Strongco Announces Substantially Improved Second Quarter 2011 Revenues and Earnings
(firmenpresse) - MISSISSAUGA, ONTARIO -- (Marketwire) -- 08/09/11 -- Strongco Corporation (TSX: SQP) today reported financial results for the three months ended June 30, 2011.
Summary (i)
(i) Comparisons are between second quarter 2011 and second quarter 2010
"We achieved substantial revenue growth in the quarter in all regions, with Western Canada particularly strong, and there were increases in all revenue categories," said Robert Dryburgh, President and Chief Executive Officer of Strongco. "While demand for equipment was certainly stronger, we also benefited from better sales execution, increased market share and contributions from Chadwick-BaRoss."
Financial Highlights (i)
(i) All financial information conforms to International Financial Reporting Standards. Results from 2010 have been restated in conformity with IFRS rules.
Second Quarter 2011 Review
Total revenues in the three months ended June 30, 2011 were $114.1 million, an increase of 64% from the second quarter of 2010.
Equipment sales increased by 85% from last year to $77.1 million. Product support revenues gained 29% to $30.9 million. Rental revenues were $6.1 million, up 53% from the year-earlier period.
Gross margin increased by 51% to $21.2 million during the second quarter. As a percentage of revenue, gross margin declined slightly to 18.6% from 20.3% in the same period of 2010. "The change in gross margin percentage was primarily due to the large increase in and resulting higher proportion of equipment sales relative to the higher margin product support and rental revenues," said David Wood, Vice President and Chief Financial Officer.
Administrative, distribution and selling expenses during the second quarter totalled $16.3 million, compared to $13.6 million in 2010. Expenses for the period just ended included $2.3 million in operating costs for the newly acquired Chadwick-BaRoss unit.
EBITDA for the second quarter increased to $10.5 million from $4.5 million a year earlier.
As a result of the strong revenue performance and the incremental earnings from the acquisition of Chadwick-BaRoss of $0.2 million, Strongco's net income in the second quarter of 2011 was $3.6 million ($0.28 per share), a significant improvement from a net loss of $0.3 million (loss of $0.03 per share) in the second quarter of 2010.
Outlook
Management is optimistic that Strongco will continue to demonstrate improved performance over 2010 levels in the balance of 2011, but does anticipate some impact from the traditional seasonality of the industry in the third and fourth quarters.
The economy and construction markets across Canada are expected to continue to improve throughout 2011, which in turn should spur demand for heavy equipment, and willingness of customers to purchase equipment. Strongco's equipment sales backlogs have continued at a high level in 2011, which indicates that demand for heavy equipment is improving.
Oil prices have continued to show strength and stability during 2011, which is supporting economic recovery in Alberta. In particular, accelerating activity in the oil sands has led to increased spending for heavy equipment in northern Alberta. In addition, the generally improving economy has fueled an increase in construction activity throughout the province. Strongco's sales in Alberta have shown strong growth in the first half of the year and backlogs have increased. Management is optimistic that heavy equipment markets in the province will continue to improve in 2011.
Demand for cranes, which started to show improvement toward the end of 2010, has continued to increase in 2011 in concert with recovering construction markets and rising activity in Alberta's oil patch. Strongco's sales backlog for cranes has grown in 2011, which is a sign that demand is improving.
Equipment manufacturers continue to improve production capacity, to reduce lead times and improve availability of new machines but this has remained an issue in the first half of 2011. In addition, the transition to the new lower emission tier 4 engine technology in 2011 presents an added complication that is impacting lead times and supply of equipment.
Seismic events in Japan have resulted in global shortages of certain brands and types of equipment and parts. Strongco has not been seriously impacted to date, as the vast majority of the equipment it distributes is manufactured outside of Japan. However, parts shortages from Japan could impact availability of equipment manufactured elsewhere in future.
Management remains optimistic that the improving trend in Canadian construction markets in the first half of 2011 will continue through the balance of the year. The Company also aims to sustain the improving operational effectiveness demonstrated in the first six months of 2011.
The normal third quarter seasonal pattern of lower equipment sales but strong product support with parts and service is anticipated in the third quarter. The ongoing high level of rental purchase option (RPO) contracts also suggests strong sales from rental conversions in the fourth quarter. In addition, the acquisition of Chadwick-BaRoss Inc., effective February 1, 2011, is anticipated to contribute to improved sales levels and profitability for Strongco in the balance of 2011.
Conference Call Details
Strongco will hold a conference call on Tuesday, August 9, 2011 at 10 am ET to discuss second quarter results. Analysts and investors can participate by dialing 416-644-3415 or toll free 1-877-974-0445. An archived audio recording will be available until midnight on August 23, 2011. To access it, dial 416-640-1917 and enter passcode 4460139#.
About Strongco
Strongco Corporation is one of Canada's largest multiline mobile equipment dealers and also 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 may contain "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. 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.
Strongco Corporation
Management's Discussion and Analysis
The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Strongco Corporation, formerly Strongco Income Fund ("the Fund"), Strongco GP Inc. and Strongco Limited Partnership collectively referred to as "Strongco" or "the Company", as at and for the three months and six months ended June 30, 2011. This discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements as at and for the three months and six months ended June 30, 2011. For additional information and details, readers are referred to the Company's audited consolidated financial statements and accompanying MD&A as at and for the year ended December 31, 2010 contained in the Company's annual report for the year ended December 31, 2010, the Company's unaudited consolidated financial statements and accompanying MD&A as at and for the three months ended March 31, 2011, the Company's Notice of Annual and Special Meeting of Shareholders and Management Information Circular ("MIC") dated April 20, 2011, and the Company's Annual Information Form ("AIF") dated March 30, 2011, all of which are published separately and are available on SEDAR at .
Unless otherwise indicated, all financial information within this discussion and analysis is in millions of Canadian dollars except per share amounts. The information in this MD&A is current to August 8, 2011.
FINANCIAL HIGHLIGHTS
Note 1 - EBITDA is a non-IFRS measure. See explanation under the heading "Non-IFRS Measures" below.
COMPANY OVERVIEW
Strongco is one of the largest multi-line mobile equipment distributors in Canada. In February 2011, Strongco acquired 100% of the shares of Chadwick-BaRoss, Inc., a multi-line distributor of mobile construction equipment in the New England region of the United States, (see discussion below under the heading "Acquisition of Chadwick-BaRoss, Inc."). Strongco sells and rents new and used equipment and provides after-sale product support (parts and service) to customers that operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets. This business distributes numerous equipment lines in various geographic territories. The primary lines distributed include those manufactured by:
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.
CONVERSION TO A CORPORATION
The Fund was an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated March 21, 2005 as amended and restated on April 28, 2005 and September 1, 2006.
Pursuant to a plan of arrangement approved by the unitholders at the Fund's Annual and Special Meeting on May 14, 2010, the Fund was converted to a corporation effective July 1, 2010. The conversion involved the incorporation of Strongco Corporation, which issued shares to the unitholders in exchange for the units of the Fund on a one for one basis so that the unitholders became shareholders in Strongco Corporation, after which the Fund was wound up into Strongco Corporation.
Following the conversion on July 1, 2010, Strongco Corporation has carried on the business of the Fund unchanged except that Strongco Corporation is subject to taxation as a corporation. The results of operations, balance sheet and cash flow figures presented in the following MD&A for comparative periods prior to July 1, 2010 reflect those of the Fund. References in this MD&A to shares and shareholders of the Company are comparable to units and unitholders previously under the Fund.
Details of the conversion are outlined in the Fund's Management Information Circular dated April 6, 2010, which contains the Plan of Arrangement, available on SEDAR at .
FINANCIAL RESULTS - THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
Consolidated Results of Operations
Note 1 - EBITDA is a non-IFRS measure. See explanation under the heading "Non-IFRS Measures" below.
Acquisition of Chadwick-BaRoss, Inc.
On February 17, 2011, the Company completed the acquisition of 100% of the shares of Chadwick-BaRoss, Inc. ("Chadwick-BaRoss") for net proceeds of US$11.1 million. The transaction value was satisfied with net cash proceeds of US$9.2 million and notes issued to the major shareholders of Chadwick-BaRoss totalling US$1.9 million. Chadwick-BaRoss is a heavy equipment dealer headquartered in Westbrook, Maine, with three branches in Maine and one in each of New Hampshire and Massachusetts. The acquisition was effective as of February 1, 2011 and the results of Chadwick-BaRoss have been included in the consolidated results of Strongco from that date.
Market Overview
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 Canada in 2010, construction markets remained weak in the first quarter of 2010. With the onset of warmer spring weather and spurred by government stimulus spending for infrastructure projects, construction activity began to show signs of improvement in the second quarter of 2010. This improvement continued in the third and fourth quarters of 2010 as confidence in the economy increased. Similarly, demand for new heavy equipment was soft in the first quarter of 2010 but started to improve late in the second quarter and continued to strengthen in the third and fourth quarters of 2010. While construction markets and demand for heavy equipment were improving, many customers remained reluctant or lacked the financial resources following the recession to commit to purchase new construction equipment and instead rented to meet their equipment needs in the first half of the year. That trend continued in the second half of 2010, 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 ("RPO") in the fourth quarter of 2010. Recovery was first evident in the markets for compact and lower priced equipment while demand for larger higher priced equipment was slower to recover. In particular, the market for cranes remained weak in the first and second quarters of 2010 but started to show improvement in the latter half of the year. Sales backlogs for all categories of equipment, including cranes, improved steadily throughout the first and second quarters of 2010 and remained strong throughout the balance of the year and into 2011.
The improving trend in construction markets and increasing demand for heavy equipment evident in the latter half of 2010 continued into the first quarter of 2011. Construction activity continued to rise in the second quarter of 2011 and with that, demand for heavy equipment strengthened further. While customers were more confident and willing to purchase equipment in the first and second quarters of 2011, rental activity, especially under RPO contracts, also remained strong in the first half of the year. In addition, sales backlogs remained at robust levels, a positive indication of the continuing recovery of construction markets and demand for heavy equipment.
As a consequence of the weak economy during the recession, 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 been unable to bring production back on line at the same pace resulting in longer delivery lead times and reduced availability. OEM production levels are improving, but delivery lead times for new equipment have remained stretched in 2011, which has benefitted dealers carrying higher levels of older equipment inventories. In addition, the scheduled transition from tier 3 engines to the new lower-emission tier 4 technology has affected supply and increased demand for equipment with tier 3 engines.
The tsunami and nuclear disaster in Japan has affected production and supply of certain brands and types of equipment manufactured in Japan. In addition, supply of certain parts from Japan for equipment manufactured in other parts of the world has also been affected by the Japanese crisis. Strongco has not been impacted to date from this disaster as the vast majority of the equipment it distributes is manufactured outside of Japan, but parts shortages from Japan could impact equipment availability in the future.
Revenues
A breakdown of revenue for the quarter and six months ended June 30, 2011 and 2010 is as follows:
Equipment Sales
Strongco's equipment sales in the three months ended June 30, 2011 were $77.1 million which was up $35.7 million or 86% from $41.4 million in the second quarter of 2010. For the six months ended June 30, 2011, sales were $133.1 million compared to $71.3 million in the first half of 2010. The recent acquisition of Chadwick-BaRoss in February 2011 accounted for $6.9 million of the sales increase in the quarter and $9.6 million of the increase year to date. Sales in Canada were up $28.8 million or 70% in the quarter and $52.2 million or 73% in the six months of the year. Sales were up in all regions of the country, with the largest increases in Alberta, Ontario and Quebec. The markets for new heavy equipment in Canada in which Strongco operates were stronger in all regions of the country. However, demand varied significantly from region to region between product categories. Demand was strongest in general purpose construction equipment ("GPE"), particularly in Western and Eastern Canada, while demand for compact equipment was up a lesser amount. Markets for cranes were also up from the first half of 2010, with the largest gains in Central and Eastern Canada.
The continued recovery in construction markets in Canada has resulted in increased demand for heavy equipment. The markets for heavy equipment that Strongco serves in Canada were estimated to be up on average 30% in the second quarter and more than 35% year to date. The largest increase in demand was in Alberta followed by Quebec and Ontario. Strongco outperformed the market with a total unit volume increase more than 55% from the second quarter of 2010 and captured a larger share of the growing market.
Average selling prices vary from period to period, depending on sales mix between product categories, model mix within product categories and features and attachments included in equipment being sold. Strongco's average selling prices in the second quarter and first six months of the year were higher than in 2010, due primarily to a higher proportion of sales of larger, more expensive equipment. Average selling prices in most product categories increased slightly compared to the first half of 2010. While the ongoing strength of the Canadian dollar and price competition continued to put pressure on selling prices, increased demand, combined with product availability and delivery issues, helped support stronger selling prices in 2011.
On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic regions) were $27.2 million in the second quarter, which was up $9.1 million or 50% from the second quarter of 2010. For the six months to June, equipment sales in Eastern Canada totalled $47.3 million, which was $19.6 million or 71% above the same period in 2010. Construction markets in Quebec continued to benefit from the high level of infrastructure spending. The markets for GPE in which Strongco participates in Eastern Canada were estimated to be approximately 16% higher for the quarter and six months to date compared to same periods in 2010. Strongco outperformed the market and captured a larger market share, with total GPE unit volume growth of nearly 55% year to date. Most of the sales increase has been in loaders and articulated trucks. In addition, sales of rock crushing equipment in Quebec have been strong in the first half of the year. The crane market in Eastern Canada, which generally remained weak in 2010 following the recession, showed an improvement 2011 as certain large crane rental customers in Quebec upgraded and increased their fleets. In addition, the sale of a few large cranes that had been on RPO contracts contributed to increased sales in the first and second quarters.
Strongco's equipment sales in the second quarter in Central Canada were $25.8 million, which was up $9.8 million or 61% from the second quarter of 2010. For the six months to June, the total was $44.0 million, $14.0 million or 47% higher than the same period in 2010. Most of the increase in the quarter was due to higher sales of GPE equipment. While the cold, snowy winter and very wet spring weather conditions delayed many announced construction and infrastructure projects, construction activity in Ontario picked up in the second quarter, which led to increased spending for GPE equipment in the quarter. Total market volume of GPE equipment sold in the quarter increased by approximately 30% from a year ago. Strongco outperformed the market, almost doubling its GPE equipment volume in the quarter and captured a larger share of the growing market. The market for compact equipment in Ontario increased to a lesser extent as the wet weather conditions, particularly in the early part of the quarter, impacted the purchasing decisions of many smaller customers. Price competition in Ontario in both GPE and compact equipment remained aggressive in the second quarter, especially from certain dealers attempting to capture market share in particular product categories and markets. Crane sales in Ontario in the first half of 2011 were more than double that of a year ago as certain crane rental customers, who refrained from purchasing new cranes during the recession, replenished their fleets.
Equipment sales in Western Canada during the first quarter were $17.2 million, which was up $9.9 million or 136% over second quarter of 2010. For the six months to June, the total was $32.2 million, $18.6 million or 137% higher than the same period in 2010. Strongco's product lines in Alberta serve the oil sector, primarily in the site preparation phase, as well as natural gas production, both of which were significantly impacted by weakness in the energy sector during 2009. In addition, 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 through 2010 and into 2011, economic conditions in Alberta have improved. Construction activity and demand for heavy equipment began to show signs of recovery in 2010, particularly in Northern Alberta in the latter half of the year and that improvement continued in the first half of 2011. Total units sold in the markets served by Strongco in Alberta, excluding cranes, were estimated to be up approximately 83% relative to the first six months of 2010. Strongco outperformed the market with total unit volume growth in excess of 165% in the first half of the year and captured a larger share of the market. Most of the increase was in sales of GPE and larger equipment. While this was a substantial increase over the first six months of 2010, sales in Northern Alberta were hampered by longer delivery lead times and product availability issues on certain products. The market for cranes in Alberta has been recovering in 2011 but more slowly that other heavy equipment. Strongco's crane sales in Alberta are up 21% year to date. Sales backlog of cranes remains strong and RPO activity has increased, positive signs that the crane markets in Western Canada are continuing to improve.
Strongco's equipment sales in the northeastern United States were $6.9 million in the second quarter and $9.6 million for the five months from February 1, 2011, the effective date of the acquisition of Chadwick-BaRoss (see "Acquisition of Chadwick-BaRoss, Inc."), to June 30, 2011. The markets for heavy equipment in New England have not recovered from a year ago and are down approximately 40% from pre-recession levels. Strongco's market share for GPE in this reduced market increased during the quarter and sales were slightly ahead of the same period of the prior year but still down from pre-recession levels. However, Strongco's market share for compact equipment in the region has declined in 2011 due primarily to lack of product.
Equipment Rentals
It is common industry practice for certain customers to rent to meet their heavy equipment needs rather than commit to a purchase. In some cases this is in response to the seasonal demands of the customer, as in the case of municipal snow removal contracts, or to meet the customers' needs for a specific project. In other cases, certain customers prefer to enter into short-term rental contracts with an option to purchase after a period of time or hours of machine usage. 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.
Strongco's rental revenue in the second quarter was $6.1 million, which was up $1.8 million, or 42%, over the second quarter of 2010. For the six months to date, rental revenues totalled $11.6 million, which were $3.6 million or 45% ahead of the same period in 2010. Rental revenue from the acquisition of Chadwick-BaRoss in February 2011 contributed $0.8 million of the increase in the quarter and $1.1 million of the increase year to date. Rental revenue in Canada was up $1.0 million, or 23%, in the quarter and $2.5 million, or 31%, in the first six months of the year. Strongco's rental activity in Canada was slow at the beginning of 2010 but grew steadily throughout the year, reflecting the preference of many customers to rent equipment as construction markets recovered following the recession. This was very evident with RPO activity, which was particularly strong in the last quarter of 2010. Rental activity, including RPOs, remained strong in the first half of 2011. Most of the increase in rental revenue was realized in Alberta, demonstrating further evidence of recovery in that province following the significant decline in rental activity during the recession. Rental activity was also strong in Quebec, in particular RPO's for larger loaders and excavators. Strongco's crane business, which has traditionally not had a significant rental element, also experienced an increase in rental activity in 2011 in Alberta and Quebec as customers showed an initial preference to rent while the demand and market for cranes improved.
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 also vary depending on customer purchases of extended warranties. Product support activities (sales of parts and service outside of warranty), therefore tend to increase at a slower rate and lag equipment sales by three to five years. The increasing equipment population in the field leads to increased product support activities over time. Product support activities are normally strongest in Canada in the first quarter due to increased use of equipment for snow removal in the winter and during the third quarter in the height of the construction season.
Product support activity declined during the recession because in the difficult economic environment, customers elected to make only critical repairs to equipment and only when they had work requiring its use. However, product support declined less than sales of equipment and represented a larger proportion of total revenue as many customers chose to repair and extend the life of their existing machines, rather than purchase new. Product support activity began to improve in the latter half of 2010 and into 2011 as construction market recovered from the recession.
Strongco's product support revenues in the second quarter of 2011 were $30.9 million, which included $4.3 million from the newly acquired Chadwick-BaRoss. This was up 29% from $23.9 million in the second quarter of 2010. For the six months to the end of June, product support revenues totalled $56.9 million, including $7.3 million from Chadwick- BaRoss, up from $44.0 million in the first six months of 2010. Product support activities were up across all regions in Canada. Parts and service revenues benefited from higher amounts of snow and increased use of snow removal equipment in the first quarter of 2011, particularly in Western and Eastern Canada. Product support activity remained strong in the second quarter 2011 as construction activity increased.
Gross Margin
As a result of the higher revenues in the second quarter of 2011, Strongco's gross margin increased by $7.1 million to $21.2 million from $14.1 million in the second quarter of 2010. For the six months ended June 30, 2011, gross margin increased to $38.2 million from $25.5 million in the first half of 2010. However, as a percentage of revenue, gross margin declined to 18.6% in the second quarter and 18.9% for the first six months of 2011 from 20.3% and 20.7% in the second quarter and half of 2010, respectively. Equipment sales typically generate a lower gross margin percentage than rental revenues and product support activities and as a result, the mix of revenue between sales, rentals and product support has a significant impact in the overall gross margin percentage. With a larger increase in equipment sales in 2011, equipment sales represented a higher proportion of total revenues than rentals and product support which resulted in the decline in the overall gross margin percentage. Equipment sales accounted for approximately 68% of total revenues in the three months ended June 30, 2011 compared to 60% in the second quarter of 2010, while product support and rental revenues represented 27% and 5% of total revenues, respectively, in the second quarter of 2011 compared to 34% and 6% of total revenue, respectively, in the second quarter of 2010. For the first half of the year equipment sales represented 66% of total revenues, while product support and rentals represented 28% and 6% of total revenues, respectively. This compared to 58%, 36% and 6% of total revenue for equipment sales, product support and rentals, respectively, in the first half of 2010.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the second quarter of 2011 were $16.3 million or 14.3% of revenue, which compared to $13.6 million or 19.8% of revenues in the second quarter of 2010. For the six months ended June 30, 2011, these expenses were $31.5 million or 15.6% of revenue, which compared to $26.2 million or 21.3% of revenues in the first half of 2010. Most of the increase from 2010 relate to administration, distribution and selling expenses of the newly acquired Chadwick-BaRoss which were $2.3 million in the quarter and $3.5 million for the five months from the date of acquisition to June 30, 2011. Expenses year to date also include the one-time costs for the acquisition of Chadwick-BaRoss of $0.4 million incurred in the first quarter. In addition, given the strong results year to date, Strongco is on target to reach its annual incentive plan targets and employee bonuses of $1.2 million were accrued in the second quarter. No bonus accrual was made in 2010. Travel and freight costs were higher by $0.1 million in the quarter and $0.3 million in the first half of the year compared to the same periods in 2010. The increase was mainly due to the higher cost of fuel in 2011, which has not been passed on to customers. In addition, the significant increase in sales and service activity in the 2011 resulted in larger amounts of overtime labour. While labour utilization and recovery improved in the 2011, overtime premiums have not been fully passed on, resulting in incremental expenses of approximately $0.2 million in the second quarter and $0.5 million for the first six months of the year.
Other Income
Other income and expense is primarily comprised of gains or losses on disposition of fixed assets, foreign exchange gains or losses, service fees received by Strongco as compensation for sales of new equipment by other third parties into the regions where Strongco has distribution rights for that equipment and commissions received from third party financing companies for customer purchase financing Strongco places with such finance companies. Other income in the second quarter of 2011 was $0.2 million, compared to $0.3 million in the second quarter of 2010. For the first six months of 2011, other income was $0.5 million compared to $0.6 million in the first half of 2010.
Interest Expense
Strongco's interest expense in the second quarter and first six months of 2011 was $1.4 million and $2.8 million, respectively, compared to $1.1 million and $2.2 million, respectively, in the same periods in 2010. The increase year over year is due to slightly higher interest rates charged on the company's bank debt and equipment notes and a higher average level of interest bearing debt.
Strongco's interest bearing debt comprises bank indebtedness and interest bearing equipment notes. Strongco typically finances equipment inventory under floor plan lines of credit available from various non-bank finance companies. Most equipment financing has interest free periods for up to eight months from the date of financing, after which the equipment notes become interest bearing. The rate of interest on the Company's bank indebtedness and interest bearing equipment notes varies with Canadian chartered bank prime rate ("prime rate") and Canadian Bankers Acceptances Rates ("BA rates").
Prime lending rates and BA rates have increased from the low levels that existed at the beginning of 2010. With the increase in prime rates and BA rates, the interest charged on the Company's bank indebtedness and equipment finance notes was higher in the first six months of 2011 compared to the first half of 2010. In addition, the average amount of interest-bearing debt was slightly higher in the first half of 2011 compared to the prior year. During the recession, Strongco successfully reduced inventory and the related floor plan financing. As a result, interest-bearing equipment notes were lower in the first six months of 2010. During 2010 and into 2011, Strongco has been increasing equipment inventories to support the increasing demand for heavy equipment as construction markets recovered. This resulted in a higher average level of interest-bearing equipment notes in the first six months of 2011 compared to the first half of 2010 (see discussion under "Financial Condition and Liquidity").
Earnings before Income Taxes
Strongco's earnings before income taxes in the second quarter and first six months of 2011 were $3.8 million and $4.4 million, respectively, which were significantly improved from a loss before income taxes of $0.3 million and $2.4 million, respectively, in the same periods of 2010. The increase was due to the strong revenue performance in the 2011 and the incremental pretax earnings from the acquisition of Chadwick-BaRoss of $0.3 million and $0.5 million in the second quarter and first half of 2011, respectively.
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. The recognition of tax loss carry forwards resulted in no provision for income tax in the first or second quarters of 2011 for Strongco in Canada. However, the tax provision from the newly acquired Chadwick-BaRoss was $0.1 million in the second quarter and $0.2 million year to date.
Strongco's net income in the second quarter and first six months of 2011 was $3.6 million ($0.28 per share) and $4.2 million ($0.33 per share), respectively, which was significantly improved from a net loss of $0.3 million (loss of $0.03 per share) and $2.4 million (loss of $0.23 per unit) in the same periods of 2010.
EBITDA
EBITDA in the second quarter of 2011 was $10.5 million, up from $4.5 million in the second quarter of 2010. For the six months to date, EBITDA increased to $17.3 million from $6.6 million in the first half of 2010.
EBITDA was calculated as follows:
Note 1 - EBITDA is a non-IFRS measure. See explanation under the heading "Non-IFRS Measures" below.
Cash Flow, Financial Resources and Liquidity
Cash Flow Provided By (Used In) Operating Activities:
During the second quarter of 2011, Strongco provided $9.4 million of cash from operating activities before changes in working capital. However, $10.1 million of cash was used to increase net working capital and $0.4 million to fund future employee benefits, resulting in a net use of cash from operations in the quarter of $1.1 million. By comparison, in the second quarter of 2010, $3.5 million of cash was provided by operating activities before changes in working capital and $4.3 million of cash was used to increase working capital, resulting in net use of cash of $0.8 million.
For the six months ended June 30, 2011, Strongco provided $14.3 million of cash from operating activities before changes in working capital. However, $15.5 million of cash was used to increase net working capital and $0.4 million to fund future employee benefits, resulting in a net use of cash from operations in the quarter of $1.6 million. By comparison, in the first six months of 2010, $4.5 million of cash was provided by operating activities before changes in working capital and $9.1 million of cash was used to increase working capital, resulting in net use of cash from continuing operations of $4.6 million.
The components of the cash used in and provided by operating activities were as follows:
Non-cash items include amortization of equipment inventory on rent of $4.2 million and $8.1 million in the three and six months ended June 30, 2011, respectively, which compares to $3.4 million and $6.3 million in the second quarter and first half of 2010. Higher volumes of equipment rentals in 2011 resulted in the higher amortization of equipment inventory on rent.
Components of cash flow from the net change in non-cash working capital for the three month and six month period ending June 30, 2011 and 2010 were as follows:
With an increase in parts and service revenue, accounts receivable increased in the second quarter and first six months of 2011 by $11.7 million and $13.8 million respectively. The average age of receivables outstanding at the end of the June 2011 was approximately 33 days, improved from December 2010 at approximately 38 days and 40 days a year ago.
Inventory levels were increased during the first and second quarters in support of the stronger sales in 2011. By comparison, Strongco's build of inventories in the first six months of 2010 was smaller as construction markets were just beginning to show signs of recovery in the early part of 2010.
As product support activity increased in 2011, there was an increase in parts purchased during the first half of 2011 which contributed to an increase in accounts payable and accrued liabilities of $3.7 million and $6.5 million in the second quarter and first six months of the year, respectively.
With the increase in equipment inventory, equipment notes also increased. By comparison, with a smaller build of equipment inventory, equipment notes increased a smaller amount in the first half of 2010.
Cash Provided By (Used In) Investing Activities:
Net cash used in investing activities amounted to $3.1 million in the second quarter of 2011. Chadwick-BaRoss sold rental fleet assets for proceeds of $2.3 million and added new equipment to its rental fleet at a cost of $4.0 million during the quarter. Capital expenditures totaled $1.5 million in the quarter and related to the construction of the new Edmonton branch as well as facilities upgrades and miscellaneous shop equipment purchases. Investing activities in the second quarter of 2010 amounted to $0.5 million related mainly to facilities upgrades and purchase of miscellaneous shop equipment.
For the six months ended June 30, 2011, Strongco used net cash of $16.5 million in investing activities primarily related to the acquisition of Chadwick-BaRoss for $11.1 million. Capital expenditures in the first six months of 2011 were $4.3 million which included the purchase of land in Edmonton, Alberta for a new branch for $2.6 million. Chadwick-BaRoss sold its rental fleet for proceeds of $3.4 million and purchased a new rental fleet totaling $4.5 million from February 1, 2011, the date of acquisition, to June 30, 2011. Investing activities in the first half of 2010 amounted to $0.6 million related mainly to facilities upgrades and miscellaneous shop equipment.
The components of the cash used in investing activities were as follows:
Cash Provided By (Used In) Financing Activities:
In the second quarter of 2011, Strongco provided $4.2 million of cash from financing activities which compared to cash of $1.2 million provided from financing activities in the second quarter of 2010. To help finance the purchase of Chadwick-BaRoss, the Company secured a $5 million term loan from its bank (see discussion under "Bank Credit Facilities" below) and made payments of $0.2 million against this acquisition loan in the quarter. In addition, the Company issued a promissory notes from the previous shareholders of Chadwick-BaRoss on the acquisition of their company in the first quarter totaling $1.8 million (see discussion under "Acquisition of Chadwick-BaRoss" above). Payments against these vendor take-back notes were $0.2 million in the quarter. To support the construction of its new Edmonton branch, the Company secured a construction loan from its bank, (see discussion under "Bank Credit Facilities" below). Borrowing under this construction loan amounted to $1.8 million in the quarter. During the quarter the Company reduced its bank indebtedness by $2.8 million.
For the six months ended June 30, 2011, net cash of $7.8 million was provided from the issue of shares under the rights offering completed in the first quarter of 2011 (see discussion under "Shareholder Capital"). Additional cash of $2.8 million was provided from increased borrowing under bank credit lines. In March of 2011, Strongco made the final scheduled repayment of $1.2 million of the note issued to Volvo Construction Equipment on the acquisition of Champion in 2008.
The components of the cash provided in financing activities were as follows:
Bank Credit Facilities
The Company has credit facilities with banks in Canada and United States which provide 364-Day committed operating lines of credit totaling approximately $22.4 million that are renewable annually. Borrowings under the lines of credit are limited by standard borrowing base calculations 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 receivable, inventories (subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), real estate and on intangible and other assets. The operating lines bear interest at rates that range between bank prime rate plus 0.50% and bank prime rate plus 1.50% and between the one month Canadian Bankers' Acceptance Rates ("BA rates") plus 1.75% and BA rates plus 2.75% in Canada and at LIBOR plus 2.60% in the United States. Under its bank credit facilities, the Company is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce the Company's availability under its operating lines of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco's performance on the sale of equipment to the customer. As at June 30, 2011, there were outstanding letters of credit of $0.1 million.
In addition to its operating lines 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 June 30, 2011, the Company had outstanding foreign exchange forward contracts under this facility totaling US$3.0 million at an average exchange rate of $0.9832 Canadian for each US$1.00 with settlement dates between July 15, 2011 and September 15, 2011.
The Company's bank credit facilities also include term loans secured by real estate in the United States. At June 30, 2011 the outstanding balance on these term loans was US$3.6 million. The term loans bear interest at LIBOR plus 3.05% and require monthly principal payments of US$13,334 plus accrued interest. The Company has interest rate swap agreements in place which have converted the variable rate on the term loans to a fixed rate of 5.17%. The term loan and swap agreements expire in September 2012 at which point a balloon payment from the balance of the loans is due.
The Company's bank credit facilities contain financial covenants typical of such credit facilities that require the Company to maintain certain financial ratios and meet certain financial thresholds. In particular, the credit facilities in Canada contain covenants that require the Company to maintain a minimum ratio of total current assets to current liabilities ("Current Ratio covenant") of 1.1:1, a minimum tangible net worth ("TNW covenant") of $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 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 12-month basis. Other covenants are measured as at the end of each quarter. The Company's bank has agreed to amend covenants for the accounting changes under IFRS (see discussion under heading "Conversion to International Financial Reporting Standards" below). The Company was in compliance with all covenants under its bank credit facilities as at June 30, 2011, before accounting adjustments for IFRS.
In connection with the acquisition of Chadwick-BaRoss, in April 2011, the Company's credit facilities were amended to add a $5 million demand non-revolving term loan ("Acquisition Loan"). The Acquisition Loan is for a term of 60 months and bears interest at the bank's prime lending rate plus 200 bps. The Acquisition Loan is subject to monthly principal payments of $83,333 plus accrued interest.
In addition, in April 2011, the bank credit facilities were further amended to add a construction loan facility ("Construction Loan") to finance the construction of the Company's new Edmonton, Alberta branch. Under the Construction Loan, the Company is able to borrow 70% of the cost of the land and building construction costs to a maximum of $7.1 million. Construction of the new branch commenced in June 2011 and is scheduled to be completed before the end of 2011. Upon completion, the Construction Loan will be converted to a demand, non-revolving term loan ("Mortgage Loan"). The Mortgage Loan will be for a term of 60 months. The Construction Loan and Mortgage Loan bear interest at the bank's prime lending rate plus 2.0%.
Equipment Notes
In addition to its bank credit facilities, the Company has lines of credit available totaling approximately $220 million from various non-bank equipment lenders in Canada and the United States, which are used to finance equipment inventory and rental fleet. At June 30, 2011, there was approximately $156 million borrowed on these equipment finance lines.
Typically, these equipment notes are interest free for periods up to 12 months from the date of financing, after which they bear interest at rates ranging from 4.25% to 5.85% over the one month BA rate and 3.25% to 4.9% over the prime rate of a Canadian chartered bank in Canada, and from 2.5% to 5.5% over on month Libor rate and between prime and prime plus 3% in the United States. As collateral for these equipment notes, the Company has provided liens on the specific inventories financed and any related accounts receivable. Monthly principal repayments 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 or when the financed equipment is sold. While financed equipment is out on rent, monthly curtailments are required equal to the greater of 70% of the rental revenue and 2.5% of the original value of the note. Any remaining balance after 24 months, which is due in full, is normally refinanced with the lender over an additional period of up to 24 months. All of the Company's equipment notes facilities are renewable annually.
Certain of the Company's equipment finance credit agreements contain restrictive financial covenants, including requiring the Company to remain in compliance with the financial covenants under all of its other lending agreements ("cross default provisions"). The Company's equipment finance lenders have agreed to amend covenants for the accounting changes under IFRS (see discussion under heading "Conversion to International Financial Reporting Standards" below). The Company was in compliance with all covenants under its equipment finance credit facilities as at June 30, 2011, before accounting adjustments for IFRS.
The balance outstanding under the Company's debt facilities at June 30, 2011 and 2010 was as follows:
As at June 30, 2011 there was $9.5 million of unused credit available under the Company's bank credit lines. While availability under the bank lines fluctuates daily depending on the amount of cash received and cheques and other disbursements clearing the bank, availability generally ranges between $5 million and $15 million. Borrowing under the Company's bank lines is typically higher in the first quarter when cash flows from operations is the lowest, and reduces through to the end of the year as cash flows increase.
The Company also had availability under its equipment finance facilities of $42.2 million at June 30, 2011. Borrowing on the Company's equipment finance lines typically increases in the first five months of the year as equipment inventory is purchased for the season and declines through to the end of the year as equipment sales increase, particularly in the fourth quarter.
With the level of funds available under the Company's bank credit lines, the current availability under the equipment finance facilities and anticipated improvement in cash flows from operations, management believes the Company will have adequate financial resources to fund its operations and make the necessary investment in equipment inventory and fixed assets to support its operations in the future.
SUMMARY OF QUARTERLY DATA
In general, business activity follows a weather related pattern of seasonality. Typically, the first quarter is the weakest quarter as construction and infrastructure activity is constrained in the winter months. This is followed by a strong gain in the second quarter as construction and other contracts begin to be tendered and companies prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter activity generally strengthens as customers make year end capital spending decisions and exercise purchase options on equipment which has previously gone out on RPO's. In addition, purchases of snow removal equipment are typically made in the fourth quarter.
A summary of quarterly results for the current and previous two years is as follows:
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 .
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations for operating lease commitments totaling $19.8 million. In addition, the Company has contingent contractual obligations where it has agreed to buy back equipment from customers at the option of the customer for a specified price at future dates ("buy back contracts"). These buy back contracts are subject to certain conditions being met by the customer and range in term from three to 10 years. The Company's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an agreement with the original equipment manufacturer, to 10% of the original sale amounts. In addition, this agreement provides a financing arrangement in order to facilitate the buyback of equipment. As at March 31, 2011, the total buy back contracts outstanding were $12.2 million. A reserve of $1.0 million has been accrued in the Company's accounts as at March 31, 2011 with respect to these commitments.
The Company has provided a guarantee of lease payments under the assignment of a property lease that expires January 31, 2014. Total lease payments from 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.
SHAREHOLDER CAPITAL
The Company is authorized to issue an unlimited number of shares. All shares are of the same class of common shares with equal rights and privileges. Effective July 1, 2010 Strongco converted from a trust to a corporation and all outstanding trust units of the Fund were exchanged for shares of Strongco Corporation on a one for one basis after which the Fund was wound up into Strongco Corporation (see discussion under heading "Conversion to a Corporation").
On January 17, 2011, the Company completed a rights offering, under which 2.62 million additional shares were issued pursuant to the rights issued to existing shareholders for gross proceeds of $7.86 million (refer to the Company's Rights Offering Circular filed on SEDAR for details). The total shares outstanding following completion of the rights offering was 13,128,719.
OUTLOOK
Management is optimistic that Strongco will continue to demonstrate improved performance over 2010 levels in the balance of 2011, but does anticipate some impact from the traditional seasonality of the industry in the third and fourth quarters.
The economy and construction markets across Canada are expected to continue to improve throughout 2011, which in turn should spur demand for heavy equipment, and willingness of customers to purchase equipment. Strongco's equipment sales backlogs have continued at a high level in 2011, which indicates that demand for heavy equipment is improving.
Oil prices have continued to show strength and stability during 2011, which is supporting economic recovery in Alberta. In particular, accelerating activity in the oil sands has led to increased spending for heavy equipment in northern Alberta. In addition, the generally improving economy has fueled an increase in construction activity throughout the province. Strongco's sales in Alberta have shown strong growth in the first half of the year and backlogs have increased. Management is optimistic that heavy equipment markets in the province will continue to improve in 2011.
Demand for cranes, which started to show improvement toward the end of 2010, has continued to increase in 2011 in concert with recovering construction markets and rising activity in Alberta's oil patch. Strongco's sales backlog for cranes has grown in 2011, which is a sign that demand is improving.
Equipment manufacturers are currently seeking to increase production capacity, reduce lead times and improve availability of new machines but this has remained an issue in the first half of 2011. In addition, the transition to the new lower emission tier 4 engine technology in 2011 presents an added complication that is impacting lead times and supply of equipment.
Seismic events in Japan have resulted in global shortages of certain brands and types of equipment and parts. Strongco has not been seriously impacted to date, as the vast majority of the equipment it distributes is manufactured outside of Japan. However, parts shortages from Japan could impact availability of equipment manufactured elsewhere in future.
Management remains optimistic that the improving trend in Canadian construction markets in the first half of 2011 will continue through the balance of the year. The Company also aims to sustain the improving operational effectiveness demonstrated in the first six months of 2011.
The normal third quarter seasonal pattern of lower equipment sales but strong product support with parts and service is anticipated in the third quarter. The ongoing high level of rental purchase option (RPO) contracts also suggests stronger sales from rental conversions in the fourth quarter. In addition, the acquisition of Chadwick-BaRoss Inc., effective February 1, 2011 is anticipated to contribute to improved sales levels and profitability for Strongco in the balance of 2011.
NON-IFRS 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 IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements. The Company bases its estimates and assumptions on past experience and various other assumptions that are believed to be reasonable in the circumstances. This involves varying degrees of judgment and uncertainty which may result in a difference in actual results from these estimates. The more significant estimates are as follows:
Inventory Valuation
The value of the Company's new and used equipment is evaluated by management throughout each year. Where appropriate, a provision is recorded against the book value of specific pieces of equipment to ensure that inventory values reflect the lower of cost and estimated net realizable value. The Company identifies slow moving or obsolete parts inventory and estimates appropriate obsolescence provisions by aging the inventory. The Company takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods. The inventory provision as at June 30, 2011 with changes from March 31, 2011 is as follows:
Allowance for Doubtful Accounts
The Company performs credit evaluations of customers and limits the amount of credit extended to customers as appropriate. The Company is however exposed to credit risk with respect to accounts receivable and maintains provisions for possible credit losses based upon historical experience and known circumstances. The allowance for doubtful accounts as at June 30, 2011 with changes from March 31, 2011 is as follows:
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 indepen
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Datum: 09.08.2011 - 04:00 Uhr
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