Strongco Reports 100% Increase in Q1 2012 Net Income
(firmenpresse) - MISSISSAUGA, ONTARIO -- (Marketwire) -- 05/09/12 -- Strongco Corporation (TSX: SQP) today reported financial results for the three months ended March 31, 2012.
Summary (i)
(i) Comparisons are between first quarter 2012 and first quarter 2011
"The improvement in construction markets that gathered momentum during 2011 continued into the first quarter of 2012," said Robert Dryburgh, President and Chief Executive Officer of Strongco. "Strongco benefited from higher end-use markets, better sales execution and one additional month of contributions from Chadwick-BaRoss, which we acquired in February of last year."
"As a result, we posted gains in all major metrics - revenues, margins, EBITDA, net earnings and EPS. As we move through 2012, we see demand continuing to rise in all of our markets and that's reflected in the strongest order book we've had in several years."
First Quarter 2012 Review
Total revenues in the three months ended March 31, 2012 were $96.8 million, an increase of 11% from the first quarter of 2011.
Equipment sales increased by 11% from last year to $62.0 million. Product support revenues gained 14% to $29.6 million. Rental revenues were $5.2 million, down 5% from the year-earlier period.
Gross margin increased by 14% to $19.4 million during the first quarter. As a percentage of revenue, gross margin moved up to 20.0% from 19.4% in the same period of 2011. "The improvement in gross margin percentage was primarily due to a higher sales mix of larger equipment such as cranes and articulated trucks, which offer higher gross margins," said David Wood, Vice President and Chief Financial Officer.
(i) All financial information conforms to International Financial Reporting Standards.
Administrative, distribution and selling expenses during the first quarter totalled $16.7 million, compared to $15.2 million in 2011. Expenses for the period just ended were higher because it included one additional month of operations by Chadwick-BaRoss, which was acquired in February 2011. As a percentage of revenue administrative, distribution and selling expenses were 17.3% compared to 17.4% in the first quarter of 2011.
EBITDA for the first quarter increased to $8.0 million from $6.8 million a year earlier and earnings before income taxes were $1.7 million, up from $0.7 million in the first quarter of 2011.
As a result of the strong revenue performance, Strongco's net income in the first quarter of 2012 was $1.2 million ($0.09 per share), up from 0.6 million ($0.05 per share) in the first quarter of 2011.
Outlook
The Canadian economy in general and construction markets across Canada are expected to continue to improve throughout 2012, which should result in strong demand for heavy equipment.
Mild weather conditions and lack of snow affected equipment usage in much of Canada and the northeastern United States and significantly curtailed oilfield activities in northern Alberta in the first quarter and delayed the buying decisions of customers across the country. This tempered demand for heavy equipment and product support in the first quarter of 2012. However, the early onset of warm spring weather brought an advanced start to the summer construction season which contributed to stronger equipment sales in March. Strongco's sales backlogs continued to rise during the quarter and by mid-April 2012 had topped $100 million, more than double the level of a year ago and the highest level in several years. This is a positive indication of the increasing demand for heavy equipment.
An important contribution to anticipated growth in 2012 is expected from Alberta. Oil prices have continued to show strength and stability, which has powered an ongoing economic upturn in the province. In particular, the outlook for northern Alberta and the oil sands is for continued significant investment over the next several years, which bodes well for heavy equipment demand in the region.
Equipment suppliers are expected to improve product availability and delivery lead times in 2012. Inventory levels at Strongco were allowed to run slightly higher than normal at year end to ensure availability of product as the Company enters the prime selling season. Consequently, product availability is not expected to affect the Company's sales in 2012. Strongco's significant position with its equipment suppliers should allow the Company to optimize equipment deliveries.
Management remains cautiously optimistic that the improving Canadian economy will continue in 2012, which is expected to increase revenues. In addition, while market conditions in the northeastern United States remain weak, Chadwick-BaRoss realized modest growth in the first quarter of 2012 and contributed positively to Strongco's overall results. Chadwick-BaRoss serves a broad range of market sectors in Maine, New Hampshire and Massachusetts. Demand for equipment in these regions is expected to continue to show a modest increase through the balance of the year, which should contribute to improved revenue and profitability in 2012.
Conference Call Details
Strongco will hold a conference call on Thursday, May 10, 2012 at 10 am ET to discuss first quarter results. Analysts and investors can participate by dialing 416-644-3421 or toll free 1-866-250-4877. An archived audio recording will be available until midnight on June 11, 2012. To access it, dial 416-640-1917 and enter passcode 4534925#.
About Strongco
Strongco Corporation is one of Canada's largest multiline mobile equipment dealers and operates in the northeastern United States through Chadwick-BaRoss, Inc. Strongco sells, rents and services equipment used in sectors such as construction, infrastructure, mining, oil and gas, utilities, municipalities, waste management and forestry. Strongco has approximately 640 employees serving customers from 26 branches in Canada and five in the United States. Strongco represents leading equipment manufacturers with globally recognized brands, including Volvo Construction Equipment, Case Construction, Manitowoc Crane, National, Grove, Terex Cedarapids, Terex Finlay, Ponsse, Fassi, Allied Construction, Taylor, ESCO, Dressta, Sennebogen, Jekko, Takeuchi, Doppstadt, Link-Belt and Kawasaki. Strongco is listed on the Toronto Stock Exchange under the symbol SQP.
Forward-Looking Statements
This news release contains "forward-looking" statements within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Strongco or industry results, to be materially different from any future results, events, expectations, performance or achievements expressed or implied by such forward-looking statements. All such forward-looking statements are made pursuant to the "safe harbour" provisions of applicable Canadian securities legislation. Forward-looking statements typically contain words or phrases such as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events. This news release contains forward-looking statements relating to the expected trading of common shares of Strongco on the TSX, and such statements are based upon the expectations of management.
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 ended March 31, 2012. This discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements as at and for the three months ended March 31, 2012. For additional information and details, readers are referred to the Company's audited consolidated financial statements and accompanying notes as at and for the year ended December 31, 2011 contained in the Company's annual report for the year ended December 31, 2011. For additional information and details, readers are referred to the Company's Notice of Annual Meeting of Shareholders and Management Information Circular ("MIC") dated March 26, 2012, and the Company's Annual Information Form ("AIF") dated March 22, 2012, all of which are published separately and are available on SEDAR at .
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 May 9, 2012.
FINANCIAL HIGHLIGHTS
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of equipment inventory on rent, and amortization of rental fleet. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance or earnings recognized under International Financial Reporting Standards ("IFRS") and therefore has no standardized meaning prescribed by IFRS and may not be comparable to similar terms and measures presented by other similar issuers. The Company's management believes that EBITDA is an important supplemental measure in evaluating the Company's performance and in determining whether to invest in Shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with IFRS as indicators of the Company's performance or to cash flows from operating, investing and financing activities as measures of the Company's liquidity and cash flows.
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 complementary equipment lines and attachments.
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of equipment inventory on rent, and amortization of rental fleet. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance or earnings recognized under IFRS and therefore has no standardized meaning prescribed by IFRS and may not be comparable to similar terms and measures presented by other similar issuers. The Company's management believes that EBITDA is an important supplemental measure in evaluating the Company's performance and in determining whether to invest in Shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with IFRS as indicators of the Company's performance or to cash flows from operating, investing and financing activities as measures of the Company's liquidity and cash flows.
Acquisition of Chadwick-BaRoss, Inc.
On February 17, 2011, the Company completed the acquisition of 100% of the shares of Chadwick-BaRoss, Inc. ("Chadwick-BaRoss") for net proceeds of US$11.1 million. The transaction value was satisfied with net cash proceeds of US$9.2 million and notes issued to the major shareholders of Chadwick-BaRoss totalling US$1.9 million. Chadwick-BaRoss is a heavy equipment dealer headquartered in Westbrook, Maine, with three branches in Maine and one in each of New Hampshire and Massachusetts. The acquisition was effective as of February 1, 2011 and the results of Chadwick-BaRoss have been included in the consolidated results of Strongco from that date.
Market Overview
Strongco participates in number of geographic regions and in a wide range of end use markets that utilize heavy equipment and which may have differing economic cycles. Construction markets generally follow the cycles of the broader economy, but typically lag by periods ranging up to 12 months. As construction markets recover following a recession, demand for heavy equipment normally improves as construction activity and confidence in construction markets build. In addition, as the financial resources of customers strengthen, they have historically replenished and upgraded their equipment fleets after a period of restrained capital expenditures. Demand in oil and gas and mining markets is affected by the economy but also tends to be driven by the global demand and pricing of the relevant commodities. Recovery in equipment markets is normally first evident in equipment used in earth moving applications and followed by cranes, which are typically utilized in later phases of construction. Cranes are also extensively utilized in the oil and gas sector. Rental of heavy equipment is typically stronger following a recession until confidence is restored and financial resources of customers improve.
With the economic recovery in Canada following the recession construction markets began to show signs of improvement in the latter half of 2010. Spurred by government stimulus spending for infrastructure projects, construction activity in Canada continued to increase in 2011. Correspondingly, demand for new heavy equipment strengthened throughout 2011. Initially, while construction markets and demand for heavy equipment were improving, many customers remained reluctant or lacked the financial resources following the recession to commit to purchase new construction equipment and instead rented to meet their equipment needs. Rental activity, especially under contracts with purchase options ("RPO" - see discussion under Equipment Rentals below), remained strong in 2011, and as confidence in the economy grew, customers were more willing to purchase equipment and exercise purchase options under RPO contracts. Strongco's sales backlogs for all categories of equipment, including cranes, improved steadily throughout the latter half of 2010 and continued to strengthen throughout 2011, a positive indication of the continuing recovery.
The improving trend in construction markets continued across Canada in the first quarter of 2012. Ongoing activity in the Alberta oil sands, large hydro-electric projects and continuing spending on infrastructure projects contributed to strong demand for heavy equipment and cranes. In the first quarter, customers delayed the buying decisions and reduced parts consumption as a result of the generally mild winter weather conditions across most of the country. In Northern Alberta, these higher than normal winter temperatures curtailed oilfield activities. This tempered demand for heavy equipment and product support in the early part of the first quarter. However, the early onset of warm spring weather brought an advanced start to the summer construction season which contributed to stronger equipment sales in March. Strongco's sales backlogs continued to rise during the quarter and by mid-April had topped $100 million, more than double the level of a year ago and the highest level in several years, a positive indication of the increasing demand for heavy equipment.
While the economy and demand for equipment have been improving in Canada, there has been little recovery in heavy equipment markets in the United States due to continued weak economic conditions. Residential construction has been a major driver of the US economy and heavy equipment markets in the past. However, current housing activity in most states remains depressed and this situation continues to negatively affect demand for heavy equipment. Certain market segments, however, such as waste management and scrap handling, have experienced continued activity and generated demand for heavy equipment in the northeastern US. In addition, while sales of new equipment have not shown significant growth, parts and service activity in New England has remained fairly strong as customers repaired rather than replaced their fleets.
Revenues
A breakdown of revenue for the quarter ended March 31, 2012 and 2011 by type within each geographic region is as follows:
Equipment Sales
Strongco's equipment sales in the first quarter of 2012 were $62.0 million which was up 11% from $56.0 million in the first quarter of 2011. Sales were strongest in western Canada and New England. Sales of cranes were particularly strong, especially in Alberta due to the ongoing activity in the oil sands and in Quebec due to hydro-electric and infrastructure projects in the province. The markets for new heavy equipment other than cranes in which Strongco operates in Canada 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 Canada, while demand for compact equipment was up a lesser amount.
Average selling prices vary from period to period depending on sales mix between product categories, model mix within product categories and features and attachments included in equipment being sold. Strongco's average selling prices in the first quarter were up slightly from a year ago due primarily to a higher proportion of sales of larger, more expensive equipment (especially cranes and articulated trucks). After scaling back during the recession, OEM's have been challenged to ramp up production in response to the increasing demand, which has resulted in longer lead times and reduced availability of certain types of equipment. OEM deliveries have been improving but with the increasing demand, shortages of certain types of equipment still exist. While average selling prices in most product categories remained fairly consistent year over year, the introduction of new tier 4 engine technology resulted in higher costs and selling prices in certain product categories. Price competition was particularly aggressive in the quarter from certain dealers who were able to increase their inventories of equipment with old tier 3 engines in 2011. High inventory levels of equipment with old tier 3 engines at certain dealers will continue to put pressure on selling prices in the near future but with the strong demand for equipment, the tier 3 product is expected to be sold though the market quickly which should ease competition and pricing.
On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic regions) were $17.1 million, which compared to $20.1 million in the first quarter of 2011. Crane sales were higher in the first quarter of 2012 while sales of other heavy equipment were below the prior year. Construction markets in Quebec continued to benefit from the hydro-electric and infrastructure projects in that province, while construction activity in the Atlantic provinces declined. Overall, the markets for GPE in Eastern Canada where Strongco participates were estimated to be up approximately 20% over first quarter of 2011. However, aggressive price competition, as well as a high level of sales of equipment on RPO's carried over from 2011 at certain competitors resulted in a decline in Strongco GPE sales, particularly in the first two months of the quarter. Sales volumes recovered in March but for the quarter unit volumes were down approximately 20% from a year ago and as a result, Strongco's market share in GPE declined in the quarter. Strongco's sales of cranes in Eastern Canada were up significantly over the first quarter of 2011 due to strong demand for hydro-electric and other infrastructure projects in Quebec and as crane rental companies continued to replenish and increase their fleets.
Strongco's equipment sales in Central Canada were $16.8 million, which was down from $18.3 million in the first quarter of 2011. Sales of both GPE and compact equipment were higher in the quarter while sales of cranes were lower. The lack of snow and very wet weather condition early in the quarter caused many customers to delay buying decisions, but with the onset of warm spring weather, equipment sales increased significantly in March. Crane sales in Ontario, while quite strong, fell short of the very strong sales level achieved in the first quarter of 2011 when Strongco's crane rental customers, started to replenish their fleets following the recession. Price competition in Ontario, for GPE and compact equipment remained aggressive in the first quarter, especially from certain dealers attempting to capture market share in particular product categories and dealers carrying high levels of product with the old tier 3 engine. However, Strongco's unit volume increases outperformed the market overall in both categories, resulting in increased market share in the quarter. At the same time, sales backlogs increased in the quarter which is an indication of continued strong demand for heavy equipment in the province.
Equipment sales in Western Canada during the first quarter were $21.8 million, which was up 46% from $14.9 million in the first quarter of 2011. With the upward trend and sustainability in oil prices, economic conditions in Alberta have improved from the recession. The milder than normal and very wet winter weather conditions curtailed activity in the early part of the first quarter, particularly in Northern Alberta, which caused customers to delay heavy equipment buying decisions. Construction activity and demand for heavy equipment improved significantly in the latter part of the quarter resulting in stronger equipment sales in March. Total units sold in the markets served by Strongco in Alberta, excluding cranes, were estimated to be up approximately 45% relative to the first quarter of 2011. Strongco outperformed the market with total unit volume growth in the first quarter greater than 60% and captured a larger share of the market. The increase was in sales of both GPE and compact equipment. Crane sales were also very strong in the quarter, growing by more than 150% over the first quarter of 2011 as crane rental customers continued to replenish and increase fleets.
Equipment sales in the North-eastern United States were $6.3 million, which was up from $2.7 million in the first quarter of 2011. As Strongco acquired Chadwick-BaRoss in February 2011, results for the first quarter of 2011 include the results of Chadwick-BaRoss for February and March only, which accounts for a portion of the year over year increase. The markets for heavy equipment in New England remained soft in the first quarter of 2012 and below pre-recession levels. The traditional heavy equipment markets for residential construction, forestry and infrastructure in the region have remained flat year over year, but other markets for scrap handling and waste management have experienced some increase in activity. Chadwick-BaRoss' equipment sales for the quarter were ahead of the same period in 2011 due to stronger sales of forestry and scrap handling products, and as a result, Strongco's market share in this region improved slightly.
Equipment Rentals
It is common industry practice for certain customers to rent to meet their heavy equipment needs rather than commit to a purchase. In some cases this is in response to the seasonal demands of the customer, as in the case of municipal snow removal contracts, or to meet the customers' needs for a specific project. In other cases, certain customers prefer to enter into short-term rental contracts with an option to purchase after a period of time or hours of machine usage. This latter type of contract is referred to as a rental purchase option contract ("RPO"). Under an RPO, a portion of the rental revenue is applied toward the purchase price of the equipment should the customer exercise the purchase option. This provides flexibility to the customer and results in a more affordable purchase price after the rental period. Normally, the significant majority of RPO's are converted to sales within a six month period and this market practice is a method of building sales revenues and the field population of equipment.
Initially, as construction markets were recovering following the recession, rental activity was robust as many customers lacked the confidence or financial resources to commit to purchase equipment and preferred instead to rent to meet their equipment needs. As heavy equipment markets continued to recover, sales of equipment increased, but at the same time rental activity, including RPOs, has remained strong. At the same time markets were recovering, Strongco made a commitment to participate to a larger extent in the RPO market. This has resulted in growth in Strongco's rental activity and revenues.
Strongco's rental revenue was $5.2 million in the quarter which was fairly consistent with the level of rental revenue in the first quarter of 2011 of $5.5 million and significantly higher than in prior years. On a regional basis, Strongco's rental revenue was strong in Eastern Canada, which historically has not been a major rental market, due to RPO contracts for articulated trucks and loaders in Quebec for hydro-electric and infrastructure projects in the province. Rental activity was also stronger at Chadwick-BaRoss as given the continued weak economy in the Northeastern United States, customers preferred to rent to meet their equipment needs. In addition, Strongco's crane business, which has traditionally not had a significant rental element, experienced an increase in rental activity since the recession as construction markets and demand for cranes improved. Crane rental revenues were up slightly in the first quarter of 2012 compared to the prior year due to RPO contracts in Ontario.
Product Support
Sales of new equipment usually carry the warranty from the manufacturer for a defined term. Product support revenues from the sales of parts and service are therefore not impacted until the warranty period expires. Warranty periods vary from manufacturer to manufacturer and depending on customer purchases of extended warranties. Product support activities (sales of parts and service outside of warranty), therefore, tend to increase at a slower rate and lag equipment sales by three to five years. The increasing equipment population in the field leads to increased product support activities over time. Product support activities are normally strongest in the first quarter due to increased use of equipment for snow removal in the winter and during the third quarter in the height of the construction season.
Strongco's product support revenues were higher in the first quarter of 2012 at $29.6 million compared to $26.0 million in the first quarter of 2011. Product support activities were up across all regions in Canada and in New England. As construction markets and other end use markets for heavy equipment have been improving since the recession, utilization of equipment has increased, which, in turn, has resulted in an increase in product support activity generally. In addition, while the first quarter of 2012 saw lower than normal amounts of snow in most regions in Canada and the North-eastern United States and resulted in lower utilization of equipment for snow removal, the early onset of warm spring weather had many customers using or preparing their equipment for the summer season, which resulted in an increase in product support activity in the quarter. In New England, where weak economic conditions persist, many customers are repairing existing machines rather than buying new, which has also lead to higher product support revenues.
As a result of the higher revenues in the first quarter of 2012, Strongco's gross margin increased to $19.4 million from $17.0 million in the first quarter of 2011. As a percentage of revenue, gross margin improved to 20.0% in the first quarter of 2012 from 19.4% in the first quarter of 2011. This was due primarily to a higher gross margin achieved on equipment sales in 2012.
The gross margin on equipment sales was $8.3 million compared to the $6.6 million in the first quarter of 2011 due to higher sales and a higher gross margin percentage in 2012. Sales were particularly strong in Alberta, with a large proportion or articulated trucks and cranes being sold in the quarter. As a percentage of sales, gross margin on equipment sales improved to 13.3%, from 11.7% in 2011 due primarily to the higher sales mix of larger equipment (cranes and articulated trucks),which offer higher gross margins.
The gross margin on rentals in the first quarter was $0.6 million, which down from $1.0 million a year ago. The gross margin percentage on rentals declined to 12.3% from 18.9% in the first quarter of 2011 due to a higher proportion of RPO rentals in 2012. The margin on rental under RPO contracts reflects the anticipated margin on the ultimate sale on conversion at the end of the rental which is typically lower than the margin on rentals with no purchase option.
The gross margin on product support activities improved to $10.5 million from $9.4 million in the first quarter of 2011. As a percentage of revenue, the gross margin on product support activities was 35.6%, which was consistent with 36.2% in the first quarter of 2011.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the first quarter of 2012 were $16.7 million, which compared to $15.2 million in the first quarter of 2011. Certain variable distribution and selling expenses were higher in 2012 as a result of the increase in revenues. In addition, expenses of Chadwick-BaRoss, which was acquired in February 2011, were higher in 2012 due to the inclusion of one additional month of expenses plus annual salary and wage increases and higher headcounts. Annual salary and wage increases and higher headcounts at Canadian operations, plus a larger accrual for annual and long-term incentive plans and other employee incentives also contributed to the higher expense levels in 2012. Expenses in the first quarter of 2012 include $0.1 million of relocation and moving costs of the new branch in Edmonton. As a percent of revenue, administration, distribution and selling expenses were 17.3%, down slightly from 17.4% in the first quarter of 2011.
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 first quarter of 2012 was $0.4 million compared to $0.3 million in the first quarter of 2011.
Interest Expense
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 the bank prime rate ("prime rate") in Canada and the United States, Canadian Bankers Acceptances Rates ("BA rates") and LIBOR rates.
Strongco's interest expense in the quarter was $1.4 million, which compared to $1.4 million in the first quarter of 2011. Interest expense in first quarter of 2012 includes a $0.3 million interest gain from the mark to market adjustment on $15 million of interest rate swaps put in place in 2011 to fix the interest rate on a portion of the Company's variable interest rate debt. Excluding this favorable adjustment interest in the first quarter of 2012 was higher than the prior year due to a higher level of interest bearing debt.
During 2011 and into 2012, Strongco's equipment inventories increased to the support the increasing demand for heavy equipment as construction markets recovered. This resulted in a higher level of interest-bearing equipment notes in the first quarter of 2012 compared to the first quarter of 2011. Financing the acquisition of Chadwick-BaRoss in February 2011 increased Strongco's interest bearing debt. In addition, the bank indebtedness, equipment notes, and mortgage term loans of Chadwick-BaRoss are now included in the Company's debt.
Interest on the construction loan facility to finance the construction of the Company's new branch facility in Edmonton, Alberta was capitalized in the cost of the building during construction. With the completion of construction in April of 2012, interest on this loan facility will now be expensed.
Earnings before Income Taxes
Strongco's earnings before income taxes in the first quarter of 2012 were $1.7 million, which was improved from $0.7 million in the first quarter of 2011. The increase was due to the strong revenue performance in the quarter.
Provision for Income Taxes
The provision for income taxes in the first quarter of 2012 was $0.5 million which reflects a combined average effective tax rate on the Company's income in Canada and the United States of 28.9%. For the first quarter of 2011, the provision for income taxes was $0.1 million which represents a tax provision for the Company's earnings from Chadwick-BaRoss in the United States. The recognition of tax loss carry forwards resulted in no provision for income taxes in the first quarter of 2011 for Strongco in Canada. All tax loss carry forwards were utilized in 2011.
Net Income
Strongco's net income in the first quarter of 2012 was $1.2 million ($0.09 per share), which was improved from $0.6 million ($0.05 per share) in the first quarter of 2011.
EBITDA
EBITDA in the first quarter of 2012 was $8.0 million which was up from $6.8 million in the first quarter of 2011. EBITDA was calculated as follows:
Note 1 - "EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of equipment inventory on rent, and amortization of rental fleet. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance or earnings recognized under International Financial Reporting Standards ("IFRS") and therefore has no standardized meaning prescribed by IFRS and may not be comparable to similar terms and measures presented by other similar issuers. The Company's management believes that EBITDA is an important supplemental measure in evaluating the Company's performance and in determining whether to invest in Shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with IFRS as indicators of the Company's performance or to cash flows from operating, investing and financing activities as measures of the Company's liquidity and cash flows.
Cash Flow, Financial Resources and Liquidity
Cash Flow Provided By (Used In) Operating Activities:
During the first quarter of 2012, Strongco provided $8.4 million of cash from operating activities before changes in working capital. This compares to $6.5 million of cash provided from operating activities before changes in working capital in the first quarter of 2011. After working capital changes and payments of interest, income taxes and pension funding cash provided by operating activities amounted to $0.4 million which compared to cash used in operating activities of $0.7 million in the first quarter of 2011.
The components of the cash provided by (used in) operating activities can be summarized as follows:
Non-cash items include amortization of equipment inventory on rent of $3.6 million, which compared to $3.9 million in the first quarter of 2011. A slightly lower volume of equipment rentals in 2012 resulted in lower amortization of equipment inventory on rent.
Components of cash flow from the net change in non-cash working capital for the three month period ending March 31, 2012 and 2011 were as follows:
During the first quarter of 2012, Strongco made a net investment in working capital of $6.0 million to support its growth. By comparison, the working capital investment in the first quarter of 2011 was $5.6 million. Most of the investment in working capital was for equipment inventory and the related equipment note financing. In the first quarter of 2012, Strongco invested $37.5 million in inventory, including $31.6 million of equipment inventory, in anticipation of the summer selling season. By comparison, in the first quarter of 2011, the Company increased inventory by $8.8 million. To finance the increase in inventory, the Company borrowed more on its equipment notes facilities. Equipment notes payable increased by $19.5 million in the quarter of 2012 and $3.0 million in the first quarter of 2011.
Given the seasonality of construction and the buying patterns of customers, the majority of Strongco's purchases of equipment inventory occur in the first quarter which is then sold through the summer season. That purchasing pattern was impacted by the recession and increase in demand as markets recovered. After scaling back during the recession, OEM's struggled to ramp up production to meet the increase in demand. As a result, supplier delivery performance deteriorated which led to product shortages and significantly extended delivery lead times. In the fourth quarter of 2011 Strongco received a large quantity of equipment inventory from its major OEM suppliers that had been ordered for delivery earlier in the year which contributed to a higher than normal level of inventory entering 2012. Equipment inventory at March 31, 2012 was $216.9 million compared to $174.4 million a year earlier. With markets for heavy equipment continuing to be robust, management is confident this higher level of inventory will be sold through the summer season in 2012.
Cash Used In Investing Activities:
In the first quarter of 2012, net cash of $2.2 million was used in financing activities which compared to net cash of $11.4 million used in financing activities in the first quarter of 2011. The components of the cash used in investing activities are summarized as follows:
In the first quarter of 2011, Strongco acquired Chadwick-BaRoss for cash proceeds of $9.2 million.
In the first quarter of 2012, Chadwick-BaRoss invested a net $0.3 million in rental fleet assets. By comparison, rental fleet assets were reduced by $0.5 million in the first quarter of 2011
Capital expenditures were $1.9 million in the first quarter of 2012 and $2.8 million in the first quarter of 2011, the majority of which related to construction of the new Edmonton, Alberta branch.
Cash Provided By Financing Activities:
In the first quarter of 2012, net cash of $1.8 million was provided by financing activities which compared to net cash of $12.1 million provided from financing activities in the first quarter of 2011.
The components of cash provided by financing activities in the first quarter are summarized as follows:
The significant sources and uses of cash from financing activities in first quarter of 2012 were as follows:
Bank Credit Facilities
The Company has credit facilities with banks in Canada and United States that provide 364-day committed operating lines of credit totaling approximately $22.5 million. Borrowings under the lines of credit are limited by standard borrowing base calculations based on accounts receivable and inventory, which are typical of such bank credit facilities. As collateral, the Company has provided a $50 million debenture and a security interest in accounts receivable, inventories (subordinated to the collateral provided to the equipment inventory lenders), capital assets (subordinated to collateral provided to lessors), real estate and on intangible and other assets. The operating lines bear interest at rates that range between bank prime rate plus 0.50% and bank prime rate plus 3.00% and between the one month Canadian BA rates plus 1.50% and BA rates plus 4.00% in Canada and at LIBOR plus 2.60% in the United States. Under its bank credit facilities, the Company is able to issue letters of credit up to a maximum of $5 million. Outstanding letters of credit reduce the Company's availability under its operating lines of credit. For certain customers, Strongco issues letters of credit as a guarantee of Strongco's performance on the sale of equipment to the customer. As at March 31, 2012, there were outstanding letters of credit of $0.1 million and $10.1 million drawn on the Company's bank operating lines of credit.
In addition to its operating lines of credit, Strongco has a $15 million line for foreign exchange forward contracts as part of its bank credit facilities ("FX Line") available to hedge foreign currency exposure. Under this FX Line, the Company can purchase foreign exchange forward contracts up to a maximum of $15 million. As at March 31, 2012, the Company had outstanding foreign exchange forward contracts under this facility totaling US$5.2 million at an average exchange rate of $1.0181 Canadian for each US$1.00 with settlement dates between April 1, 2012 and September 30, 2012.
The Company's bank credit facilities also include term loans secured by real estate in the United States. At March 31, 2012 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$13,300 plus accrued interest. The Company has interest rate swap agreements in place that have converted the variable rate on the term loans to a fixed rate of 5.17%. The term loan and swap agreements expire in September 2012 at which point a balloon payment from the balance of the loans is due. It is management's intention to renew the term loans and interest rate swap agreement prior to their expiry.
In connection with the acquisition of Chadwick-BaRoss, in April 2011, Strongco secured an additional $5.0 million demand non-revolving term loan from its bank secured against certain real estate assets in Canada ("Term Loan - Canadian Real Estate"). This loan is for a term of 60 months to April 2016 and bears interest at the bank's prime rate plus 2.0%. The Term loan - Canadian Real Estate is subject to monthly principal payments of $83.3 thousand plus accrued interest. As at March 31, 2012, there was $4.1 million owing on the Term Loan - Canadian Real Estate.
In April 2011, Strongco secured an additional construction loan facility with its bank ("Construction Loan #1") to finance the construction of the Company's new Edmonton, Alberta branch. Under Construction Loan #1, the Company is able to borrow 70% of the cost of the land and building construction costs to a maximum of $7.1 million. Construction of the new branch commenced in June 2011 and is scheduled to be completed in April 2011. Upon completion, Construction Loan #1 will be converted to a demand, non-revolving term loan ("Mortgage Loan #1"). Mortgage Loan #1 will be for an amount of $7.1 million and a term of 60 months. Construction Loan #1 (and Mortgage Loan #1) bears interest at the bank's prime lending rate plus 2.0%. As at March 31, 2012, there was $6.2 million drawn on Construction Loan #1.
In addition, in September 2011, Strongco secured an additional construction loan facility with its bank ("Construction Loan #2") to finance the construction of a planned new Fort McMurray, Alberta branch. Under Construction Loan #2, the Company is able to borrow 70% of the cost of the land and building construction costs. The Company anticipates construction of the new Fort McMurray branch will commence in the third quarter of 2012 with completion in the first quarter of 2013. Upon completion, Construction Loan #2 will be converted to a demand, non-revolving term loan ("Mortgage Loan #2"). As at March 31, 2012, Construction Loan #2 was undrawn.
Strongco's bank credit facilities contain financial covenants typical of such credit facilities that require the Company to maintain certain financial ratios and meet certain financial thresholds. In particular, the credit facilities in Canada contain covenants that require the Company to maintain a minimum ratio of total current assets to current liabilities ("Current Ratio covenant") of 1.1:1, a minimum tangible net worth ("TNW covenant") of $50 million, a maximum ratio of total debt to tangible net worth ("Debt to TNW Ratio covenant") of 4.0:1 and a minimum ratio of EBITDA minus cash taxes paid and capital expenditures to total interest ("Debt Service Coverage Ratio covenant") of 1.3:1. For the purposes of calculating covenants under the credit facility, debt is defined as total liabilities less deferred income taxes, trade and other payables, customer deposits and accrued employee future benefits obligations. The Debt Service Coverage Ratio is measured at the end of each quarter on a trailing 12-month basis. Other covenants are measured as at the end of each quarter. The Company was in compliance with all covenants under its bank credit facilities as at March 31, 2012.
Equipment Notes
In addition to its bank credit facilities, the Company has lines of credit available totaling approximately $240 million from various non-bank equipment lenders in Canada and the United States that are used to finance equipment inventory and rental fleet. At March 31, 2012, there was approximately $185 million borrowed on these equipment finance lines.
Typically, these equipment notes are interest free for periods up to 12 months from the date of financing, after which they bear interest at rates ranging, in Canada, from 4.00% to 5.50% over the one-month BA rate and 3.25% to 4.25% over the prime rate of a Canadian chartered bank, and in the United States, from 2.5% to 5.5% over the one-month LIBOR rate and between the U.S. bank prime rate and prime rate plus 4.00%. At March 31, 2012, approximately $76 million of these equipment notes were interest free and $104 million were interest bearing. As collateral for these equipment notes, the Company has provided liens on the specific inventories financed and any related accounts receivable. For the majority of the equipment notes, monthly principal repayments equal to 3% of the original principal balance of the note commence 12 months from the date of financing and the remaining balance is due in full at the earlier of 24 months after financing or when the financed equipment is sold. While financed equipment is out on rent, monthly curtailments are required equal to the greater of 70% of the rental revenue and 2.5% of the original value of the note. Any remaining balance after 24 months is normally refinanced with the lender over an additional period of up to 24 months. All of the Company's equipment note facilities are renewable annually.
As indicated above, the interest bearing equipment notes in Canada bear interest at floating BA rates plus a fixed component or premium over BA rates. In September 2011, Strongco put interest rate swaps in place that have effectively fixed the floating BA rate component on $15.0 million of its interest bearing equipment notes at 4.615% for five years to September 2016. (See discussion under "Interest Rate Swaps" below).
Certain of the Company's equipment finance credit agreements contain restrictive financial covenants, including requiring the Company to remain in compliance with the financial covenants under all of its other lending agreements ("cross default provisions"). The Company was in compliance with all covenants under its equipment finance credit facilities as at March 31, 2012.
Interest Rate Swaps
In September of 2011, BA rates were at very low levels. However, there was an expectation that interest rates would rise in the future. In September, Strongco secured a Swap Facility in Canada with its bank that allows the Company to swap the floating interest rate component (BA rate) on up to $25.0 million of its floating interest rate debt to a five-year fixed swap rate of interest. On September 8, 2011, the Company entered into an interest rate swap agreement under this facility to fix the floating BA rate on $15.0 million of interest bearing debt at a fixed interest rate equal to 1.615% for a period of five years to September 8, 2016. The company has put these swaps in place to effectively fix the interest rate on $15.0 million of its interest-bearing equipment notes.
The Company also has interest rate swap agreements in place in the US that have converted the variable rate on its US term loans to a fixed rate of 5.17%. The term loan and swap agreements expire in September 2012 at which point a balloon payment from the balance of the loans is due. It is management's intention to renew the term loans and interest rate swap agreement prior to their expiry.
Summary of Outstanding Debt
The balance outstanding under Strongco's debt facilities at March 31, 2012 and 2011 consisted of the following:
As at March 31, 2012 there was $12.5 million of unused credit available under the Company's bank credit lines. While availability under the bank lines fluctuates daily depending on the amount of cash received and cheques and other disbursements clearing the bank, availability generally ranges between $5.0 million and $15.0 million. Borrowing under the Company's bank lines is typically highest in the first quarter when cash flows from operations are at the lowest point of the year, and reduces through to the end of the year as cash flows increase.
The Company also had $55 million available under its equipment finance facilities at March 31, 2012. Borrowing on these lines typically increases in the first five months of the year as equipment inventory is purchased for the season and declines to the end of the year as equipment sales increase, particularly in the fourth quarter.
With the level of funds available under the Company's bank credit lines, the current availability under the equipment finance facilities and anticipated improvement in cash flows from operations, management believes the Company will have adequate financial resources to fund its operations and make the necessary investment in equipment inventory and fixed assets to support its operations in the future.
SUMMARY OF QUARTERLY DATA
In general, business activity in the Equipment Distribution segment follows a weather related pattern of seasonality. Typically, the first quarter is the weakest quarter as construction and infrastructure activity is constrained in the winter months. This is followed by a strong gain in the second quarter as construction and other contracts begin to be tendered and companies begin to prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter activity generally strengthens as customers make year-end capital spending decisions and exercise purchase options on equipment which has previously gone out on RPO's. In addition, purchases of snow removal equipment are typically made in the fourth quarter.
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 $21.1 million. In addition, the Company has contingent contractual obligations where it has agreed to buy back equipment from customers at the option of the customer for a specified price at future dates ("buy back contracts"). These buy back contracts are subject to certain conditions being met by the customer and range in term from three to 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, 2012, the total buy back contracts outstanding were $14.0 million. A reserve of $1.1 million has been accrued in the Company's accounts as at March 31, 2012 with respect to these commitments.
The Company has provided a guarantee of lease payments under the assignment of a property lease which expires January 31, 2014. Total lease payments from April 1, 2012 to January 31, 2014 are $0.3 million.
Contractual obligations are set out in the following tables. Management believes that the Company will generate sufficient cash flow from operations to meet its contractual obligations.
SHAREHOLDER CAPITAL
The Company is authorized to issue an unlimited number of shares. All shares are of the same class of common shares with equal rights and privileges.
On January 17, 2011, the Company completed a rights offering, under which 2.6 million additional shares were issued pursuant to the rights issued to existing shareholders for gross proceeds of $7.9 million (refer to the Company's Rights Offering Circular filed on SEDAR for details). The total shares outstanding following completion of the rights offering was 13,128,719. There were no changes in the issued and outstanding shares during the first quarter of 2012.
OUTLOOK
The Canadian economy in general and construction markets across Canada are expected to continue to improve throughout 2012, which should result in strong demand for heavy equipment.
Mild weather conditions and lack of snow affected equipment usage in much of Canada and the northeastern United States and significantly curtailed oilfield activities in northern Alberta in the first quarter and delayed the buying decisions of customers across the country. This tempered demand for heavy equipment and product support in the first quarter of 2012. However, the early onset of warm spring weather brought an advanced start to the summer construction season which contributed to stronger equipment sales in March. Strongco's sales backlogs continued to rise during the quarter and by mid-April 2012 had topped $100 million, more than double the level of a year ago and the highest level in several years. This is a positive indication of the increasing demand for heavy equipment.
An important contribution to anticipated growth in 2012 is expected from Alberta. Oil prices have continued to show strength and stability, which has powered an ongoing economic upturn in the province. In particular, the outlook for northern Alberta and the oil sands is for continued significant investment over the next several years, which bodes well for heavy equipment demand in the region.
Equipment suppliers are expected to improve product availability and delivery lead times in 2012. Inventory levels at Strongco were allowed to run slightly higher than normal at year end to ensure availability of product as the Company enters the prime selling season. Consequently, product availability is not expected to affect the Company's sales in 2012. Strongco's significant position with its equipment suppliers should allow the Company to optimize equipment deliveries.
Management remains cautiously optimistic that the improving Canadian economy will continue in 2012, which is expected to increase revenues. In addition, while market conditions in the northeastern United States remain weak, Chadwick-BaRoss realized modest growth in the first quarter of 2012 and contributed positively to Strongco's overall results. Chadwick-BaRoss services a broad range of market sectors in Maine, New Hampshire and Massachusetts. Demand for equipment in these regions is expected to continue to show a modest increase throughout the balance of the year, which should contribute to improved revenue and profitability in 2012.
NON-IFRS MEASURES
"EBITDA" refers to earnings before interest, income taxes, amortization of capital assets, amortization of equipment inventory on rent, and amortization of rental fleet. EBITDA is presented as a measure used by many investors to compare issuers on the basis of ability to generate cash flow from operations. EBITDA is not a measure of financial performance or earnings recognized under International Financial Reporting Standards ("IFRS") and therefore has no standardized meaning prescribed by IFRS and may not be comparable to similar terms and measures presented by other similar issuers. The Company's management believes that EBITDA is an important supplemental measure in evaluating the Company's performance and in determining whether to invest in Shares. Readers of this information are cautioned that EBITDA should not be construed as an alternative to net income or loss determined in accordance with IFRS as indicators of the Company's performance or to cash flows from operating, investing and financing activities as measures of the Company's liquidity and cash flows.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements. The Company bases its estimates and assumptions on past experience and various other assumptions that are believed to be reasonable in the circumstances. This involves varying degrees of judgment and uncertainty which may result in a difference in actual results from these estimates. The more significant estimates are as follows:
Inventory Valuation
The value of the Company's new and used equipment is evaluated by management throughout each year. Where appropriate, a provision is recorded against the book value of specific pieces of equipment to ensure that inventory values reflect the lower of cost and estimated net realizable value. The Company identifies slow moving or obsolete parts inventory and estimates appropriate obsolescence provisions by aging the inventory. The Company takes advantage of supplier programs that allow for the return of eligible parts for credit within specified time periods. The inventory provision as at March 31, 2012 with changes from December 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 March 31, 2012 with changes from December 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 independent actuaries using the projected benefit method prorated on service and based on assumptions that reflect management's best estimates. The assumptions were determined by management recognizing the recommendations of Strongco's actuaries. These key assumptions include the rate used to discount obligations, the expected rate of return on plan assets, the rate of compensation increase and the growth rate of per capita health care costs.
The discount rate is used to determine the present value of future cash flows that we expect will be required to pay employee benefit obligations. Management's assumptions of the discount rate are based on current interest rates on long-term debt of high quality corporate issuers.
The assumed return on pension plan assets of 6.5% per annum is based on expectations of long-term rates of return at the beginning of the fiscal year and reflects a pension asset mix consistent with the Company's investment policy. The costs of employee future benefits other than pension are determined at the beginning of the year and are based on assumptions for expected claims experience and future health care cost inflation.
Changes in assumptions will affect the accrued benefit obligation of Strongco's employee future benefits and the future years' amounts that will be charged to results of operations.
Future Income Taxes
At each quarter end the Company evaluates the value and timing of the Company's temporary differences. Future income tax assets and liabilities, measured at substantively enacted tax rates, are recognized for all temporary differences caused when the tax bases of assets and liabilities differ from those reported in the consolidated financial statements.
Changes or differences in these estimates or assumptions may result in changes to the current or future tax balances on the consolidated balance sheet, a charge or credit to income tax expense in the consolidated statements of earnings and may result in cash payments or receipts. Where appropriate, the provision for future income taxes and future income taxes payable are adjusted to reflect management's best estimate of the Company's future income tax accounts.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis contains forward-looking statements that involve assumptions and estimates that may not be realized and other risks and uncertainties. These statements relate to future events or future performance and reflect management's current expectations and assumptions which are based on information currently available to the Company's management. The forward-looking statements include but are not limited to: (i) the ability of the Company to meet contractual obligations through cash flow generated from operations, (ii) the expectation that customer support revenues will grow following the warranty period on new machine sales and (iii) the outlook for 2012. There is significant risk that forward-looking statements will not prove to be accurate. These statements are based on a number of assumptions, including, but not limited to, continued demand for Strongco's products and services. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward looking statements. The inclusion of this information should not be regarded as a representation of the Company or any other person that the anticipated results will be achieved and investors are cautioned not to place undue reliance on
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Datum: 09.05.2012 - 16:43 Uhr
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