Strongco Reports Continued Growth in Revenues in Second Quarter 2012
(firmenpresse) - MISSISSAUGA, ONTARIO -- (Marketwire) -- 08/01/12 -- Strongco Corporation (TSX: SQP) today reported financial results for the three and six months ended June 30, 2012.
Highlights(i)
(i) Comparisons are between second quarter 2012 and second quarter 2011
"We are pleased with the continued growth in revenues and operating profits evident in Strongco's results for the second quarter of 2012," said Robert Dryburgh, President and Chief Executive Officer of Strongco. "In the quarter, the Company achieved increases in all major revenue streams year-over-year and, simultaneously improved gross margins on equipment sales in competitive markets. Revenues in all regions were up from the prior period. Revenues were significantly higher in Alberta, in particular, where we are making substantial investment to enhance our market position."
(i) All financial information conforms to International Financial Reporting Standards.
Second Quarter 2012 Review
Total revenues in the three months ended June 30, 2012 were up 16% from the second quarter of 2011. Equipment sales increased by 20% from last year to $92.4 million; product support revenues gained 8% to $33.4 million; and rental revenues were $6.4 million, up 5% from the year-earlier period.
Gross margin increased by 12% to $23.8 million during the second quarter. As a percentage of revenue, the sales mix slightly reduced the overall gross margin to 18.0% from 18.6% in the same period of 2011.
Administrative, distribution and selling expenses during the second quarter totalled $18.5 million, compared to $16.3 million in 2011. As a percentage of revenue administrative, distribution and selling expenses were 14.0% compared to 14.3% in the second quarter of 2011.
EBITDA for the second quarter increased to $12.7 million from $10.5 million a year earlier and earnings before income taxes were $4.4 million, up from $3.8 million in the second quarter of 2011.
Strongco is now taxable whereas the company was able to utilize loss carry forwards to offset tax expenses in 2011. Consequently, Strongco's net income in the second quarter of 2012 was $3.2 million ($0.25 per share), down from $3.6 million ($0.28 per share) in the second quarter of 2011. The second quarter of 2012 included $1.1 million of provision for income taxes, compared to $0.1 million in 2011.
Outlook
"We are optimistic about the economic outlook in regions across the country and in particular in Alberta, where we have expanded our branch capacity and anticipate construction to begin in the third quarter of 2012 for our new Fort McMurray branch," said Mr. Dryburgh.
The Canadian economy in general and the markets for construction equipment and cranes across Canada are expected to continue the improvement the Company has seen in the first half throughout 2012. Strongco's sales backlogs grew during the first quarter and have remained at robust levels through the second quarter as Strongco moved into its prime selling season, a positive indication of the increasing demand for heavy equipment.
Equipment suppliers are expected to continue to improve production capability and delivery lead times throughout the balance of 2012. Inventory levels at Strongco were allowed to run higher than normal at year end and through the first half of the year to ensure availability of product for the Company through the prime selling season. While availability of certain product lines did impact sales in the first half of 2012, current inventory and improving product availability is expected to support sales through the balance of the year.
Management remains cautiously optimistic that the improving Canadian economy will continue through the balance of the year, and lead to increased revenues. In addition, while market conditions in the northeastern United States remain weak, Chadwick-BaRoss realized modest growth in the first half of 2012 and contributed positively to Strongco's overall results. While demand for equipment from its traditional markets is expected to remain flat, Chadwick-BaRoss expects to continue to show a modest increase in revenues from sales to other non-traditional markets and strong product support sales throughout 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, August 2, 2012 at 10 am ET to discuss second quarter results. Analysts and investors can participate by dialing 416-644-3414 or toll free 1-800-814-4859. An archived audio recording will be available until midnight on August 16, 2012. To access it, dial 416-640-1917 and enter passcode 4545438#.
About Strongco Corporation
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 27 branches in Canada and five in the United States. Strongco represents leading equipment manufacturers with globally recognized brands, including Volvo Construction Equipment, Case Construction, Manitowoc Crane, National, Grove, Terex Cedarapids, Terex Finlay, Ponsse, Fassi, Allied Construction, Taylor, ESCO, Dressta, Sennebogen, Jekko, Takeuchi, Doppstadt, Link-Belt and Kawasaki. Strongco is listed on the Toronto Stock Exchange under the symbol SQP.
Forward-Looking Statements
This news release contains "forward-looking" statements within the meaning of applicable securities legislation which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Strongco or industry results, to be materially different from any future results, events, expectations, performance or achievements expressed or implied by such forward-looking statements. All such forward-looking statements are made pursuant to the "safe harbour" provisions of applicable Canadian securities legislation. Forward-looking statements typically contain words or phrases such as "may", "outlook", "objective", "intend", "estimate", "anticipate", "should", "could", "would", "will", "expect", "believe", "plan" and other similar terminology suggesting future outcomes or events. This news release contains forward-looking statements relating to the expected trading of common shares of Strongco on the TSX, and such statements are based upon the expectations of management.
Information Contact
The following management discussion and analysis ("MD&A") provides a review of the consolidated financial condition and results of operations of Strongco Corporation, formerly Strongco Income Fund ("the Fund"), Strongco GP Inc. and Strongco Limited Partnership collectively referred to as "Strongco" or "the Company", as at and for the three months and six months ended June 30, 2012. This discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements as at and for the three months and six months ended June 30, 2012. For additional information and details, readers are referred to the Company's audited consolidated financial statements and accompanying MD&A as at and for the year ended December 31, 2011 contained in the Company's annual report for the year ended December 31, 2011, the Company's unaudited consolidated financial statements and accompanying MD&A as at and for the three months ended March 31, 2012, 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 August 1, 2012.
FINANCIAL HIGHLIGHTS
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.
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 transaction price 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 a 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 and the first half of 2012, a positive indication of the continuing recovery.
The improving trend in construction markets continued across Canada in the first half of 2012. Ongoing activity in the Alberta oil sands, large hydro-electric projects and continuing spending on infrastructure projects contributed to strong demand for both heavy equipment and cranes. In the first quarter of 2012, generally mild winter weather conditions across most of the country resulted in customers delaying the buying decisions and reduced parts consumption. However, the early onset of warm spring weather brought an advanced start to the summer construction season which contributed to stronger equipment sales in the latter part of the first quarter and through the second quarter. In Northern Alberta, higher than normal winter temperatures curtailed oilfield activities in the early part of the first quarter of 2012, which tempered purchases of heavy equipment and product support. 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. Heavy rains in April and May reduced construction activity and caused customers to delay equipment purchases. However, demand for heavy equipment in the region remained strong and with improving weather conditions and increased construction activity, customers firmed up their buying decisions for heavy equipment which led to increased sales in the latter part of the second quarter. Strongco's sales backlog rose through the first quarter and remained at consistent high levels through the second quarter, a positive indication of continued strong demand.
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 and six months ended June 30, 2012 and 2011 is as follows:
Equipment Sales
Strongco's equipment sales in the three months ended June 30, 2012 were $92.4 million which was up $15.3 million or 20% from $77.1 million in the second quarter of 2011. Sales in Canada were up $12.6 million or 18% in the quarter with all regions of the country reporting an increase. Equipment sales in the quarter were also up in Northeastern U.S. despite continued weak construction markets. For the six months ended June 30, 2012, total sales were $154.5 million compared to $133.1 million in the first half of 2011. Sales in Canada were up $15.0 million or 12% compared to the first six months of 2011 led by a significant year-over-year increase in Western Canada due to the strong ongoing activity in the oil sands. Equipment sales in the Northeastern U.S. for the first six months of the year were also significantly ahead of the same period in 2011 due to stronger sales of forestry and scrap handling products, and improved market share in this region.
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 half of 2012 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, Original Equipment Manufacturers ("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 first half of 2012 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 through the market quickly which should ease competition and pricing.
On a regional basis, equipment sales in Eastern Canada (Quebec and Atlantic regions) were $30.8 million in the second quarter, which was up $3.6 million or 13% from the second quarter of 2011. For the six months to June, equipment sales in Eastern Canada totalled $47.9 million, which was up slightly from $47.3 million in the first half of 2011. Construction markets in Quebec continued to benefit from significant infrastructure activity in the province and large hydro-electric projects in northern Quebec, while construction activity in the Atlantic Provinces declined in the quarter. Strongco's sales of cranes in Eastern Canada were up significantly over the first half of 2011 due to strong demand for cranes in Quebec and deliveries of several large cranes to crane rental companies to replenish and increase their fleets. Excluding cranes, the heavy equipment markets in Eastern Canada where Strongco participates were estimated to be up approximately 3% over the second quarter of 2011 and for the first half of the year were up roughly 10% over the same period in 2011. Strongco's sales and market share declined in Eastern Canada in the first quarter as a result of aggressive price competition, as well as a high level of sales by certain competitors, of equipment that were on RPO's carried over from 2011. Strongco's sales and market share in the region recovered slightly in the second quarter, but for the six months to June 30, 2012, was down from a year ago.
Strongco's equipment sales in the second quarter in Central Canada were $29.4 million, which was up $3.6 million or 14% from the second quarter of 2011. For the six months to June 30, 2012, total sales in the region were $46.1 million, $2.1 million or 5% higher than the same period in 2011. Crane sales were strong in the quarter and the first six months of the year due to sales of several cranes to crane rental companies who were replenishing and increasing their fleets, and sales of two large crawler cranes for use on infrastructure projects in the region. Sales of heavy equipment other than cranes in the region were down in the quarter and first six months of the year. While construction markets in Ontario have shown recovery from the depths of the recession in 2009, uncertainty still remains which has caused customers to curtail spending on heavy equipment and take a wait-and-see attitude toward the marketplace in general. In addition, price competition has remained aggressive in 2012 in particular product categories and from dealers carrying high levels of product with the old tier 3 engine. Overall, for the first six months of the year, the markets for heavy equipment in Central Canada where Strongco participates were estimated to be up approximately 20% over the first half of 2011, with the biggest growth in compact equipment. Strongco's unit volumes in the region were up approximately 7% in the first six months of the year, resulting in a small decrease in overall market share. Strongco's sales backlogs in Ontario have been building in 2012, which is a positive sign of increasing demand.
Equipment sales in Western Canada during the second quarter were $22.6 million, which was up $5.4 million or 31% over the second quarter of 2011. For the six months to June 30, 2012, the total was $44.5 million, $12.3 million or 38% higher than the same period in 2011. Economic conditions in Alberta have improved from the recession, fueled to a large extent by robust activity in the oil sands, which has resulted in strong demand for heavy equipment and cranes in the region. However, the milder than normal and very wet winter weather conditions curtailed activity in the early part of the year, particularly in Northern Alberta, which tempered purchases of heavy equipment and product support. While the early onset of warm spring weather brought an advanced start to the summer construction season, heavy rains in the second quarter also hampered construction activity and caused some customers to delay equipment purchases. Crane sales in Western Canada have been very strong in 2012 driven by sales of truck mounted cranes to customers who provide service to the energy sector as well as sales of several large cranes to crane rental companies. Strongco's sales of heavy equipment, other than cranes, while up year-over-year, have been negatively impacted by the poor weather conditions, as well as delayed deliveries and lack of availability of equipment from the OEM, particularly articulated trucks which are in high demand for the Alberta market. The market served by Strongco in Alberta, excluding cranes, was estimated to be up approximately 40% relative to the first half of 2011 but Strongco's unit volumes were up 30% year to date which resulted in a slight reduction in market share. Product availability and delivery performance from the OEM is improving and additional articulated trucks are expected in the third quarter which should support stronger sales and improved market share in the balance of the year. Demand for heavy equipment overall in the region remains strong and with improving weather conditions and increased construction activity, customers have firmed up their buying decisions for heavy equipment which led to increased sales backlogs in the region.
Strongco's equipment sales in the northeastern United States were $9.6 million in the second quarter and $16.0 million for the first half of 2012, compared to $6.9 million and $9.6 million, respectively, in the same periods of 2011.
As Strongco acquired Chadwick-BaRoss in February 2011, results for the first half of 2011 include the results of Chadwick-BaRoss for the five months from February to June, which accounts for a portion of the year-over-year increase. The markets for heavy equipment in New England remained soft in 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 Chadwick-BaRoss has been successful in penetrating other markets for heavy equipment in scrap handling and waste management. Chadwick-BaRoss' equipment sales for the first half were ahead of the same period in 2011 due in part to stronger sales to the forestry and scrap handling sectors, which contributed to an improvement in Strongco's market share in this region.
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 2009 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, remained strong. As markets were recovering, Strongco made a commitment to participate to a larger extent in the RPO market which has resulted in growth in Strongco's rental activity and revenues.
Strongco's rental revenue in the second quarter was $6.4 million, which was up $0.3 million, or 5%, over the second quarter of 2011. For the six months to date, rental revenues totalled $11.5 million, which was essentially unchanged from $11.6 million in the same period in 2011. On a regional basis, Strongco's rental revenue was strong in the quarter and first six months of the year 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 Western Canada, rental revenues were off from the same period last year, as many customers chose to purchase equipment through RPO contracts during the first half of the year. 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 half 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 in the second quarter of 2012 were $33.4 million, up 8% from $30.9 million in the second quarter of 2011. For the six months to the end of June, product support revenues totalled $63.0 million, up from $56.9 million in the first six months 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 which 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 later part of the first quarter. Product support activities continued strong in the second quarter, although heavy rains in Alberta caused lower use of equipment which impacted parts and service activity. 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.
Gross Margin
As a result of the higher revenues, Strongco's gross margin was higher in the second quarter and first six months of 2012. As a percentage of revenue, Strongco's overall gross margin has remained fairly consistent year-over-year. The slight decline in the gross margin percentage in the second quarter was due to the increased level of equipment sales in second quarter of 2012, which generate a lower margin percentage compared to rentals and product support.
Higher sales of equipment in the quarter and first six months of the year contributed to higher sales gross margins. In addition, despite aggressive price competition, especially from dealers carrying higher amounts of equipment with tier 3 engines, Strongco was able to increase its gross margin percentage of sales in the second quarter and first six months of 2012 compared to the same periods in 2011 due in part to a higher proportion of sales of cranes and articulated trucks, which command higher margins compared to other equipment.
The gross margin on rentals in the second quarter and first six months of the year was down from a year ago. The decrease was due to lower overall gross margin percentage on rentals in 2012 as a result of an increase in rentals under RPO contracts. The gross margin percentage on rentals under RPO contracts reflects the margin anticipated on the sale on exercise of the purchase option which is typically lower than the margin on rentals with no purchase option.
The gross margin on product support activities improved in the second quarter and the six months of the year compared to the same periods in 2011. As a percentage of revenue, the gross margin on product support remained strong around 40% in the second quarter and first six-months of 2012 consistent with the prior year.
Administrative, Distribution and Selling Expense
Administrative, distribution and selling expenses in the second quarter of 2012 were $18.5 million or 14.0% of revenue, which compared to $16.3 million or 14.3% of revenues in the second quarter of 2011. For the six months ended June 30, 2012, administrative, distribution and selling expenses were $35.2 million or 15.4% of revenue, which compared to $31.5 million or 15.6% of revenues in the first half of 2011. Certain variable distribution and selling expenses were higher in 2012 as a result of the increase in revenues. In addition, expenses in 2012 were higher as a result of incremental operating expenses of the new branches in Orillia, Ontario and Edmonton, Alberta and one-time relocation and moving costs for the new branch in Edmonton. Most of the increase in expenses was in support of revenue growth. Annual salary and wage increases plus additional sales and customer service reps and sales/service managers at Canadian operations also contributed to the higher expense levels. Expenses of Chadwick-BaRoss, which was acquired in February 2011, were higher in 2012 due to the inclusion of one additional month of expenses and due to annual salary and wage increases and additional sales personnel hired to support revenue growth. In addition, the accrual for incentive bonuses was higher in 2012 by $0.2 million due primarily to the introduction of a new long-term incentive program.
Other Income
Other income and expense is primarily comprised of gains or losses on disposition of fixed assets, foreign exchange gains or losses, service fees received by Strongco as compensation for sales of new equipment by other third parties into the regions where Strongco has distribution rights for that equipment and commissions received from third party financing companies for customer purchase financing Strongco places with such finance companies. Other income in the second quarter of 2012 was $1.1 million, compared to $0.2 million in the second quarter of 2011. For the first six months of 2012, other income was $1.5 million compared to $0.5 million in the first half of 2011. Other income was higher in the second quarter and first half of 2012 primarily due to higher service fees related to sales made by other distributors within the Company's territories.
Interest Expense
Strongco's interest-bearing debt comprises interest bearing equipment notes, bank indebtedness and various other bank term loans and mortgages. Strongco typically finances equipment inventory under floor plan lines of credit available from the captive finance affiliate of its OEM suppliers and various other non-bank finance companies. Most equipment financing has interest free periods for between three and eight months and in limited cases up to twelve months, from the date of financing after which the equipment notes become interest bearing. The rate of interest on the Company's interest bearing equipment notes, bank indebtedness and other bank loans 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 second quarter and first six months of 2012 was $2.1 million and $3.4 million, respectively, compared to $1.4 million and $2.8 million, respectively, in the same periods in 2011. The increase was due to a higher average amount of interest-bearing debt in the first half of 2012 compared to the prior year. During 2011 and into 2012, Strongco increased its equipment inventories to support higher revenues and the increasing demand for heavy equipment as construction markets recovered. This resulted in a higher average level of interest-bearing equipment notes in the first six months of 2012 compared to the first half of 2011 (see discussion under "Financial Condition and Liquidity"). In addition, Strongco has taken on additional term loan debt to finance the purchase and construction of its new Edmonton, Alberta branch. Interest expense in second quarter of 2012 also includes a $0.2 million loss from the mark-to-market adjustment on $25 million of interest rate swaps which fix the interest rate on a portion of the Company's variable interest rate debt. In the first quarter of 2012, there was a mark-to-market gain of $0.3 million on these swaps.
Earnings before Income Taxes
Strongco's earnings before income taxes in the second quarter and first six months of 2012 were $4.3 million and $6.1 million, respectively, which were significantly improved from earnings before income taxes of $3.8 million and $4.4 million, respectively, in the same periods of 2011. The increase was due to the stronger revenue performance in 2012.
Provision for Income Taxes
The provision for income taxes in the second quarter and first six months of 2012 were $1.1 million and $1.6 million, respectively, which reflects a combined average effective tax rate on the Company's income in Canada and the United States of 26.25% for the period. The recognition of tax loss carry forwards resulted in no provision for income taxes in the first half of 2011 for Strongco in Canada. All tax loss carry forwards were utilized in 2011.
Net Income
Strongco's net income in the second quarter was $3.2 million ($0.25 per share), which compared to net income of $3.6 million ($0.28 per share) in the second quarter of 2011. Net income for the first six months of 2012 was $4.5 million ($0.34 per share), compared to $4.2 million ($0.33 per share) in the first half of 2011.
EBITDA
EBITDA in the second quarter of 2012 was $12.6 million (9.6% of revenue), up from $10.5 million (9.2% of revenue) in the second quarter of 2011. For the six months to date, EBITDA increased to $20.7 million (9.0% of revenue) from $17.3 million (8.6% of revenue) in the first half of 2011.
EBITDA was calculated as follows:
Cash Flow, Financial Resources and Liquidity
Cash Flow Provided By (Used In) Operating Activities:
During the second quarter of 2012, Strongco provided $12.7 million of cash from operating activities before changes in working capital. This compares to $11.3 million of cash provided from operating activities before changes in working capital in the second quarter of 2011. After working capital changes and payments of interest, income taxes and pension funding, cash provided by operating activities amounted to $10.0 million, which compared to cash used in operating activities of $0.9 million in the second quarter of 2011.
For the six months ended June 30, 2012, Strongco provided $21.1 million of cash from operating activities before changes in working capital. By comparison, in the first six months of 2011, $17.8 million of cash was provided by operating activities before changes in working capital. After working capital changes and payments of interest, income taxes and pension funding, cash provided by operating activities amounted to $10.4 million which compared to cash used in operating activities of $1.6 million in the first half of 2011.
The components of the cash used in and provided by operating activities were as follows:
Non-cash items include amortization of equipment inventory on rent of $4.4 million and $8.0 million in the three and six months ended June 30, 2012, respectively, which compares to $4.2 million and $8.1 million in the second quarter and the first half of 2011. Higher volumes of equipment rentals in 2012 resulted in the higher amortization of equipment inventory on rent.
During the second quarter of 2012, the net decrease in non-cash working capital was $0.1 million. By comparison, during the first six months of 2012, there was a net increase in non-cash working capital of $5.9 million, which compares to an increase in non-cash working capital of $10.1 million and $15.7 million, respectively, in the same periods of 2011. Components of cash flow from the net change in non-cash working capital for the three month and six month period ending June 30, 2012 and 2011 were as follows:
With an increase in parts and service revenue, accounts receivable increased in the second quarter and first six months of 2012 to $8.9 million and $6.5 million respectively. The average age of receivables outstanding at the end of the June 30, 2012 was approximately 31 days, improved from December 2011 at approximately 38 days and 33 days a year ago.
Given the seasonality of construction and the buying patterns of customers, the majority of Strongco's inventory purchases is ordered in the fourth quarter for delivery the first half of the year to support the anticipated sales level of equipment and parts during the summer and fall selling season. During the second quarter of 2012, there was a net increase in inventory of $32.0 million which compares to a net increase of $25.7 million in the second quarter of 2011. In the first six months of 2012, there was a net increase in inventory of $69.5 million compared to a net increase of $34.5 million in the first half of 2011. More inventories were ordered for delivery in 2012 to support higher anticipated sales levels. As mentioned above under the discussion of equipment sales, 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 delivery lead times and reduced availability of certain types of equipment. Delayed deliveries have not only hampered sales efforts, but have also played havoc with inventory levels. In the fourth quarter of 2011, Strongco accepted a large amount of equipment inventory from its OEM suppliers that had been scheduled for delivery much earlier in the year, most of it in April and May. Even though it was delivered late and well beyond the prime selling season, Strongco accepted this inventory to ensure it had adequate amounts of equipment to sell in the upcoming 2012 season, which inflated inventory levels entering 2012. OEM delivery performance has been improving but is not yet at an acceptable level. Strongco's equipment inventory at June 30, 2012 was $244 million compared to $185 million a year earlier. While this is a higher level of inventory than the Company would normally carry at this point in the year, management feels it is prudent given the less than adequate OEM delivery performance and is confident given continued strong demand in the market, that the higher level of inventory will be sold through the summer/fall season in 2012.
To finance the increase in equipment inventory, the Company's equipment notes payable increased to $33.3 million during the second quarter and $52.8 million during the first six months of the year. This compares to an increase in equipment notes of $24.2 million and $27.2 million in the second quarter and first six months, respectively, of 2011. Floor plan debt levels are expected to decline throughout the balance of the year in line with the anticipated reduction in inventory described above.
Cash Used In Investing Activities:
Net cash used in investing activities amounted to $4.2 million in the second quarter of 2012. Chadwick-BaRoss sold rental fleet assets for proceeds of $3.0 million and added new equipment to its rental fleet at a cost of $5.4 million during the quarter. Capital expenditures totalled $1.8 million in the quarter and related to the construction of the new Edmonton branch as well as facilities upgrades and miscellaneous shop equipment purchases. Investing activities in the second quarter of 2011 amounted to $2.0 million related mainly to the purchase of rental fleet equipment.
For the six months ended June 30, 2012, Strongco used net cash of $6.4 million in investing activities primarily related to the purchase and sale of rental fleet equipment. Capital expenditures in the first six months of 2012 were $3.7 million which included the completion of the construction of the new Edmonton facility. Chadwick-BaRoss sold part of its rental fleet for proceeds of $4.4 million and made new additions to the rental fleet totalling $7.1 million. Investing activities in the first half of 2011 amounted to $13.4 million which included $9.2 million for the acquisition of Chadwick-BaRoss, $3.1 million for capital expenditures relating mainly to the construction of the new Edmonton branch and net additions to rental fleet of Chadwick-BaRoss of $1.1 million.
The components of the cash used in investing activities were as follows:
Cash Provided By (Used In) Financing Activities:
In the second quarter of 2012, Strongco used $5.0 million of cash in financing activities which compared to cash of $2.9 million provided from financing activities in the second quarter of 2011.
For the six months ended June 30, 2012, Strongco used $3.2 million of cash in financing activities which compared to cash of $15.0 million provided from financing activities in the same period of 2011.
To help finance the purchase of Chadwick-BaRoss, the Company secured a $5.0 million term loan from its bank in April 2011 and issued $1.9 million of promissory notes to the previous shareholders of Chadwick-BaRoss. In the first half of 2012, $0.5 million was repaid on the term loan and $0.4 million of the vendor take back notes were repaid.
In addition, to support the construction of its new Edmonton branch, the Company secured a construction loan from its bank (see discussion under "Bank Credit Facilities" below). Borrowing under this construction loan amounted to $3.6 million in the first half of 2012. During the second quarter of 2012, upon completion of the branch, the construction loan was converted to a term loan. Principal repayments of the term loan will commence in Q3 2012.
Cash of $4.8 million was used to reduce the Company's bank indebtedness in the first half of 2012 and $1.1 million was used to repay finance leases (primarily service vehicles and computer equipment).
The components of the cash provided by (used in) financing activities were as follows:
Bank Credit Facilities
The Company has credit facilities with banks in Canada and United States that provide operating lines of credit of $20 million in Canada and $US2.5 million in the United States. During the second quarter of 2012, the Company renewed and amended its bank credit facilities in Canada. The renewed facility provides a three-year committed facility, improved from the previous one year committed facility and the $20 million limit is now allowed to increase up to $35 million, provided the borrowing base assets support the level of debt.
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 in intangible and other assets. The operating lines bear interest at rates in Canada 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%, and in the United States at LIBOR plus 2.60%. 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.
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 June 30, 2012, the Company had outstanding foreign exchange forward contracts under this facility totalling US$4.4 million at an average exchange rate of $1.007 Canadian for each US$1.00 with settlement dates between July 1, 2012 and October 31, 2012.
The Company's U.S. bank credit facilities also include term loans secured by real estate in the United States. These loans require monthly principal payments of US$13,300 plus accrued interest. During the quarter, the Company renegotiated these term loans to reduce the interest to LIBOR plus 2.75% and to extend the term of the loans to May 2017, at which point a balloon payment for the balance of the loans is due. The Company has interest rate swap agreements in place that have converted the variable rate on the term loans to a fixed rate. During the quarter, the swap agreements were also renegotiated to reduce the fixed swap rate to 4.13%, effective September 2012. The new swap agreements are set to expire in May 2017, coincident with the term loan. It is management's intention to renew the term loans and interest rate swap agreement prior to their expiry. At June 30, 2012, the outstanding balance on these term loans was US$3.6 million.
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%. In the second quarter of 2012, the Company entered into interest rate swap agreements that have converted the variable rate on the term loans to a fixed rate of 5.29%. The Term loan - Canadian Real Estate is subject to monthly principal payments of $83.3 thousand plus accrued interest. As at June 30, 2012, there was $3.8 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 was 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 now complete. Upon completion of the branch, in the second quarter the Construction Loan #1 converted to a demand, non-revolving term loan ("Mortgage Loan #1"). Mortgage Loan #1 was for an amount of $7.1 million and a term of 60 months. Construction Loan #1 bore interest and Mortgage Loan #1 bears interest at the bank's prime lending rate plus 2.0%. The Company has interest rate swap agreements in place that have converted the variable rate on the Mortgage Loan #1 to a fixed rate of 5.15%. As at June 30, 2012, there was $7.1 million drawn on Mortgage 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. With the renewal of the bank credit facility in the second quarter of 2012, the maximum limit for Construction Loan #2 was increased to $13.9 million from $8.9 million. The Company anticipates construction of the new Fort McMurray branch will commence in the third quarter of 2012 with expected 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 June 30, 2012, Construction Loan #2 was undrawn.
The 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. The financial covenants were amended on renewal of the facility in the second quarter of 2012 to allow for the higher level of borrowing on Construction Loan #2 and Mortgage Loan #2 to finance the construction of the Company's proposed new Fort McMurray branch.
A summary of these financial covenants is as follows:
(Note: 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 June 30, 2012.
Equipment Notes
In addition to its bank credit facilities, the Company has lines of credit available totalling approximately $270 million from various non-bank equipment lenders in Canada and the United States that are used to finance equipment inventory and rental fleet. At June 30, 2012, there was approximately $220.4 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 June 30, 2012, approximately $90.3 million of these equipment notes were interest free and $130.1 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 variable rate of interest on $25.0 million of its interest bearing equipment notes at approximately 4.6% 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 June 30, 2012.
Interest Rate Swaps
In September 2011, 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. On June 8, 2012, the Company entered into an additional interest rate swap agreement under this facility to fix the floating BA rate on an additional $10.0 million of interest bearing debt at a fixed interest rate equal to 1.58% for a period of five years to June 8, 2017. The company has put these swaps in place to effectively fix the interest rate on $25.0 million of its interest-bearing equipment notes at approximately 4.61%.
In the second quarter, the Company entered into an interest rate swap agreements that converted the variable interest rate components on the Term Loan - Canadian Real Estate and Mortgage Loan #1 to a fixed rate of 5.29% and 5.15%, respectively.
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 4.14%. The term loan and swap agreements expire in May 2017 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 June 30, 2012 and 2011 consisted of the following:
As at June 30, 2012, there was approximately $16 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 normally 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 approximately $49.6 million available under its equipment finance facilities at June 30, 2012. Borrowing on these lines typically increases in the first six 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 follows a weather related pattern of seasonality. Typically, the first quarter is the weakest quarter as construction and infrastructure activity is constrained in the winter months. This is followed by a strong gain in the second quarter as construction and other contracts begin to be tendered and companies prepare for summer activity. The third quarter generally tends to be slightly slower from an equipment sales standpoint, which is partially offset by continued strength in equipment rentals and customer support activities. Fourth quarter activity generally strengthens as customers make year-end capital spending decisions and exercise purchase options on equipment which has previously gone out on RPO's. In addition, purchases of snow removal equipment are typically made in the fourth quarter.
A summary of quarterly results for the current and previous two years is as follows:
A discussion of the Company's previous quarterly results can be found in the Company's quarterly Management's Discussion and Analysis reports available on SEDAR at .
CONTRACTUAL OBLIGATIONS
The Company has contractual obligations for operating lease commitments totalling $20.9 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 OEM, 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 June 30, 2012, the total buy back contracts outstanding were $13.3 million. A reserve of $1.1 million has been accrued in the Company's accounts as at June 30, 2012 with respect to these commitments.
The Company has provided a guarantee of lease payments under the assignment of a property lease that expires January 31, 2014. Total lease payments from July 1, 2012 to January 31, 2014 are $0.2 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 $7.8 million (refer to the Company's Rights Offering Circular filed on SEDAR for details). The total shares outstanding following completion of the rights offering was 13,128,719. There were no changes in the issued and outstanding shares during the first half 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 continued strong demand for heavy equipment. Strongco's sales backlogs grew significantly during the first quarter and have remained at high levels through the second quarter as Strongco moved into its strong selling season. This is a positive indication of the increasing demand for heavy equipment.
Equipment suppliers are expected to continue to improve production capacity and delivery lead times throughout the balance of 2012. Inventory levels at Strongco were allowed to run slightly higher than normal at year end and through the first half of the year to ensure availability of product for the Company through the prime selling season. While availability of certain product lines did impact sales in the first half of 2012, current inventory and improving product availability are expected to support sales through the balance of the year.
Management remains cautiously optimistic that the improved Canadian economy will continue through the balance of the year, which should lead to increased revenues compared to the same period in 2011. In addition, while market conditions in the northeastern United States remain weak, Chadwick-BaRoss realized modest growth in the first half 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. While demand for equipment from its traditional markets is expected to remain flat, Chadwick-BaRoss expects to continue to show a modest increase in revenues from sales to other non-traditional markets and strong product support sales 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 ap
Themen in dieser Pressemitteilung:
Unternehmensinformation / Kurzprofil:
Datum: 01.08.2012 - 14:30 Uhr
Sprache: Deutsch
News-ID 1138682
Anzahl Zeichen: 0
contact information:
Contact person:
Town:
MISSISSAUGA, ONTARIO
Phone:
Kategorie:
Forest and Paper Products
Anmerkungen:
Diese Pressemitteilung wurde bisher 169 mal aufgerufen.
Die Pressemitteilung mit dem Titel:
"Strongco Reports Continued Growth in Revenues in Second Quarter 2012
"
steht unter der journalistisch-redaktionellen Verantwortung von
Strongco Corporation (Nachricht senden)
Beachten Sie bitte die weiteren Informationen zum Haftungsauschluß (gemäß TMG - TeleMedianGesetz) und dem Datenschutz (gemäß der DSGVO).
