Ag Growth Announces Q3 2011 Results; Declares Dividends
(firmenpresse) - WINNIPEG, MANITOBA -- (Marketwire) -- 11/14/11 -- Ag Growth International Inc. (TSX: AFN) ("Ag Growth" or the "Company") today reported its financial results for the three and nine months ended September 30, 2011, and declared dividends for December 2011, January 2012 and February 2012.
Overview of Results
Ag Growth achieved record sales in the nine months ended September 30, 2011, due largely to revenues from divisions acquired in 2010 and strength in commercial grain handling. Sales for the quarter ended September 30, 2011 decreased from 2010 due to weather related weakness in western Canada, less than optimal growing conditions in the United States and the impact of a stronger Canadian dollar. EBITDA for the three and nine months ended September 30, 2011 was $12.7 million and $46.4 million, respectively (2010 - $25.6 million and $57.8 million) and adjusted EBITDA was $14.8 million and $44.8 million, respectively, (2010 - $22.9 million and $53.0 million) for the periods then ended. Diluted profit per share for the three and nine months ended September 30, 2011 were $0.36 per share and $1.69 per share, respectively (2010 - $1.12 and $2.35).
"Our commercial divisions continue to deliver solid results", said Gary Anderson, President and Chief Executive Officer, "however, we also faced a number of challenges in the third quarter. Sales of portable grain handling, aeration and temporary storage equipment were negatively impacted by a fast and dry harvest in western Canada and an unusual growing season and reduced crop yields in the United States. In addition, our financial results were significantly impacted by start-up challenges at our Twister greenfield plant, while regional market issues, primarily the result of a 2010 drought in northern Europe, negatively impacted our Finland-based Mepu division."
"While these factors negatively impacted 2011 results, we remain positive about growth for 2012 and beyond. We are confident the start-up challenges at our greenfield storage bin facility will have been largely addressed by the end of 2011, and as a result expect a significant contribution from this product line in 2012. Mepu's regional market appears to have stabilized and requests for preseason quotations have increased significantly over the prior year. Finally, we remain enthusiastic about our international prospects, as positive agricultural fundamentals are expected to continue to drive international sales, as evidenced by recent successes in Ukraine and Latin America."
Summary of Results
Outlook
The fourth quarter of the fiscal year is typically a period of relatively low demand for portable grain handling equipment as dealers begin building their inventories subsequent to the completion of harvest. Based on current information, dealer inventory levels and preseason order activity appears to be consistent with historical patterns. Commercial sales in the fourth quarter are expected to exceed the previous year due to strong domestic demand and international sales to Russia, Ukraine and Latin America. Actual results in the fourth quarter may be impacted by revenue recognition including the timing of overseas shipments.
Looking ahead to 2012, demand for portable grain handling equipment in the first and second quarters primarily relates to dealers building inventory in advance of the harvest season. Current dealer inventory levels in both western Canada and the U.S. appear to be at average historical levels. As 2012 progresses our dealer networks will consider planting intentions and crop conditions when determining the appropriate levels of inventory to carry into harvest. In the U.S., based on early indicators including commodity prices and farmer net income, management anticipates farmers will again plant a large number of acres with an emphasis on corn acres which is supportive of demand for portable grain handling equipment. In western Canada, farmer sentiment is positive for the future period. Based on current conditions and assuming a return to more typical weather patterns in 2012, management anticipates a return to historical sales levels.
The rate of exchange between the Canadian and US dollars may impact results in the fourth quarter of 2011 and in 2012 compared to prior years. Consistent with prior years, demand in 2012, particularly in the second half, will be influenced by crop and harvest conditions. Changes in global macro-economic factors also may influence demand, primarily for commercial grain handling and storage products.
Results in 2011 were negatively impacted by poor results from our Mepu division which resulted from the carryover impact of the 2010 drought in northern Europe and a spike in steel costs. Mepu has historically been very seasonal, with negative EBITDA in the first and fourth quarters of the fiscal year, and this trend is expected to continue in Q4 2011 and Q1 2012. Management expects results at Mepu in fiscal 2012 to improve over 2011 due to improved market conditions, largely the result of a favourable 2011 harvest, and improved steel cost alignment.
Our commercial divisions delivered strong growth in North America and internationally in 2011 and management expects another strong year in 2012. Order backlogs at commercial divisions remain high as positive agricultural macro-economic factors continue to drive demand. The geographic scope of activity continues to expand beyond the original areas of focus of Russia, Eastern Europe and Latin America to include increased activity in Southeast Asia, the Middle East and Africa. Ag Growth has continued to invest in its international development with additions to its sales team and recently opened sales offices in Latin America and the Baltic region.
Results in 2011 were significantly impacted by start-up issues related to the ambitious ramp up of our greenfield storage bin facility in Alberta. These matters are currently being resolved, however less than optimal operating efficiencies continued into the fourth quarter of 2011. Entering 2012, management anticipates the start-up challenges will largely be resolved however targeted gross margins may not be immediately achieved. Interest in our storage bin product line remains strong both domestically and overseas and management retains a very positive outlook for contributions from this plant in 2012 and beyond. The new bins have been well received, based on feedback from domestic and international customers.
Dividends
Ag Growth today announced the declaration of cash dividends of $0.20 per common share for the months of December 2011, January 2012 and February 2012. The dividends are eligible dividends for Canadian income tax purposes. Ag Growth's current annualized cash dividend rate is $2.40 per share.
The table below sets forth the scheduled payable and record dates:
MD&A and Financial Statements
Ag Growth's financial statements and management's discussion and analysis for the three and nine months ended September 30, 2011 will be available electronically from SEDAR () or from Ag Growth's website ().
Conference Call
Ag Growth will hold a conference call at 1:00 p.m. EST today to discuss its financial results. The call will begin with a short address by Gary Anderson, President and Chief Executive Officer, followed by a question and answer period for investment analysts, investors, and other interested parties.
To participate in the conference call, please dial 1-800-952-6845 or for local access dial 416-695-6616. An audio replay of the call will be available for seven days. To access the audio replay, please dial 1-800-408-3053 or for local access dial 905-694-9451. Please quote confirmation code 4751527.
Company Profile
Ag Growth International Inc. is a leading manufacturer of portable and stationary grain handling, storage and conditioning equipment, including augers, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems. Ag Growth has eleven manufacturing facilities in Canada, the United States, the United Kingdom and Finland, and its sales, marketing, and distribution system distributes product in 48 states, nine provinces, and internationally.
Non-IFRS Measures
References to "EBITDA" are to profit before income taxes, finance costs, depreciation and amortization. References to "Adjusted EBITDA" are to EBITDA before the Company's gain or loss on foreign exchange, gains or losses on the sale of property, plant & equipment, expenses related to corporate acquisition activity and other operating expenses. References to "trade sales" are to sales excluding the gain on foreign exchange. References to "funds from operations" are to cash flow from operating activities before the net change in non-cash working capital balances related to operations and stock-based compensation, less maintenance capital expenditures and adjusted for the gain or loss on the sale of property, plant & equipment. Management believes that, in addition to cash provided by (used in) operating activities, funds from operations provide a useful supplemental measure in evaluating its performance. References to "payout ratio" are to dividends declared as a percentage of funds from operations. Management believes that, in addition to sales, profit or loss and cash flows from operating, investing, and financing activities, trade sales, EBITDA, Adjusted EBITDA and funds from operations are useful supplemental measures in evaluating the Company's performance. Trade sales, EBITDA, Adjusted EBITDA, funds from operations and payout ratio are not financial measures recognized by IFRS and do not have a standardized meaning prescribed by IFRS. Management cautions investors that trade sales, EBITDA, Adjusted EBITDA, funds from operations and payout ratio should not replace sales or profit or loss as indicators of performance, or cash flows from operating, investing, and financing activities as a measure of the Company's liquidity and cash flows. Ag Growth's method of calculating trade sales, EBITDA, Adjusted EBITDA, funds from operations and payout ratio may differ from the methods used by other issuers.
Forward-Looking Statements
This press release contains forward-looking statements that reflect our expectations regarding the future growth, results of operations, performance, business prospects, and opportunities of the Company. Forward-looking statements may contain such words as "anticipate", "believe", "continue", "could", "expects", "intend", "plans", "will" or similar expressions suggesting future conditions or events. In particular, the forward looking statements in this press release include statements relating to the benefits of acquisitions, our business and strategy, including our outlook for our financial and operating performance through the balance of 2011 and in future years, growth in sales to developing markets, the resolution of start-up issues at our Twister bin plant and the future contribution of that plant to our operating and financial performance, the impact of crop conditions in our market areas, the impact of current economic conditions on the demand for our products, and the payment of dividends. Such forward-looking statements reflect our current beliefs and are based on information currently available to us, including certain key expectations and assumptions concerning anticipated financial performance, business prospects, strategies, product pricing, regulatory developments, tax laws, the sufficiency of budgeted capital expenditures in carrying out planned activities, foreign exchange rates and the cost of materials, labour and services. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including changes in international, national and local business conditions, crop yields, crop conditions, seasonality, industry cyclicality, volatility of production costs, commodity prices, foreign exchange rates, and competition. In addition, actual results may be materially impacted by the pace of recovery from the global economic crisis in certain areas, including the cost and availability of capital. These risks and uncertainties are described under "Risks and Uncertainties" in our MD&A and in our most recently filed Annual Information Form. We cannot assure readers that actual results will be consistent with these forward-looking statements and we undertake no obligation to update such statements except as expressly required by law.
AG GROWTH INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS, THIRD QUARTER 2011
Dated: November 14, 2011
This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the audited consolidated financial statements and accompanying notes of Ag Growth International Inc. ("Ag Growth", the "Company", "we", "our" or "us") for the year ended December 31, 2010, which were prepared in accordance with previous Canadian generally accepted accounting principles ("CGAAP"), the unaudited interim consolidated financial statements of the Company for the three month period ended March 31, 2011, which were prepared in accordance with International Financial Reporting Standards ("IFRS") and the unaudited interim condensed consolidated financial statements of the Company for the three month and nine month periods ended September 30, 2011, which were prepared in accordance with IAS 34, Interim Financial Reporting. Results are reported in Canadian dollars unless otherwise stated.
Throughout this MD&A references are made to "trade sales", "EBITDA", "adjusted EBITDA", "gross margin", "funds from operations" and "payout ratio". A description of these measures and their limitations are discussed below under "Non-IFRS Measures".
This MD&A contains forward-looking statements. Please refer to the cautionary language under the heading "Risks and Uncertainties" and "Forward-Looking Statements" in this MD&A and in our most recently filed Annual Information Form.
SUMMARY OF RESULTS
Ag Growth achieved record sales in the nine months ended September 30, 2011, due largely to revenues from divisions acquired in 2010 and strength in commercial grain handling. Sales for the quarter ended September 30, 2011 decreased from 2010 due to weather related weakness in western Canada, less than optimal growing conditions in the United States and the impact of a stronger Canadian dollar. Adjusted EBITDA decreased primarily due to lower gross margins that resulted from start-up challenges at the Company's Twister greenfield storage bin plant and regional market issues at the Company's Finland based Mepu division. These factors are discussed in more detail later in this MD&A. Net profit and diluted profit per share for the three and nine months ended September 30, 2011 decreased compared to the prior year due to the factors discussed above, transaction costs of $1.7 million that related to the Airlanco acquisition and a significant acquisition bid that was unsuccessful, and in the three months ended September 30, 2011, the Company recorded a $1.1 million non-cash loss (2010 - gain of $0.8 million) related to translating its U.S. dollar denominated debt into Canadian dollars.
CORPORATE OVERVIEW
We are a manufacturer of agricultural equipment with a focus on grain handling, storage and conditioning products. Our business is affected by regional and global trends in grain volumes, on-farm and commercial grain storage and handling practices, and crop prices. Our business is seasonal, with higher sales occurring in the second and third calendar quarters compared with the first and fourth quarters.
We sell portable versions of our products primarily to individual farmers, mainly through a network of independent dealers and distributors. We sell larger, commercial (sometimes referred to as stationary) versions of our products primarily to corporate customers, mainly by bidding for contracts.
We manufacture in Canada, the US and Europe and we sell products globally, with most of our sales in the US. The following table sets forth our geographic concentration of sales for the first nine months of 2011 compared with a year earlier.
Our business is sensitive to fluctuations in the value of the Canadian and US dollars as a result of our exports from Canada to the US and as a result of earnings derived from our US based divisions. Fluctuations in currency impact our results even though we engage in currency hedging with the objective of partially mitigating our exposure to these fluctuations.
Our business is also sensitive to fluctuations in input costs, especially steel, a principal raw material in our products. Steel represented approximately 29% of production costs in fiscal 2010. Short-term fluctuations in the price of steel impact our financial results even though we strive to partially mitigate our exposure to such fluctuations through the use of long-term purchase contracts, bidding commercial projects based on current input costs and passing input costs on to customers through sales price increases.
Acquisitions in Fiscal 2010
The inclusion of the assets, liabilities and operating results of a number of acquisitions completed in fiscal 2010 significantly impact comparisons with the prior year. As such, these acquisitions are summarized briefly below.
Mepu - Ag Growth acquired 100% of the outstanding shares of Mepu Oy ("Mepu") on April 29, 2010, for cash consideration of $11.3 million, plus costs related to the acquisition of $0.6 million and the assumption of a $1.0 million operating line. The acquisition was funded from cash on hand. Mepu is a Finland based manufacturer of grain drying systems and other agricultural equipment. The acquisition of Mepu provided the Company with a complementary product line, distribution in a region where the Company previously had only limited representation and a corporate footprint near the growth markets of Russia and Eastern Europe. Mepu had average sales and EBITDA of approximately 14 million Euros (CAD $19 million) and 1.5 million Euros (CAD $2 million), respectively, in the three fiscal years prior to acquisition. The nature of Mepu's business is very seasonal with a heavy weighting towards the second and third quarters.
Franklin Enterprises - Ag Growth acquired the assets of Winnipeg-based Franklin Enterprises Ltd ("Franklin") effective October 1, 2010 for cash consideration of $7.1 million, plus costs related to the acquisition of $0.4 million and a working capital adjustment of $1.7 million. The acquisition was funded from cash on hand. Franklin enhances Ag Growth's manufacturing capabilities and can increase production capacity in periods of high in-season demand. Franklin has played an integral role in the development of the new storage bin product line. Franklin's custom manufacturing business is expected to generate monthly sales of approximately $1 million and to roughly break-even on an EBITDA basis.
Tramco - Ag Growth acquired 100% of the outstanding shares of Wichita, Kansas-based Tramco, Inc. ("Tramco"), on December 20, 2010, for cash consideration of $21.5 million, less a working capital adjustment of $1.3 million. Costs related to the acquisition were $0.6 million. The acquisition was funded from cash on hand. Tramco is a manufacturer of heavy duty chain conveyors and related handling products, primarily for the grain processing sector. Tramco is an industry leader with a premier brand name and strong market share and as such provides the Company with an excellent entry point into a new segment of the food supply chain. Tramco had average sales and EBITDA of approximately $30 million and $4 million, respectively, in the two fiscal years prior to acquisition. Demand in the processing sector in 2011 remains strong, particularly in overseas markets. Tramco manufactures in Wichita, Kansas, and in Hull, England. It has a sales office in the Netherlands.
Acquisitions in Fiscal 2011
Airlanco - On October 3, 2011, the Company acquired the operating assets of Airlanco, a manufacturer of aeration products and filtration systems that are sold primarily into the commercial grain handling and processing sectors. The purchase price of USD $11.0 million was financed primarily from Ag Growth's acquisition line of credit while costs related to the acquisition of $0.2 million and a working capital adjustment will be financed by cash on hand. The purchase price represents a valuation of approximately five times Airlanco's normalized fiscal 2010 EBITDA. Airlanco is located in Falls City, Nebraska and has traditionally served customers headquartered or located in North America. The Company had sales of approximately $11 million in 2010, operating out of an 80,000 square foot facility with 65 employees.
OUTLOOK
The fourth quarter of the fiscal year is typically a period of relatively low demand for portable grain handling equipment as dealers begin building their inventories subsequent to the completion of harvest. Based on current information, dealer inventory levels and preseason order activity appears to be consistent with historical patterns. Commercial sales in the fourth quarter are expected to exceed the previous year due to strong domestic demand and international sales to Russia, Ukraine and Latin America. Actual results in the fourth quarter may be impacted by revenue recognition including the timing of overseas shipments.
Looking ahead to 2012, demand for portable grain handling equipment in the first and second quarters primarily relates to dealers building inventory in advance of the harvest season. Current dealer inventory levels in both western Canada and the U.S. appear to be at average historical levels. As 2012 progresses our dealer networks will consider planting intentions and crop conditions when determining the appropriate levels of inventory to carry into harvest. In the U.S., based on early indicators including commodity prices and farmer net income, management anticipates farmers will again plant a large number of acres with an emphasis on corn acres which is supportive of demand for portable grain handling equipment. In western Canada, farmer sentiment is positive for the future period. Based on current conditions and assuming a return to more typical weather patterns in 2012, management anticipates a return to historical sales levels.
The rate of exchange between the Canadian and US dollars may impact results in the fourth quarter of 2011 and in 2012 compared to prior years. Consistent with prior years, demand in 2012, particularly in the second half, will be influenced by crop and harvest conditions. Changes in global macro-economic factors also may influence demand, primarily for commercial grain handling and storage products.
Results in 2011 were negatively impacted by poor results from our Mepu division which resulted from the carryover impact of the 2010 drought in northern Europe and a spike in steel costs. Mepu has historically been very seasonal, with negative EBITDA in the first and fourth quarters of the fiscal year, and this trend is expected to continue in Q4 2011 and Q1 2012. Management expects results at Mepu in 2012 to improve over 2011 due to improved market conditions, largely the result of favourable 2011 harvest conditions, and improved steel cost alignment.
Our commercial divisions delivered strong growth in North America and internationally in 2011 and management expects another strong year in 2012. Order backlogs at commercial divisions remain high as positive agricultural macro-economic factors continue to drive demand. The geographic scope of activity continues to expand beyond the original areas of focus of Russia, Eastern Europe and Latin America to include increased activity in Southeast Asia, the Middle East and Africa. Ag Growth has continued to invest in its international development with additions to its international sales team and recently opened sales offices in Latin America and the Baltic region.
Results in 2011 were significantly impacted by start-up issues related to the ambitious ramp up of our greenfield storage bin facility in Alberta. These matters are currently being resolved, however less than optimal operating efficiencies continued into the fourth quarter of 2011. Entering 2012, management anticipates the start-up challenges should be resolved however targeted gross margins may not be immediately achieved. Interest in our storage bin product line remains strong both domestically and overseas and management retains a very positive outlook for contributions from this plant in 2012 and beyond. The new bins have been well received by our domestic and international customers.
DETAILED OPERATING RESULTS
Trade sales in 2011 benefited from continued strength in commercial grain handling, increased storage bin sales and revenues from divisions acquired in 2010. Excluding acquisitions, trade sales for the three and nine month periods ending September 30, 2011 decreased $15.2 million and $15.1 million, respectively. The decrease in sales excluding acquisitions is primarily the result of the following:
As expected the consolidated gross margin was negatively impacted by the inclusion of Mepu, Franklin and Tramco as the gross margin percentages of these newly acquired businesses are lower than Ag Growth's historical gross margin percentage. Gross margin also declined due to significant start up issues at the Company`s greenfield storage bin facility. To provide an indication of margin performance on the remainder of the Company's businesses, gross margin has been recalculated below to exclude 2010 acquisitions and Edwards:
Gross margin percentages in 2011 have also been adversely impacted by the strong Canadian dollar and the higher cost of steel inputs. The factors noted above were partially offset by the continued benefits of high throughput and production efficiencies that resulted from the implementation of lean manufacturing practices at several of the Company's divisions.
G&A expenses increased compared to 2011 largely due to acquisitions made in 2010. G&A expressed as a percentage of trade sales increased in the third quarter of 2011 compared to the prior year primarily due to lower sales, and was relatively consistent with 2010 for the nine month period. Excluding acquisitions, compared to the same periods in 2010, G&A expenses decreased due to lower stock-based compensation that resulted from a reduced number of share awards outstanding and a lower expense related to the LTIP, offset by increased professional fees which primarily resulted from expenditures of $0.6 million related the Company's conversion to IFRS.
EBITDA in the third quarter and nine-month period ended September 30, 2011 was impacted by transaction costs related to the acquisition of Airlanco and other M&A activity totalling $1.7 million. The decline in EBITDA and Adjusted EBITDA in 2011 compared with a year earlier is largely due to the stronger Canadian dollar, start-up challenges at the Company's new storage bin facility, weather and crop related weakness in western Canada and the U.S. and the factors affecting Mepu, as discussed under "Explanation of Operating results".
Finance Costs
The Company's bank indebtedness as at September 30, 2011 was $nil (2010 - $nil) and its outstanding long-term debt and obligations under capital leases including the current portion was $26.2 million (2010 - $25.5 million). Long-term debt at September 30, 2011 is comprised of US $25.0 million aggregate principal amount of non-amortizing secured notes that bear interest at 6.80% and mature October 29, 2016 and $0.1 million of 0% GMAC financing, net of all deferred financing costs of $0.4 million. The Company is also party to a credit facility with three Canadian chartered banks that includes CAD $10.0 million and US $2.0 million available for working capital purposes and provides for non-amortizing long-term debt of up to CAD $38.0 million and US $20.5 million. The facilities bear interest at rates of prime plus 0.50 % to prime plus 1.50% based on performance calculations and matures on October 29, 2012. See "Financial Instruments".
Obligations under capital lease of $0.2 million include a number of equipment leases with an average interest rate of 6.5%. The lease end dates are in 2011 and 2012.
Finance costs for the three and nine month periods ended September 30, 2011 were $3.2 million and $9.4 million, respectively (2010 - $3.1 million and $9.3 million). At September 30, 2011 the Company had outstanding $114.9 million aggregate principal amount of convertible unsecured subordinated debentures (2010 - $115.0 million). The Debentures bear interest at an annual rate of 7.0% and mature December 31, 2014. See "Capital Resources".
In addition to interest on the instruments noted above, finance costs include non-cash interest related to debenture accretion, the amortization of deferred finance costs, stand-by fees and other sundry cash interest.
Finance Income
Finance income is comprised of interest earned on the Company's surplus cash balances and gains or losses on translation of the Company's U.S. dollar denominated long-term debt.
Depreciation and amortization
Under IFRS the depreciation of property, plant and equipment and the amortization of intangible assets are categorized on the income statement in accordance with the function to which the underlying asset is related.
Current income tax expense
For the three and nine months ended September 30, 2011, the Company recorded current tax expense of $1.2 million and $4.0 million, respectively (2010 - $2.1 million and $3.8 million). Current tax expense relates primarily to certain subsidiary corporations of Ag Growth, including its U.S. and Finland based divisions.
Deferred income tax expense
For the three and nine months ended September 30, 2011, the Company recorded deferred tax expense of $1.6 million and $4.9 million, respectively (2010 - $3.4 million and $8.5 million). The deferred tax expense in 2011 relates to the utilization of deferred tax assets plus a decrease in deferred tax liabilities that related to the application of corporate tax rates to reversals of temporary differences between the accounting and tax treatment of depreciable assets, intangibles, reserves, deferred compensation plans and deferred financing fees.
The effective tax rate in the third quarter of 2011 exceeded that of year ago largely due to the impact of non-cash foreign exchange translation.
Profit and profit per share
For the three and nine months ended September 30, 2011, the Company reported net profit of $4.6 million and $21.3 million, respectively (2010 - $15.2 million and $31.1 million), basic net profit per share of $0.37 and $1.71 (2010 - $1.23 and $2.44), and fully diluted net profit per share of $0.36 and $1.69 (2010 - $1.12 and $2.35). Profit per share for the three and nine month periods ended September 30, 2011 decreased compared to the prior year primarily due to lower Adjusted EBITDA (see "Explanation of Operating Results") and transaction costs of $1.7 million that related to the Airlanco acquisition and a significant acquisition bid that was unsuccessful. In addition, for the quarter ended September 30, 2011, the Company recorded a non-cash loss related to translating its U.S. dollar denominated debt into Canadian dollars of $1.1 million (2010 - gain of $0.8 million).
Interim period sales and profit historically reflect seasonality. The third quarter is typically the strongest primarily due to the timing of construction of commercial projects and high in-season demand at the farm level. Due to the seasonality of Ag Growth's working capital movements, cash provided by operations will typically be highest in the fourth quarter.
For the three and nine months ended September 30, 2011, cash provided by operations was $11.8 million and $10.3 million, respectively (2010 - $24.9 million and $28.3 million). The decrease in cash generated from operations compared to 2010 is the result of a decrease in profit, inventory purchases related to the Company's new storage bin operation and higher than expected levels of inventory at Edwards/Twister and Mepu.
Working Capital Requirements
Interim period working capital requirements typically reflect the seasonality of the business. Ag Growth's collections of accounts receivable are weighted towards the third and fourth quarters. This collection pattern, combined with historically high sales in the third quarter that result from seasonality, typically lead to accounts receivable levels increasing throughout the year and peaking in the third quarter. Inventory levels typically increase in the first and second quarters and then begin to decline in the third or fourth quarter as sales levels exceed production. As a result of these working capital movements, historically, Ag Growth begins to draw on its operating lines in the first or second quarter. The operating line balance typically peaks in the second or third quarter and normally begins to decline later in the third quarter as collections of accounts receivable increase. Ag Growth has typically fully repaid its operating line balance by early in the fourth quarter.
Working capital requirements in 2011 have thus far been generally consistent with historical patterns, however due to a larger than typical opening cash balance the Company has not drawn on its operating lines to the same extent as in prior years.
In addition, the Company's inventory levels increased in three months ending September 30, 2011, as lower than anticipated sales (see "Explanation of Operating Results") and the timing of shipment of certain international orders resulted in less drawdown of inventory compared to historical patterns. Acquisitions completed in 2010 are having a minor effect on seasonal working capital requirements in 2011 as sales and EBITDA at Mepu and Tramco are weighted to the second and third quarters.
Capital Expenditures
Ag Growth had maintenance capital expenditures of $0.6 million and $2.7 million in the three and nine months ended September 30, 2011 (2010 - $0.8 and $2.8), representing 0.7% and 1.1% of trade sales, respectively (2010 - 0.9% and 1.3%). Maintenance capital expenditures in 2011 relate primarily to purchases of manufacturing equipment, trucks, trailers, and forklifts and were funded through cash on hand, cash from operations and bank indebtedness. Maintenance capital expenditures in 2011 were expected to increase slightly over 2010 levels, largely due to the addition of three new divisions in 2010, and were funded through cash on hand, cash from operations and bank indebtedness.
Ag Growth defines maintenance capital expenditures as cash outlays required to maintain plant and equipment at current operating capacity and efficiency levels. Non-maintenance capital expenditures encompass other investments, including cash outlays required to increase operating capacity or improve operating efficiency. Ag Growth had non-maintenance capital expenditures in the three and nine months ended September 30, 2011 of $1.0 million and $4.8 million, respectively (2010 - $5.8 million and $16.6 million). As expected, non-maintenance capital expenditures in 2011 have decreased significantly from 2010 largely due to the significant investment in 2010 related to the Company's greenfield storage bin facility. Non-maintenance capital expenditures in 2011 were financed through cash on hand, cash from operations and bank indebtedness. The following capital expenditures were classified as non-maintenance in 2011:
Cash Balance
For the three months ended September 30, 2011 the Company's cash balance increased $2.4 million (2010 - decrease $7.2 million) and for the nine month period ended September 30, 2011, the Company's cash balance decreased $32.6 million (2010 - $61.5 million). The decrease in the cash balance in 2010 and 2011 resulted primarily from payments related to acquisitions, strategic capital expenditures, seasonality, and a normal course issuer bid in 2010.
Debentures relate to the aggregate principal amount of debentures issued by the Company in October 2009 (see "Convertible Debentures"). Long-term debt at June 30, 2011 is comprised of US $25.0 million aggregate principal amount of secured notes issued through a note purchase and private shelf agreement, net of deferred financing costs, and GMAC financed vehicle loans. Capital lease obligations relate to a number of leases for equipment. The operating leases relate primarily to vehicle, equipment, warehousing, and facility leases and were entered into in the normal course of business.
As at November 14, 2011, the Company had no outstanding commitments in relation to capital expenditures for building and equipment.
CAPITAL RESOURCES
Cash
The Company had a cash balance of $2.4 million as at September 30, 2011 (2010 - $47.6 million). The Company's cash balance at September 30, 2010 was higher than is typical because it included a portion of the net proceeds received from an October 2009 debenture offering (see "Convertible Debentures"). The remainder of the debenture proceeds was deployed later in fiscal 2010.
Long-term debt
On October 29, 2009, the Company authorized the issue and sale of US $25.0 million aggregate principal amount of secured notes through a note purchase and private shelf agreement. The notes are non-amortizing and bear interest at 6.80% and mature October 29, 2016. The agreement also provides for a possible future issuance and sale of notes of up to an additional US $75.0 million aggregate principal amount, with maturity dates no longer than ten years from the date of issuance. Ag Growth is subject to certain financial covenants, including a maximum leverage ratio and a minimum debt service ratio. The Company is in compliance with all financial covenants.
On October 29, 2009, the Company also entered a credit facility with three Canadian chartered banks that includes CAD $10.0 million and US $2.0 million available for working capital purposes, and provides for non-amortizing long-term debt of up to CAD $38.0 million and US $20.5 million. No amounts were drawn under these facilities as at September 30, 2011. The facilities bear interest at rates of prime plus 0.50 % to prime plus 1.50% based on performance calculations and matures on October 29, 2012. Ag Growth is subject to certain financial covenants, including a maximum leverage ratio and a minimum debt service ratio, and is in compliance with all financial covenants.
On October 3, 2011, the Company increased its non-amortizing long-term debt by U.S. $10.5 million to finance its acquisition of Airlanco. See "Acquisitions in Fiscal 2011".
Obligation under capital leases
Upon the acquisition of Franklin the Company assumed a number of capital leases for manufacturing equipment. The leases bear interest at rates averaging 6.5% and mature in 2011 and 2012. The Company expects to exercise the buyout option upon maturity of the equipment leases.
Convertible Debentures
In the fourth quarter of 2009, the Company issued $115 million aggregate principal amount of convertible unsecured subordinated debentures (the "Debentures") at a price of $1,000 per Debenture. The Debentures bear interest at an annual rate of 7.0% payable semi-annually on June 30 and December 31. Each Debenture is convertible into common shares of the Company at the option of the holder at a conversion price of $44.98 per common share. The maturity date of the Debentures is December 31, 2014.
Net proceeds of the offering of approximately $109.9 million were used by Ag Growth for general corporate purposes and to repay existing indebtedness of approximately US $37.6 million and CAD $11.9 million under the Company's credit facility. In 2010, the Company used proceeds from the Debentures to fund the acquisitions of Mepu, Franklin and Tramco (see "Acquisitions in Fiscal 2010") and to finance the expansion of the Company's storage bin product line (see "capital expenditures").
The Debentures are not redeemable before December 31, 2012. On and after December 31, 2012 and prior to December 31, 2013, the Debentures may be redeemed, in whole or in part, at the option of the Company at a price equal to their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price of the common shares during the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of redemption is given is not less than 125% of the conversion price. On and after December 31, 2013, the Debentures may be redeemed, in whole or in part, at the option of the Company at a price equal to their principal amount plus accrued and unpaid interest.
On redemption or at maturity, the Company may, at its option, subject to regulatory approval and provided that no event of default has occurred, elect to satisfy its obligation to pay the principal amount of the Debentures, in whole or in part, by issuing and delivering for each $100 due that number of freely tradeable common shares obtained by dividing $100 by 95% of the volume weighted average trading price of the common shares on the Toronto Stock Exchange ("TSX") for the 20 consecutive trading days ending on the fifth trading day preceding the date fixed for redemption or the maturity date, as the case may be. Any accrued and unpaid interest thereon will be paid in cash. The Company may also elect, subject to any required regulatory approval and provided that no event of default has occurred, to satisfy all or part of its obligation to pay interest on the Debentures by delivering sufficient freely tradeable common shares to satisfy its interest obligation.
The Debentures trade on the TSX under the symbol AFN.DB.
COMMON SHARES
The following common shares were issued and outstanding and participated pro rata in dividends during the periods indicated:
On December 10, 2009, Ag Growth commenced a normal course issuer bid for up to 1,272,423 common shares, representing 10% of the Company's public float at that time. In the year ended December 31, 2010, the Company purchased 674,600 common shares for $23.4 million under the normal course issuer bid. The normal course issuer bid terminated on December 9, 2010.
During the nine month period ended September 30, 2011, 2,556 common shares were issued on conversion of $115,000 principal amount of Debentures. Ag Growth has reserved 2,554,136 common shares for issuance upon conversion of the Debentures as at September 30, 2011.
Ag Growth has granted 220,000 share awards under its share award incentive plan. Effective January 1, 2010, a total of 73,333 awards vested and the equivalent number of common shares were issued to the participants. On October 15, 2010, an additional 66,667 share awards vested and the equivalent number of common shares were issued to the participant. Effective January 1, 2011, 40,000 share awards vested however no common shares were issued as the participants were compensated in cash rather than common shares. As at November 14, 2011, 40,000 share awards remain outstanding and subject to vesting and payment of the exercise price are each exercisable for one common share.
The administrator of the LTIP has acquired 317,304 common shares to satisfy its obligations with respect to awards under the LTIP for fiscal 2007, 2008, 2009 and 2010. These common shares are not cancelled but rather are held by the administrator until such time as they vest to the LTIP participants. As at September 30, 2011, a total of 182,928 common shares related to the LTIP had vested to the participants.
A total of 20,741 deferred grants of common shares are outstanding under the Company's Director's Deferred Compensation Plan.
Ag Growth's common shares trade on the TSX under the symbol AFN.
DIVIDENDS
In the three and nine month periods ended September 30, 2011, Ag Growth declared dividends to security holders of $7.5 million and $22.6 million, respectively (2010 - $6.4 million and $19.7 million). Ag Growth increased its dividend rate from $0.17 per common share to $0.20 per common share in November 2010. Ag Growth's policy is to pay monthly dividends. The Company's Board of Directors reviews financial performance and other factors when assessing dividend levels. An adjustment to dividend levels may be made at such time as the Board determines an adjustment to be in the best interest of the Company and its shareholders.
FUNDS FROM OPERATIONS
Funds from operations, defined under "Non-IFRS Measures" is cash flow from operating activities before the net change in non-cash working capital balances related to operations and stock-based compensation, less maintenance capital expenditures and adjusted for the gain or loss on the sale of property, plant & equipment. The objective of presenting this measure is to provide a measure of free cash flow. The definition excludes changes in working capital as they are necessary to drive organic growth and have historically been financed by the Company's operating facility (See "Capital Resources"). Funds from operations should not be construed as an alternative to cash flows from operating, investing, and financing activities as a measure of the Company's liquidity and cash flows.
Dividends in a fiscal year are typically funded entirely through cash from operations, although due to seasonality dividends may be funded on a short-term basis by the Company's operating lines. Dividends in the nine months ended September 30, 2011 were funded through cash on hand, cash from operations and bank indebtedness. The Company expects dividends in the remainder of 2011 will be funded through bank indebtedness and cash from operations.
Ag Growth's Board of Directors reviews financial performance and other factors when assessing dividend levels. An adjustment to dividend levels may be made at such time as the Board determines an adjustment to be in the best interest of the Company and its shareholders. The Company increased its dividend from $2.04 per annum to $2.40 per annum in November 2010.
FINANCIAL INSTRUMENTS
Foreign exchange contracts
Risk from foreign exchange arises as a result of variations in exchange rates between the Canadian and the U.S. dollar. Ag Growth has entered into foreign exchange contracts with two Canadian chartered banks to partially hedge its foreign currency exposure on anticipated U.S. dollar sales transactions and as at November 14, 2011, had outstanding the following foreign exchange contracts:
The fair value of the outstanding forward foreign exchange contracts in place as at September 30, 2011 was a loss of $3.3 million. Consistent with prior periods, the Company has elected to apply hedge accounting for these contracts and the unrealized loss has been recognized in other comprehensive income for the period ended September 30, 2011.
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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. By their nature, these estimates are subject to a degree of uncertainty and are based on historical experience and trends in the industry. Management reviews these estimates on an ongoing basis. While management has applied judgment based on assumptions believed to be reasonable in the circumstances, actual results can vary from these assumptions. It is possible that materially different results would be reported using different assumptions.
Ag Growth believes the accounting policies that are critical to its business relate to the use of estimates regarding the recoverability of accounts receivable and the valuation of inventory, intangibles, goodwill, convertible debentures and deferred income taxes. Ag Growth's accounting policies are described in Note 3 to the unaudited financial statements for the three month period ended March 31, 2011.
Allowance for Doubtful Accounts
Due to the nature of Ag Growth's business and the credit terms it provides to its customers, estimates and judgments are inherent in the on-going assessment of the recoverability of accounts receivable. Ag Growth maintains an allowance for doubtful accounts to reflect expected credit losses. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and these judgments must be continuously evaluated and updated. Ag Growth is not able to predict changes in the financial conditions of its customers, and the Company's judgment related to the recoverability of accounts receivable may be materially impacted if the financial condition of the Company's customers deteriorates.
Valuation of Inventory
Assessments and judgments are inherent in the determination of the net realizable value of inventories. The cost of inventories may not be fully recoverable if they are slow moving, damaged, obsolete, or if the selling price of the inventory is less than its cost. Ag Growth regularly reviews its inventory quantities and reduces the cost attributed to inventory no longer deemed to be fully recoverable. Judgment related to the determination of net realizable value may be impacted by a number of factors including market conditions.
Goodwill and Intangible Assets
Assessments and judgments are inherent in the determination of the fair value of goodwill and intangible assets. Goodwill and indefinite life intangible assets are recorded at cost and finite life intangibles are recorded at cost less accumulated amortization. Goodwill and intangible assets are tested for impairment at least annually. Assessing goodwill and intangible assets for impairment requires considerable judgment and is based in part on current expectations regarding future performance. Changes in circumstances including market conditions may materially impact the assessment of the fair value of goodwill and intangible assets.
Deferred Income Taxes
Deferred income taxes are calculated based on assumptions related to the future interpretation of tax legislation, future income tax rates, and future operating results, acquisitions and dispositions of assets and liabilities. Ag Growth periodically reviews and adjusts its estimates and assumptions of income tax assets and liabilities as circumstances warrant. A significant change in any of the Company's assumptions could materially affect Ag Growth's estimate of deferred tax assets and liabilities.
Future Benefit of Tax-loss Carryforwards
Ag Growth should only recognize the future benefit of tax-loss carryforwards where it is more likely than not that sufficient future taxable income can be generated in order to fully utilize such losses and deductions. We are required to make significant estimates and assumptions regarding future revenues and profit, and our ability to implement certain tax planning strategies, in order to assess the likelihood of utilizing such losses and deductions. These estimates and assumptions are subject to significant uncertainty and if changed could materially affect our assessment of the ability to fully realize the benefit of the deferred income tax assets. Deferred tax asset balances would be reduced and additional income tax expense recorded in the applicable accounting period in the event that circumstances change and we, based on revised estimates and assumptions, determined that it was no longer more likely than not that those deferred tax assets would be fully realized.
RISKS AND UNCERTAINTIES
The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not currently known to us or that we currently consider immaterial also may impair operations. If any of the following risks actually occur, our business, results of operations and financial condition, and the amount of cash available for dividends could be materially adversely affected.
Industry Cyclicality and General Economic Conditions
The performance of the agricultural industry is cyclical. To the extent that the agricultural sector declines or experiences a downturn, this is likely to have a negative impact on the grain handling, storage and conditioning industry, and the business of Ag Growth. Among other things, the agricultural sector has benefited from the expansion of the ethanol industry, and to the extent the ethanol industry declines or experiences a downturn, this is likely to have a negative impact on the grain handling, storage and conditioning industry, and the business of Ag Growth.
Future developments in the domestic and global economies may negatively impact the demand for our products. Management cannot estimate the level of growth or contraction of the economy as a whole or of the economy of any particular region or market that we serve. Adverse changes in our financial condition and results of operations may occur as a result of negative economic conditions, declines in stock markets, contraction of credit availability or other factors affecting economic conditions generally.
Risk of Decreased Crop Yields
Decreased crop yields due to poor weather conditions and other factors are a significant risk affecting Ag Growth. Both reduced crop volumes and the accompanying decline in farm incomes can negatively affect demand for grain handling, storage and conditioning equipment.
Potential Volatility of Production Costs
Various materials and components are purchased in connection with Ag Growth's manufacturing process, some or all of which may be subject to wide price variation. Consistent with past and current practices within the industry, Ag Growth seeks to manage its exposure to material and component price volatility by planning and negotiating significant purchases on an annual basis, and endeavours to pass through to customers, most, if not all, of the price volatility. There can be no assurance that industry dynamics will allow Ag Growth to continue to reduce its exposure to volatility of production costs by passing through price increases to its customers.
Foreign Exchange Risk
Ag Growth generates the majority of its sales in U.S. dollars, but a materially smaller proportion of its expenses are denominated in U.S. dollars. In addition, Ag Growth may denominate its long term borrowings in U.S. dollars. Accordingly, fluctuations in the rate of exchange between the Canadian dollar and the U.S. dollar may significantly impact the Company's financial results. Management has implemented a foreign currency hedging strategy and the Company has entered into a series of hedging arrangements to partially mitigate the potential effect of fluctuating exchange rates. To the extent that Ag Growth does not adequately hedge its foreign exchange risk, changes in the exchange rate between the Canadian dollar and the U.S. dollar may have a material adverse effect on Ag Growth's results of operations, business, prospects and financial condition.
Acquisition and Expansion Risk
Ag Growth may expand its operations by increasing the scope or changing the nature of operations at existing facilities or by acquiring or developing additional businesses, products or technologies. There can be no assurance that the Company will be able to identify, acquire, develop or profitably manage additional businesses, or successfully integrate any acquired business, products, or technologies into the business, or increase the scope or change the nature of operations at existing facilities without substantial expenses, delays or other operational or financial difficulties. The Company's ability to increase the scope or change the nature of its operations or acquire or develop additional businesses may be impacted by its cost of capital and access to credit. Acquisitions and expansions may involve a number of special risks including diversion of management's attention, failure to retain key personnel, unanticipated events or circumstances, and legal liabilities, some or all of which could have a material adverse effect on Ag Growth's performance. In addition, there can be no assurance that an increase in the scope or a change in the nature of operations at existing facilities or that acquired or newly developed businesses, products, or technologies will achieve anticipated revenues and income. The failure of the Company to manage its acquisition or expansion strategy successfully could have a material adverse effect on Ag Growth's results of operations and financial condition.
Commodity Prices, International Trade and Political Uncertainty
Prices of commodities are influenced by a variety of unpredictable factors that are beyond the control of Ag Growth, including weather, government (Canadian, United States and other) farm programs and policies, and changes in global demand or other economic factors. A decrease in commodity prices could negatively impact the agricultural sector, and the business of Ag Growth. New legislation or amendments to existing legislation, including the Energy Independence and Security Act in the U.S., may ultimately impact demand for the Company's products. The world grain market is subject to numerous risks and uncertainties, including risks and uncertainties related to international trade and global political conditions.
Competition
Ag Growth experiences competition in the markets in which it operates. Certain of Ag Growth's competitors have greater financial and capital resources than Ag Growth. Ag Growth could face increased competition from newly formed or emerging entities, as well as from established entities that choose to focus (or increase their existing focus) on Ag Growth's primary markets. As the grain handling, storage and conditioning equipment sector is fragmented, there is also a risk that a larger, formidable competitor may be created through a combination of one or more smaller competitors. Ag Growth may also face potential competition from the emergence of new products or technology.
Seasonality of Business
The seasonality of the demand for Ag Growth's products results in lower cash flow in the first three quarters of each calendar year and may impact the ability of the Company to make cash dividends to shareholders, or the quantum of such dividends, if any. No assurance can be given that Ag Growth's credit facility will be sufficient to offset the seasonal variations in Ag Growth's cash flow.
Business Interruption
The operation of Ag Growth's manufacturing facilities are subject to a number of business interruption risks, including delays in obtaining production materials, plant shutdowns, labour disruptions and weather conditions/natural disasters. Ag Growth may suffer damages associated with such events that it cannot insure against or which it may elect not to insure against because of high premium costs or other reasons. For instance, Ag Growth's Rosenort facility is located in an area that is often subject to widespread flooding, and insurance coverage for this type of business interruption is limited. Ag Growth is not able to predict the occurrence of business interruptions.
Litigation
In the ordinary course of its business, Ag Growth may be party to various legal actions, the outcome of which cannot be predicted with certainty. One category of potential legal actions is product liability claims. Farming is an inherently dangerous occupation. Grain handling, storage and conditioning equipment used on farms or in commercial applications may result in product liability claims that require insuring of risk and management of the legal process.
Dependence on Key Personnel
Ag Growth's future business, financial condition, and operating results depend on the continued contributions of certain of Ag Growth's executive officers and other key management and personnel, certain of whom would be difficult to replace.
Labour Costs and Shortages and Labour Relations
The success of Ag Growth's business depends on a large number of both hourly and salaried employees. Changes in the general conditions of the employment market could affect the ability of Ag Growth to hire or retain staff at current wage levels. The occurrence of either of these events could have an adverse effect on the Company's results of operations. There is no assurance that some or all of the employees of Ag Growth will not unionize in the future. If successful, such an occurrence could increase labour costs and thereby have an adverse affect on Ag Growth's results of operations.
Distribution, Sales Representative and Supply Contracts
Ag Growth typically does not enter into written agreements with its dealers, distributors or suppliers. As a result, such parties may, without notice or penalty, terminate their relationship with Ag Growth at any time. In addition, even if such parties should decide to continue their relationship with Ag Growth, there can be no guarantee that the consideration or other terms of such contracts will continue on the same basis.
Availability of Credit
Ag Growth's credit facility expires October 29, 2012, and is renewable at the option of the lenders. There can be no guarantee the Company will be able to obtain alternate financing and no guarantee that future credit facilities will have the same terms and conditions as the existing facility. This may have an adverse effect on the Company, its ability to pay dividends and the market value of its common shares. In addition, the business of the Company may be adversely impacted in the event that the Company's customer base does not have access to sufficient financing. Sales related to the construction of commercial grain handling facilities, sales to developing markets, and sales to North American farmers may be impacted.
Interest Rates
Ag Growth's term and operating credit facilities bear interest at rates that are in part dependant on performance based financial ratios. The Company's cost of borrowing may be impacted to the extent that the ratio calculation results in an increase in the performance based component of the interest rate. To the extent that the Company has term and operating loans where the fluctuations in the cost of borrowing are not mitigated by interest rate swaps, the Company's cost of borrowing may be impacted by fluctuations in market interest rates.
Uninsured and Underinsured Losses
Ag Growth uses its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on its assets and operations at a commercially reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of its assets or cover the cost of a particular claim.
Cash Dividends are not Guaranteed
Future dividend payments by Ag Growth and the level thereof is uncertain, as Ag Growth's dividend policy and the funds available for the payment of dividends from time to time are dependent upon, among other things, operating cash flow generated by Ag Growth and its subsidiaries, financial requirements for Ag Growth's operations and the execution of its growth strategy, fluctuations in working capital and the timing and amount of capital expenditures, debt service requirements and other factors beyond Ag Growth's control.
Income Tax Matters
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Datum: 14.11.2011 - 07:18 Uhr
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News-ID 1056676
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