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Strongco Corporation
Unaudited Interim Condensed Consolidated Financial Statements
September 30, 2014 and 2013
Notice required under National Instrument 51-102, “Continuous
Disclosure Obligations,” Part 4.3 (3) (a).
The accompanying unaudited condensed interim financial statements for
Strongco Corporation as at and for the nine-month and three-month
periods ended September 30, 2014, together with the accompanying notes
have not been reviewed by the Company’s auditors
Strongco Corporation
Unaudited Interim Consolidated Statement of Financial Position
(in thousands of Canadian dollars, unless otherwise indicated)
As at Se pte m be r
30, 2014
As at De ce m be r 31,
2013
As at Se pte m be r
30, 2013
As s e ts
Curre nt as s e ts
Cash
$
Trade and other receivables
Inventories [note 3]
45
$
57
$
326
54,309
48,762
55,110
294,804
242,579
283,811
Prepaid expenses and other deposits
2,505
2,017
2,830
Assets classif ied as held f or sale [note 4]
1,064
-
-
352,727
293,415
342,077
Property and equipment [note 5]
30,369
61,385
54,810
Rental f leet
30,658
29,844
25,233
Def erred income tax asset [note 10]
1,914
-
760
Intangible asset
1,800
1,800
1,800
Non-curre nt as s e ts
Other assets
Total as s e ts
1,944
155
249
66,685
93,184
82,852
$
419,412
$
386,599
$
424,929
$
21,688
$
25,402
$
25,213
Liabilitie s and s hare holde rs ' e quity
Curre nt liabilitie s
Bank indebtedness
Trade and other payables
Def erred revenue and customer deposits
54,427
32,725
47,147
1,070
1,396
894
Equipment notes payable
- non-interest bearing [note 8]
- interest bearing [note 8]
Current portion of f inance lease obligations
77,442
29,079
53,864
149,650
163,899
171,200
4,809
4,612
4,162
Current portion of notes payable [note 9]
179
4,958
4,363
Current portion of provisions f or other liabilities [note 7]
171
177
97
309,436
262,248
306,940
Def erred income tax liability [note 10]
3,237
3,365
2,858
Finance lease obligations
5,343
6,479
5,749
18,904
36,166
30,863
Non-curre nt liabilitie s
Notes payable and other liabilities [note 9]
Long-term portion of provisions f or other liabilities [note 7]
Employee f uture benef it obligations
Total liabilitie s
Contingencies, commitments and guarantees [note 12]
202
806
811
6,567
4,405
8,042
34,253
51,221
48,323
343,689
313,469
355,263
Share holde rs ' e quity
Shareholders' capital [note 13]
65,324
65,324
65,324
Accumulated other comprehensive income
1,687
950
470
Contributed surplus
1,064
875
796
Retained earnings
7,648
5,981
3,076
Total s hare holde rs ' e quity
Total liabilitie s and s hare holde rs ' e quity
75,723
$
419,412
73,130
$
386,599
69,666
$
424,929
The accom panying notes are an integral part of these unaudited interim condensed consolidated financial statem ents.
2
Strongco Corporation
Unaudited Interim Consolidated Statement of Income
For the three and nine month periods ended September 30
(in thousands of Canadian dollars, unless otherwise indicated, except share and per share
amounts)
Three-month period ended
September 30
2014
2013
Revenue [note 15]
Cost of sales
Gross profit
$
Expenses
Administration
Distribution
Selling
Other income
Operating income
Interest expense
Income before income taxes
129,216 $
107,342
21,874
131,693
107,535
24,158
Nine-month period ended
September 30
2014
2013
$
369,524 $
304,724
64,800
369,358
302,086
67,272
11,375
5,870
4,239
(7,796)
8,186
9,416
6,281
4,079
(1,355)
5,737
30,060
18,266
12,002
(7,894)
12,366
27,014
18,776
11,391
(1,692)
11,783
2,582
5,604
2,826
2,911
8,459
3,907
7,885
3,898
115
928
(314)
1,180
$
4,221 $
2,718
0.15 $
0.32 $
0.21
Provision for (recovery of) income taxes [note 10]
Net income attributable to
shareholders for the period
$
5,489 $
Earnings per share
Basic and diluted
$
0.42 $
1,983
Weighted average number
of shares [note 14]
- basic
13,221,719
13,179,262
13,221,719
13,145,752
- diluted
13,221,719
13,190,306
13,221,719
13,172,918
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
Strongco Corporation
Unaudited Interim Consolidated Statement of Comprehensive Income
For the three and nine month periods ended September 30
(in thousands of Canadian dollars, unless otherwise indicated)
Three-month period ended
September 30
2014
2013
Net income attributable to
shareholders for the period
$
Items that will not be reclassified
to net earnings:
Actuarial gain (loss) on post-employment benefit
obligations (net of tax of $905)
$
(2,554)
Adjustment to employee benefit obligation
due to tax rate change
Items that may be reclassified
to net earnings:
Currency translation adjustment
Comprehensive income attributable
to shareholders for the period
5,489
1,498
$
-
739
$
2,404
2,718
1,291
(2)
(308)
$
4,221
(2,554)
-
644
3,575
$
(177)
(4)
$
1,983
Nine-month period ended
September 30
2014
2013
441
$
4,450
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
Strongco Corporation
Unaudited Interim Consolidated Statement of Changes in Shareholders’ Equity
For the nine month periods ended September 30
(in thousands of dollars, unless otherwise indicated)
Number of
shares
Balance
- December 31, 2012
13,128,719
Shareholders'
capital
$
64,898
Accumulated
other
comprehensive
income
$
29
Retained
earnings
(deficit)
Contributed
surplus
$
707
$
Total
(933) $
64,701
Net income for the period
-
-
-
2,718
Other comprehensive income:
Currency translation adjustment
-
441
-
-
64,898
470
707
1,291
3,076
-
-
237
-
237
426
-
(148)
-
278
Adjustment to employee benefit obligation
due to change in discount rate
Total comprehensive income
Share-based compensation expense
Issuance of shares on
exercise of stock options
Balance
- September 30, 2013
93,000
13,221,719
$
Number of
shares
Balance
- December 31, 2013
13,128,719
65,324
Shareholders'
capital
$
Net income for the period
65,324
$
470
$
Accumulated
other
comprehensive
income
$
950
796
$
Contributed
surplus
$
875
3,076
2,718
441
1,291
69,151
$
69,666
Retained
earnings
$
5,981
Total
$
73,130
-
-
-
4,221
4,221
Currency translation adjustment
-
739
-
-
Adjustment to employee benefit obligation
due to change in discount rate
-
-
-
(2,554)
(2,554)
65,324
(2)
1,687
875
7,648
(2)
75,534
-
-
189
-
Other comprehensive income
Adjustment to employee benefit obligation
due to tax rate change
Total comprehensive income
Share-based compensation expense
Balance
- September 30, 2014
13,128,719
$
65,324
$
1,687
$
1,064
$
7,648
739
189
$
75,723
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
5
Strongco Corporation
Unaudited Interim Consolidated Statement of Cash Flows
For the nine month periods ended September 30
(in thousands of Canadian dollars, unless otherwise indicated)
2014
Cash flows from operating activities
Net income (loss) for the period
Adjustments for
Depreciation - property and equipment
Depreciation - equipment inventory on rent
Depreciation - rental fleet
Gain on disposal of property
and equipment [note 5]
Gain on sale of rental fleet
Share-based payment expense
Interest expense
Income tax expense (recovery)
Employee future benefit expense
Foreign exchange gain
Changes in non-cash working capital [note 16]
Funding of employee future benefit obligations
Interest paid
Income taxes paid
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchases of rental fleet
Proceeds from sale of rental fleet
Purchases of property and equipment
Proceeds from sale of property and equipment [note 5]
Net cash provided by (used in) investing activities
Cash flows from financing activities
Increase (decrease) in bank indebtedness
Increase in long-term debt
Repayment of long-term debt
Repayment of finance lease obligations
Issue of share capital
Repayment of business acquisition purchase financing
Net cash provided by (used in) financing activities
Foreign exchange on cash balances
Change in cash and cash
equivalents during the period
Cash and cash equivalents - Beginning of period
Cash and cash equivalents - End of period
$
4,221
2013
$
2,718
4,415
13,862
3,449
3,702
16,241
2,245
$
(8,224)
(261)
189
8,459
(314)
1,334
(12)
(17,004)
(2,631)
(8,590)
(140)
(1,247)
(1,512)
(1,116)
89
7,885
1,180
1,066
(15)
(19,503)
(1,534)
(8,032)
(3,082)
332
$
(13,071)
11,586
(7,060)
41,131
32,586 $
(11,906)
8,234
(26,267)
11,502
(18,437)
$
(3,792)
391
(25,052)
(2,908)
(31,361) $
9,901
14,013
(4,465)
(2,367)
426
(514)
16,994
$
10
$
$
(12) $
57
45 $
42
(1,069)
1,395
326
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
6
Strongco Corporation
Notes to Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine month periods ended September 30, 2014 and September 30, 2013
(in thousands of dollars, unless otherwise indicated)
1
General information
Strongco Corporation (“Strongco” or the “Company”) 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 in Canada and the United
States.
The Company is a public entity, incorporated and domiciled in Canada and listed on the Toronto Stock
Exchange. The address of its registered office is 1640 Enterprise Road, Mississauga,
Ontario L4W 4L4.
2
Basis of presentation
These interim condensed consolidated financial statements have been prepared in accordance with
International Accounting Standards (“IAS”) 34, Interim Financial Reporting, as issued by the
International Accounting Standards Board (“IASB”).
These interim condensed consolidated financial statements do not include all of the information required
for full annual financial statements and should be read in conjunction with the Company’s annual financial
statements for the year ended December 31, 2013, which are available at www.sedar.com and on the
Company’s website at www.strongco.com.
The timely preparation of the interim condensed consolidated financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingencies, if any, as at the date of the financial statements and the reported amounts
of revenue and expenses during the period. By their nature, estimates are subject to measurement
uncertainty and changes in such estimates in future years could require a material change in the interim
condensed consolidated financial statements.
These interim condensed consolidated financial statements were authorized for issuance by the Board of
Directors of the Company on October 29, 2014.
The accounting policies followed in these interim condensed consolidated financial statements are the
same as those applied in the Company’s consolidated financial statements for the year ended
December 31, 2013, except the following interpretation and amendments that were adopted, as required,
on January 1, 2014:
IAS 32 Financial Instruments: Presentation
In December 2011, the IASB amended IAS 32 to clarify certain requirements for offsetting financial assets
and liabilities. The amendment addresses the meaning and application of the concepts of legally
enforceable right of set-off and simultaneous realization and settlement. The amendment affects
presentation and disclosures but does not have an impact on financial results.
IAS 36 Impairment of Assets
The amendment reverses the unintended requirement in IFRS 13 Fair Value Measurement, to disclose
the recoverable amount of every cash-generating unit to which significant goodwill or indefinite-lived
intangible assets have been allocated. Under the amendment, the recoverable amount is required to be
disclosed only when an impairment loss has been recognized or reversed. The amendment affects
presentation and disclosures but does not have an impact on financial results.
7
Strongco Corporation
Notes to Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine month periods ended September 30, 2014 and September 30, 2013
(in thousands of dollars, unless otherwise indicated)
International Financial Reporting Interpretations Committee (“IFRIC”) 21 - Levies
IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as
identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum
threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum
threshold is reached.
The adoption of these standards and amendments had no impact on the unaudited interim condensed
consolidated financial statements.
Accounting standard adopted during the period
The Company has adopted the following standard during the period.
IFRS 5 Non-current assets held for sale and discontinued operations
Non-current assets and disposal groups are classified as assets held for sale when their carrying amount
is to be recovered principally through a sale transaction rather than through continuing use. This
condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is
available for immediate sale in its immediate condition. Management must be committed to the sale, and
it should be expected to qualify for recognition as a completed sale within one year from the date of
classification. Assets (and disposal groups) classified as held for sale are measured at the lower of the
carrying amount or fair value less costs to sell.
Comparative amounts
Certain comparative amounts have been reclassified to conform to current period’s unaudited interim
condensed consolidated financial statements presentation.
8
Strongco Corporation
Notes to Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine month periods ended September 30, 2014 and September 30, 2013
(in thousands of dollars, unless otherwise indicated)
3
Inventories
Inventory components, net of write-downs and provisions are as follows:
As at
Equipment in-stock
Equipment on rental contract with a purchase option
Equipment on a short-term rental contract
Equipment
Parts
Work-in-process
Total inventory
September 30,
2014
$
$
194,898
40,406
23,251
258,555
December 31,
2013
$
156,817
38,909
16,278
212,004
29,246
7,003
294,804 $
26,369
4,206
242,579
September 30,
2013
$
$
186,361
45,814
21,398
253,573
24,877
5,361
283,811
As at September 30, 2014, provisions against inventory totalled $5,097 (December 31, 2013 - $4,365;
September 30, 2013 - $4,544). During the period, the Company recorded inventory write-downs of
$2,844 (2013 - $678).
4
Assets classified as held for sale
Land and building are transferred to assets classified as assets held for sale from property and equipment
when they meet the criteria to be assets classified as held for sale. Land and buildings previously
included in assets classified as held for sale are transferred to property and equipment when it is
determined that they no longer meet the criteria to be assets classified as held for sale.
The fair value measurement of assets held for sale is categorized within Level 2 of the fair value
hierarchy.
Land and buildings classified as assets held for sale are facilities which the Company has previously
announced that it intends to sell through sale leaseback transactions. The Company has entered into
agreements or received letters of intent to sell certain properties in Canada subject to due diligence and
normal commercial conditions.
During the three and nine months ended September 30, 2014, the Company sold assets held for sale and
recorded a gain of $8,170 which is reported in other income in the consolidated statements of income.
5
Property and equipment
During the nine months ended September 30, 2014, the Company acquired property and equipment,
excluding new branch construction, of $7,312 (nine months ended September 30, 2013 - $1,190).
During the nine months ended September 30, 2014, the Company incurred expenditures of $1,793 to
complete the construction of the facilities in Fort McMurray, Alberta and Saint-Augustin-de-Desmaures,
Quebec (2013 - $20,471).
9
Strongco Corporation
Notes to Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine month periods ended September 30, 2014 and September 30, 2013
(in thousands of dollars, unless otherwise indicated)
During the third quarter, the Company completed a sale and leaseback transaction for its Mississauga,
Ontario branch and head office. Proceeds from the sale were $17.3 million, resulting in a gain of $8.4
million. Also, the Company completed a sale and leaseback transaction for its Saint-Augustin-deDesmaures, Quebec branch. Proceeds from the sale were $7.9 million, resulting in a loss of $0.1 million.
During the second quarter, the Company completed a sale and leaseback transaction for its Fort
McMurray, Alberta branch. Proceeds from the sale were $19.4 million, including a $2.0 million vendor
take-back mortgage to be paid over 10 years recorded in prepaid expenses and other deposits ($0.2
million) and other assets ($1.8 million). The sale resulted in a loss of $0.2 million.
In addition, during the nine month period, the Company entered into an agreement to sell its Moncton,
New Brunswick branch and listed for sale its Val D’Or, Quebec facility. The carrying value of these
properties has been reclassified to assets held for sale (land - $188 and buildings - $876).
6
Bank indebtedness
The Company has credit facilities with banks in Canada and the United States that provide committed operating
lines of credit totalling approximately $38.4 million. The Canadian bank credit facility is a three-year committed
facility expiring in September 2015 and provides an operating line of credit for a maximum of $30.0 million.
During the period the Company’s bank provided a temporary increase in the operating line to $35.0 million to
the end of September 2014, after which the operating line reduced back to $30.0 million. The U.S. bank
operating line of credit is renewable annually in June of each year with the next renewal extended to June 2015,
at the option of both the lender and the Company. The U.S. bank credit facility provides a maximum operating
line of credit of U.S. $3.0 million.
7
Provisions for other liabilities
The Company has agreed to buy back equipment from certain customers at the option of the customer for a
specified price at future dates ("buy back contracts"). These contracts are subject to certain conditions being
met by the customer and range in term from three to 10 years. As at September 30, 2014, the total obligation
under these contracts was $11,485 (December 31, 2013 - $11,638; September 30, 2013 - $12,375). The
Company's maximum potential losses pursuant to the majority of these buy back contracts are limited, under an
agreement with a third party, to 10% of the original sale amounts. A provision of $373 (December 31, 2013 $982; September 30, 2013 - $908) has been accrued in the Company's accounts with respect to these potential
losses. The long-term portion of the provision of $202 (December 31, 2013 - $805; September 30, 2013 - $811)
is classified as long-term liabilities.
8
Equipment notes payable
In addition to its bank credit facilities, the Company has lines of credit available totalling approximately
$318 million from various non-bank equipment lenders in Canada and the United States, which are used
to finance equipment inventory. As at September 30, 2014, there was approximately $242 million
borrowed on these equipment finance lines (December 31, 2013 – approximately $193 million;
September 30, 2013 – approximately $238 million).
Typically, these equipment notes are interest-free for periods up to 12 months from the date of financing,
after which they bear interest at variable rates based upon 30-day and 90-day Bankers’ Acceptance rates
(“BA”), the prime rate of a Canadian chartered bank, and 30-day and 90-day LIBOR rates plus the
10
Strongco Corporation
Notes to Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine month periods ended September 30, 2014 and September 30, 2013
(in thousands of dollars, unless otherwise indicated)
financing company’s margin. As at September 30, 2014, the rates ranged from 2.81% to 7.25% with an
effective weighted average rate of 5.39%. As collateral for these equipment notes, the Company has
provided liens on the specific inventory financed and any related accounts receivable. In the normal
course of business, these liens cover substantially all of the equipment inventories. Monthly principal
repayments equal to 3.00% of the original principal balance of the note commence 12 months from the
date of financing and the remaining balance is due in full at the earlier of 24 months after financing or
when the financed equipment is sold. While financed equipment is out on rent, monthly curtailments are
required equal to the greater of 70% of the rental revenue and 2.5% of the original value of the note. Any
remaining balance after 24 months, which is due in full, is normally refinanced with the lender over an
additional period of up to 24 months. All of the Company’s equipment notes facilities are renewable
annually.
On May 6, 2014, the Company entered into an interest rate swap agreement available under the credit
facility with its bank to fix the floating BA rate on $25 million of interest bearing debt at a fixed interest rate
equal to 1.78% for a period of three years to May 6, 2017. As at September 30, 2014, the Company has
total outstanding swaps in place to fix the interest rate on $50 million of interest bearing debt at
approximately 5.94%.
Certain of the Company’s bank and 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”). As at September 30, 2014, the Company
was in compliance with all financial covenants.
9
Notes payable and other liabilities
Notes payable and other liabilities comprise of the following:
Equipment plan notes payable - rental fleet (i)
Term note - United States (ii)
Term note - Canada (iii)
Construction facility - Fort McMurray (iv)
Construction facility
- Saint-Augustin-de-Desmaures (v)
Current portion
Long-term portion
September 30,
2014
$
15,495
3,588
-
$
19,083
179
18,904
December 31,
2013
$
15,808
3,531
5,021
11,461
$
5,303
41,124
4,958
36,166
September 30,
2013
$
12,570
3,455
5,380
9,603
$
4,218
35,226
4,363
30,863
(i)
In addition to equipment notes payable as described in note 8, the Company utilizes floor plan
notes payable to finance its rental fleet. Payment is required at the earlier of the sale of the item
and per contractual schedule ranging from 12 to 24 months. Effective interest rates range from
2.81% to 6.25% with various maturity dates.
(ii)
The Company’s bank credit facilities in the United States include a term note secured by real
estate and cross-collateralized with the Company’s revolving line of credit in the United States.
The term note matures in May 2017 and bears interest at a rate of LIBOR plus 2.75%. Monthly
11
Strongco Corporation
Notes to Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine month periods ended September 30, 2014 and September 30, 2013
(in thousands of dollars, unless otherwise indicated)
payments of principal of US$13 plus accrued interest are required under the terms of the note.
The Company has interest rate swap agreements in place related to the term note, which have
converted the variable rate on the term loans to a fixed rate of 4.14%. The term loans and swap
agreements expire in May 2017, at which point a balloon payment for the balance of the loans is
due.
(iii)
The Company’s bank credit facilities in Canada included a term note secured by the Mississauga,
Ontario property and cross-collateralized with the Company’s revolving line of credit in Canada
(“Term note – Canada”). The term note was to mature in June 2017 and bore interest at the
bank’s one-month Bankers’ Acceptance (BA) rate plus 4%. Monthly principal payments of $120
plus accrued interest were required under the terms of the note. On September 29, 2014 the
Company completed the sale leaseback of this facility and the outstanding balance of the term
loan was repaid in full.
(iv)
In September 2011, the Company secured a construction loan facility with its bank to finance the
construction of a new Fort McMurray, Alberta branch (“Construction Facility – Fort McMurray”).
Under this facility, the Company was able to borrow 70% of the cost of the land and building
construction costs to a maximum of $13.9 million. Interest on this construction loan was at the
bank’s prime lending rate plus 3.0%. During March 2014, this construction loan was converted to
a term loan which was to mature in March 2029 and bore interest at the bank’s prime lending rate
plus 3.0%. Monthly principal payments of $77 plus accrued interest were required under the
terms of the note. On June 30, 2014, the Company completed the sale leaseback of this facility
and the outstanding balance of the term loan was repaid in full.
(v)
In March 2013, the Company secured a construction loan facility with its bank to finance the
construction of a new Saint-Augustin-de-Desmaures branch, outside of Quebec City, Quebec.
Under this facility, the Company was able to borrow 70% of the cost of the land and building
construction costs to a maximum of $6.0 million. Interest on this construction loan was at the
bank’s prime lending rate plus 3.0%. During March 2014, this construction loan was converted to
a term loan which was to mature in March 2029 and bore interest at the bank’s prime lending rate
plus 3.0%. Monthly principal payments of $33 plus accrued interest were required under the
terms of the note. On August 13, 2014, the Company completed the sale leaseback of this facility
and the outstanding balance of the term loan was repaid in full.
10 Income taxes
The major components of the income tax expense in the interim consolidated statement of income are:
Three months ended
September 30
2014
2013
Current income tax expense
Deferred tax recovery related to
origination and reversal of deferred taxes
$
$
792
$
(677)
115 $
992
Nine months ended
September 30
2014
2013
$
(64)
928 $
825
$
(1,139)
(314) $
1,676
(496)
1,180
12
Strongco Corporation
Notes to Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine month periods ended September 30, 2014 and September 30, 2013
(in thousands of dollars, unless otherwise indicated)
11 Employee future benefits obligations
During the nine months ended September 30, 2014, the discount rate used to value the obligations under
the Company’s defined benefit pension plans decreased from 5.00% to 4.10% for the employee plan.
This resulted in a $3,459 actuarial loss ($2,554 after tax) for the nine months ended September 30, 2014,
which was recorded in Other Comprehensive Income.
12 Contingencies, commitments and guarantees
In the ordinary course of business activities, the Company may be contingently liable for litigation. On an
ongoing basis, the Company assesses the likelihood of any adverse judgments or outcomes, as well as
potential ranges of probable costs or losses. A determination of the provision required, if any, is made
after analysis of each individual matter. The required provision may change in the future due to new
developments in each matter or changes in approach such as a change in settlement strategy dealing
with these matters. As at September 30, 2014, management has determined that there is no pending or
actual litigation requiring a provision.
13 Shareholders’ capital
Authorized:
Unlimited number of shares
Issued:
As at September 30, 2014, a total of 13,221,719 shares (December 31 and September
30, 2013 – 13,221,719) with a stated valued of $65,324 (December 31 and September
30, 2013 - $65,324) were issued and outstanding.
On April 30, 2014, the Company granted irrevocable options to certain members of senior
management to purchase 95,000 shares of the Company. These options have an exercise price of
$3.67 per share, which is equal to the average trading price of the Company’s units over the five
days immediately following April 30, 2014. A third of the options vest and become exercisable after
36 months from the grant date, a third of the options vest and become exercisable after 48 months
from the grant date and the balance vest and become exercisable after 60 months from the grant
date. The options expire seven years from the issue date, on April 30, 2021. The stock-based
compensation expense of these options is based on the estimated fair value of the options at the
grant date, which was determined using the Black-Scholes option pricing model, amortized over the
vesting period of the options. The following assumptions were used in determining the fair value of
the options using the Black-Scholes model:
Risk-free interest rate
Option life
Expected volatility
Estimated forfeiture rate
1.43%
7 years
38%
8.5%
The expected volatility reflects the assumption that the historical volatility over a period similar to the
life of the options is indicative of future trends, which may not necessarily be the actual outcome.
Other assumptions have been based on the Company’s historical experience. The dividend rate
assumption used in the Black-Scholes option pricing model is nil% for all stock option grants.
13
Strongco Corporation
Notes to Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine month periods ended September 30, 2014 and September 30, 2013
(in thousands of dollars, unless otherwise indicated)
As at September 30, 2014, stock options totalling 469,141 (December 31 and September 30, 2013 –
374,141) had been granted and were outstanding with a weighted average remaining contractual life
of 47.5 months (December 31, 2013 – 48.3; September 30, 2013 – 51.4) and the weighted average
exercise price was $4.63 (December 31, 2013 - $4.87; September 30, 2013 - $4.87). No stock
options were cancelled or forfeited during the period.
As at September 30, 2014, restricted share units totalling 80,965 had been granted and were
outstanding (December 31 and September 30, 2013 – 80,965) with a weighted average unit value of
$5.50 (December 31 and September 30, 2013 – $5.50).
Stock-based compensation expense resulting from the stock options and RSUs for the period ended
September 30, 2014 is $189 (2013 - $237).
14 Earnings per share
Three-month period ended
September 30
2014
2013
Nine-month period ended
September 30
2014
2013
Weighted average number of shares for
basic earnings per share calculation
Effect of dilutive options outstanding
13,221,719
-
13,179,262
11,044
13,221,719
-
13,145,752
27,166
Weighted average number of shares for
diluted earnings per share calculation
13,221,719
13,190,306
13,221,719
13,172,918
The computation of dilutive options outstanding only includes those options having exercise prices below
the average market price of the shares during the period.
15 Segment information
Management has determined that the Company has one reportable segment, Equipment Distribution,
based on reports reviewed by the President and Chief Executive Officer. This business sells and rents
new and used equipment and provides after-sale product support (parts and service) to customers that
operate in infrastructure, construction, mining, oil and gas exploration, forestry and industrial markets.
A breakdown of revenue from the Equipment Distribution segment is as follows:
Equipment sales
Equipment rentals
Product support
Total Equipment Distribution
Three-month period ended
September 30
2014
2013
$
83,635 $
87,811
9,038
8,472
36,543
35,410
$
129,216 $
131,693
Nine-month period ended
September 30
2014
2013
$
241,978 $
245,782
21,608
22,664
105,938
100,912
$
369,524 $
369,358
14
Strongco Corporation
Notes to Unaudited Interim Condensed Consolidated Financial Statements
For the three and nine month periods ended September 30, 2014 and September 30, 2013
(in thousands of dollars, unless otherwise indicated)
16 Changes in non-cash working capital
The components of the changes in non-cash working capital are detailed below:
For the nine-month period ended September 30
Changes in non-cash working capital
Trade and other receivables
Inventories
Prepaid expenses and other deposits
Other assets
Trade and other payables
Provision for other liabilities
Deferred revenue and customer deposits
Equipment notes payable
2014
$
$
(5,164)
(65,137)
(248)
11
20,810
(6)
(340)
33,070
(17,004)
2013
$
$
(10,563)
(24,710)
(854)
42
1,789
(238)
(373)
15,405
(19,503)
17 Seasonality
The Company’s interim period revenues and earnings historically follow 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 increase in the second quarter as
construction and other contracts begin to be put out for bid and companies begin to prepare for summer
activity. The third quarter generally tends to be slower from an equipment sales standpoint, which is
partially offset by continued strength in equipment rentals and customer support (parts and service)
activities. Fourth quarter activity generally strengthens as companies make year-end capital spending
decisions in addition to the exercise of purchase options on equipment that has previously gone out on
rental contracts.
18 Economic relationship
The Company sells, rents and services heavy equipment and related parts. Distribution agreements are
maintained with several equipment manufacturers, of which the most significant are with Volvo
Construction Equipment North America Inc. The distribution and servicing of Volvo products account for
a substantial portion of overall operations. The Company has had an ongoing relationship with Volvo
since 1991.
15