canadian economy continued to
recover from the recession throughout 2010, although the economy in the United
States was much slower to recover. Improving oil and other resource prices,
combined with a weakening U.S. dollar, contributed to continued strengthening of
the Canadian dollar in 2010.
Construction markets generally follow the cycles of the broader economy, but
typically lag. As construction markets recover following a recession, demand for
heavy equipment normally improves as construction activity and confidence in
construction markets build. In addition, as the financial resources of customers
in that sector strengthen, they have historically replenished and upgraded their
equipment fleets after a period of restrained capital expenditures. Recovery in
equipment markets is normally first evident in equipment used in earth moving
applications and followed by cranes, which are typically utilized in later
phases of construction. Rental of heavy equipment is typically stronger
following a recession until confidence in construction markets is restored and
financial resources of customers improve.
While the economic recession that persisted throughout most of 2009 was
officially over in 2010 in Canada, construction markets remained weak in the
first quarter of 2010. With the onset of warmer spring weather and spurred by
government stimulus spending for infrastructure projects, construction activity
began to show signs of improvement in the second quarter. This improvement
continued in the third quarter as confidence in the economy increased.
Similarly, demand for new heavy equipment was soft in the first quarter but
started to improve late in the second quarter and continued to strengthen in the
third and fourth quarters of the year. While construction markets and demand for
heavy equipment were improving, many customers remained reluctant or lacked the
financial resources following the recession to commit to purchase new
construction equipment and instead rented to meet their equipment needs in the
first half of the year. That trend continued in the second half of the year, but
with confidence in the economy continuing to rise and construction activity
increasing, customers were more willing to purchase equipment and exercise
purchase options under rental contracts in the fourth quarter. Recovery was
first evident in the markets for compact and smaller, lower priced equipment
while demand for higher priced equipment was slower to recover. In particular,
the market for cranes remained weak in the first and second quarters of the year
but started to show improvement in the latter half of the year. Sales backlogs
for all categories of equipment, including cranes, improved steadily throughout
the first and second quarters and remained strong throughout the balance of 2010
and into 2011, a positive indication of the recovery of construction markets and
increase in demand for heavy equipment.
As construction markets in Canada strengthened, demand for heavy equipment
increased. The markets for heavy equipment in which Strongco operates were
estimated to be up on average between 15% and 25% across the country in 2010
with the largest increases in Alberta. Demand for heavy equipment varied
significantly from region to region and between product categories but in most
of the markets Strongco serves, total unit volume for general purpose equipment
(GPPE) and compact equipment was up over the prior year while unit volume for
road equipment was up in certain regions and down in others. While the continued
recovery in heavy equipment markets was positive, volumes in 2010 remained below
pre-recession levels.
While demand picked up in 2010, the recession in 2009 left many dealers holding
higher levels of aging inventories and equipment coming off of rent entering
2010 which led to aggressive price competition in the market. In addition, there
has been aggressive pricing in particular markets and product categories in an
apparent attempt by certain dealers to gain market share and increase equipment
population. Most dealer inventory is purchased from equipment manufacturers in
US dollars and the strengthening of the Canadian dollar to near parity with the
US dollar in the latter part of 2009, put additional pressure on selling prices
of equipment. The Canadian dollar remained strong relative to the US dollar
throughout 2010, resulting in continued pricing and margin pressure on
equipment.
During the recession period of 2009, significant volumes of new and used
equipment went to auction at prices that were depressed from traditional auction
pricing. As demand improved throughout 2010, and excess inventories were
reduced, the volume of equipment sold at auction declined and auction prices
increased. Used equipment pricing has generally improved through 2010 while
availability of used equipment became tighter.
As a consequence of the weak economy in 2009, particularly in the United States,
Original Equipment Manufacturers ("OEM's") scaled back production capacity.
While the economy and construction markets in Canada have been improving, OEM's
have struggled to bring production back on line at the same pace resulting in
the lengthening of delivery lead times and the reduced availability of new
equipment. This situation benefitted certain dealers in the first quarter which
were carrying higher levels of equipment inventories or with available equipment
coming off rent entering 2010. While the supply of new equipment improved as
capacity at OEM's increased throughout the year, the conversion to Tier 4
engines from Tier 3, to meet new environmental standards in the United States,
has also resulted in some shortages of equipment.
Revenues
A breakdown of revenue within the Equipment Distribution business for the years
ended December 31, 2010, 2009 and 2008 is as follows:
Year Ended December 31, 2010/09 2009/08
($ millions) 2010 2009 2008 % Var % Var
----------------------------------------------------------------------------
Eastern Canada (Atlantic
and Quebec)
---------------------------
Equipment Sales $ 71.2 $ 71.9 $ 79.6 -1% -10%
Equipment Rentals $ 8.3 $ 4.7 $ 5.3 78% -12%
Product Support $ 36.6 $ 38.0 $ 35.7 -4% 6%
----------------------------------------------------------------------------
Total Eastern Canada $ 116.1 $ 114.6 $ 120.6 1% -5%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------
Central Canada (Ontario)
---------------------------
Equipment Sales $ 70.7 $ 79.9 $ 124.2 -12% -36%
Equipment Rentals $ 6.0 $ 5.9 $ 4.0 1% 51%
Product Support $ 32.0 $ 36.3 $ 38.5 -12% -6%
----------------------------------------------------------------------------
Total Central Canada $ 108.7 $ 122.2 $ 166.6 -11% -27%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------
Western Canada (Manitoba to
BC)
---------------------------
Equipment Sales $ 41.8 $ 31.9 $ 78.2 31% -59%
Equipment Rentals $ 7.9 $ 3.7 $ 8.5 112% -56%
Product Support $ 20.2 $ 19.4 $ 24.4 4% -21%
----------------------------------------------------------------------------
Total Western Canada $ 69.9 $ 55.1 $ 111.1 27% -50%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------
TOTAL Equipment
Distribution
---------------------------
Equipment Sales $ 183.7 $ 183.7 $ 282.0 0% -35%
Equipment Rentals $ 22.2 $ 14.3 $ 17.7 55% -19%
Product Support $ 88.8 $ 93.7 $ 98.6 -5% -5%
----------------------------------------------------------------------------
TOTAL Equipment
Distribution $ 294.7 $ 291.8 $ 398.3 1% -27%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment Sales
To view the graph of equipment sales, please visit the following link:
http://media3.marketwire.com/docs/sqp0330equipmentsales.pdf.
Equipment sales throughout 2008 were robust despite the sudden and significant
weakening of the economy in October 2008. Existing backlogs partially sustained
weakening sales in the first quarter of 2009 as the economy slipped into
recession which lasted for most of the year. Construction markets in Canada
declined significantly during the recession and equipment sales fell in all
regions of the country in 2009. Total unit volumes in the markets Strongco
serves were estimated to be down on average approximately 50% in 2009 with some
regions experiencing decline of close to 80%. By comparison, Strongco's unit
volume across Canada was down only 40% in 2009 which resulted in a decline in
total equipment sales of $98.3 million or 35%.
With the recession over, construction markets slowly began to recover in Canada
in 2010. However, backlogs coming out of the recession were low and 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. For the full year, Strongco's equipment
sales were flat compared to 2009 at $183.7 million, however, sales increased
each quarter throughout the year as construction markets and demand for heavy
equipment recovered following the recession. While 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.
As anticipated, Strongco's equipment sales in the first quarter of 2010 remained
weak at $29.9 million, down 32% compared to the first quarter of 2009. Sales
increased in the second quarter to $41.7 million as heavy equipment markets
showed the first real signs of improvement late in the quarter, but remained
below 2009 levels. In the third quarter, despite the normal seasonal decline in
the market, Strongco's equipment sales increased to $49.9 million and exceeded
third quarter sales in 2009 by 5%. Equipment sales in the fourth quarter
increased further to $62.3 million, a 47% increase over the fourth quarter of
2009 due to continued strong demand for heavy equipment and a high level of
rental purchase option conversions in December, particularly in Alberta.
While the Canadian economy was showing modest recovery in the first quarter of
2010, construction markets were still feeling the effects of the recession. In
addition to weak demand for new equipment, in the aftermath of the recession,
many customers remained reluctant or did not have the financial resources to
purchase larger, higher price equipment (e.g. cranes, articulated trucks and
large loaders). As construction markets improved throughout the year, demand for
heavy equipment increased. Strongco's sales backlog followed the same trend.
While the economy had slipped into recession, sales backlogs entering 2009
remained quite high, especially for cranes, reflecting the stronger
pre-recession market in 2008. Sales backlog declined throughout the recession of
2009 and were very low entering 2010.Strongco's sales backlogs began to improve
in February of 2010 and continued to improve each month through June when they
stood at greater than $50 million, and remained at that higher level through the
balance of the year and into 2011.
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 throughout 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
remained below pre- recession levels in 2010, Strongco's average selling prices
increased throughout the year across most product categories. In the first half
of the year, many customers were reluctant or lacked the financial resources in
the aftermath of the recession to purchase new equipment, preferring instead to
rent or purchase used equipment. With continued strength in construction
markets, the situation improved in the third quarter but many customers remained
reluctant to purchase larger, higher price equipment (e.g. cranes, articulated
trucks and large loaders), preferring instead to rent, most often with an option
to purchase. As a result, the mix of equipment sales revenue remained more
heavily weighted to smaller, lower priced equipment and used equipment
throughout the first three quarters of the year, which contributed to lower
average selling prices. In the fourth quarter, average selling prices increased
due to a higher proportion of sales of larger equipment (loaders and articulated
trucks) many of which had been on rental contracts with purchase options. In
addition, the ongoing strength of the Canadian dollar and increased price
competition also contributed to lower average selling prices in 2010.
On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic)
were essentially flat year over year at $71.2 million. After a disappointing
first quarter, sales for the balance of the year improved each quarter. Fourth
quarter sales were particularly strong due in part to the conversion to sale of
several rental purchase option contracts in December. After some erosion of
market share in the first quarter, market shares recovered through the balance
of the year and increased significantly in the last quarter of the year. Most of
the sales improvement has been in rock crushing equipment, loaders and
articulated trucks. The crane market in Eastern Canada has generally remained
weak following the recession of 2009, but there has been some ongoing demand for
cranes for large hydroelectric projects in Quebec. For the year, sales of cranes
were down more than 50% from the prior year in Eastern Canada.
Strongco's equipment sales in Central Canada (Ontario) were down 12% in 2010
following a 36% reduction in 2009. Construction markets in Ontario were
significantly impacted by the recession of 2009 and recovery has been slow,
particularly in general purpose equipment ("GPPE"). Government stimulus spending
has had some positive effect on construction activity and the markets for GPPE
started to show recovery in the latter half of 2010. Strongco's sales
performance followed much the same trend with an improving sales performance in
the second half of the year, especially in the fourth quarter where equipment
sales were up 35% over the fourth quarter of 2009. As expected, the market for
compact equipment in Ontario has recovered much faster following the recession.
This was evident within Strongco's Case construction equipment business, which
has a stronger position in the compact end of the market. Sales of Case
equipment were up 30% from 2009 levels due to the market recovery and market
share gains. Price competition in Ontario remained aggressive in 2010,
especially from certain dealers attempting to capture market share in particular
product categories and markets and Strongco's market share in its Volvo business
has suffered. Personnel changes made within the sales organization of Strongco's
Volvo business unit early in the year also affected sales performance in Ontario
but the positive results of those actions began to be realized in the latter
part of the year with increased sales and market share gains in the fourth
quarter. The market for cranes in Ontario remained weak in 2010. While
construction activity in the province increased, demand for cranes which are
typically used in later phases of construction, remained soft. Strongco's sales
of cranes in Ontario improved in the fourth quarter of the year due the sales of
a few large cranes but for the full year were down 30% compared to 2009.
Equipment sales in Western Canada were up 31% over 2009 to $41.8 million.
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 have been
significantly impacted by weakness in the energy sector. In addition, Strongco
serves construction and infrastructure segments in the region, which were also
severely impacted by the recession. With the upward trend and sustainability in
oil prices, economic conditions in Alberta have been improving. Construction
activity and demand for heavy equipment began to show signs of improvement in
the second quarter and continued to improve in the third and fourth quarters and
into 2011. With confidence in the economy improving, Strongco's equipment sales
increased substantially in the latter half of the year, particularly in Northern
Alberta, where customers exercised purchase options on rental contracts entered
into earlier in the year. The markets served by Strongco in Alberta, excluding
cranes, were down relative to the first quarter of 2009 but grew significantly
in each quarter thereafter. For the year Strongco's markets in Alberta were
estimated to be up 22% for GPPE and up overall by 11%. After a decline in the
first half of the year, Strongco's market share in Alberta, excluding cranes,
improved substantially in the third and fourth quarters. Sales of cranes in the
second half of the year were more than double the level from a year ago and
ended the year ahead by 60%, further evidence markets are recovering. A sense of
optimism has developed in Alberta as oil prices have continued to strengthen.
Sales backlogs are continuing to build and the expectation is for continued
strength in 2011.
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 is a method of building sales revenues and the field population
of equipment.
Rental activity was stronger in 2009 compared to 2008, as customers were more
inclined to rent equipment rather than purchase in the uncertain, recessionary
environment. In 2010, following the recession, customers remained reluctant or
lacked the financial resources to purchase equipment. Consequently, Strongco
decided to commit a higher level of inventory available for RPO's and, as a
result, rental activity remained strong in 2010. While construction markets were
recovering, many customers opted to rent equipment under RPO contracts. Rentals
under RPO contracts were particularly strong in Alberta as the economy recovered
and activity in the oil sands increased, and in Quebec. A large number of these
RPO contracts were converted to sale in the fourth quarter, many in the last
month of the year, which contributed to Strongco's strong sales performance in
the fourth quarter.
While the loss of certain rental contracts for snow removal in Ontario reduced
rentals in the first quarter of 2010, Strongco's rental revenues were above 2009
levels and increased in each quarter thereafter during the balance of the year.
The majority of the rental revenue was from RPO activity reflecting the
preference of many customers to rent equipment following the recession. Rental
revenues in 2010 were $22.2 million, which was up 55% from $14.3 million in
2009. Rental activity was higher generally across all product categories and in
all regions of the country, but was particularly strong with larger, more
expensive equipment, including cranes in Alberta and Quebec. While the market
for cranes continued to show signs of improvement, many customers remained
reluctant to commit to purchase cranes at this time of the recovery cycle and
continued to prefer to rent. Strongco's crane rentals were up in all regions of
the country, and rentals of cranes under RPO remained strong, a positive sign
that construction markets are improving.
In Eastern Canada, which has traditionally not been a big rental market,
equipment rentals were $8.3 million in 2010, which was up 78% from 2009. Rental
revenues in Ontario were $6.0 million compared to $5.9 million in 2009. In
Alberta, which has traditionally been a strong rental market, rental revenues in
2010 were $7.9 million, which was more than double the prior year.
Product Support
Sales of new equipment usually carry the warranty from the manufacturer for a
defined term. Product support revenues from the sales of parts and service are
therefore not impacted until the warranty period expires. Warranty periods vary
from manufacturer to manufacturer and depending on customer purchases of
extended warranties. Product support activities (sales of parts and service
outside of warranty), therefore, tend to increase at a slower rate and lag
equipment sales by three to five years. The increasing equipment population in
the field leads to increased product support activities over time.
Product support 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. That trend was expected to continue into
2010, but the mild winter and lack of snow in the first quarter of the year,
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. With the mild winter and early onset of
spring, construction activity in 2010 commenced earlier in the season, which
resulted in increased sales of parts and service in the second quarter, but many
customers, particularly in Ontario, continued to only make critical repairs
necessary to keep their equipment in service. The situation in Central and
Eastern Canada was much the same in the third quarter, but in the fourth
quarter, parts and service activity increased relative to the fourth quarter of
2009. In Alberta, as customers began using equipment that had sat idle through
the recession in 2009, product support revenues increased throughout the year.
For the year, Strongco's product support revenues were $88.8 million, which was
down by 5% from 2009. Product support revenues were mixed on a regional basis.
In Alberta, where product support activity was particularly weak in 2009, parts
and service revenues were up 4%. In Central and Eastern Canada, parts and
service sales were down 12% and 4%, respectively.
Gross Margin
Year Ended December 31,
2010 2009 2008
---------------------------------------------------------
Gross Margin $ millions GM% $ millions GM% $ millions GM%
----------------------------------------------------------------------------
Equipment Sales $ 17.7 9.6% $ 19.0 10.3% $ 21.7 7.7%
Equipment Rentals $ 3.3 14.9% $ 2.4 16.8% $ 2.6 14.7%
Product Support $ 35.7 40.2% $ 38.5 41.1% $ 41.5 42.1%
----------------------------------------------------------------------------
Total Gross Margin $ 56.7 19.2% $ 59.9 20.5% $ 65.8 16.5%
----------------------------------------------------------------------------
2010/2009 2009/2008
-----------------------------------------
Gross Margin $ Variance % Var $ Variance % Var
------------------------------------------------------------
Equipment Sales (1.3) -7% (2.7) -12%
Equipment Rentals 0.9 39% (0.2) -8%
Product Support (2.8) -7% (3.0) -7%
------------------------------------------------------------
Total Gross Margin $ (3.2) -5% $ (5.9) -9%
------------------------------------------------------------
With lower revenues in 2009, Strongco's gross margin declined by $5.9 million or
9% from 2008, to $59.9 million. However, as a percentage of revenue, gross
margin improved in 2009 to 20.5% from 16.5% in 2008 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. In addition, the gross
margin percentage in 2008 was negatively impacted by the unusual inventory
reserves of $2.6 million primarily related to forestry equipment recorded in the
latter half of 2008.
Gross margin in 2010 was $56.7 million, which was down $3.2 million from 2009.
The decline was due primarily to sales mix which resulted in a lower overall
gross margin percentage of 19.2% compared to 20.5% in 2009. As construction
markets and demand for heavy equipment improved, equipment sales increased and
represented a higher proportion of revenues in 2010. This contributed most to
the decline in the overall gross margin percentage in 2010.
In 2009, the gross margin percentage on equipment sales was 10.3%, which was up
from 7.7% in 2008 due mainly to the unusual inventory reserves of $2.6 million
recorded in latter half of 2008, and in part to a slightly higher proportion of
used equipment sales. Sales of used equipment and equipment that has come off
rental typically generate higher margins than sales of new equipment. The gross
margin percentage on equipment sales declined slightly in 2010 to 9.6% due
primarily to price competition. In the first half of 2010, following the
recession, certain equipment dealers priced aggressively to sell aging equipment
inventories and equipment coming off rent. This put pressure on selling prices
and compressed margins. In addition, dealers of a particular brand of equipment
have been pricing very aggressively in an attempt to gain market share, which
has compressed selling prices and margin for certain product lines. The
continued strength of the Canadian dollar has also put pressure on selling
prices and resulted in lower gross margins on sales of inventory purchased when
the Canadian dollar was weaker.
The gross margin percentage on rental 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. During the recession, the volume of
RPO rentals was down which resulted in a slightly higher overall rental margin
in 2009 of 16.8% compared to 14.7% in 2008. Following the recession, rental
activity under RPO contracts increased in 2010, particularly in Alberta and
Quebec, which resulted in a lower overall rental gross margin percentage of
14.9%.
Gross margin percentage on product support activities was 40.2% in 2010, which
was down slightly from 41.1% in 2009 and 42.1% in 2008 due primarily to a higher
proportion of parts sales which offer lower margins compared to service revenue
and price competition for parts.
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 costs, 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% from 2008 to $55.8 million. While heavy equipment
markets have been improving and revenues growing throughout 2010, expense levels
have been 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, administrative, distribution and selling expenses were down a
further 4% in 2010 to $53.6 million.
Strongco's administration, distribution and selling expenses would have been
even lower in 2010 were it not for a lower net recovery on warranty work.
Strongco performs warranty repairs/replacements on behalf of the OEM suppliers
of the equipment it distributes and recovers its costs of warranty from the OEM.
The warranty recovery rates from the OEM typically provide Strongco a small net
recovery or profit from the performance of the warranty work. Following the
recession, OEM's have been more restrictive in reimbursing for warranty work and
warranty recovery rates have been reduced. In addition, the volume of warranty
work being carried out in 2010 was lower than in 2009. The lower volume of
warranty work, combined with the lower recovery rates has resulted in the net
warranty recovery amount being $1.3 million lower in 2010 compared to 2009.
While most expense categories were lower in 2010, additional expenses were
incurred in certain areas. Additional costs were incurred for a program to
provide increased training for its sales and customer support employees totaling
$0.2 million, and additional costs of $0.2 million were incurred for recruiting
and severance related to replacement of certain employees.
In addition, Strongco incurred some additional unusual costs in 2010 related to
its conversion to International Financial Reporting Standards (IFRS) totaling
approximately $0.2 million.
Plan of Arrangement Costs
Effective July 1, 2010, Strongco Income Fund converted from a trust to a
corporation (see discussion under the heading "Conversion to a Corporation").
Certain one-time legal and other regulatory costs totaling $0.5 million were
incurred to affect this conversion.
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 2009 was $1.8 million compared to $0.7 million in 2008. In 2008,
Strongco incurred a net foreign exchange loss of $1.5 million as a result of the
sharp decline in the value of the Canadian dollar in the fourth quarter of the
year. In 2009, Strongco incurred a net foreign exchange gain of $0.3 million due
to the strengthening of the Canadian dollar during the year. In addition, other
income in 2009 included the receipt of a recovery from Volvo Construction
Equipment of $0.4 million as an adjustment to the purchase price related to the
acquisition in 2008 of Champion Road Machinery. Commissions received from
finance companies were less in 2009 than in 2008 as a result of the lower sales
volumes in 2009.
Other income in 2010 declined to $0.7 million due primarily to the termination
of a royalty fee on parts distribution as the parts supplier changed to direct
distribution and the one-time recovery from Volvo in 2009 related to the
Champion acquisition. Other income in 2010 also included net unrealized losses
of $0.2 million on forward foreign exchange contracts due the continued strength
of the Canadian dollar relative to the U.S. dollar. The Company purchases future
foreign currency contracts as a hedge to protect the margin of certain equipment
inventory being purchased in U.S. dollars for a committed sale in the future.
The unrealized foreign exchange losses arose as a result of the strengthening of
the Canadian dollar relative to the exchange rate in the forward currency
contract. This unrealized foreign exchange loss will be offset by a realized
gain in gross margin at the time of the sale of the related equipment.
Interest Expense
Strongco's interest expense was $4.8 million in 2010 compared to $4.4 million in
2009 and $4.1 million in 2008.
Strongco's interest bearing debt comprises bank indebtedness and interest
bearing equipment notes. 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 twelve months from the date
of financing, after which the equipment notes become interest bearing. The rate
of interest on the Company's bank indebtedness and interest bearing equipment
notes varies with Canadian chartered bank prime rate ("prime rate") and Canadian
Bankers Acceptances Rates ("BA rates"). (See discussion under "Financial
Condition and Liquidity"). Prime rates and BA rates declined during the
recession in 2009 but have increased in 2010.
During 2009, in response to the recession, Strongco reduced equipment
inventories and correspondingly reduced equipment notes payable. However, as
most of the reduction occurred in the latter half of 2009, the average balance
of interest bearing equipment notes outstanding was slightly higher in 2009
compared to 2008. In response to the credit crisis in financial markets and the
weak economy during 2009, Strongco's equipment note lenders increased the
interest rates charged on the Company's equipment notes in 2009. The higher
interest rates combined with a slightly higher average balance of interest
bearing equipment notes outstanding in 2009, resulted in a higher interest
expense in the 2009 compared to 2008.
As demand for heavy equipment and equipment sales have increased throughout
2010, Strongco has increased inventory levels in support of this growth as well
as the commitment to inventory for the purposes of RPO's. Consequently,
equipment notes have increased correspondingly. As a result, the average balance
of interest bearing equipment notes outstanding was slightly higher in 2010
compared to 2009. Strongco's average bank debt levels were also higher in 2010
than in 2009. Prime lending rates have been increasing in 2010 following the
recession, which has resulted in higher rates of interest being charged on the
Company's bank debt and equipment notes in the year. The effective average
interest rate charged on Strongco's equipment notes was 5.4% in 2010 compared to
4.9% in 2009 and the effective average interest rate charged the Company's bank
indebtedness in 2010 was 3.7% compared to 3.0% in 2009. The higher effective
interest rates, combined with the slightly higher average balance of interest
bearing equipment notes and average bank debt levels in 2010, resulted in a
higher interest expense in the year.
Earnings (Loss) Before Income Taxes
In 2010, Strongco incurred a loss before taxes of $1.5 million which compares to
a profit before tax from continuing operations in 2009 of $1.5 million and loss
in 2008 of $0.1 million. The lower gross margin combined with higher interest
expenses and the costs for conversion to a corporation contributed to the loss.
Net Income (Loss)
Following conversion to a corporation on July 1, 2010, Strongco is now subject
to income tax at corporate tax rates, whereas previously, as an income trust,
the Fund was not subject to corporate tax. In addition, as a consequence of
conversion, Strongco is now able to utilize tax losses, including tax losses
previously unrecognized from the Fund. Strongco has tax affected the losses
since becoming a corporation and unrecognized losses carried forward from the
Fund prior to conversion, which resulted in a deferred recovery of income tax of
$1.0 million in 2010.
After this tax recovery, Strongco's net loss in 2010 was $0.4 million compared
to earnings from continuing operations in 2009 of $0.7 million and net loss of
$0.4 million in 2008. After the loss from discontinued operations, net income
was essentially at break even in 2009 and net loss of$0.4 million in 2008.
EBITDA From Continuing Operations
EBITDA (see note 1 below) from continuing operations in 2010 was $22.5 million
which compares to $18.0 million in 2009 and $20.5 in 2008. EBITDA was calculated
as follows:
Year Ended December 31,
2010 2009 2008 2010/2009 2009/2008
----------------------------------------------------------
$ millions $ millions $ millions $ Variance $ Variance
----------------------------------------------------------------------------
Earnings (loss)
from continuing
operations $ (0.4) $ 0.7 $ (0.4) $ (1.1) $ 1.1
Add Back:
Interest 4.8 4.4 4.1 0.4 0.3
Income taxes (1.0) 0.8 0.3 (1.8) 0.5
Amortization of
capital assets 0.9 0.9 0.8 - 0.1
Amortization of
intangible
assets - - 0.5 - (0.5)
Amortization of
equipment
inventory on
rent 18.2 11.2 14.3 7.0 (3.1)
Goodwill
impairment - - 0.8 - (0.8)
----------------------------------------------------------------------------
EBITDA (note 1) -
from continuing
operations $ 22.5 $ 18.0 $ 20.5 $ 4.5 $ (2.5)
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes,
amortization of capital assets, amortization of intangible assets,
amortization of equipment inventory on rent, and goodwill impairment. EBITDA
is a measure used by many investors to compare issuers on the basis of
ability to generate cash flow from operations. EBITDA is not an earnings
measure recognized by GAAP, does not have standardized meanings prescribed
by GAAP and is therefore unlikely to be comparable to similar measures
presented by other issuers. The Company's management believes that EBITDA is
an important supplemental measure in evaluating the Company's performance
and in determining whether to invest in Shares. Readers of this information
are cautioned that EBITDA should not be construed as an alternative to net
income or loss determined in accordance with GAAP as indicators of the
Company's performance or to cash flows from operating, investing and
financing activities as measures of the Company's liquidity and cash flows.
The Company's method of calculating EBITDA may differ from the methods used
by other issuers and, accordingly, the Company's EBITDA may not be
comparable to similar measures presented by other issuers.
Discontinued Operations
In May 2009, Strongco sold the net assets of its Engineered Systems business
allowing Strongco to focus its resources and management efforts on growing its
core Equipment Distribution business. In accordance with the CICA Handbook
section 3475 - Disposal of Long-Lived Assets and Discontinued Operations, the
results of operations of the Engineered Systems business, together with the loss
on sale have been reported as discontinued operations in 2009 and 2008.
Cash Flow, Financial Resources and Liquidity
Cash Flow Used In Operating Activities:
During 2010, Strongco used $0.5 million of cash in operating activities of
continuing operations compared to $3.2 million of cash used in operating
activities of continuing operations in 2009. Before changes in working capital,
operating activities in 2010 provided cash of $18.7 million. However, this was
more than offset by $19.2 million of cash used to increase net working capital.
By comparison, in 2009, operating activities from continuing operations, before
changes in working capital, provided cash of $12.0 million and working capital
increases used $15.2 million of cash.
The components of the cash used in operating activities were as follows:
Year Ended December 31,
($ millions) 2010 2009
----------------------------------------------------------------------------
Earnings (loss) from continuing operations $ (0.4) $ 0.7
Add (deduct) items not involving an outlay
(inflow) of cash
Amortization of capital assets 0.9 0.9
Amortization of equipment on rent 18.2 11.2
Loss (gain) on disposal of capital assets - 0.1
Stock based compensation 0.3 0.1
Future income taxes (recovery) (1.0) 0.1
Other 0.8 (1.1)
----------------------------------------------------------------------------
$ 18.7 $ 12.0
Changes in non-cash working capital balances (19.2) (15.2)
----------------------------------------------------------------------------
Cash used in operating activities of continuing
operations (0.5) (3.2)
Cash used in operating activities of discontinued
operations - (0.4)
----------------------------------------------------------------------------
Cash used in operating activities $ (0.5) $ (3.6)
----------------------------------------------------------------------------
Items not involving an outlay of cash includes amortization of equipment
inventory on rent of $18.2 million in 2010 and $11.2 million in 2009. Higher
volumes of equipment rentals in 2010 resulted in the higher amortization of
equipment inventory on rent.
The components of the (increase)/decrease in non-cash working capital was as
follows:
Net (Increase)/Decrease in Non-cash Working Changes in Non-Cash Working
Capital Capital
(millions) Year ended December 31,
(increase)/decrease 2010 2009
----------------------------------------------------------------------------
Accounts receivable $ (8.8) $ 13.1
Inventories (33.7) 8.4
Prepaids (0.2) -
Income & other taxes receivable - 0.8
----------------------------------------------------------------------------
$ (42.7) $ 22.3
----------------------------------------------------------------------------
increase/(decrease)
Accounts payable and accrued liabilities 9.4 (21.2)
Deferred revenue & customer deposits 0.8 (2.1)
Equipment notes payable - non-interest
bearing 11.4 (6.9)
Equipment notes payable - interest bearing 1.9 (7.1)
----------------------------------------------------------------------------
$ 23.5 $ (37.4)
----------------------------------------------------------------------------
Net Increase in Non-cash Working Capital $ (19.2) $ (15.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As construction markets began to recover in 2010 from the recession, Strongco's
revenues have increased through the year and in the fourth quarter, in
particular. As a result, as revenues increased, accounts receivable increased
and at December 31, 2010 were at $35.9 million compared to $27.1 million a year
earlier. In addition, Strongco made further investment in inventory and other
assets in 2010 in support of the increasing revenues. Equipment inventories at
December 31, 2010 were $142.1 million compared to $124.5 million at December 31,
2009. Accounts payable and equipment notes have increased in 2010 in support of
the increase level of business activities and to finance the increased
investment in inventories and other assets. Non-interest equipment notes at
December 31, 2010 were $40.1 million compared to $28.7 million at December 31,
2009 and interest bearing equipment notes were $78.1 million at December 31,
2010 compared to $76.2 million at December 31, 2009.
By comparison, in 2009 the recession resulted in a weakening of markets for
heavy equipment throughout the year and reduced business and revenues for
Strongco. As a result, accounts receivable in 2009 declined. During this period
Strongco, scaled back its purchases of inventory, reducing the amount of
inventory it was carrying and the related equipment notes financing the
inventory. As business slowed during 2009, accounts payable declined and cost
reduction initiatives implemented in 2009 resulted in a reduction in expenses
and a further decline in accounts payable during the year.
Cash Provided By (Used In) Investing Activities:
During 2009 and 2010, Strongco restricted spending for fixed assets and other
investing activities in response to the weak construction markets and lower
revenues in the year. Net cash used in investing activities of continuing
operations in 2010 amounted to $0.6 million for capital expenditures related to
the upgrade of facilities and purchase of miscellaneous shop equipment. Capital
expenditures in 2009 for the upgrade of facilities and purchase of miscellaneous
shop equipment amounted to $0.7 million. Cash of $0.9 million was generated in
2009 on the sale of the Company's branch in Timmins, Ontario.
Cash flow from investing activities of discontinued operations in 2009 includes
the net proceeds received on the sale of Strongco Engineered Systems of $6.2
million.
The components of the cash used in operating activities were as follows:
Year Ended December 31,
($ millions) 2010 2009
----------------------------------------------------------------------------
Purchase of capital assets $ (0.6) $ (0.7)
Proceeds from disposition of capital assets 0.1 0.9
Capital lease repayments (0.1) -
----------------------------------------------------------------------------
Cash provided by (used in) investing activities
of continuing operations (0.6) 0.2
Cash provided by investing activities of
discontinued operations - 6.2
----------------------------------------------------------------------------
Cash provided by (used in) investing activities $ (0.6) $ 6.4
----------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities:
During 2010, Strongco made a scheduled $1.2 million partial repayment of note
taken back by Volvo Construction Equipment on the acquisition of Champion in
2008. The final repayment of this note of $1.2 million is due March 2011. In
addition, bank borrowing increased to support Strongco's increase in business
throughout 2010. In total, bank indebtedness increased by $2.4 million during
2010.
By comparison, during 2009, Strongco reduced its bank debt by $2.8 million
primarily as a result of the $6.2 million of cash received on the sale of
Strongco Engineered Systems and $0.9 million of proceeds on the sale of the
Timmins facility which were partially offset by cash used in operating
activities and capital expenditures in the year. Bank debt at December 31, 2010
was $12.4 million compared to $10.0 million at December 31, 2009. No
distributions were paid in 2009 or in 2010 prior to conversion to a corporation
(see discussion under "Conversion to a Corporation") following suspension of
distributions in August 2008.
Cash Provided By (Used In) Financing Activities Year Ended December 31,
($ millions) 2010 2009
----------------------------------------------------------------------------
Increase (decrease) in bank indebtedness 2.4 (2.8)
Repayment of term debt (1.2) -
----------------------------------------------------------------------------
Cash (used in) provided by financing activities 1.2 (2.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bank Credit Facilities
The Company has a credit facility with a Canadian Chartered Bank which provides
a $20 million 364-Day committed operating line of credit which is renewable
annually. Borrowings under the line of credit are limited by a standard
borrowing base calculation based on accounts receivable and inventory, typical
of such lines of credit. As collateral the Company has provided a $50 million
debenture and a security interest in accounts receivables, 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. Interest rates on the operating line ranges
between bank prime rate plus 0.50% and bank prime rate plus 1.50% and between
the one month Canadian Bankers' Acceptance Rates ("BA rates") plus 1.75% and BA
rates plus 2.75%, depending on the Company's ratio of debt to tangible net worth
("TNW"). Under its operating facility, 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 line 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, 2010,
there were outstanding letters of credit of $0.1 million.
In addition to its operating line of credit, the Company has a $15 million line
for foreign exchange forward contracts as part of its bank credit facilities
("FX Line") available to hedge foreign currency exposure. Under this FX Line,
Strongco can purchase foreign exchange forward contracts up to a maximum of $15
million. As at December 31, 2010, the Company had outstanding foreign exchange
forward contracts under this facility totaling US$7.5 million at an average
exchange rate of $1.0227 Canadian for each US $1.00 with settlement dates
between January and May 2011. At December 31, 2009 there were foreign exchange
forward contracts outstanding of US$2.4 million at an average exchange rate of
$1.07 Canadian for each US $1.00.
The Company's bank credit facility contains 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 $54 million ($50 million at December 31, 2010 as outlined
below), a maximum ratio of total debt to tangible net worth ("Debt to TNW Ratio
covenant") of 3.5 : 1 and a minimum ratio of EBITDA minus capital expenditures
to total interest ("Debt Service Coverage Ratio covenant") of 1.3 : 1. For the
purposes of calculating covenants under the credit facility, debt is defined as
total liabilities less future income tax amounts and subordinated debt. The Debt
Service Coverage Ratio is measured at the end of each quarter on a trailing
twelve month basis. Other covenants are measured as at the end of each quarter.
On March 29, 2010, the bank renewed the credit facility and the $20 million
operating line of credit, and the $10 million foreign exchange line ("FX Line").
In conjunction with this renewal, the bank amended the covenants to reduce the
minimum tangible net worth requirement to $52 million as at March 31, 2010,
increasing to $54 million as at June 30, 2010. All other terms and conditions of
the credit facility remained unchanged.
As at June 30, 2010 actual tangible net worth was $52 million. On August 6, 2010
the bank issued a waiver for the shortfall in the covenant and amended the
minimum tangible net worth requirement to $50 million as at September 30, 2010,
increasing to $54 million as at December 31, 2010. In addition, the bank
increased the FX Line to $15 million. The bank charged a fee of $25 thousand for
these amendments.
On December 30, 2010 the bank amended the minimum tangible net worth requirement
to $50 million as at December 31, 2010, increasing to $54 million as at March
31, 2011.
The Company was in compliance with all covenants under its bank credit facility
as at December 31, 2010.
In addition to the covenants, the bank's prior written consent is required for
the Company to declare or pay any cash dividends, repurchase or redeem any of
its shares or reduce its capital in any way whatsoever, or repay any Shareholder
advance.
Equipment Notes
In addition to its bank operating line of credit, the Company has lines of
credit available totaling $200 million from various non- bank equipment lenders,
which are used to finance equipment inventory. The available credit was
increased from $155 million as one of the Company's equipment lenders increased
the credit line by $45 million in September 2010. At December 31, 2010, there
was $118.0 million borrowed on the equipment finance lines compared to $104.8
million borrowed at December 31, 2009.
Typically, these equipment notes are interest free for periods up to 12 months
from the date of financing, after which they bear interest at rates ranging from
4.25% to 5.85% over the one month BA rate or 3.25% to 4.9% over the prime rate
of a Canadian chartered bank. As collateral for these equipment notes, the
Company has provided liens on specific inventories and accounts receivable.
Monthly principal repayments or "curtailments" equal to 3% of the original
principal balance of the note commence 12 months from the date of financing and
the remaining balance is due in full at the earlier of 24 months after financing
and when the financed equipment is sold. While financed equipment is out on
rent, monthly curtailments are required equal to the greater of 70% of the
rental revenue, and 2.5% of the original value of the note. While any remaining
balance after 24 months is due in full, any remaining balance is normally
refinanced with the lender over an additional period of up to 24 months. All of
the Company's equipment notes facilities are renewable annually.
Certain of the Company's equipment note credit agreements contain restrictive
financial covenants, including requiring the Company to remain in compliance
with the financial covenants under all of its other lending agreements ("cross
default provisions"). The company obtained waivers for the cross default that
arose as a result of the violation under the Company's bank covenants at June
30, 2010 from all of its equipment note lenders. The Company was in compliance
with all financial covenants under these equipment notes at December 31, 2010.
The balance outstanding under the Company's debt facilities at December 31, 2010
and 2009 was as follows:
Debt Facilities
As at December 31 ($ millions) 2010 2009
----------------------------------------------------------------------------
Bank indebtedness (including outstanding cheques) $ 12.4 $ 10.0
Equipment notes payable - non interest bearing 40.1 28.7
Equipment notes payable - interest bearing 78.1 76.2
Other notes payable 1.2 2.3
----------------------------------------------------------------------------
$ 131.8 $ 117.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at December 31, 2010 there was $7.6 million of unused credit available under
the bank credit line. While availability under the bank line fluctuates daily
depending on the amount of cash received and cheques and other disbursements
clearing the bank, availability generally ranged between $7 million and $15
million throughout 2010. The Company also had availability under its equipment
finance facilities of $81.8 million at December 31, 2010.
Management expects the Canadian economy will continue to strengthen in 2011 and
construction markets will improve, which in turn will lead to increased spending
for heavy construction equipment (see Outlook section). As a result, management
anticipates Strongco's cash flows from operations, before changes in working
capital, will improve throughout 2011. While management anticipates increased
purchases of equipment to support the expected increased level of activity in
construction markets, inventory levels will continue to be managed closely
relative to sales activity. Management does not expect significant growth in
working capital as any increased investment in equipment inventory will be
financed through the availability under the Company's equipment finance
facilities. With the level of funds available under the Company's bank credit
line, 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.
Management plans to upgrade or replace certain of the Company's branch locations
in 2011 and to add branches in select regions to increase market presence and
better service customers. Management intends to finance these branch expansions
with either new real property leases, in many cases replacing existing leases,
or from new term mortgage financing secured against the properties to be
financed which management believes can be obtained from the Company's current
bank or other third party lenders.
Subsequent Events
Rights Issue
On January 17, 2011, subsequent to its year end, the Company completed a rights
offering, under which 2.6 million additional shares were issued to existing
shareholders for gross proceeds of $7.9 million (refer to the Company's Rights
Offering Circular filed on SEDAR for details). The total shares outstanding
following completion of the rights offering was 13,128,629. Proceeds from the
rights offering will be used for Strongco's future growth.
Acquisition of Chadwick-BaRoss, Inc.
On February 17, 2011, subsequent to its year end, the Company completed the
acquisition of 100% of the shares of Chadwick- BaRoss, Inc. for US$11.5 million.
The transaction value was satisfied with cash of US$9.6 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.
In the fiscal year ended January 31, 2011, Chadwick-BaRoss was profitable on
sales of approximately US$44 million and generated EBITDA of approximately
US$3.6 million. As at January 31, 2011, Chadwick-BaRoss, Inc. had total assets
of approximately $33,216 and total liabilities of approximately $21,821,
included bank indebtedness and term loan of $4,047.
FINANCIAL RESULTS - FOURTH QUARTER
Consolidated Results of Operations for the Three Months Ended December 31
Three month ending
December 31, 2010/2009
-----------------
($ thousands, except per %
unit amounts) 2010 2009 $ Change Change
----------------------------------------------------------------------------
Revenues $ 91,798 $ 67,494 $ 24,304 36.0%
Cost of sales 75,431 54,405 21,026 38.6%
----------------------------------------------------------------------------
Gross Margin 16,367 13,089 3,278 25.0%
Admin, distribution and
selling expenses 13,524 14,374 -850 -5.9%
Other income (273) (590) 317 -53.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating income 3,116 (695) 3,811 -548.3%
Interest expense 1,354 1,135 219 19.3%
----------------------------------------------------------------------------
Earnings (loss) before
income taxes 1,762 (1,830) 3,592 196.3%
Provision for income taxes 277 270 7 2.6%
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) $ 1,485 $ (2,100) $ 3,585 170.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic and diluted earnings
(loss) per unit 0.14 (0.20) 0.34 170.7%
Number of units issued 10,508,719 10,508,719
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Key financial measures:
Gross margin as a
percentage of revenues 17.8% 19.4%
Admin, distribution and
selling expenses as
percentage of revenues 14.7% 21.3%
Operating income as a
percentage of revenues 3.4% -1.0%
EBITDA (note1) $ 9,256 $ 2,867 $ 6,389 222.8%
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes,
amortization of capital assets, amortization of intangible assets,
amortization of equipment inventory on rent, and goodwill impairment. EBITDA
is 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 under Canadian Generally Accepted
Accounting Principles ("GAAP") and therefore has no standardized meaning
prescribed by GAAP and may not be comparable to similar terms and measures
presented by other similar issuers. EBITDA is intended to provide additional
information on the Company's performance and should not be considered in
isolation, seen as a measure of cash flow from operations or as a substitute
for measures of performance prepared in accordance with GAAP.
Market Overview
While the Canadian economy started to emerge from recession in the latter part
of 2009, construction activity remained very slow in the fourth quarter of 2009
resulting in continued weak markets for heavy equipment. With the recession
over, construction markets slowly began to recover in Canada in 2010, although
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. While the third quarter
experienced the normal seasonal decline, demand for equipment increased
throughout the balance of the year. In Strongco's markets total unit volume in
the fourth quarter was estimated to be up 6% from the level in third quarter and
compared to the fourth quarter of 2009, total unit volume was estimated to be up
15%.
Regionally recovery was most pronounced in Alberta, where the economy has been
significantly impacted by weakness in the energy sector. In addition, Strongco
serves construction and infrastructure segments in the region, which were also
severely impacted by the recession. With the upward trend and sustainability in
oil prices, economic conditions in Alberta have been improving. Construction
activity and demand for heavy equipment began to show signs of improvement in
the second quarter and continued to improve in the third and fourth quarters and
into 2011. With confidence in the economy improving, Strongco's equipment sales
increased substantially in the latter half of the year, particularly in Northern
Alberta, where customers exercised purchase options on rental contracts entered
into earlier in the year.
Recovery in demand for compact equipment was much faster than for larger, more
expensive units. The market for cranes remained particularly weak in the first
and second quarters of the year but started to show improvement in the latter
half of the year and finished with a strong fourth quarter.
Rental activity was also strong throughout 2010, especially rentals under RPO
contracts, as customer remained reluctant or lacked financial resources to
purchase equipment. Customers' willingness to purchase equipment increased as
construction markets improved and their backlog of business grew. This was
particularly evident with larger, more expensive equipment (articulated trucks,
large loaders and cranes), many of which were rented under RPO contracts. As a
result of a high level of rental purchase option conversions in December,
particularly in Alberta, equipment sales in the fourth quarter were very strong.
After a slow first quarter, as construction activity picked up, product support
activity also slowly started to increase in 2010, however, many customers,
particularly in Ontario, continued to only make critical repairs necessary to
keep their equipment in service. The situation improved further in the fourth
quarter and parts and service activity increased relative to the fourth quarter
of 2009. In Alberta, as customers began using equipment that had sat idle
through the recession in 2009, product support revenues increased throughout the
year and remained strong into the fourth quarter.
Revenues
Strongco's revenues generally followed this market trend throughout 2010. First
quarter revenues remained depressed but increased each quarter thereafter and
finished the year with a strong fourth quarter 15% over the third quarter and
36% higher than in the fourth quarter of 2009. Revenues increased in all
categories, (sales, rentals and product support) were up in the quarter and in
all regions of the country.
A breakdown of revenue for the three months ended December 31, 2010, 2009 and
2008 were as follows:
Three Months Ended
December 31, 2010/09
($ millions) 2010 2009 % Var
----------------------------------------------------------------------------
Eastern Canada (Atlantic and Quebec)
---------------------------------------
Equipment Sales $ 23.4 $ 18.8 24%
Equipment Rentals $ 2.7 $ 1.5 80%
Product Support $ 8.8 $ 8.7 1%
----------------------------------------------------------------------------
Total Eastern Canada $ 34.9 $ 29.0 20%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------
Central Canada (Ontario)
---------------------------------------
Equipment Sales $ 23.6 $ 17.4 36%
Equipment Rentals $ 1.7 $ 1.7 0%
Product Support $ 8.5 $ 8.1 5%
----------------------------------------------------------------------------
Total Central Canada $ 33.8 $ 27.2 24%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------
Western Canada (Manitoba to BC)
---------------------------------------
Equipment Sales $ 15.1 $ 6.1 148%
Equipment Rentals $ 2.9 $ 1.0 192%
Product Support $ 5.1 $ 4.2 23%
----------------------------------------------------------------------------
Total Western Canada $ 23.1 $ 11.3 104%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------
TOTAL Equipment Distribution
---------------------------------------
Equipment Sales $ 62.1 $ 42.3 47%
Equipment Rentals $ 7.3 $ 4.2 74%
Product Support $ 22.4 $ 21.0 7%
----------------------------------------------------------------------------
TOTAL Equipment Distribution $ 91.8 $ 67.5 36%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment Sales
Strongco's equipment sales grew by 24% over the third quarter to $62.1 million
and were up 47% from sales in the fourth quarter of 2009. Sales were up across
all of Strongco's major brands, including cranes, and in all regions of the
country, with the largest increases in Alberta.
As construction markets in Canada continued to recover from the recession of
2009, the markets for heavy equipment in which Strongco operates showed further
improvement in the fourth quarter. In the markets Strongco serves, total unit
volumes were up an estimated 6% over the third quarter and 15% over the fourth
quarter of 2009, with the largest market increase within GPPE which grew by 26%
over both the third quarter of 2010 and the fourth quarter of 2009.
Strongco outperformed its market with total unit growth of greater than 30% over
the third quarter and more than 45% from the fourth quarter of 2009, and
realized substantial market share gains. Strongco's performance was strongest
within GPPE with unit volume increasing by more than 95% from the third quarter
and more than 57% from the fourth quarter of 2009. The strong GPPE performance
was fueled by a significant volume of RPO contracts being converted to sale in
the quarter, especially in Alberta and Quebec.
On a regional basis, sales in Western Canada were up 148% over the fourth
quarter of 2009. As indicated, sales growth was strongest in Alberta where
economic growth has been fueled by recovery in the oil sands. Sales in Northern
Alberta benefitted from a large volume of conversions of RPO contracts for
articulated trucks entered into earlier in the year, with most conversions
occurring in December. Crane sales in Western Canada were also stronger in the
fourth quarter compared to the fourth quarter of 2009.
Equipment Sales in Eastern Canada were also stronger in the fourth quarter with
an increase of 24% from the fourth quarter of 2009. Sales were especially strong
in Quebec, which benefitted from a high volume of RPO conversions and large
sales to customers involved in hydro electric projects in the province.
Sales in Central Canada were up 36% from the fourth quarter of 2009 due mainly
to a strong sales performance within the Company's Case product line.
Equipment Rentals
As expected, rental activity was higher in 2010 following the recession, as
construction markets and customer confidence and financial resources grew. In
particular, many customers opted to rent equipment under RPO contracts as
construction markets recovered. RPO contracts were particularly high in Alberta
and Quebec. While the loss of certain rental contracts for snow removal in
Ontario reduced rentals in the first quarter of 2010, Strongco's rental revenues
increased each quarter thereafter reflecting customers' preference to rent
equipment following the recession. Rental revenues in the fourth quarter were
$7.3 million, which was up 6% from the third quarter and up 74% from fourth
quarter of 2009. Rental activity was higher generally across all product
categories, including cranes, and in all regions of the country.
In Eastern Canada, which has traditionally not been a big rental market,
equipment rentals were $2.7 million in the fourth quarter of 2010, which
compared to $1.5 million in the same quarter in 2009. Rental revenues in Ontario
were $1.7 million, unchanged from a year ago. In Western Canada, which has
traditionally been a strong rental market, especially in Alberta, rental
revenues in the fourth quarter were $2.9 million, which was almost triple that
of a year ago. A large volume of the rentals in Alberta and Quebec were RPO
contracts, most of which converted to sale in December which contributed to the
stronger sales in the quarter.
Product Support
Relative to the decline in heavy equipment markets that occurred during the
recession in 2009, product support activity remained fairly strong as customers
opted to repair/refurbish their existing equipment rather than buy new. However,
in light of the weak economic conditions, many customers chose to make only
critical repairs to the equipment they were working, and as a result parts and
service revenues, while representing a higher proportion of total revenues,
declined in 2009. While the recession was officially over in 2010, that trend
continued through the first half of the year until construction activity and
confidence in construction markets improved. As construction markets gained
momentum throughout 2010, product support activity and revenues slowly
increased.
Strongco's product support revenues in the fourth quarter were $22.4 million,
which was up 7% from a year ago. Strongco's operations in Alberta, which
experienced a significant drop in product support revenues in 2009, have seen a
steady increase in product support activities in 2010 as customers began working
their equipment. Parts and service revenues were up 23% in Western Canada in the
fourth quarter of 2010 compared to 2009. In Eastern Canada (Quebec and
Atlantic), which was least affected by the recession in 2009, product support
revenues in the fourth quarter were flat compared to 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. Some improvement was evident in the fourth quarter and
Strongco's operations in Central Canada achieved a 5% increase in product
support revenues from a year ago, the first quarterly increase in 2010.
Strongco's shops in Ontario have continued to be busier into the first quarter
of 2011 which should lead to higher product support revenues.
Gross Margin
Three Months Ended December 31,
2010 2009 2010/2009
--------------------------------------------------------
Gross Margin $ millions GM% $ millions GM% $ Variance % Var
----------------------------------------------------------------------------
Equipment Sales $ 6.3 10.1% $ 3.8 9.0% $ 2.5 66%
Equipment Rentals $ 1.1 15.1% $ 0.6 14.3% $ 0.5 83%
Product Support $ 9.0 40.1% $ 8.7 41.4% $ 0.3 3%
----------------------------------------------------------------------------
Total Gross Margin $ 16.4 17.8% $ 13.1 19.4% $ 3.3 25%
----------------------------------------------------------------------------
As a result of the higher revenues in the fourth quarter of 2010 compared to the
fourth quarter of 2009, Strongco's gross margin increased by $3.3 million, or
25%. As a percentage of revenue, total gross margin in the fourth quarter of
2010 was 17.8%, which was down from 19.4% in the fourth quarter of 2009 due
mainly to sales mix.
The majority of the margin increase came from equipment sales which we up 47% in
the quarter. Equipment sales in the fourth quarter of 2010 represented a larger
proportion of revenues in 2010 which contributed to the decline in the overall
gross margin percentage. Equipment sales represented 68% of total revenues in
the fourth quarter of 2010, while product support represented only 24%. This
compared to 63% equipment sales and 31% product support revenues in the fourth
quarter of 2009.
The gross margin on equipment sales was up $2.5 million dollars, or 66%,
compared to the fourth quarter of 2009. As a percentage of sales, gross margin
on equipment sales was 10.1%, up from 9.0% in 2009 due primarily to the mix of
equipment being sold. There was a higher proportion of cranes and larger
equipment, which command higher margins, sold in the fourth quarter of 2010.
The gross margin on rentals in the fourth quarter was $1.1 million, which was
almost double that of a year ago. The gross margin percentage on rentals
improved in the fourth quarter of 2010 to 15.1% compared to 14.3% in the same
period in 2009 due primarily to the mix of equipment rented.
The gross margin on product support activities improved to $9.0 million from
$8.7 million in the fourth quarter of 2009. As a percentage of revenue, the
gross margin on product support activities was 40.1%, which was down slightly
from 41.4% in the fourth quarter of 2009 due to a higher proportion of parts
sales which command lower margins compared to service revenue and ongoing price
competition for parts.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the fourth quarter of 2010
were $13.5 million, which was down from $13.6 million in the third quarter and
down from $14.4 million in the fourth quarter of 2009.
In 2009, Strongco implemented cost controls and reengineered its cost structure
to reduce costs, which resulted in substantial savings in 2009 and established a
lower cost base from which to operate going forward. Realizing the full year
impact of the cost reduction initiatives implemented in the prior year,
administrative, distribution and selling expenses were down $0.9 million or 6%
in the fourth quarter of 2010 compared to the fourth quarter of 2009.
Bad debts and collection costs, which were high in earlier quarters of the year
as a result of the bankruptcy and insolvency of certain customers, primarily in
Alberta, were minimal in the fourth quarter. Bad debts in the fourth quarter
were $0.1 million.
Strongco performs warranty repairs/replacements on behalf of the OEM suppliers
of the equipment it distributes and recovers its costs of warranty from the OEM.
The warranty recovery rates from the OEM typically provide Strongco a small net
recovery or profit from the performance of the warranty work. The volume of
warranty work was particularly low in the fourth quarter of 2009 but has been
increasing as the economy has been improving and equipment sales increasing and
was higher in the fourth quarter of 2010. As a result of the higher volume of
warranty work being carried out, the net warranty recovery amount was slightly
higher in the fourth quarter of 2010 compared to 2009. Net warranty recovery was
higher in the fourth quarter of 2010 by $0.2 million compared to the fourth
quarter of 2009.
In the fourth quarter of 2010, Strongco incurred additional costs for recruiting
and severance related to replacement of certain employees totaling $0.1 million.
In addition, Strongco incurred some additional costs in 2010 related to its
conversion to International Financial Reporting Standards (IFRS) totaling
approximately $0.1 million in the fourth quarter.
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 2010 was $0.3 million compared to income
of $0.6 million in the fourth quarter of 2009. In the fourth quarter of 2010,
Strongco incurred an unrealized net foreign exchange loss of $0.2 million on
forward foreign currency contracts due the continued strength of the Canadian
dollar relative to the U.S. dollar in the quarter, while in the fourth quarter
of 2009 Strongco incurred a small net foreign gain of $0.3 million.
Interest Expense
Strongco's interest expense was $1.4 million in the fourth quarter of 2010
compared to $1.1 million in fourth quarter of 2009. The increase is due mainly
to a higher average balance of interest bearing debt in the fourth quarter of
2010 compared to the fourth quarter of 2009.
Strongco's interest bearing debt comprises bank indebtedness and interest
bearing equipment notes. 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 twelve months from the date
of financing, after which the equipment notes become interest bearing. The rate
of interest on the Company's bank indebtedness and interest bearing equipment
notes varies with Canadian chartered bank prime rate ("prime rate") and Canadian
Bankers Acceptances Rates ("BA rates"). (See discussion under "Financial
Condition and Liquidity"). Prime rates and BA rates declined during the
recession in 2009 but have increased in 2010.
During 2009, in response to the recession, Strongco reduced equipment
inventories and correspondingly reduced equipment notes payable. As demand for
heavy equipment and equipment sales have increased throughout 2010, Strongco has
increased inventory levels in support of the growth and equipment notes have
increased correspondingly. As a result, the average balance of interest bearing
equipment notes outstanding was higher in the fourth quarter of 2010 compared to
the fourth quarter of 2009. Strongco's average bank debt levels were also higher
in the fourth quarter of 2010 than in the fourth quarter of 2009.
Prime lending rates have been increasing in 2010 following the recession, which
has resulted in higher rates of interest being charged on the Company's bank
debt and equipment notes in the year. The effective average interest rate
charged on Strongco's equipment notes was 5.7% in the fourth quarter of 2010
compared to 5.4% in the fourth quarter of 2009 and the effective average
interest rate charged the Company's bank indebtedness in the fourth quarter of
2010 was 5.0% compared to 2.8 in the fourth quarter of 2009. The higher
effective interest rates, combined with the higher average balance of interest
bearing equipment notes and average bank debt levels in fourth quarter of 2010,
resulted in a higher interest expense in the quarter.
Net Income (Loss)
Following conversion to a corporation on July 1, 2010, Strongco is now subject
to income tax at corporate tax rates, whereas previously, as an income trust,
the Fund was not subject to corporate tax. In addition, as a consequence of
conversion, Strongco is now able to utilize tax losses, including tax losses
previously unrecognized from the Fund. This resulted in a provision for income
tax in the fourth quarter of 2010 of $0.3 million.
As a result of the strong revenue performance in the quarter, Strongco's net
income in the fourth quarter of 2010 of $1.5 million ($0.14 per share), which
was significantly improved from a net loss of $2.1 million (loss of $0.20 per
unit) in the fourth quarter of 2009.
EBITDA
EBITDA in the fourth quarter of 2010 was $9.3 million which compares to $2.9
million in the fourth quarter of 2009. EBITDA was calculated as follows:
Three Months Ended
December 31,
2010 2009 2010/2009
--------------------------------------
--------------------------------------
$ millions $ millions $ Variance
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income $ 1.5 $ (2.1) $ 3.6
Add Back:
Interest 1.4 1.1 0.2
Income taxes 0.3 0.3 -
Amortization of capital assets 0.2 0.3 -
Amortization of equipment inventory
on rent 5.9 3.3 2.6
----------------------------------------------------------------------------
EBITDA (note 1) $ 9.3 $ 2.9 $ 6.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note 1 - "EBITDA" refers to earnings before interest, income taxes,
amortization of capital assets, amortization of intangible assets,
amortization of equipment inventory on rent, and goodwill impairment. EBITDA
is a measure used by many investors to compare issuers on the basis of
ability to generate cash flow from operations. EBITDA is not an earnings
measure recognized by GAAP, does not have standardized meanings prescribed
by GAAP and is therefore unlikely to be comparable to similar measures
presented by other issuers. The Company's management believes that EBITDA is
an important supplemental measure in evaluating the Company's performance
and in determining whether to invest in Shares. Readers of this information
are cautioned that EBITDA should not be construed as an alternative to net
income or loss determined in accordance with GAAP as indicators of the
Company's performance or to cash flows from operating, investing and
financing activities as measures of the Company's liquidity and cash flows.
The Company's method of calculating EBITDA may differ from the methods used
by other issuers and, accordingly, the Company's EBITDA may not be
comparable to similar measures presented by other issuers.
Cash Flow
Cash Flow Used In Operating Activities:
As a result of the strong revenues and earnings in the fourth quarter of 2010,
Strongco generated $8.0 million of cash before changes in working capital. This
was offset by cash used in building working capital of $8.0 million resulting in
no cash being provided from operating activities. By comparison, Strongco
generated only $0.5 million of cash before changes in working capital in the
fourth quarter of 2009, and used cash of $1.8 million to increase working
capital which resulted in a use of cash from operating activities of continuing
operations $1.3 million in the fourth quarter of 2009.
The components of the cash used in and provided by operating activities were as
follows:
Three Months Ended
December 31,
($ millions) 2010 2009
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) from continuing operations $ 1.5 $ (2.1)
Add (deduct) items not involving an outlay
(inflow) of cash
Amortization of equipment inventory on rent 5.9 3.3
Amortization of capital assets 0.2 0.3
Stock based compensation (0.1) 0.1
Future income taxes (recovery) 0.3 0.2
Other 0.2 (1.3)
----------------------------------------------------------------------------
$ 8.0 $ 0.5
Changes in non-cash working capital balances (8.0) (1.8)
----------------------------------------------------------------------------
Cash used in operating activities of continuing
operations - (1.3)
Cash provided by operating activities of
discontinued operations - 0.1
----------------------------------------------------------------------------
Cash used in operating activities $ - $ (1.2)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Items not involving the outlay of cash includes amortization of equipment
inventory on rent of $5.9 million in the fourth quarter of 2010 which compares
to $3.3 million in the fourth quarter of 2009. Higher volumes of equipment
rentals in the fourth quarter of 2010 resulted in the higher amortization of
equipment inventory on rent.
The components of the (increase)/decrease in non-cash working capital was as
follows:
Net (Increase)/Decrease in Non-cash Working Changes in Non-Cash Working
Capital Capital
Three months ended December
(millions) 31,
(increase)/decrease 2010 2009
----------------------------------------------------------------------------
Accounts receivable $ (3.4) $ 6.3
Inventories 11.8 17.0
Depreciation of equipment inventory on rent (5.9) (3.3)
Prepaids 0.7 -
Income & other taxes receivable - (0.5)
----------------------------------------------------------------------------
$ 3.2 $ 19.5
----------------------------------------------------------------------------
increase/(decrease)
Accounts payable and accrued liabilities (4.3) (8.8)
Deferred revenue & customer deposits 0.4 0.2
Equipment notes payable - non-interest
bearing (5.2) (12.6)
Equipment notes payable - interest bearing (2.1) (0.1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$ (11.2) $ (21.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Increase in Non-cash Working Capital $ (8.0) $ (1.8)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenues increased in the fourth quarter of 2010 which resulted in an increase
in accounts receivable in the quarter of $3.4 million. By comparison, revenues
were lower in the fourth quarter of 2009 which resulted in a decrease in
accounts receivable of $6.3 million in the final quarter of 2009. The average
age of receivables outstanding at the end of the year was unchanged from
September 2010 at approximately 38 days, slightly improved from 40 days a year
ago.
While following the recession, inventories had grown in support of the increase
in business through 2010, inventories declined in the fourth quarter of the year
due to the strong sales and in particular, the high level of RPO conversions. In
2009, in response to ongoing weakness in the markets for heavy equipment,
Strongco management significantly curtailed the amount of equipment and parts
inventory purchased and as a result, in the fourth quarter of 2009 inventory
levels dropped significantly.
Accounts payable and accrued liabilities were down on the fourth quarter of 2010
due primarily to the timing of payments and also due to lower purchases of parts
inventory in the last quarter. In 2009, Strongco managed expenses and reduced
spending levels throughout the year in response to the weak markets, which in
turn resulted in a reduction of accounts payable in the final quarter of 2009.
As a result of the strong sales of equipment, including RPO conversions,
equipment notes were reduced during the fourth quarter of 2010. While sales were
lower in the fourth quarter of 2009, reduced purchases of equipment inventory
resulted in a reduction of equipment notes in the final quarter of the prior
year 2009.
Cash Provided By (Used In) Investing Activities:
Net cash used in investing activities of continuing operations amounted to $0.1
million in the fourth quarter of 2010 primarily related to the upgrade of
facilities and purchase of miscellaneous shop equipment. This compared to
capital expenditures of $0.3 million in the fourth quarter of 2009 related
mainly facilities upgrades and miscellaneous shop equipment.
The release of the portion of the purchase price on the sale of Strongco
Engineered Systems that had been held in escrow provided cash of $0.5 million
from investing activities of discontinued operations in the fourth quarter of
2009.
The components of the cash used in operating activities were as follows:
Three Months Ended
December 31,
-------------------------------
($ millions) 2010 2009
----------------------------------------------------------------------------
Purchase of capital assets $ (0.1) $ (0.3)
----------------------------------------------------------------------------
Cash used in investing activities of
continuing operations (0.1) (0.3)
Cash provided by investing activities of
discontinued operations - 0.5
----------------------------------------------------------------------------
Cash used in investing activities $ (0.1) $ 0.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash Provided By Financing Activities:
Financing activities generated $0.2 million of cash in the fourth quarter of
2010 from an increase in bank debt used to fund operating and investing
activities. By comparison, in the fourth quarter 2009, borrowing under the
Company's bank facility increased by $1.0 million.
Three Months Ended
Cash Provided By Financing Activities December 31,
($ millions) 2010 2009
----------------------------------------------------------------------------
Increase in bank indebtedness $ 0.2 $ 1.0
----------------------------------------------------------------------------
Cash provided by financing activities $ 0.2 $ 1.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUMMARY OF QUARTERLY DATA
In general, business activity in the Equipment Distribution segment follows a
weather related pattern of seasonality. Typically, the first quarter is the
weakest quarter as construction and infrastructure activity is constrained in
the winter months. This is followed by a strong gain in the second quarter as
construction and other contracts begin to be tendered and companies begin to
prepare for summer activity. The third quarter generally tends to be slightly
slower from an equipment sales standpoint, which is partially offset by
continued strength in equipment rentals and customer support activities. Fourth
quarter activity generally strengthens as customers make year-end capital
spending decisions and exercise purchase options on equipment which has
previously gone out on RPO's. In addition, purchases of snow removal equipment
are typically made in the fourth quarter. However, as a result of weak 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 have improved in 2010 but
volumes remained below historic pre-recession levels.
A summary of quarterly results for the current and previous two years is as follows:
2010
($ millions, except per
share/unit amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 91.8 $ 79.6 $ 69.6 $ 53.7
Earnings (loss) from
continuing operations before
income taxes 1.5 0.7 (0.5) (2.1)
Net income (loss) 1.5 0.7 (0.5) (2.1)
Basic and diluted earnings
(loss) per share/unit $ 0.14 $ 0.07 $ (0.05) $ (0.20)
2009
($ millions, except per unit
amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 67.5 $ 74.6 $ 76.7 $ 73.0
Earnings (loss) from
continuing operations before
income taxes (1.8) 0.1 2.0 1.2
Net income (loss) (2.1) (0.5) 1.4 1.2
Basic and diluted earnings
(loss) per unit $ (0.20) $ (0.05) $ 0.14 $ 0.11
2008
($ millions, except per unit
amounts) Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Revenue $ 103.7 $ 98.7 $ 119.2 $ 76.9
Earnings (loss) from
continuing operations before
income taxes (2.4) (0.2) 3.1 (0.6)
Net income (loss) (2.6) (0.1) 2.9 (0.6)
Basic and diluted earnings
(loss) per unit $ (0.25) $ (0.01) $ 0.27 $ (0.05)
A discussion of the Company's previous quarterly results can be found in the
Company's quarterly Management's Discussion and Analysis reports available on
SEDAR at www.sedar.com.
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations for operating lease commitments totaling
$24.1 million. In addition, the Company has contingent contractual obligations
where it has agreed to buy back equipment from customers at the option of the
customer for a specified price at future dates ("buy back contracts"). These buy
back contracts are subject to certain conditions being met by the customer and
range in term from three to ten 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, 2010, the total buy
back contracts outstanding were $10.3 million, which compared to $9.8 million
outstanding at December 31, 2009. A reserve of $0.9 million has been accrued in
the Company's accounts as at December 31, 2010 with respect to these
commitments, compared to a reserve of $0.7 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, 2011 to January 31, 2014 are $0.5 million.
Contractual obligations are set out in the following tables. Management believes
that the Company will generate sufficient cash flow from operations to meet its
contractual obligations.
Payment due by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After
($ millions) Total 1 Year Years Years 5 Years
----------------------------------------------------------------------------
Operating leases $ 24.1 $ 6.2 $ 11.4 $ 4.4 $ 2.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contingent obligation by period
----------------------------------------------------------------------------
Less Than 1 to 3 4 to 5 After
($ millions) Total 1 Year Years Years 5 Years
----------------------------------------------------------------------------
Buy back contracts $ 10.3 $ 1.4 $ 6.6 $ 2.3 $ 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")
Common Shares/Trust Units Issued and Outstanding Shares Shares/Units
----------------------------------------------------------------------------
Units as at December 31, 2009 10,508,719
Units Issued January 1, 2009 to June 30, 2010 -
Units exchanged for common shares on conversion to a
corporation July 1, 2010 (10,508,719)
Common shares issued in exchange for units on conversion to
a corporation July 1, 2010 10,508,719
Common shares issued July 2, 2010 to December 31, 2010 -
----------------------------------------------------------------------------
Common shares outstanding as at December 31, 2010 10,508,719
----------------------------------------------------------------------------
OUTLOOK
Construction markets began to show signs of recovery toward the end of the
second quarter of the last year and continued to pick up through the balance of
2010 and into 2011. With that, demand for equipment has increased. The economy
and construction markets across Canada are expected to continue to improve
throughout 2011, which in turn, will lead to increased demand for heavy
equipment, and increased willingness of customers to purchase equipment.
Strongco's equipment sales backlogs, which rose during the first half of 2010
from the very low levels that existed at the end of 2009, remained strong
through the balance of the year and into 2011, a positive sign that demand for
heavy equipment is improving.
As expected following a recession, recovery has been more evident in the markets
for earth moving equipment. The markets for cranes, which are typically utilized
in latter stages of construction, have been slower to recover, but demand for
cranes started to show improvement towards the end of 2010 and is expected to
increase in 2011 as construction activity continues to grow. Strongco's sales
backlog for cranes has also risen, which is a sign that demand is improving.
An important contribution to the anticipated growth in 2011 is expected from
Alberta. Oil prices have continued to show strength and stability and with that,
the economy in Alberta has continued to improve. Activity in the oil sands has
accelerated and which has led to increase spending for heavy equipment in
northern Alberta. That improvement was particularly evident late in 2010. In
addition, there has been an increase in construction activity in general
throughout the province, especially in the latter half of 2010 and sales
backlogs have increased. There has also been an increase in equipment rental
activity in Alberta. Consequently, management is cautiously optimistic that
heavy equipment markets in Alberta will continue to improve in 2011.
Most OEM's have scaled back production and reduced capacity in response to the
weak North American economy in 2009 and 2010. This resulted in increased
delivery times and shortages of certain types of equipment. A welcome upturn in
the sales of equipment in the United States in Q4 2010 has OEM's struggling to
increase production capacity and improve lead time and availability. There are
indications of improvement but the transition to the new tier 4 engine
technology in 2011 is an added complication which may lead to longer lead times
and reduced supply. Management is optimistic that Strongco's significant
position with its OEMs will offset any possibility of equipment shortages.
Management remains cautiously optimistic that the improving trend evidenced in
Canada in the latter half of 2010 will continue in 2011 and expects demand for
heavy equipment will grow which will leads to increased revenues in 2011. In
addition, the acquisition of Chadwick-BaRoss, effective February 1, 2011 will
contribute to improved sales levels for Strongco in 2011. Chadwick-BaRoss
services a broad range of market sectors in Maine, New Hampshire and
Massachusetts, similar to Strongco in Canada, and the expectation is that the
demand for equipment in these geographies will show a modest increase from
recent depressed levels at which Chadwick-BaRoss has been profitable.
NON-GAAP MEASURES
"EBITDA" refers to earnings before interest, income taxes, amortization of
capital assets, amortization of intangible assets, amortization of equipment
inventory on rent, and goodwill impairment. EBITDA is a measure used by many
investors to compare issuers on the basis of ability to generate cash flow from
operations. EBITDA is not an earnings measure recognized by GAAP, does not have
standardized meanings prescribed by GAAP and is therefore unlikely to be
comparable to similar measures presented by other issuers. The Company's
management believes that EBITDA is an important supplemental measure in
evaluating the Company's performance and in determining whether to invest in
Shares. Readers of this information are cautioned that EBITDA should not be
construed as an alternative to net income or loss determined in accordance with
GAAP as indicators of the Company's performance or to cash flows from operating,
investing and financing activities as measures of the Company's liquidity and
cash flows. The Company's method of calculating EBITDA may differ from the
methods used by other issuers and, accordingly, the Company's EBITDA may not be
comparable to similar measures presented by other issuers.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with Canadian GAAP
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, 2010 with
changes from December 31, 2009 is as follows:
Provision for Inventory Obsolescence ($ millions)
----------------------------------------------------------------------------
Provision for inventory obsolescence as at December 31, 2009 $ 3.1
Inventory disposed of during the year (1.0)
Additional provisions made during the year 0.9
----------------------------------------------------------------------------
Provision for inventory obsolescence as at December 31, 2010 $ 3.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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, 2010 with changes from
December 31, 2009 is as follows:
Allowance for Doubtful Accounts
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December 31, 2009 $ 1.4
Accounts written off during the year (0.5)
Additional provisions made during the year 0.3
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December 31, 2010 $ 1.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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.
RISK 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 the Company currently considers
immaterial, may also impair the operations of the Company. If any such risks
actually occur, the business, financial condition, or liquidity and results of
operations of the Company, the ability of the Company 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
The Company faces strong competition from various distributors of products which
compete with the products it sells. Strongco 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 Queens 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 declare
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, 2010 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, 2010 to provide reasonable assurance that the financial information
being reported is materially accurate. During the fourth quarter ended December
31, 2010, 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Business Combinations
In January 2009, the AcSB issued the new the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 1582 Business Combinations, Section 1601
Consolidated Financial Statements, and Section 1602 Non-controlling Interests.
Section 1582 specifies a number of changes, including an expanded definition of
a business, a requirement to measure all business acquisitions at fair value, a
requirement to measure non-controlling interests at fair value, and a
requirement to recognize acquisition-related costs as expenses. Section 1601
establishes the standards for preparing consolidated financial statements.
Section 1602 specifies that non-controlling interests be treated as a separate
component of equity, not as a liability or other item outside of equity. These
new standards are harmonized with International Financial Reporting Standards
(IFRS). The new standards will become effective in 2011, however early adoption
is permitted. The Company has not yet determined the impact of these standards
on the consolidated statements.
International Financial Reporting Standards ("IFRS")
Publicly accountable enterprises are required to adopt International Financial
Reporting Standards ("IFRS") for fiscal years beginning on or after January 1,
2011. Accordingly, the first annual consolidated financial statements in
accordance with IFRS will be for the year ending December 31, 2011 and will
include the comparative period of 2010 and the opening balance sheet as at
January 1, 2010. Starting in the first quarter of 2011, the Company will provide
unaudited consolidated financial statements in accordance with IFRS including
comparative figures for 2010.
The Company has established a three phased changeover methodology and an
internal IFRS project team that is led by executive management and includes key
participants from various areas of the Company as necessary to achieve a smooth
transition to IFRS. Regular progress reporting to the audit committee on the
status of the IFRS implementation has been ongoing since 2009.
Impact of IFRS conversion
A number of differences have been identified which include: the initial adoption
of IFRS; employee benefits, property, plant and equipment, impairment of assets,
the classification of trust units, share-based payments, provisions and income
taxes.
The information below is provided to allow investors and others to obtain an
understanding of the unaudited effects on the Company's consolidated financial
statements. The Company is in the process of finalizing the financial reporting
impacts of adopting IFRS. The full impacts of adoption on the financial position
and results of operations of the Company have not been fully assessed and
approved by the Board of Directors, and have not been audited. Accordingly, the
items described below should not be regarded as a complete description of the
changes resulting from the transition to IFRS. Readers are cautioned that it may
not be appropriate to use such information for any other purpose and the
information is subject to change.
To date, the Company has made decisions relating to certain IFRS policies as
discussed below. The following information is contingent on the standards that
will be effective as at December 31, 2011, the date of the Company's first
audited annual consolidated financial statements prepared in accordance with
IFRS.
The table below reconciles shareholders' equity from the audited consolidated
financial statements of the Company under Canadian GAAP as at December 31, 2009
to shareholders' equity under IFRS at January 1, 2010, based on the analysis,
elections and exemptions completed to date as further discussed below. As the
Company is still in the process of finalizing its assessment of the full impacts
of adoption of IFRS on the financial position and results of operations of the
Company, these adjustments must be considered preliminary and subject to change.
These adjustments are unaudited and have not been approved by the Board of
Directors.
----------------------------------------------------------------------------
As at January 1, 2010 (in $ millions)
----------------------------------------------------------------------------
Shareholders' equity under Canadian GAAP (audited) 54,648
----------------------------------------------------------------------------
IFRS Adjustments: (unaudited)
----------------------------------------------------------------------------
Re-measurement of deferred tax liability using the tax
rate applicable to undistributed profits (1,247)
----------------------------------------------------------------------------
Stock-based compensation in accordance with IFRS 2 (148)
----------------------------------------------------------------------------
IFRS 1 election - Recognition of unamortized actuarial
losses (4,711)
----------------------------------------------------------------------------
Record additional provisions in accordance with IAS 37 (83)
----------------------------------------------------------------------------
Record employee benefit liability in accordance with
IFRIC 14 (805)
----------------------------------------------------------------------------
Shareholders' equity under IFRS (unaudited) 47,654
----------------------------------------------------------------------------
-- First-time adoption of IFRS ("IFRS 1")
IFRS 1 provides the framework for the first-time adoption of IFRS and
outlines that, in general, an entity shall apply the principles under
IFRS retrospectively and that adjustments arising on conversion from
Canadian GAAP to IFRS shall be directly recognized in retained earnings.
However, IFRS 1 also provides a number of optional exemptions from
retrospective application of certain IFRS requirements as well as
mandatory exceptions which prohibit retrospective application of
standards.
The Company will apply the following optional exemptions on transition
to IFRS to:
-- not restate the accounting of past business combinations in
accordance with IFRS 3R, Business Combinations that have occurred
prior to January 1, 2010;
-- not apply the accounting for share based payments under IFRS 2 to
awards that were granted after November 7, 2002 that vested before
the later of (a) the date of transition to IFRSs and (b) January 1,
2005; and
-- recognize actuarial losses as at January 1, 2010, totaling $8,789
($4,711 after tax), in retained earnings.
-- Employee Benefits
IAS 19, Employee Benefits ("IAS 19") requires the past service cost
element of defined benefit plans to be expensed on an accelerated basis,
with vested past service costs being expensed immediately and unvested
past service costs being recognized on a straight-line basis until the
benefits become vested. Under Canadian GAAP, past service costs are
generally amortized on a straight-line basis over the expected average
remaining service period of active employees in the defined benefit
plan. In addition, actuarial gains and losses are permitted under IAS 19
to be recognized directly in equity, rather than through earnings, as
required under Canadian GAAP. Further, IFRS provides for an "asset
ceiling" test under which the recoverability of a pension asset needs to
be assessed. Canadian GAAP also limits the carrying amount of the
accrued benefit asset but the calculation is different than under IFRS.
The Company will follow the method of recognizing actuarial gains and
losses directly in equity. In addition, the Company completed the
calculation with respect to the limitation of the defined benefit asset
under IFRIC 14 and will record a liability of approximately $1,503 ($805
after tax) at January 1, 2010.
-- Property, plant and equipment
While IAS 16 - Property, Plant and Equipment ("IAS 16") and Canadian
GAAP contain the same basic principles; differences in application of
the standards exist. For instance, consideration needs to be given to
whether there are individually significant components of an item of
property, plant and equipment that need to be identified and depreciated
based on their specific useful lives. In addition, unlike Canadian GAAP,
IFRS permits property, plant and equipment to be measured using the cost
model or the revaluation model.
The Company will continue to account for property, plant and equipment
using the cost model. Management has completed their review of the
significant components of property, plant and equipment and does not
expect any significant changes with respect to componentization and the
useful lives of property, plant and equipment.
-- Impairment of assets
The GAAP impairment analysis for long-lived assets involves a two step
process, the first of which compares the asset carrying values with
undiscounted future cash flows to determine whether impairment exists.
If the carrying value exceeds the amount recoverable on an undiscounted
basis, then the cash flows are discounted to calculate the amount of the
impairment and the carrying values are written down to estimated fair
value.
IAS 36, Impairment of Assets, uses a one-step approach for both testing
for, and measurement of impairment, with asset carrying values being
compared to the higher of its value in use and fair value less costs to
sell. This may result in more frequent write-downs where carrying values
of assets were previously accepted under GAAP on an undiscounted cash
flow basis, but could not be supported on a discounted cash flow basis.
As the market capitalization of the Company was less than the carrying
value of equity, the Company has completed an impairment test on its
long-lived assets at January 1, 2010 and determined that no impairment
exists. In addition, the Company completed an impairment test on the
indefinite life intangible asset at January 1, 2010 and determined that
no impairment exists. For the purposes of the impairment testing, the
Company determined the following five cash generating units: Ontario
region, Quebec region, Atlantic region and Western Canada region.
-- Trust units
The Company reviewed their trust indenture and concluded that the Fund
units, which were outstanding during the period the Company operated as
an income trust, have met the requirements of a puttable financial
instrument in accordance with IAS 32 and, accordingly the Fund units
will continue to be classified as equity under IFRS.
-- Income Taxes
As at January 1, 2010 and for the six month period ended June 30, 2010,
Strongco operated as an income trust that qualified for special tax
treatment permitting a tax deduction by the trust for distributions paid
to the trust's unitholders. The change in tax legislation in 2007
effectively imposed an income tax for income trusts for taxation years
beginning in 2011, As a result, Strongco has recorded future income
taxes under Canadian GAAP during this period using the enacted (or
substantively enacted) income tax rates that, at the balance sheet date,
are expected to apply when the temporary differences reverse in years
2011 and beyond.
Although IFRS recognizes that in some jurisdictions income taxes may be
payable at a higher or lower rate or be refundable or payable if part,
or all, of the net profit or retained earnings is paid out as a dividend
to shareholders of the entity, there is a general requirement that
income taxes be measured at the tax rate applicable to undistributed
profits. As a result, deferred income taxes will be re-measured at the
tax rate of approximately 46.4% applicable to undistributed profits
which will result in an increase of $1,247 to the Company's deferred tax
liability as at January 1, 2010. The deferred taxes will subsequently be
re-measured at the applicable corporate rates on July 1, 2010, the date
Strongco converted to a corporation.
-- Provisions
The threshold for recognition of provisions under IFRS is lower than
that under Canadian GAAP. Under IFRS, a provision must be recorded where
the required payment is "probable", which is a lower threshold than
"likely" under Canadian GAAP. This could result in additional provisions
being required on transition to IFRS. The measurement of those
provisions may also be adjusted, with IFRS requiring the mid-point in a
range of potential outcomes to be used, whereas Canadian GAAP permits
use of an amount at the low end of the range where no amount within the
range is indicated as a better estimate than any other. Measurement of
provisions may also be affected by differences in the required
calculation, such as the determination of the discount rate to be used.
The Company has reviewed their provisions considering the IFRS
recognition and measurement criteria and expects to record an additional
liability of $155 ($83 after tax) at January 1, 2010.
-- Share-based payments
IFRS 2, Share-based Payments, requires options that vest over various
periods (tranches) to be accounted for as separate arrangements which
results in the recognition of the expense on an accelerated basis. In
addition, under IFRS the recognition of compensation expense can occur
prior to the grant date when services have commenced whereas under
Canadian GAAP recognition of compensation expense cannot occur prior to
the grant date. Further, the Company currently adjusts for forfeitures
as they occur and treats the options as a pool and determines the fair
value using the average life of the options. IFRS requires an estimate
of forfeitures on initial recognition and the useful life of each
tranche to be considered separately.
The Company has assessed the impact of the recognition and measurement
criteria under IFRS 2 on the Company's share based payment arrangements
and will record an additional liability of $68 at January 1, 2010.
In addition, since the Fund units are only allowed to be classified as
equity for the purpose of assessing the classification under IAS 32, it
was determined that the options issued under the Company's equity
incentive plan are not to be accounted for under IFRS 2. As a result,
the Company will reclassify prior year stock based compensation expense
totalling $80 from contributed surplus to liabilities.
-- Internal Controls over Financial Reporting and Disclosure
In accordance with the Company's approach to the certification of
internal controls required under Canadian Securities Administrators'
National Instrument 52-109, the Company's entity level, information
technology, disclosure and business process controls are in the process
of being updated and tested to reflect changes arising from the
Company's conversion to IFRS.
The Company determined that the transition to IFRS will not have a significant
impact on its information systems or internal controls.
Covenants contained in the existing agreements with the Company's lenders are
determined in accordance with Canadian GAAP. The Company has had preliminary
discussions with its financing institutions and will ensure that the lending
agreements, and if necessary the covenants, are amended to reflect the
transition of IFRS with due consideration of any impacts arising from the
transition.
The Company's incentive compensation is largely based upon attaining and
exceeding certain financial targets. These targets are determined on an annual
basis and may need to be re-evaluated in 2011 when the impacts of changes
brought about by the transition to IFRS are finalized.
IFRS training for key members of the finance staff is completed which included
attending various technical courses, conferences, webinars and discussions with
external IFRS consultants.
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.
Management's Responsibility for Financial Reporting
The accompanying audited consolidated financial statements of Strongco
Corporation (the "Company") were prepared by management in accordance with
Canadian generally accepted accounting principles. 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
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, results of operations
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
Independent auditors' report
To the Shareholders of Strongco Corporation
We have audited the accompanying consolidated financial statements of Strongco
Corporation which comprise the consolidated balance sheets as at December 31,
2010 and 2009 and the consolidated statements of operations and retained
earnings (deficit) and cash flows for the years then ended, 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 Canadian generally accepted
accounting principles, 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 auditor considers
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 is sufficient in our audits
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, 2010 and 2009 and the results of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.
(Signed)
Ernst & Young LLP
Toronto, Canada, Chartered Accountants
March 29, 2011 Licensed Public Accountants
Consolidated Balance Sheets
----------------------------------------------------------------------------
As at December 31 (in thousands of dollars) 2010 2009
----------------------------------------------------------------------------
ASSETS
Current
Accounts receivable (note 18) $ 35,884 $ 27,088
Inventories (note 5) 159,988 144,461
Prepaid expenses and deposits 1,452 1,255
----------------------------------------------------------------------------
Total current assets 197,324 172,804
----------------------------------------------------------------------------
Capital assets, net (note 6) 13,768 14,133
Other assets 188 243
Accrued benefit asset (note 15) 6,275 6,607
Intangibles (note 3) 1,800 1,800
----------------------------------------------------------------------------
$ 219,355 $ 195,587
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness (notes 7, 18 and 19) $ 12,370 $ 10,014
Accounts payable and accrued liabilities
(note 18) 30,265 20,866
Deferred revenue and customer deposits 1,321 515
Equipment notes payable - non-interest
bearing (note 8) 40,097 28,671
Equipment notes payable - interest bearing
(note 8) 78,063 76,172
Current portion of capital lease obligations
(note 9) 173 92
Current portion of notes payable (note 3) 1,233 1,094
----------------------------------------------------------------------------
Total current liabilities 163,522 137,424
----------------------------------------------------------------------------
Future income taxes (note 12) 389 1,424
Notes payable (note 3) - 1,218
Capital lease obligations (note 9) 114 104
Accrued benefit liability (note 15) 819 769
----------------------------------------------------------------------------
Total liabilities 164,844 140,939
----------------------------------------------------------------------------
Commitments and Contingencies (note 14 and
16)
Shareholders' equity
Shareholder capital (note 10) 57,089 57,089
Deferred compensation (note 11) 360 80
Deficit (2,938) (2,521)
----------------------------------------------------------------------------
Total shareholders' equity 54,511 54,648
----------------------------------------------------------------------------
$ 219,355 $ 195,587
----------------------------------------------------------------------------
See accompanying notes
On behalf of the Board:
(Signed) (Signed)
Robert J. Beutel Ian Sutherland
Director Director
Consolidated Statement of Operations and Retained Earnings (Deficit)
----------------------------------------------------------------------------
Years ended December 31
(in thousands of dollars, except units /
shares and per unit / share data) 2010 2009
----------------------------------------------------------------------------
Revenue $ 294,657 $ 291,795
Cost of sales 237,971 231,847
----------------------------------------------------------------------------
Gross margin 56,686 59,948
Expenses
Administration, distribution and selling 53,604 55,822
Plan of Arrangement (note 1) 463 -
Other income (740) (1,816)
----------------------------------------------------------------------------
Income before the following 3,359 5,942
Interest 4,816 4,433
----------------------------------------------------------------------------
Earnings (loss) from continuing operations
before income taxes (1,457) 1,509
Provision (recovery) for income taxes (note
12) (1,040) 775
----------------------------------------------------------------------------
Earnings (loss) from continuing operations (417) 734
----------------------------------------------------------------------------
Loss from discontinued operations (note 4) - (716)
----------------------------------------------------------------------------
Net income (loss) and comprehensive income
(loss) $ (417) $ 18
----------------------------------------------------------------------------
Retained deficit, beginning of year (2,521) (2,539)
----------------------------------------------------------------------------
Deficit, end of year $ (2,938) $ (2,521)
----------------------------------------------------------------------------
Earnings (loss) per unit / share
Continuing operations - basic and diluted (0.04) 0.07
Discontinued operations - basic and diluted
(note 4) - (0.07)
----------------------------------------------------------------------------
Earnings (loss) per unit / share - basic and
diluted $ (0.04) $ 0.00
----------------------------------------------------------------------------
Weighted average number of units / shares
issued 10,508,719 10,508,719
----------------------------------------------------------------------------
See accompanying notes
Consolidated Statement of Cash Flows
----------------------------------------------------------------------------
Years ended December 31
(in thousands of dollars, except units /
shares and per unit / share data) 2010 2009
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Income from continuing operations $ (417) $ 734
Add (deduct) items not involving a current
outlay (inflow) of cash
Amortization of capital assets 788 824
Amortization of equipment inventory on rent 18,211 11,209
Amortization of capital leases 136 42
Loss (gain) on disposal of capital assets (3) 82
Increase in capital leases 223 44
Stock based compensation 280 80
Interest accretion on note payable (note 3) 84 135
Future income taxes (recovery) (1,035) 82
Accrued benefit (asset) liability and other 437 (1,223)
----------------------------------------------------------------------------
18,704 12,009
Net change in non-cash working capital
balances related to operations (note 20) (19,209) (15,158)
----------------------------------------------------------------------------
Cash used in operating activities of
continuing operations (505) (3,149)
Cash used in operating activities of
discontinued operations - (391)
----------------------------------------------------------------------------
Cash used in operating activities $ (505) $ (3,540)
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (631) (696)
Capital lease repayments (131) (44)
Proceeds on disposal of capital assets 74 882
----------------------------------------------------------------------------
Cash used in investing activities of
continuing operations (688) 142
Cash provided by investing activities of
discontinued operations - 6,228
----------------------------------------------------------------------------
Cash provided by (used in) investing
activities $ (688) $ 6,370
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in bank indebtedness 2,356 (2,830)
Repayment of term debt (1,163) -
----------------------------------------------------------------------------
Cash provided by (used in) financing
activities $ 1,193 $ (2,830)
----------------------------------------------------------------------------
Net increase in cash and cash equivalents
during the year - -
Cash and cash equivalents, beginning of year - -
----------------------------------------------------------------------------
Cash and cash equivalents, end of year $ - $ -
----------------------------------------------------------------------------
Supplemental cash flow information
Interest paid 4,732 $ 4,358
Income taxes recovered (1) $ (79)
See accompanying notes
Strongco Corporation
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2010 and 2009 (unless otherwise indicated in thousands
of dollars, except per share amounts)
1. ORGANIZATION
Prior to July 1, 2010, Strongco Income Fund (the "Fund") was an unincorporated,
open-ended, limited purpose trust established under the laws 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 (the "Conversion") from an
income trust to a corporation through the incorporation of Strongco Corporation
(the "Company" or "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
(see note 10b). 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 financial statements
for periods prior to June 30, 2010, refer to the Fund and for periods on or
after July 1, 2010, refer to the Company. Additionally, references to shares and
shareholders of the Company are comparable to units and unitholders previously
under the Fund.
The conversion was accounted for as a continuity of interests. Transaction costs
of $463 related to the conversion were expensed on conversion.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The audited consolidated financial statements of Strongco have been prepared by
management in accordance with Canadian generally accepted accounting principles
("GAAP") within the framework of the significant accounting policies summarized
below:
Basis of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All transactions and balances between the Company and its
subsidiaries have been eliminated.
Use of estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates.
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,
and ultimate collection of the revenue is reasonably assured.
a) Revenue from sales of equipment 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. Revenues for these sales are recognized at
the time significant risks and rewards of ownership passes to the
customer.
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, revenues are recognized when the
part is shipped to the customer. For servicing of equipment,
revenues are recognized when the service work is completed,
including recognition of revenue from parts installed as part of the
service.
Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at the exchange rate prevailing at the consolidated
balance sheet date. Revenue and expenses are effectively recorded at the rate of
exchange in effect on the transaction dates. Exchange gains or losses are
included in the determination of earnings for the year.
Financial instruments
The fair market values of the Company's current financial assets and liabilities
approximate carrying values due to their short-term nature. The Company enters
into foreign currency forward contracts to reduce the impact of currency
fluctuations on the cost of certain pieces of equipment ordered for future
delivery to customers. These contracts are recorded at their fair value with
gains and losses recorded in income (loss).
Employee future benefit plans
The Company accrues its obligations under employee future benefit plans and the
related costs, net of plan assets. The Company has adopted the following
policies:
The actuarial determination of the accrued benefit obligations for pensions and
other retirement benefits uses the projected benefit method prorated on service
(which incorporates management's best estimate of future salary levels, other
cost escalation, retirement ages of employees and other actuarial factors).
For the purpose of calculating the expected return on plan assets, those assets
are valued at fair value.
Actuarial gains (losses) arise from the difference between 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. The excess of the net accumulated
actuarial gain (loss) over 10% of the greater of the benefit obligation and the
fair value of plan assets is amortized over the average remaining service period
of active employees. The average remaining service period of the active
employees covered by the employee pension plan is 16 years for 2010 and 16 years
for 2009. For the executive pension plan, the period used to amortize gains and
losses is based on the average expected remaining lifetime of the retirees (14
years for 2010 and 14 years for 2009).
Past service costs arising from plan amendments are deferred and amortized on a
straight-line basis over the average remaining service period of the employees
active at the date of the amendment.
On January 1, 2000, the Company adopted the new accounting standard on employee
future benefits using the prospective application method. The Company is
amortizing the transitional obligation on a straight-line basis over 16 years,
which was the average remaining service period of employees expected to receive
benefits as of January 1, 2000.
When the restructuring of a future benefit plan gives rise to both a curtailment
and a settlement of obligations, the curtailment is accounted for prior to the
settlement.
Stock-based compensation plan
The Company accounts for stock options using the fair value method. Under the
fair value method, compensation expense for options is measured at the grant
date using an option pricing model and recognized in income on a graded method
basis over the vesting period.
Earnings per share
Basic earnings per share is calculated by dividing the net earnings available to
common shareholders by the weighted average number of common shares outstanding
during the year. Diluted earnings per share is calculated using the treasury
stock method, which assumes that all outstanding stock option grants are
exercised, if dilutive, and the assumed proceeds are used to purchase the
Company's common shares at the average market price during the year.
Cash and cash equivalents
Cash and cash equivalents consist of all bank balances and short-term
investments with remaining maturities of less than 90 days at the date of
acquisition.
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
repair and distribution parts is determined on a weighted average cost basis.
Equipment inventory while on rent is amortized based upon expected usage while
on rent.
Capital assets
Capital assets are initially recorded at cost. Amortization is provided on a
declining balance basis using the following annual rates:
Buildings 3% to 5%
Machinery and equipment 10% to 30%
Computer software 30%
Vehicles 30%
Computer equipment under capital leases and leasehold improvements are amortized
on a straight-line basis over the remaining term of the lease.
Leases
Leases entered into by the Company, in which substantially all of the benefits
and risks of ownership are transferred to the Company, are recorded as
obligations under capital leases. Obligations under capital leases reflect the
present value of future minimum lease payments, discounted at an appropriate
interest rate, are reduced by rental payments net of imputed interest. Equipment
under capital leases are depreciated based on the useful life of the asset. All
other leases are classified as operating leases. Payments for these leases are
charged to income on a straight-line basis over the life of the assets.
Discontinued operations
The results of discontinued operations are presented net of tax on a one-line
basis in the consolidated statement of operations. Refer to note 4 for details
of discontinued operations.
Income taxes
The Company follows the liability method of tax allocation to account for income
taxes. Under this method of tax allocation, future income tax assets and
liabilities are determined based upon the differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
substantively enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Impairment of long-lived assets
The Company reviews whether there are any indicators that the carrying amount of
its capital assets and identifiable intangible assets with definite lives
("long-lived depreciable assets") may not be recoverable. If such indicators are
present, the Company assesses the recoverability of the assets or group of
assets by determining whether the carrying value of such assets can be recovered
through undiscounted future cash flows expected to arise as a direct result of
the use of the assets over their remaining useful lives and eventual
disposition. If the sum of the undiscounted future cash flows is less than the
carrying amount, then the fair value of the assets is determined and any excess
of the carrying amount of the assets over their estimated fair value is recorded
as a charge to earnings.
Intangible assets with indefinite lives
Identifiable intangible assets with indefinite lives acquired are not subject to
amortization but are subject to an annual review for impairment, or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The review for impairment compares the fair value of the intangible
asset to its carrying value. Where the carrying value of the intangible asset
exceeds its fair value an impairment loss equal to the excess is recorded as a
charge to earnings.
Future accounting changes
Business Combinations
In January 2009, the AcSB issued the new the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 1582 Business Combinations, Section 1601
Consolidated Financial Statements, and Section 1602 Non-controlling Interests.
Section 1582 specifies a number of changes, including an expanded definition of
a business, a requirement to measure all business acquisitions at fair value, a
requirement to measure non-controlling interests at fair value, and a
requirement to recognize acquisition-related costs as expenses. Section 1601
establishes the standards for preparing consolidated financial statements.
Section 1602 specifies that non- controlling interests be treated as a separate
component of equity, not as a liability or other item outside of equity. These
new standards are harmonized with International Financial Reporting Standards
(IFRS). The new standards will become effective in 2011, however early adoption
is permitted. The Company has not yet determined the impact of these standards
on the consolidated statements.
International Financial Reporting Standards ("IFRS")
In March 2009, the Canadian Accounting Standards Board ("AcSB") issued its
exposure draft, "Adopting IFRS in Canada, II", which reconfirmed that publicly
accountable enterprises are required to adopt IFRS for fiscal years beginning on
or after January 1, 2011. Accordingly, the first annual consolidated financial
statements in accordance with IFRS will be for the year ending December 31, 2011
and will include the comparative period of 2010. Starting in the first quarter
of 2011, the Company will provide unaudited consolidated financial statements in
accordance with IFRS including comparative figures for 2010.
3. NOTES PAYABLE
On March 20, 2008, the Fund purchased substantially all of the assets (excluding
real property) of the Champion Road Machinery division ("Champion") of Volvo
Group Canada Inc. for a total consideration of $24,984 including deal-related
costs of $190. Included in the acquisition was distribution rights valued at
$1,800. These distribution rights are accounted for as identifiable intangible
assets with an indefinite life, subject to impairment review.
The consideration was comprised of cash of $22,830 and non-interest bearing note
payable in favour of Volvo Group Canada Inc. of $2,500 with installment payments
of $1,250 due in March 2010 and March 2011. The note is secured with certain
assets of Champion. The note has been discounted at 6.0% using the effective
interest rate method, resulting in a discount of $346 that will be amortized as
expense to continuing operations over the three-year period to March 2011. The
original note was reduced by Volvo in 2009 by $88 with the reduction in the
first installment payment. The first installment payment was paid during 2010.
As at December 31, 2010, the remaining balance of the $1,233 non-interest
bearing note has been classified as short-term debt.
4. DISCONTINUED OPERATIONS
On May 26, 2009, the Company completed the sale of the assets and liabilities of
its Engineered Systems segment, allowing Strongco to focus its resources and
management efforts on growing its core Equipment Distribution business. Proceeds
of $6,284 resulted in a loss on sale, after deal costs, of $556. Initial
proceeds of $5,962 on the sale were settled in cash with an additional $500
deposited in trust with working capital adjustments to be completed by August
11, 2009. Claims under the indemnification provisions totaling $178 were settled
out of the funds held in trust and the remaining trust deposit of $322 was
released to Strongco in November 2009.
There was no activity from discontinued operations for the year ended December
31, 2010. The results from discontinued operations for the year ended December
31, 2009, including the loss on sale, were as follows:
----------------------------------------------------------------------------
($ thousands, except per unit amounts) 2009
----------------------------------------------------------------------------
Revenues $ 8,982
Cost of sales 7,435
----------------------------------------------------------------------------
Gross Margin 1,547
Administration, distribution and selling expenses 2,484
Other (income)/expense 110
----------------------------------------------------------------------------
Operating income (loss) $ (1,047)
Interest expense 60
Loss on sale of business 556
----------------------------------------------------------------------------
Loss before income taxes (1,663)
Provision for income taxes (947)
----------------------------------------------------------------------------
Loss from discontinued operations after tax $ (716)
----------------------------------------------------------------------------
Basic and diluted loss per unit from discontinued operations $ (0.07)
----------------------------------------------------------------------------
The loss on sale of $556 was calculated as follows:
----------------------------------------------------------------------------
($ thousands)
----------------------------------------------------------------------------
Accounts receivable $ 3,754
Prepaids and other assets 553
Inventory 2,519
Legal and exit costs 450
Capital assets, net 2,929
Other assets 67
Accounts payable and accrued liabilities (3,432)
----------------------------------------------------------------------------
6,840
----------------------------------------------------------------------------
Cash Proceeds 6,284
----------------------------------------------------------------------------
Loss on Sale $ 556
----------------------------------------------------------------------------
5. INVENTORIES
Inventories are recorded at the lower of cost and net realizable value. The cost
of purchased equipment inventories is determined on a specific item basis. The
cost of purchased repair and distribution parts is determined on a weighted
average cost basis. Spare parts and stand-by equipment used in the Company's
operations are not included in inventory.
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, 2010, the Company recorded $442 of equipment write- downs (2009 -
$390).
Throughout the year, Company management identifies slow moving or obsolete parts
inventory and estimates appropriate obsolescence provisions by aging the
inventory. For the year ended December 31, 2010, the Company expensed $440 (2009
- $191) in additional obsolescence and scrap provisions.
During the year ended December 31, 2010, there were reversals of write-downs
recognized in prior periods of $230 (2009 - nil). In fiscal 2010, an improvement
in the economic environment triggered the assessment of the recoverable amount
on certain pieces of equipment.
Inventory costs of $207,268 (2009 - $205,604) recognized as an expense during
the year are reported as cost of sales in the consolidated statements of
operations. Cost of sales also includes amortization of equipment inventory on
rent of $18,211 (2009 - $11,209). Equipment inventory on rent as at December 31,
2010 was $49,784 (2009 - $33,919).
----------------------------------------------------------------------------
As at December 31 2010 2009
----------------------------------------------------------------------------
Equipment $ 142,080 $ 124,518
Parts 15,401 17,679
Work in process 2,507 2,264
----------------------------------------------------------------------------
$ 159,988 $ 144,461
----------------------------------------------------------------------------
As at December 31, 2010, the Company held $8,378 (2009 - $5,036) of inventory
against which a provision has been recorded.
6. CAPITAL ASSETS
Capital assets consist of the following:
----------------------------------------------------------------------------
2010
Accumulated
Cost amortization Net book value
----------------------------------------------------------------------------
Land $ 2,883 $ - $ 2,883
Buildings and leasehold
improvements 13,071 5,817 7,254
Machinery, equipment and
vehicles 14,400 11,051 3,349
Computer equipment under
capital leases 460 178 282
----------------------------------------------------------------------------
$ 30,814 $ 17,046 $ 13,768
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2009
Accumulated
Cost amortization Net book value
----------------------------------------------------------------------------
Land $ 2,883 $ - $ 2,883
Buildings and leasehold
improvements 13,052 5,481 7,571
Machinery, equipment and
vehicles 14,154 10,669 3,485
Computer equipment under
capital leases 236 42 194
----------------------------------------------------------------------------
$ 30,325 $ 16,192 $ 14,133
----------------------------------------------------------------------------
Amortization expense for the year ended December 31, 2010 totalled $924 (2009 -
$866).
7. BANK CREDIT FACILITY AND BANK INDEBTEDNESS
The Company has a credit facility with a Canadian Chartered Bank which provides
a $20 million 364-Day committed operating line of credit which is renewable
annually (see note 18). Borrowings under the line of credit are limited by a
standard borrowing base calculation based on accounts receivable and inventory
typical of such lines of credit. As collateral the Company has provided a $50
million debenture and a security interest in accounts receivables, 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. Interest rate on the operating line ranges
between bank prime rate plus 0.50% and bank prime rate plus 1.50% and between
the one month Canadian Bankers' Acceptance Rates ("BA rates") plus 1.75% and BA
rates plus 2.75%, depending on the Company's ratio of debt to tangible net worth
("TNW"). Under its operating facility 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 line 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, 2010,
there were outstanding letters of credit of $74 (2009 - $74).
In addition to its operating line of credit, the Company has a $15 million line
for foreign exchange forward contracts as part of its bank credit facilities
("FX Line") available to hedge foreign currency exposure. Under this FX Line,
Strongco can purchase foreign exchange forward contracts up to a maximum of $15
million. As at December 31, 2010, the Company had outstanding foreign exchange
forward contracts under this facility totaling US$7,447 at an average exchange
rate of $1.0227 Canadian for each US $1.00 with settlement dates between January
and May 2011 (December 31, 2009 - US$2,438 at an average exchange rate of $1.07
Canadian for each US $1.00).
8. EQUIPMENT NOTES PAYABLE
Various non-bank lenders provide secured wholesale financing on equipment
inventory ("equipment notes payable"), some of which is interest free for
periods up to twelve months from the date of financing. Thereafter, the
equipment notes payable bear interest at rates ranging from 4.25% to 5.85% over
the one month Canadian Bankers' Acceptance Rate and 3.25% to 4.90% over the
prime rate of Canadian chartered banks. The effective interest rates on these
notes payable as at December 31, 2010 ranged from 5.37% to 7.90% (2009 - 4.56%
to 8.25%). Monthly principal repayments equal to 3% of the original face value
of the notes commence twelve months from the date of financing and the remaining
balance is due in full twenty-four months after the date of financing or when
the financed equipment is sold. As collateral, the Company has provided liens on
specific inventories and accounts receivable with an approximate book value of
$139,270 (2009 - $117,000). The equipment notes are payable on demand and
therefore have been classified as current liabilities (see note 19).
9. CAPITAL LEASE OBLIGATIONS
At December 31, 2010, the Company had computers under capital leases of $287 at
an interest rate of 4.2%. The capital leases expire over a 12 to 33 month term
through to July 2013. The future minimum annual payments, interest and balance
of obligations were as follows:
----------------------------------------------------------------------------
For the years ending December 31 2010 2009
----------------------------------------------------------------------------
2010 $ - $ 92
2011 180 89
2012 108 28
2013 13 -
----------------------------------------------------------------------------
Total minimum lease payments 301 209
Less amount representing interest 14 13
----------------------------------------------------------------------------
Present value of minimum lease payments 287 196
Current portion of obligations under capital
leases 173 92
----------------------------------------------------------------------------
Long term portion of obligations under capital
leases $ 114 $ 104
----------------------------------------------------------------------------
10. SHAREHOLDERS' EQUITY
(a) Authorized
Unlimited number of shares.
(b) Issued
As at December 31, 2010, a total of 10,508,719 shares, valued at $57,089 were
issued and outstanding. There was no activity, other than the conversion noted
below and in note 1, in shareholders' capital during the year ended December 31,
2010. As at December 31, 2010, a total of 445,000 stock options were outstanding
(see note 11).
----------------------------------------------------------------------------
Unitholders' /
Shareholders' capital 2010 2009
Unit / Share
(#) Amount Unit (#) Amount
----------------------------------------------------------------------------
Units, beginning of
year 10,508,719 $ 57,089 10,508,719 $ 57,089
Units cancelled on
conversion (note 1) (10,508,719) (57,089) - -
Shares issued on
conversion (note 1) 10,508,719 57,089 - -
----------------------------------------------------------------------------
Shares, end of year 10,508,719 $ 57,089 10,508,719 $ 57,089
----------------------------------------------------------------------------
11. STOCK BASED COMPENSATION
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. The 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 on a straight line basis 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 rate of return 3%
Option Life 5 years
Expected volatility 60%
Expected dividends nil
On October 28, 2009, the Company issued irrevocable options to certain members
of senior management to purchase 375,000 units of the Company. The 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, a 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 the three 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 rate of return 3%
Option Life 7 years
Expected volatility 64%
Expected dividends nil
The stock based compensation expense related to stock options for 2010 was $280
(2009 - $80).
As at December 31, 2010, a total of 445,000 stock options were outstanding, at a
weighted average strike price of $4.16, with 100,000 vested, at a weighted
average strike price of $2.98.
----------------------------------------------------------------------------
As at December 31 2010 2009
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------------------------------------------------------------------------
Options outstanding,
beginning of year 100,000 $ 2.98 100,000 $ 2.98
Granted 375,000 4.50 - -
Exercised - - - -
Forfeited (30,000) 4.50 - -
----------------------------------------------------------------------------
Options outstanding, end of
year 445,000 $ 4.16 100,000 $ 2.98
----------------------------------------------------------------------------
Options vested, end of year 100,000 $ 2.98 50,000 $ 2.98
----------------------------------------------------------------------------
12. INCOME TAXES
Significant components of the provision for (recovery of) income taxes are as
follows:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Current income tax expense (recovery) $ (6) $ 693
Future income tax expense (recovery) (1,034) 82
----------------------------------------------------------------------------
$ (1,040) $ 775
----------------------------------------------------------------------------
The provision for income taxes differs from that which would be obtained by
applying the statutory tax rate as a result of the following:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Earnings (loss) before taxes $ (1,457) $ 1,509
Statutory tax rate 30.07% 46.40%
----------------------------------------------------------------------------
Provision for (recovery of) income taxes at
statutory tax rate (438) 700
Adjustments thereon for the effect of:
Permanent & other differences 191 234
Rate change 156 -
Recovery resulting from plan of arrangement (674) -
Benefit of Fund losses previously unrecognized (246) -
Income of the Fund not subject to tax - (79)
Other (29) (80)
----------------------------------------------------------------------------
$ (1,040) $ 775
----------------------------------------------------------------------------
The net future income tax liability is represented by the following:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Eligible capital expenditures and other reserves $ 1,688 $ 1,017
----------------------------------------------------------------------------
Future income tax assets 1,688 1,017
----------------------------------------------------------------------------
Capital and other assets 479 475
Accrued benefit asset 1,598 1,966
----------------------------------------------------------------------------
Future income tax liabilities 2,077 2,441
----------------------------------------------------------------------------
Net future income tax liability $ 389 $ 1,424
----------------------------------------------------------------------------
Following conversion to a corporation on July 1, 2010 Strongco became subject to
income tax at corporate tax rates, whereas previously the Fund was subject to
tax rates applicable to trusts. In addition, as a consequence of conversion to a
corporation, Strongco is now able to utilize tax losses, including tax losses
previously unrecognized from the Fund. The non-capital loss carryforwards expire
as follows:
2029: $952
2031: $582
Total: $1,534
13. LONG-TERM INCENTIVE PLAN
When Strongco operated as an income fund, key senior management of the Fund and
its affiliates were eligible to participate in the Strongco Long-Term Incentive
Plan (the "LTIP"). Pursuant to the LTIP, Strongco set aside a pool of funds
based upon the amount by which the Company's distributions per unit exceed cash
distribution threshold amounts. The Board of Directors would then purchase units
in the market with such pool of funds and would hold such units until such time
as ownership vests to each participant, generally over three years. No awards
have been made under the LTIP since 2006 and as of December 31, 2009, all units
awarded in prior years pursuant to the plan have vested and been released to the
applicable participants. In 2010 and 2009, $nil was transferred into the LTIP
pool relating to the excess of cash distributions over threshold amounts. The
LTIP compensation expense was $nil in 2010 (2009 - $nil). In 2009, the Board of
Directors have determined that no further awards will be made under the LTIP and
the LTIP was terminated effective June 30, 2010.
14. OPERATING LEASE COMMITMENTS
The Company has entered into various operating leases for its premises, certain
vehicles, furniture and fixtures and equipment. Approximate future minimum
annual payments under these operating leases are as follows:
----------------------------------------------------------------------------
2011 $ 6,214
2012 4,582
2013 3,883
2014 2,959
2015 2,234
Thereafter 4,291
----------------------------------------------------------------------------
Total $ 24,163
----------------------------------------------------------------------------
15. POST RETIREMENT OBLIGATIONS
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. One of
its defined benefit plans is based on years of service and final average salary,
while another one is a career average plan. The Company also has other post
retirement benefit obligations which include an unfunded retiring allowance plan
and a non-contributory dental and health care plan. Under these plans, the cost
of benefits is determined using the projected benefit method prorated on
services.
Effective May 29, 2009, Strongco sold its Engineered Systems segment (note 4).
Employees of the Engineered Systems segment were transferred to the purchaser.
Benefits earned by the transferred employees were frozen in the Strongco
Employees' Pension Plan on that date. This transaction constitutes a curtailment
under CICA 3461 accounting. Remeasurement of the value of the affected members'
benefits resulted in an actuarial gain of $360. This amount was used to reduce
the Plan's net unamortized actuarial losses. In addition, a pro rata portion of
the outstanding transitional obligation was reflected as a curtailment loss and
increased the 2009 Plan expense by $19.
Defined benefit pension plan for employees
Information about the Company's defined benefit pension plans for employees
("Employee Plan") and executive employees ("Executive Plan") is as follows:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Accrued benefit obligation, beginning of year $ 27,492 $ 23,012
Current service cost:
- employer contribution 723 426
- employee contribution 696 797
Interest cost 1,713 1,724
Benefits paid (2,329) (2,579)
Actuarial loss 2,959 4,472
Corporate restructuring giving rise to:
- curtailments - (360)
----------------------------------------------------------------------------
Accrued benefit obligation, end of year 31,254 27,492
----------------------------------------------------------------------------
Fair value of plan assets, beginning of year 26,088 21,599
Actual return on plan assets 2,831 4,118
Employer contributions 799 2,153
Employee contributions 696 797
Benefits paid (2,329) (2,579)
----------------------------------------------------------------------------
Fair value of plan assets, end of year $ 28,085 $ 26,088
----------------------------------------------------------------------------
Plan assets consist of:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Asset category
Equity securities 68.5% 67.3%
Debt securities 30.9% 29.3%
Other 0.6% 3.4%
----------------------------------------------------------------------------
Total 100.0% 100.0%
----------------------------------------------------------------------------
Fair value of plan assets $ 28,085 $ 26,088
Accrued benefit obligation 31,254 27,492
----------------------------------------------------------------------------
Funded status of plan - deficit (3,169) (1,404)
Unamortized net actuarial loss 9,359 7,908
Unamortized transitional obligation 85 103
----------------------------------------------------------------------------
Accrued benefit asset $ 6,275 $ 6,607
----------------------------------------------------------------------------
Elements of defined benefit costs recognized in the year:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Current service cost, net of employee
contributions $ 723 $ 426
Interest on accrued benefits 1,713 1,724
Actual return on plan assets (2,831) (4,118)
Actuarial loss 2,959 4,472
Curtailment losses - 19
----------------------------------------------------------------------------
Elements of defined benefit costs before
adjustments recognized: 2,564 2,523
Adjustments to recognize the long term nature of
benefit costs:
- loss on assets (expected vs actual in year) 1,179 2,575
- actuarial gains (recognized vs actual in
year) (2,629) (4,157)
- transitional obligation 18 19
----------------------------------------------------------------------------
Defined benefit costs recognized $ 1,132 $ 960
----------------------------------------------------------------------------
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
Plan, the most recent actuarial valuation for funding purposes was performed as
of August 31, 2010 and the next required valuation will be due no later than
August 31, 2011. For the Executive Plan, the most recent funding valuation was
performed as of June 30, 2009 and the next required valuation will be due no
later than June 30, 2012.
Accrued benefit asset is comprised as follows:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Employee Plan $ 5,743 $ 6,016
Executive Plan 532 591
----------------------------------------------------------------------------
$ 6,275 $ 6,607
----------------------------------------------------------------------------
Information about the Company's other post retirement benefit obligations, in
aggregate, is as follows:
--------------------------------------------------------------------------
2010 2009
--------------------------------------------------------------------------
Accrued benefit obligation, beginning of year $ 1,547 $ 1,432
Interest cost 82 96
Benefits paid (94) (98)
Actuarial (gain) loss (427) 117
--------------------------------------------------------------------------
Accrued benefit obligation, end of year 1,108 1,547
--------------------------------------------------------------------------
Fair value of plan assets - -
Accrued benefit obligation 1,108 1,547
--------------------------------------------------------------------------
Funded status of plan - deficit (1,108) (1,547)
Unamortized net actuarial loss 146 607
Unamortized transitional obligation 143 171
--------------------------------------------------------------------------
Accrued benefit liability $ (819) $ (769)
--------------------------------------------------------------------------
Elements of defined benefit costs recognized in the year:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Current service cost, net of employee
contributions $ - $ -
Interest on accrued benefits 82 96
Actuarial (gain) loss (427) 117
----------------------------------------------------------------------------
Elements of defined benefit costs before
adjustments recognized: (345) 213
Adjustments to recognize the long term nature of
benefit costs:
- actuarial loss (gain) (recognized vs actual
in year) 461 (87)
- transitional obligation (amortization) 29 29
----------------------------------------------------------------------------
Defined benefit costs recognized $ 145 $ 155
----------------------------------------------------------------------------
The significant actuarial assumptions adopted in measuring the Company's accrued
benefit obligations are as follows:
Accrued benefit obligation as of the end of the year:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Discount rate 5.50% 6.25%
Rate of compensation increase 3.00% 3.00%
----------------------------------------------------------------------------
Benefit cost for the year:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Discount rate 6.25% 7.50%
Expected long-term rate of return on plan assets 6.50% 7.00%
Rate of compensation increase 3.00% 3.00%
----------------------------------------------------------------------------
The actual claims cost for 2010 was used to project the 2011 expense. The
assumed health care cost trend rate is 7.5% in 2011, declining by 0.5% per annum
to 5.0% per annum in 2016 and thereafter. The assumed dental cost rate is 4.0%
per annum.
Assumed health and dental care cost trend rates have a significant effect on the
amounts reported for the health and dental care plans. A one percentage point
change in assumed health and dental care cost trend rates would have the
following effects for 2010:
----------------------------------------------------------------------------
Increase Decrease
----------------------------------------------------------------------------
Total of service and interest cost $ 8 $ (7)
Accrued benefit obligation as of December 31,
2010 $ 108 $ (87)
----------------------------------------------------------------------------
In February 2006, the Company established a new defined benefit retirement
savings program for executive officers, the ("DPRSP") with retroactive effect to
January 1, 2006. The expense related to the DPRSP for the year ended December
31, 2010 was $192 (2009 - $227). Interest is accrued monthly, based on the Bank
of Canada's five year conventional mortgage rate.
Defined contribution pension plans
In addition, the Company maintains a defined contribution plan available only to
certain employees (approximately 11.3% of the workforce (2009 - 12.0%)) who were
existing members of the plan following a previous acquisition and members of a
defined contribution plan of a business acquired in 2008. In 2010, the Company's
contributions were $172 (2009 - $176). The Company also maintains a group
RSP/LIRA available only to certain employees (approximately 11.8% of the
workforce (2009 - 13.4%)) covered under a collective bargaining agreement. In
accordance with the terms of the collective bargaining agreement in 2010, the
Company's contributions were $192 (2009 - $191).
In June 2007, Strongco established a new defined contribution retirement savings
program for designated senior management, the ("DCRSP-GM"). The expense related
to the DCRSP-GM for the year ended December 31, 2010 was $49 (2009 - $59).
Total cash payments for employee future benefits for 2010 consisting of cash
contributed by the Company to its funded pension plans, cash payments directly
to beneficiaries for its unfunded other benefit plans and cash contributed to
its defined contribution plan were $1,499 (2009 - $2,858).
16. CONTINGENCIES
(a) The Company has agreed to buy back equipment from certain customers at
the option of the customer for a specified price at future dates ("buy
back contracts"). These contracts are subject to certain conditions
being met by the customer and range in term from three to ten years. At
December 31, 2010, the total obligation under these contracts was
$10,279 (2009 - $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 $860 (2009 - $699) has been accrued in the Company's
accounts with respect to these commitments.
(b) The Company has provided a guarantee of lease payments under the
assignment of a property lease which expires January 31, 2014. Total
lease payments from January 1, 2011 to January 31, 2014 are $461 (2009
- $610).
(c) In the ordinary course of business activities, the Company may be
contingently liable for litigation. On an ongoing basis, the Company
assesses the likelihood of any adverse judgements 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
issue. The required provision may change in the future due to new
developments in each matter or changes in approach such as a change in
settlement strategy dealing with these matters.
A statement of claim has been filed naming a former division of the
Company as one of several defendants in proceedings under the Superior
Court of Quebec. The action claims errors and omissions in the
contractual execution of work entrusted to the defendants and names the
Company as jointly and severally liable for damages of approximately
$5.9 million. Although the Company cannot predict the outcome at this
time, 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.
A statement of claim has been filed naming a former division of the
Company as one of several defendants in proceedings under the Queens
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. 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.
17. SEGMENTED INFORMATION
As a result of the divestiture of the Engineered Systems segment in 2009 (see
note 4), the Company operates in one reportable segment, Equipment Distribution.
Strongco is one of the largest multi-line mobile equipment distributors in
Canada. 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 within the Equipment Distribution segment is as follows:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Equipment Sales $ 183,744 $ 183,751
Equipment Rentals 22,093 14,321
Product Support 88,820 93,723
----------------------------------------------------------------------------
Total Equipment Distribution $ 294,657 $ 291,795
----------------------------------------------------------------------------
18. FINANCIAL INSTRUMENTS
Categories of financial assets and liabilities
Under GAAP, financial instruments are classified into one of the five
categories: held-for-trading, 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,
including those held for sale on the consolidated balance sheet are classified
into the following categories:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Loans and receivables (1) $ 35,884 $ 27,088
Liabilities (2) $ 162,588 $ 138,550
----------------------------------------------------------------------------
(1) Includes accounts receivable.
(2) Includes bank indebtedness, accounts payable and accrued liabilities,
equipment and other notes payable.
The Company has determined the estimated fair values of its financial
instruments based on appropriate valuation methodologies; however, considerable
judgment is required to develop these estimates. The fair values of the
Company's financial assets are not materially different from their carrying
value, due to the short-term nature of balances. The fair values of the
Company's financial liabilities were approximately $158,000 as at December 31,
2010. These fair values were determined using a discounted cash flow model with
the Company's current risk adjusted rate of 6.5%.
The amendment to Section 3862 is applied to financial assets and liabilities,
such as derivative instruments consisting of foreign exchange forward contracts
(Level 2 - inputs, other than quoted prices in active markets, that are
observable, either directly or indirectly). Total realized and unrealized losses
of $456K were included in Other Income for the year ended December 31, 2010.
The anticipated maturities of the Company's financial liabilities are as follows:
Maturities of Financial Liabilities
----------------------------------------------------------------------------
As at December 31, 2010
Financial Liability Less than
3 months
----------------------------------------------------------------------------
Bank indebtedness (1) $ 12,370
Accounts payable and accrued liabilities 30,265
Customer deposits 560
Equipment notes payable - non- interest bearing (2) 40,097
Equipment notes payable - interest bearing (2) 78,063
Notes payable (3) 1,250
----------------------------------------------------------------------------
$ 162,605
----------------------------------------------------------------------------
(1) Bank operating line of credit is due on demand and therefore the
maturity is reflected as due currently.
(2) Equipment notes are due on demand and therefore the maturity is
reflected as due currently. Principal repayments commence over the
period from the date of financing to twelve months thereafter and are
due in full when the related equipment is sold or within twenty-four
months from the date of financing if the related equipment is not sold
(see note 8).
(3) Notes payable is due in March 2011. It is related to the Champion Road
Machinery acquisition in 2008.
Foreign exchange forward contracts, interest rate swaps and other hedging
arrangements
On a transaction specific basis, the Company utilizes financial instruments to
manage the risk associated with fluctuations in foreign exchange. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objective and strategy for undertaking
various hedge transactions.
The Company enters into foreign currency forward contracts to reduce the impact
of currency fluctuations on the cost of certain pieces of equipment ordered for
future delivery to customers. As at December 31, 2010, the Company had
outstanding foreign exchange forward contracts totalling US$7,447 at an average
exchange rate of $1.0227 Canadian for each US$1.00 with maturities between
January and the end of May 2011. These foreign currency forward contracts are
not considered hedges for accounting purposes and as a result any gain or loss
resulting from the fair valuation of these contracts at each month end prior to
their settlement is charged to earnings from continuing operations. The
outstanding foreign exchange contracts are reported as accrued liabilities in
the consolidated balance sheets and changes in the outstanding amount are
reported as changes in non-cash working capital balances related to operations
on the consolidated statements of cash flows. The fair valuation of these
contracts at December 31, 2010 was $239.
Risks arising from financial instruments and risk management
The Company's activities expose it to a variety of financial risks: market risk
(including foreign exchange and interest rate), 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.
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.
Foreign exchange risk
The Company operates in Canada. The functional and reporting currency of the
Company is Canadian dollars. Foreign exchange risk arises because the amount of
Canadian dollars receivable or payable for transactions denominated in foreign
currencies may vary due to changes in exchange rates ("transaction exposures").
The balance sheet of the Company includes U.S. dollar denominated accounts
payable and accounts receivable. These amounts are translated into Canadian
dollars at each period end, with resulting gains and losses recorded in
earnings. 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, 2010, the Company carried $3,836 in U.S. dollar denominated
liabilities net of U.S. dollar denominated cash and accounts receivable. A +/-
$0.10 change in foreign exchange rate between Canadian and U.S. currencies would
have an effect of approximately $384 on earnings from continuing operations for
the year ended December 31, 2010.
Total foreign exchange gains for the year ended December 31, 2010 were $64
(foreign exchange gains for the year ended December 31, 2009 were $211).
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, 2010, all of the Company's
interest-bearing debt is subject to movements in floating interest rates.
As at December 31, 2010, the Company had $90,433 in interest bearing floating
rate debt. A +/- 1.0% change in interest rates would have an effect of
approximately $904 on earnings from continuing operations for the year ended
December 31, 2010.
Credit risk
Effective January 1, 2009, the Company adopted the recommendations of the CICA
guidance under EIC 173 "Credit Risk and the Fair Value of Financial Assets and
Financial Liabilities". This guidance clarified that an entity's own credit risk
and the credit risk of the counterparty should be taken into account in
determining the fair value of financial assets and financial liabilities
including derivative instruments. The adoption of the above described standard
did not have a material impact on the Company's consolidated financial
statements.
Credit risk arises from cash and cash equivalents held with banks and financial
institutions, derivative financial instruments (foreign exchange forward
contracts), as well as credit exposure to customers, including outstanding
accounts receivable. 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
accounts receivable 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, 2010, the Company held customer deposits of $560.
The carrying amount of accounts receivable is reduced by an allowance for
doubtful accounts. The provision of the allowance for doubtful accounts is
recognized in the income statement within operating expenses in the period of
provision. When a receivable balance is considered uncollectible, it is written
off against the allowance for doubtful accounts. Subsequent recoveries of
amounts previously written off are credited against operating expenses in the
income statement.
The following table sets forth details of the age of receivables that are not
overdue as well as an analysis of overdue amounts and related allowance for the
doubtful accounts:
----------------------------------------------------------------------------
As at December 31, 2010
----------------------------------------------------------------------------
Total accounts receivable $ 37,081
Less: Allowance for doubtful accounts (1,196)
----------------------------------------------------------------------------
Total accounts receivable, net 35,884
----------------------------------------------------------------------------
Of which:
Current 25,267
1-30 Days Past Due 7,767
31-60 Days Past Due 1,898
Greater than 60 Days Past Due 2,150
----------------------------------------------------------------------------
37,081
----------------------------------------------------------------------------
Less: Allowance for doubtful accounts as at
December 31, 2009 (1,362)
Decrease in allowance for the year ended December
31, 2010 166
----------------------------------------------------------------------------
Allowance for doubtful accounts as at December 31,
2010 (1,196)
----------------------------------------------------------------------------
Total accounts receivable, net $ 35,884
----------------------------------------------------------------------------
There were no significant balances outstanding with individual customers as of
December 31, 2010.
Liquidity risk
Effective October 1, 2009, the Company adopted the recommendations of the CICA
on the amended accounting standard, Section 3862, "Fair Value and Liquidity Risk
Disclosure". The amendment is effective for fiscal years ending on or after
October 1, 2009 and now requires that all financial instruments measured at fair
value be categorized into one of the following three hierarchy levels for
disclosure purposes:
-- Level 1 - Using quoted prices in active markets for identical
instruments that are observable;
-- Level 2 - Using quoted prices for similar instruments and inputs other
than quoted prices that are observable and derived from or corroborated
market data; or
-- Level 3 - Valuations derived from valuation techniques in which one or
more significant inputs are unobservable.
The three levels distinguish between the levels of observable inputs when
measuring fair value. The amendment only affects the Company's fair value
disclosure in the notes to the audited consolidated statements and did not have
an impact on the results of operations and financial condition of the Company.
Liquidity risk arises through 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, 2010, the Company had undrawn lines of credit
available to it of $7.6 million.
19. 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 interest-free) and other interest-bearing debt. The
Company's objectives when managing capital are to ensure that it 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 depend upon multiple factors, including availability of
supply from manufacturers, seasonal market conditions, local market conditions
and date of receipt of inventories from the manufacturer. Refer to note 8 for
details of the equipment note facility.
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 3.5:1.
As at December 31, 2010 and December 31, 2009, the above capital management
criteria can be illustrated as follows:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Interest bearing debt $ 12,370 $ 10,014
Equipment notes payable 118,160 104,843
Notes payable 1,233 2,312
----------------------------------------------------------------------------
Total managed debt instruments $ 131,763 $ 117,169
----------------------------------------------------------------------------
Unitholders' equity $ 54,511 $ 54,648
----------------------------------------------------------------------------
Ratio of total managed debt instruments to
shareholders' equity 2.4 2.1
----------------------------------------------------------------------------
The Company has a credit facility with a Canadian chartered bank which provides
a $20 million 364-Day committed operating line of credit which is renewable
annually. Refer to note 7 for details of the credit facility.
The Company's bank credit facility contains 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 $54 million, a maximum ratio of total debt to tangible net
worth ("Debt to TNW Ratio covenant") of 3.5 : 1 and a minimum ratio of earnings
before interest, taxes, depreciation and amortization ("EBITDA") minus capital
expenditures to total interest ("Debt Service Coverage Ratio covenant") of 1.3 :
1. For the purposes of calculating covenants under the credit facility, debt is
defined as total liabilities less future income tax amounts and subordinated
debt. The Debt Service Coverage Ratio is measured at the end of each quarter on
a trailing twelve month basis. Other covenants are measured as at the end of
each quarter.
On March 29, 2010, the bank renewed the credit facility and the $20 million
operating line of credit, and the $10 million foreign exchange line ("FX Line").
In conjunction with this renewal, the bank amended the covenants to reduce the
minimum tangible net worth requirement to $52 million as at March 31, 2010,
increasing to $54 million as at June 30, 2010. All other terms and conditions of
the credit facility remained unchanged.
As at June 30, 2010 actual tangible net worth was $52 million. On August 6, 2010
the bank issued a waiver for the shortfall in the covenant and amended the
minimum tangible net worth requirement to $50 million as at September 30, 2010,
increasing to $54 million as at December 31, 2010. In addition, the bank
increased the FX Line to $15 million. The bank charged a fee of $25 for these
amendments. The Company's equipment note lenders provided a waiver of the cross
default resulting from the covenant violation under the bank agreement.
On December 30, 2010 the bank amended the minimum tangible net worth requirement
to $50 million as at December 31, 2010, increasing to $54 million as at March
31, 2011.
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 equipment finance credit agreements contain other
restrictive financial covenants that are similar but less restrictive than those
of the bank.
The Company was in compliance with all covenants under its bank credit facility
and all equipment finance lines as at December 31, 2010.
20. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
The net changes in non-cash working capital balances related to continuing
operations are as follows:
----------------------------------------------------------------------------
2010 2009
----------------------------------------------------------------------------
Accounts receivable $ (8,796) $ 13,102
Prepaids (197) (23)
Inventories (33,738) 8,421
Income & other taxes receivable - 772
----------------------------------------------------------------------------
$ (42,731) $ 22,272
----------------------------------------------------------------------------
Accounts payable and accrued liabilities 9,399 (21,250)
Deferred revenue & customer deposits 806 (2,139)
Equipment notes payable - non-interest bearing 11,426 (6,906)
Equipment notes payable - interest bearing 1,891 (7,135)
----------------------------------------------------------------------------
23,522 (37,430)
----------------------------------------------------------------------------
$ (19,209) $ (15,158)
----------------------------------------------------------------------------
21. ECONOMIC RELATIONSHIP
The Company, through its Equipment Distribution segment, sells and services
heavy equipment and related parts. Distribution agreements are maintained with
several equipment manufacturers, of which the most significant are with Volvo
Construction Equipment North America, Inc. The distribution and servicing of
Volvo products account for a substantial portion of the Equipment Distribution
segments operations. The Company has had an ongoing relationship with Volvo
since 1991.
22. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from
statements previously presented to conform to the presentation of the 2010
consolidated financial statements.
23. SUBSEQUENT EVENTS
On January 17, 2011, the Company completed a rights offering for aggregate gross
proceeds of $7.86 million. The offering was virtually fully subscribed, with a
total of 9,941,964 rights being exercised for 2,485,491 common shares and
134,419 common shares being issued pursuant to the additional subscription
privilege. Under the offering, each registered holder of the Corporation's
Common Shares as of December 17, 2010 received one Right for each Common Share
held. Four Rights plus the sum of $3.00 were required to subscribe for one
Common Share. Each common share was issued at a price of $3.00. Expenses of $105
related to the rights offering were expensed as a period cost. As of January 17,
2011, the Corporation has 13,128,629 common shares issued and outstanding.
On February 18, 2011, the Company completed the acquisition of 100% of the
shares of Chadwick-BaRoss, Inc., a US corporation for US$11.5 million.
Chadwick-BaRoss, Inc. is a heavy equipment dealer headquartered in Westbrook,
Maine, with three branches in Maine and one in each of New Hampshire and
Massachusetts. The transaction value was satisfied with cash of US$9.6 million
and notes issued to the major shareholders of Chadwick-BaRoss totalling US$1.9
million.
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