1 » AutoCanada 2011
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AutoCanada Inc.
Management’s Discussion & Analysis
Consolidated Finacial Statements
Corporate Information
1
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AutoCanada Inc.
Management’s Discussion & Analysis of
Financial Conditions and Results of
Operations
For the year ended December 31, 2012
As of March 26, 2013
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4 » AutoCanada 2011
READER ADVISORIES
The Management’s Discussion & Analysis (“MD&A”) was prepared as of March 26, 2013 to assist readers in understanding
AutoCanada Inc.’s (the “Company” or “AutoCanada”) consolidated financial performance for the year ended December 31, 2012
and significant trends that may affect AutoCanada’s future performance. The following discussion and analysis should be read in
conjunction with the audited annual consolidated financial statements and accompanying notes (the “Consolidated Financial
Statements”) of AutoCanada for the year ended December 31, 2012. Results are reported in Canadian dollars. Certain dollar
amounts have been rounded to the nearest thousand dollars. References to notes are to the Notes of the Consolidated Financial
Statements of the Company unless otherwise stated.
To provide more meaningful information, this MD&A typically refers to the operating results for the three-month period and year
ended December 31, 2012 of the Company, and compares these to the operating results of the Company for the three-month period
and year ended December 31, 2011.
This MD&A contains forward-looking statements. Please see the section “FORWARD-LOOKING STATEMENTS” for a
discussion of the risks, uncertainties and assumptions used to develop our forward-looking information. This MD&A also makes
reference to certain non-GAAP measures to assist users in assessing AutoCanada’s performance. Non-GAAP measures do not
have any standard meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by
other issuers. These measures are identified and described under the section “NON-GAAP MEASURES”.
OVERVIEW OF THE COMPANY
Corporate Structure
AutoCanada Inc. (“ACI”, “AutoCanada”, or the “Company”) was incorporated under the Canada Business Corporations Act on
October 29, 2009 in connection with participating in an arrangement with AutoCanada Income Fund and the conversion to a
corporate structure on December 31, 2009. The principal and head office of ACI is located at 200 - 15505 Yellowhead Trail,
Edmonton, Alberta, T5V 1E5. AutoCanada Inc. holds interests in a number of limited partnerships that each carry on the business
of a franchised automobile dealership. AutoCanada is a reporting issuer in each of the provinces of Canada. AutoCanada’s shares
trade on the Toronto Stock Exchange under the symbol “ACQ”.
Additional information relating to AutoCanada, including our 2012 Annual Information Form dated March 26, 2013, is available
on the System for Electronic Document Analysis and Retrieval (“SEDAR”) website at www.sedar.com.
The Business of the Company
AutoCanada is one of Canada’s largest multi-location automobile dealership groups, currently operating 25 wholly-owned
franchised dealerships and managing 3 franchised dealership investments (see “GROWTH, ACQUISITIONS, RELOCATIONS
AND REAL ESTATE”) in British Columbia, Alberta, Manitoba, Ontario, New Brunswick and Nova Scotia. In 2012, our
dealerships sold approximately 30,000 vehicles and processed approximately 310,000 service and collision repair orders in our 333
service bays during that time.
Our dealerships derive their revenue from the following four inter-related business operations: new vehicle sales; used vehicle
sales; parts, service and collision repair; and finance and insurance. While new vehicle sales are the most important source of
revenue, they generally result in lower gross profits than used vehicle sales, parts, service and collision repair operations and
finance and insurance sales. Overall gross profit margins increase as revenues from higher margin operations increase relative to
revenues from lower margin operations.
2
The Company’s geographical profile is illustrated below by number of dealerships and revenues by province for the years ended
December 31, 2012 and December 31, 2011.
December 31, 2012
December 31, 2011
(In thousands of dollars except
% of total and number of
dealerships)
Number
of
Dealerships
British Columbia
Alberta
Ontario
All other
Total
Revenue
% of Total
406,329
37%
468,428
42%
92,572
8%
136,584
13%
Number
of
Dealerships
Revenue
% of Total
9
9
3
3
359,725
35%
411,440
41%
107,719
11%
130,442
13%
9
9
3
3
24
1,103,913
100%
24
1,009,326
100%
The following table sets forth the dealerships that we currently own and operate and the date opened or acquired by the Company
or its predecessors, organized by location.
Location of Dealerships
Operating Name
Franchise
Year
Opened or
Acquired
Wholly-Owned Dealerships:
Edmonton, Alberta
Edmonton, Alberta
Grande Prairie, Alberta
Grande Prairie, Alberta
Grande Prairie, Alberta
Grande Prairie, Alberta
Grande Prairie, Alberta
Grande Prairie, Alberta
Ponoka, Alberta
Sherwood Park, Alberta
Abbotsford, British Columbia
Chilliwack, British Columbia
Kelowna, British Columbia
Maple Ridge, British Columbia
Maple Ridge, British Columbia
Prince George, British Columbia
Prince George, British Columbia
Prince George, British Columbia
Victoria, British Columbia
Thompson, Manitoba
Moncton, New Brunswick
Dartmouth, Nova Scotia
Cambridge, Ontario
Mississauga, Ontario
Newmarket, Ontario
Dealership investments:
Sherwood Park, Alberta
Sherwood Park, Alberta
Duncan, British Columbia
Crosstown Chrysler Jeep Dodge FIAT
Capital Chrysler Jeep Dodge FIAT
Grande Prairie Chrysler Jeep Dodge FIAT
Grande Prairie Hyundai
Grande Prairie Subaru
Grande Prairie Mitsubishi
Grande Prairie Nissan
Grande Prairie Volkswagen(1)
Ponoka Chrysler Jeep Dodge
Sherwood Park Hyundai
Abbotsford Volkswagen
Chilliwack Volkswagen
Okanagan Chrysler Jeep Dodge FIAT
Maple Ridge Chrysler Jeep Dodge FIAT
Maple Ridge Volkswagen
Northland Chrysler Jeep Dodge
Northland Hyundai
Northland Nissan
Victoria Hyundai
Thompson Chrysler Jeep Dodge
Moncton Chrysler Jeep Dodge
Dartmouth Chrysler Jeep Dodge
Cambridge Hyundai
401/Dixie Hyundai
Newmarket Infiniti Nissan
Chrysler
Chrysler
Chrysler
Hyundai
Subaru
Mitsubishi
Nissan
Volkswagen
Chrysler
Hyundai
Volkswagen
Volkswagen
Chrysler
Chrysler
Volkswagen
Chrysler
Hyundai
Nissan
Hyundai
Chrysler
Chrysler
Chrysler
Hyundai
Hyundai
Nissan / Infiniti
Sherwood Park Chevrolet(2)
Petersen Pontiac Buick GMC(2)
Peter Baljet Chevrolet GMC Buick(3)
General Motors
General Motors
General Motors
1994
2003
1998
2005
1998
2007
2007
2013
1998
2006
2011
2011
2003
2005
2008
2002
2005
2007
2006
2003
2001
2006
2008
2010
2008
2012
2012
2013
1 On January 4, 2013, the Company acquired Grande Prairie Volkswagen located in Grande Prairie, Alberta.
2 During 2012, the Company acquired an indirect 31% equity interest in Nicholson Chevrolet originally located in
Edmonton, Alberta, now operating as Sherwood Park Chevrolet in Sherwood Park, Alberta. On June 1, 2012, the Company
acquired an indirect 31% equity interest in Petersen Pontiac Buick GMC located in Sherwood Park, Alberta.
3 On March 1, 2013, the Company acquired an indirect 80% equity interest in Peter Baljet Chevrolet GMC Buick located in
Duncan, British Columbia.
3
OUR PERFORMANCE
New light vehicle sales in Canada in 2012 were up 5.7% when compared to 2011. Annual sales of new light vehicles in Alberta
and British Columbia, our primary markets, were up by 9.9% and 10.0% respectively. The Company’s same store unit sales of
new vehicles have increased by 9.2% during this period, which includes an increase in new vehicle units retailed of 17.0% in 2012.
Our dealerships performed particularly well in new vehicle sales, picking up market share in many sales regions. Management is
very pleased with our dealerships’ abilities to outperform the market in many of the regions in which we operate. We accredit the
performance of our dealerships to their strong management teams and their ability to leverage best practices from operating within
a dealer group. We believe that the advances our dealership management teams have made in integrating technology and best
practices have contributed greatly to their ability to outperform the market in new vehicle sales.
The following table summarizes Canadian new light vehicle sales for 2012 by Province:
December Year to Date Canadian New Vehicle Sales by Province1
Percentage
Change
December Year to Date
2012
2011
Province
British Columbia
Alberta
Saskatchewan
Manitoba
Ontario
Quebec
New Brunswick
PEI
Nova Scotia
Newfoundland
Total
172,126
238,884
54,728
49,667
617,767
415,694
38,789
6,885
47,985
33,150
1,675,675
156,515
217,425
49,607
46,681
588,402
406,996
38,309
5,970
45,015
30,599
1,585,519
10.0%
9.9%
10.3%
6.4%
5.0%
2.1%
1.3%
15.3%
6.6%
8.3%
5.7%
Units
Change
15,611
21,459
5,121
2,986
29,365
8,698
480
915
2,970
2,551
90,156
1 DesRosiers Automotive Consultants Inc.
AutoCanada’s success in 2012 is largely driven by increases in new vehicle retail sales, which tend to attract new and existing
customers into our dealership showrooms. New vehicle retail sales are the main driver of finance, insurance and other revenue
(one of our most profitable revenue streams) as well as parts, service and collision repair business (the foundation of our business
and most profitable revenue stream). New vehicle retail sales also typically attract customer trade-in vehicles of which many are
reconditioned and marketed for resale in our used vehicle departments. Given the limited supply of quality used vehicles in the
marketplace, customer trade-ins of used vehicles from the sale of new retail vehicles are an important source of supply for our used
vehicle departments. Most importantly, new vehicle retail sales are the main driver of revenue and profit of our manufacturer
partners and we seek to outperform our minimum sales responsibility in all regions to develop a mutually rewarding relationship
with our partners.
The Company’s manufacturer partners have performed well in Canada in 2012; led by Volkswagen (sales up 12.4% in 2012),
Chrysler (sales up 5.5% in 2012), Hyundai (sales up 5.4% in 2012), Infiniti (sales up 15.2%), and Subaru (sales up 14.9%).
Various manufacturers also provide our dealerships with performance based incentives for meeting and exceeding monthly new
vehicle sales targets. Due to our strong performance in new vehicle retail sales, these performance based incentives have increased
significantly in 2012 as compared to the prior year. As a result, we continue to see a shift in focus at our dealerships to selling
higher volumes of new vehicles as opposed to used vehicles. We cannot project the duration of these performance based
incentives; the decrease or loss of such incentives would make it difficult for the Company to maintain its current level of
profitability in its new vehicle department.
As previously noted, the improvement in the new vehicle retail sales during the year has also positively impacted the Company’s
finance and insurance business. The consumer credit climate is currently well positioned due to low interest rates and favourable
loan to value ratios, which assisted in our customers’ ability to finance new and used vehicles, accessories and other finance and
insurance products. As a result of the improved consumer credit conditions and increases in retail sales, the Company realized a
substantial increase in finance and insurance revenue and gross profit over the prior year.
4
The used vehicle market in Canada remained challenging to many of our dealerships in fiscal 2012. With significant new vehicle
retail volume incentives available to our dealerships, our dealership management teams allocated more resources to new vehicle
departments and were more aggressive in used vehicle trade-in values, which resulted in a reduction in gross profit in our used
vehicle departments. Many of our dealerships have also adopted a new model in their used vehicle departments, which typically
results in higher volume and lower margins. Due to advances in technology available to consumers in the used vehicle segment,
many of our dealerships have reacted with more competitive pricing in order to attract a higher volume of customers from the
internet. Although implementing a velocity pricing model may result in less gross profit per used vehicle retailed, the increase in
volume may contribute to higher overall finance and insurance revenues, as well as gross profit from increased reconditioning
work in our parts, service and collision repair departments. Although overall gross profit in the Company’s used vehicle
department decreased, our finance and insurance and parts, service and collision repair departments have benefitted from the
increase in overall volumes in used vehicles retailed.
Our parts, service and collision repair department posted modest gains in revenue and gross margins. The Company has invested
in technology to improve the customer experience in many of our service departments, which we believe results in a better
customer experience and retention of service customers. We expect that the impact the technology will have on customer
satisfaction and improvement in customer awareness of ongoing maintenance requirements will lead to increased sales and higher
margins in our parts, service and collision repair departments in the future. The parts, service and collision repair business is our
most profitable and stable revenue stream, therefore we believe that investing in technology and training our service advisors to
improve the customer experience is critical to growing our same store business in the future.
The majority of our operating expenses are variable in nature, mainly consisting of employee costs. Many of our dealership
employee pay structures are tied to meeting sales objectives, maintaining customer satisfaction indexes, as well as improving gross
profit and net income. Our dealership management teams typically do not promote a reduction in wages as a means to control
costs, but rather controlling wages to promote the achievement of its objectives and rewarding employees for the achievement of
above average performance. The Company regularly reviews the operating performance of its dealerships and utilizes the leverage
of a large dealer group to reduce its overall operating expenses. The Company operates a centralized marketing department and
information technology department which provides services to the dealerships in order to leverage the size of the group as a means
to lower the operating costs of the dealerships. As a result of pay structures tied to dealership performance and the ability to
leverage the group operating structure, the Company has reduced its overall operating expenses as a percentage of gross profit to
78.3% in fiscal 2012 as compared to 80.9% in the prior year.
During late fiscal 2012, the Company was able to refinance its revolving floorplan facilities at twenty-one of its dealerships. The
refinancing of its revolving floorplan facilities resulted in a reduction of the interest rate on its financed inventory from 4.20% to
approximately 2.52%. Since the refinancing was not completed until November 2012, the Company’s finance costs were not
significantly reduced in 2012. However, the Company expects significant savings in the 2013 fiscal year as a result of the
refinancing.
5
SELECTED ANNUAL FINANCIAL INFORMATION
The following table shows the audited results of the Company for the years ended December 31, 2010, December 31, 2011 and
December 31, 2012. The results of operations for these periods are not necessarily indicative of the results of operations to be
expected in any given comparable period.
(In thousands of dollars except Operating
Data and gross profit %)
The Company
The Company
The Company
(Audited)
(Audited)
(Audited)
2010
2011
2012
Income Statement Data
Revenue
New vehicles
Used vehicles
Parts, service & collision repair
Finance, insurance & other
Gross profit
New vehicles
Used vehicles
Parts, service & collision repair
Finance, insurance & other
Gross profit %
Operating expenses
Operating expenses as % of gross profit
Finance costs - floorplan
Finance costs – long term debt
(Reversal of) Impairment of intangible assets
Income taxes
Net earnings
EBITDA 1
Cash dividends per share
Basic earnings (loss) per share
Diluted earnings (loss) per share
Operating Data
Vehicles (new and used) sold
New retail vehicles sold
New fleet vehicles sold
Used retail vehicles sold
Number of service & collision repair orders
completed
Absorption rate 2
# of dealerships
# of same store dealerships 3
# of service bays at period end
Same store revenue growth 3
Same store gross profit growth 3
869,507
514,676
202,552
108,558
43,721
150,020
38,164
16,885
55,888
39,083
17.3%
130,237
86.8%
7,536
1,076
(8,059)
4,956
14,596
16,740
0.120
0.734
0.734
24,239
12,767
2,717
8,755
309,705
86%
23
21
339
10.5%
4.1%
1,009,326
640,722
206,030
110,678
51,896
169,161
47,705
17,381
57,480
46,595
16.8%
136,846
80.9%
8,057
1,136
(25,543)
12,509
36,784
29,137
0.310
1.850
1.850
27,998
14,499
4,832
8,667
305,298
88%
24
21
333
17.3%
13.9%
1,103,913
683,375
243,351
114,600
62,587
190,365
57,575
16,311
59,643
56,836
17.2%
149,140
78.3%
8,832
984
(222)
8,576
24,236
37,885
0.620
1.222
1.222
29,780
16,226
4,096
9,458
309,488
86%
24
22
333
8.6%
10.9%
1
2
3
EBITDA has been calculated as described under “NON-GAAP MEASURES”.
Absorption has been calculated as described under “NON-GAAP MEASURES”.
Same store revenue growth & same store gross profit growth is calculated using franchised automobile dealerships that we have owned for at least 2 full years.
6
SELECTED QUARTERLY FINANCIAL INFORMATION
The following table shows the unaudited results of the Company for each of the eight most recently completed quarters. The
results of operations for these periods are not necessarily indicative of the results of operations to be expected in any given
comparable period.
(In thousands of dollars except Operating
Data and gross profit %)
Income Statement Data
New vehicles
Used vehicles
Parts, service & collision repair
Finance, insurance & other
Revenue
New vehicles
Used vehicles
Parts, service & collision repair
Finance, insurance & other
Gross profit
Gross profit %
Operating expenses
Operating exp. as % of gross profit
Finance costs – floorplan
Finance costs – long-term debt
Reversal of impairment of intangibles
Income taxes
Net earnings 4
EBITDA 1, 4
Basic earnings (loss) per share
Diluted earnings (loss) per share
Operating Data
Vehicles (new and used) sold
New retail vehicles sold
New fleet vehicles sold
Used retail vehicles sold
Number of service & collision repair
orders completed
Absorption rate 2
# of dealerships at period end
# of same store dealerships 3
# of service bays at period end
Same store revenue growth 3
Same store gross profit growth 3
Balance Sheet Data
Cash and cash equivalents
Restricted cash
Accounts receivable
Inventories
Revolving floorplan facilities
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
128,303 196,850
44,906
52,054
26,462
28,256
13,577
11,113
210,784 290,737
172,688
55,351
26,980
14,115
269,134
9,724
3,486
13,278
9,947
36,435
17.3%
31,891
87.5%
1,685
283
-
690
1,995
4,047
0.100
0.100
5,826
3,050
796
1,980
72,360
80%
23
22
339
2.7%
2.9%
13,974
4,301
15,159
12,118
45,552
15.7%
35,127
77.1%
2,311
323
-
2,029
5,951
9,321
0.299
0.299
8,210
4,158
1,900
2,152
80,851
91%
22
21
322
19.3%
8.2%
12,740
5,020
14,492
12,647
44,899
16.7%
35,742
79.6%
2,190
296
-
1,646
5,230
8,216
0.263
0.263
7,649
3,886
1,361
2,402
76,176
90%
22
21
322
21.6%
22.9%
142,881
53,719
28,980
13,091
238,671
11,267
4,574
14,551
11,883
42,275
17.7%
34,086
80.6%
1,871
234
(25,543)
8,144
23,608
7,553
1.187
1.187
6,313
3,405
775
2,133
75,911
91%
24
21
333
24.8%
20.6%
147,383
60,453
26,913
13,648
248,397
186,649
62,822
28,847
16,451
294,769
190,139
62,816
28,593
17,133
298,681
159,204
57,260
30,247
15,355
262,066
12,046
4,412
14,004
12,387
42,849
17.3%
35,381
82.6%
1,935
230
-
1,441
4,113
6,809
0.207
0.207
6,836
3,434
969
2,433
74,439
81%
24
21
333
20.2%
18.3%
14,647
4,237
15,228
14,878
48,990
16.6%
37,661
76.9%
2,511
256
-
2,216
6,711
10,208
0.338
0.338
8,154
4,400
1,313
2,441
78,104
89%
24
21
333
2.4%
7.1%
15,461
3,994
15,078
15,579
50,112
16.8%
38,361
76.6%
2,645
267
-
2,379
6,807
10,592
0.344
0.344
8,087
4,410
1,265
2,412
78,944
89%
24
22
333
8.0%
7.9%
15,421
3,668
15,333
13,992
48,414
18.5%
37,737
77.9%
1,741
231
(222)
2,540
6,605
10,276
0.334
0.334
6,703
3,982
549
2,172
78,001
85%
24
22
333
7.4%
11.9%
43,837
39,337
-
-
51,539
42,260
134,865 149,481
152,075 172,600
49,366
-
44,172
159,732
175,291
53,641
-
42,448
136,869
150,816
53,403
-
51,380
155,778
178,145
51,198
-
52,042
201,302
221,174
54,255
-
54,148
193,990
212,840
34,472
10,000
47,944
199,226
203,525
1
2
3
4
EBITDA has been calculated as described under “NON-GAAP MEASURES”.
Absorption has been calculated as described under “NON-GAAP MEASURES”.
Same store revenue growth & same store gross profit growth is calculated using franchised automobile dealerships that we have owned for at least 2 full years.
The results from operations have been lower in the first and fourth quarters of each year, largely due to consumer purchasing patterns during the holiday
season, inclement weather and the reduced number of business days during the holiday season. As a result, our financial performance is generally not as
strong during the first and fourth quarters than during the other quarters of each fiscal year. The timing of acquisitions may have also caused substantial
fluctuations in operating results from quarter to quarter.
7
RESULTS FROM OPERATIONS
Annual Operating Results
EBITDA for the year ended December 31, 2012 increased by 30.2% to $37.9 million, from $29.1 million when compared to the
results of the Company for the prior year. The increase in EBITDA for the year can be mainly attributed to the improvement in
new vehicle sales which is a main driver of our business and tends to provide additional sales opportunities in our finance and
insurance and parts, service and collision repair departments.
The following table reconciles EBITDA to Net comprehensive income for the years ended December 31:
Net comprehensive income
Goodwill impairment (recovery of impairment)
Income tax
Amortization
Interest on long-term debt
EBITDA
2012
24,236
(222)
8,576
4,311
984
37,885
2011
36,784
(25,543)
12,509
4,251
1,136
29,137
2010
14,596
(8,059)
4,956
4,171
1,076
16,740
Normalized pre-tax earnings increased by $8.8 million or 37.0% to $32.6 million in 2012 from $23.8 million in the prior year.
Normalized earnings increased by $6.5 million or 36.9% to $24.1 million in 2012 from $17.6 million in the prior year.
As the pre-tax net effect of reversals of impairment of intangible assets for the year ended December 31, 2012 was $0.2 million, as
compared to total reversals of $25.5 million before taxes in 2011, the variances in the following paragraph include the effects of
reversals of the impairments, which resulted in a decrease in overall net earnings in 2012 due to the large reversal of impairment
incurred in 2011.
Pre-tax earnings decreased by $16.5 million to $32.8 million in 2012 from $49.3 million in 2011. Net earnings decreased by $12.6
million to $24.2 million in 2012 from $36.8 million when compared to the prior year. Income tax expense decreased to $8.6
million in 2012 from $12.5 million in 2011 due to lower pre-tax earnings and future income tax expense related to the reversal of
impairment of intangible assets in 2011, which had a significant non-cash impact on earnings and income tax expense.
Revenues
Revenues for the year ended December 31, 2012 increased by $94.6 million or 9.4% as compared to the prior year. This increase
was mainly driven by increases in new and used vehicle sales with modest increases in the finance and insurance and parts, service
and collision repair business. In 2012, new vehicle sales increased by $42.7 million or 6.7% to $683.4 million from $640.7 million
in the prior year. The increase in new vehicle sales was a key driver of the increase in finance and insurance revenue of $10.7
million or 20.6% for the year ended December 31, 2012. Used vehicle sales also increased by $37.3 million or 18.1% to $243.4
million from $206.0 million. Parts, service and collision repair revenue posted a modest increase of $3.9 million or 3.5% for the
year ended December 31, 2012.
The tables in the “Same-Store Analysis” sections below summarize the results for the year ended December 31, 2012 on a same
store basis by revenue source and compare these results to the same period in 2011. An acquired or open point dealership may take
as long as two years in order to reach normalized operating results. As a result, in order for an acquired or open point dealership to
be included in our same store analysis, the dealership must be owned and operated by us for eight complete quarters. For example,
if a dealership was acquired on December 1, 2009, the results of the acquired entity would be included in quarterly same store
comparisons beginning with the quarter ended March 31, 2012 and in annual same store comparisons beginning with the year
ended December 31, 2012. As a result, only dealerships opened or acquired prior to January 1, 2011 are included in this same store
analysis. In addition, dealership divestitures are also not included in same store operating results. As a result, the current and
historical operating results of Colombo Chrysler Jeep Dodge (divested in the second quarter of 2011) and Abbotsford and
Chilliwack Volkswagen (acquired in the last quarter of 2011) are not included in same store analysis.
8
Revenues - Same Store Analysis
Company management considers same store gross profit and sales information to be an important operating metric when
comparing the results of the Company to other industry participants.
Same Store Revenue and Vehicles Sold
For the Year Ended
(In thousands of dollars except % change
and vehicle data)
December
31, 2012
December
31, 2011
%
Change
Revenue Source
New vehicles
Used vehicles
666,118
626,790
6.3%
235,984
202,884
16.3%
Finance, insurance and other
60,440
51,132
18.2%
Subtotal
Parts, service and collision repair
Total
New vehicles - retail sold
New vehicles – fleet sold
Used vehicles sold
Total
962,542
880,806
111,576
107,964
1,074,118
988,770
9.3%
3.3%
8.6%
15,691
13,415
17.0%
4,096
4,706
(13.0)%
9,174
8,284
10.7%
28,961
26,405
9.7%
Total vehicles retailed
24,865
21,699
14.6%
Same store revenue increased by $85.3 million or 8.6% in the year ended December 31, 2012 when compared to 2011. New
vehicle revenues increased by $39.3 million or 6.3% for the year ended December 31, 2012 over the prior year due in part to a net
increase in new vehicle sales of 1,666 units, consisting of an increase of 2,276 retail units partially offset by a decrease of 610 low
margin fleet units. This increase was partially offset by a decrease in the average selling price per new vehicle retailed (“PNVR”)
of $925 over the prior year.
Same store used vehicle revenues increased by $33.1 million or 16.3% for the year ended December 31, 2012 over the prior year.
This increase was due to an increase in the average selling price per used vehicle retailed of $1,232 and an increase in the number
of used vehicles retailed of 890 units.
Same store parts, service and collision repair revenue experienced a modest gain of $3.6 million or 3.3% for the year ended
December 31, 2012 compared to the prior year and was primarily a result of an increase in the number of repair orders completed
of 12,782 or 4.4%, partially offset by a decrease in the average selling price per repair order of $4 or 1.1%.
Same store finance, insurance and other revenue increased by $9.3 million or 18.2% for the year ended December 31, 2012 over
the prior year. This was due to an increase in the number of new and used vehicles retailed of 3,166 units along with a modest
increase in the average revenue per unit retailed of 3.2%. Credit conditions have continued to improve in 2012 which has allowed
our finance and insurance departments to earn higher commissions on the increased ability of our customers to finance vehicles,
parts, accessories and other insurance products.
9
Gross profit
Gross profit increased by $21.2 million or 12.5% for the year ended December 31, 2012 when compared to the prior year. Gross
profit increased due to increases in new vehicle sales, finance and insurance and parts, service and collision repair revenue. Gross
profit on the sale of new vehicles increased by $9.9 million or 20.7% for the year ended December 31, 2012. The increase in new
vehicle gross can be attributed to increases in new vehicle unit sales of 991 units or 5.1% and the average gross profit per new
vehicle retailed of $365 or 14.8%. The Company’s finance and insurance gross profit increased by $10.2 million or 22.0% during
2012. This increase can be attributed to increases in the average gross profit per unit retailed of $202 and in the number of vehicles
retailed of 2,518 units. Parts, service and collision repair gross profit increased by $2.2 million or 3.8% in 2012. The increase in
overall gross profit of the Company for the year was partially offset by a decrease in used vehicle gross profit of $1.1 million or
6.2% due to a decrease in the average gross profit per used vehicle retailed of $280 or 14.0%.
Gross Profit - Same Store Analysis
The following table summarizes the results for the year ended December 31, 2012, on a same store basis by revenue source, and
compares these results to the same periods in 2011.
Same Store Gross Profit and Gross Profit Percentage
For the Year Ended
Gross Profit
Gross Profit %
(In thousands of dollars except %
change and gross profit %)
Dec. 31,
2012
Dec. 31,
2011
%
Change
Dec. 31,
2012
Dec. 31,
2011
Change
Revenue Source
New vehicles
Used vehicles
55,573
46,858
18.6%
8.3%
7.6%
0.9%
15,715
17,271
(9.0)%
6.7%
8.5%
(1.9)%
Finance, insurance and other
54,933
45,938
19.6%
90.6%
89.8%
1.0%
Subtotal
126,221
110,067
14.7%
Parts, service and collision repair
58,009
56,077
3.4%
52.0%
51.9%
0.7%
Total
184,230
166,144
10.9%
17.2%
16.8%
0.3%
Same store gross profit increased by $18.1 million or 10.9% for the year ended December 31, 2012 when compared to the prior
year. New vehicle gross profit increased by $8.7 million or 18.6% in the year ended December 31, 2012 when compared to 2011
as a result of the previously discussed net increase in new vehicle sales of 1,666 units.
Used vehicle gross profit decreased by $1.6 million or 9.0% in the year ended December 31, 2012 over the prior year. This was
primarily due to a decrease in the average gross profit per vehicle retailed of $372 or 17.8% partially offset by an increase in the
number of used vehicles sold of 890 units or 10.7%.
Parts, service and collision repair gross profit increased by $1.9 million or 3.4% in the year ended December 31, 2012 when
compared to the same period in the prior year as a result of an increase of 12,782 in the number of repair orders completed during
the year partially offset by a decrease of $2 in the average gross profit earned per repair order.
Finance and insurance gross profit increased by 19.6% or $9.0 million in the year ended December 31, 2012 when compared to the
prior year as a result of an increase in the average gross profit per unit sold of $92 and an increase in units retailed of 3,166.
10
Operating expenses
Operating expenses increased by 9.0% or $12.3 million during the year ended December 31, 2012 as compared to the prior year.
Since many operating expenses are variable in nature, management considers operating expenses as a percentage of gross profit to
be a good indicator of expense control. Operating expenses as a percentage of gross profit decreased to 78.3% in 2012 from 80.9%
in the prior year. Operating expenses consist of four major categories; employee costs, selling and administrative costs, facility
lease costs, and amortization.
Employee costs
During the year ended December 31, 2012, employee costs increased by $10.6 million to $93.0 million from $82.4 million in the
prior year, primarily as a result of higher commissions paid on increased sales volumes year-over-year. Employee costs as a
percentage of gross profit remained relatively stable at 48.9% in 2012 compared 48.7% in 2011.
Selling and administrative costs
During the year ended December 31, 2012, selling and administrative costs increased by $1.3 million or 3.4% primarily due to the
inclusion of a full year of expenses from Abbotsford and Chilliwack Volkswagen, which were acquired in November 2011.
Selling and administrative expenses as a percentage of gross profit decreased to 21.0% in 2012 from 22.9% in 2011. This decrease
is due to more cost-effective advertising and a decrease in other semi-variable costs as a percentage of gross profit. The Company
has focused over the past year on cost effective advertising through more effective use of the internet. These efforts have resulted
in a decrease in advertising expense per vehicle retailed.
Facility lease costs
During the year ended December 31, 2012, facility lease costs increased by 2.6% to $11.9 million from $11.6 million. The rent
savings from the sale of the Company’s Colombo Chrysler Jeep Dodge location in June 2011 partially offsets the increase in rent
costs from the acquisition of Abbotsford and Chilliwack Volkswagen at the end of 2011.
Amortization
During the year ended December 31, 2012, amortization increased by 2.3%, mainly due to the purchase of the land and building in
the fourth quarter of 2012; which the Company plans to use for the future Kia open point which was awarded in the second quarter
of 2012. The Company is currently leasing the facility to a third party.
Reversal of impairment of intangible assets
The Company has a number of franchise agreements for its individual dealerships which it classifies as intangible assets. These
intangible assets are tested for impairment at least annually as they are considered to be indefinite-lived intangible assets. Under
IFRS, previously recognized impairment charges, with the exception of impairment charges related to goodwill, may potentially be
reversed if the circumstances causing the impairment have improved or are no longer present. If such circumstances change, a new
recoverable amount should be calculated and all or part of the impairment charge should be reversed to the extent the recoverable
amount exceeds carrying value. The Company performed its annual test for impairment of its cash generating units (“CGUs”) in
the fourth quarter of 2012. As a result of the tests performed, the Company determined that although the financial results improved
in many of the Company’s CGUs, in most cases the value of its intangible assets had been fully recovered in 2011. Since
impairments of intangible assets cannot be reversed to an amount greater than the intangible asset’s original cost, the improved
financial results of many of the Company’s CGUs has no impact on the value of the Company’s intangible assets.
As a result of the tests performed, the Company recorded a net reversal of impairment of intangible assets in the amount of $0.2
million (2011 - $25.5 million).
Income from investment in associate
During the year ended December 31, 2012, the Company earned $0.5 million, including acquisition costs, as a result of its
investment in Dealer Holdings Ltd. (“DHL”). During the three and nine month periods ended September 30, 2012, the Company
also earned $0.12 million in management services fees with subsidiaries of DHL. The management services agreements are fixed
monthly fees charged to the dealerships from AutoCanada in return for marketing, training, technological support and accounting
support provided to the two dealerships owned by DHL. AutoCanada provides support services to all dealerships in which it owns
and operates, however since the two dealerships are not wholly-owned by AutoCanada, the Company charges a management
services fee in order to recover the costs of resources provided. Management believes that as a result of the support provided that
the dealerships have improved in sales volumes and profitability since being acquired by DHL.
11
The Nicholson Chevrolet dealership was successfully relocated to its new location in Sherwood Park, Alberta in the third quarter of
2012 and is now operating under the name of Sherwood Park Chevrolet.
The Petersen GMC Buick dealership remains located in its current facility, which is subject to a remaining lease term of five years.
At this time, management has no intention of relocating this dealership.
Since the purchase of Sherwood Park Chevrolet on May 1, 2012 and Petersen GMC Buick on June 1, 2012, management has been
satisfied with the return on investment. The net comprehensive income of the dealerships are slightly lower than expected due to
the implementation of accounting policies in order to be consistent with the Company’s policies. In addition, legal fees associated
with the purchase of the two dealerships reduced net comprehensive income during the period. The profitability of both
dealerships continues to improve and management has been pleased with their performance.
See GROWTH, ACQUISITIONS, RELOCATIONS AND REAL ESTATE for more information related to the investment.
Finance costs
The Company incurs finance costs on its revolving floorplan facilities, long term indebtedness and banking arrangements. During
the year ended December 31, 2012, finance costs on our revolving floorplan facilities increased by 8.6% to $8.8 million from $8.1
million in 2011, mainly due to the Company holding more inventories at year end. Finance costs on long term indebtedness
decreased to $1.0 million from $1.1 million in 2011. Finance costs, net of finance income increased by $0.5 million or 5.7% over
the prior year, due primarily to the increase in inventory throughout the year.
During the year, the Company refinanced the revolving floorplan facilities at twenty-one of its twenty-four wholly owned
dealerships with the Bank of Nova Scotia (“Scotiabank”). As at December 31, 2012, our floorplan interest rates on new vehicles
and used vehicles were calculated as Bankers’ Acceptance Rate plus 1.40% (2.62%) and Bankers’ Acceptance Rate plus 1.90%
(3.12%), respectively. As of the date of this MD&A, our floorplan interest rates on new vehicles and used vehicles are calculated
as Bankers’ Acceptance Rate plus 1.30% (2.50%) and Bankers’ Acceptance Rate plus 1.80% (3.00%), respectively. The following
table provides a historical summary of the Company’s floorplan interest rates on new vehicles at twenty-one of its twenty-four
wholly owned dealerships:
Q1 2011
Q2 2011
Q3 2011
Q4 2011 Q1 2012
Q2 2012
Q3 2012 Q4 2012
Interest Rate
4.20%
4.20%
4.20%
4.20%
4.20%
4.20%
4.20%
2.62%
The refinancing of its revolving floorplan facilities was completed in November of 2012; therefore the impact of the decrease in
interest rates was not significant to the Company in 2012. Management expects significant savings in finance costs in 2013 due to
the decrease in interest rates associated with its revolving floorplan facilities with Scotiabank.
Some of our manufacturers provide non-refundable credits on the finance costs for our revolving floorplan facilities to offset the
dealership’s cost of inventory that, on average, effectively provide the dealerships with interest-free floorplan financing for the first
45 to 60 days of ownership of each financed vehicle. During the year ended December 31, 2012, the net floorplan credits were
$6,072 (2011 - $5,501). The increase in floorplan credits is a result of higher turnover in new vehicle inventory. Accounting
standards require the floorplan credits to be accounted for as a reduction in the cost of new vehicle inventory and subsequently a
reduction in the cost of sales as vehicles are sold.
The following table summarizes the net floorplan credits that were received in 2012.
(In thousands of dollars)
Q1 2012
Q2 2012
Q3 2012
Q4 2012
For the year ended
December 31, 2012
Net floorplan credits
1,358
1,608
1,755
1,351
6,072
12
Management believes that a comparison of floorplan financing costs to floorplan credits can be used to evaluate the efficiency of
our new vehicle sales relative to stocking levels. The following table details the carrying cost of vehicles based on floorplan
interest net of floorplan assistance earned:
Floorplan financing costs
Floorplan credits earned
Net carrying cost of vehicle inventory
Income taxes
Year ended
December 31,
2012
Year ended
December 31,
2011
8,832
(6,072)
8,057
(5,501)
2,760
2,556
Income tax expense for the year ended December 31, 2012 decreased by $3.9 million to $8.6 million from $12.5 million in 2011.
As a result of the reversal of impairments of intangible assets, the Company recorded deferred tax expense in the amount of $0.06
million (2011 - $6.4 million) as a result of the revised temporary differences between the tax basis and carrying value of these
assets.
As a result of its improved earnings over the past two years, the Company recorded $5.8 million in current tax expense in the 2012
fiscal year, as compared to $2.0 million in the fiscal 2011 year. As described in further detail below, the Company effectively
maintains a one year deferral of its partnership income (income earned by its wholly-owned dealerships). As such, the current
income tax expense for 2012 is mainly calculated based on our dealerships’ income from 2011. The income earned by our
dealerships in fiscal 2012 will be substantially deferred until next year, however as described in further detail below, the
Company’s current tax expense contains the first instalment payment of its tax deferral, expected to be fully repaid over the next
five years.
Until December 31, 2009, our previous trust structure was such that current income taxes were passed on to our unitholders. In
conjunction with our conversion from a trust to a corporation, we became subject to normal corporate tax rates starting in 2010.
The corporate income tax rate applicable to 2010 was approximately 29.0%; however, we did not pay any corporate income tax in
2010 due to the tax deductions available to us and the effect of the deferral of our partnership income.
In December 2011, legislation was passed implementing tax measures outlined in the 2011 budget (Bill C-13), which included the
elimination of the ability of a corporation to defer income as a result of timing differences in the year-end of the corporation and of
any partnership of which it is a member, subject to transitional relief over five years. The Company estimates the following
amounts to be recorded as current income tax payable over the next four years in conjunction with the payment of the deferral.
The Company notes that these amounts paid will be in addition to the normal current income tax payable of future years:
(In thousands of dollars)
Increase to current tax payable
2013
1,176
2014
1,366
2015
1,366
2016
1,707
The Company expects income tax to have a more significant effect on our free cash flow and adjusted free cash flow as in fiscal
2012, the Company began to pay current income taxes, as well as, income tax instalments for the anticipated current tax expense
for the fiscal year.
Prior to 2012, the Company had not paid any corporate tax or installments for corporate tax. In 2012, the Company paid $4.3
million of cash taxes which relates to the fiscal 2011 taxation year and installments toward the 2012 taxation year. The payment of
cash taxes will have an impact on adjusted free cash flow. Investors are cautioned that income taxes will have a more significant
effect on the Company’s cash flow in the future, and as a result, the current level of adjusted free cash flow will inherently be
lowered by cash taxes in the future.
13
Fourth Quarter Operating Results
EBITDA for the three month period ended December 31, 2012 increased by 37.3% to $10.3 million, from $7.6 million when
compared to the results of the Company for the same period in the prior year. The increase in EBITDA for the fourth quarter can be
attributed to the improvement in new vehicle sales and the resulting finance and insurance product sales. As explained below, the
Company’s parts, service and collision repair department also had strong gains in revenue and gross profit which contributed to
strong EBITDA in the fourth quarter of 2012.
The following table reconciles EBITDA to Net comprehensive income for the three months ended December 31:
Net comprehensive income
Goodwill impairment (recovery of impairment)
Income tax
Amortization
Interest on long-term debt
EBITDA
2012
6,605
(222)
2,540
1,122
231
10,276
2011
23,608
(25,543)
8,144
1,110
234
7,553
2010
7,585
(8,059)
2,404
1,207
332
3,469
Normalized pre-tax earnings increased by $2.7 million to $8.9 million in the fourth quarter of 2012 from $6.2 million in the same
period of the prior year. Normalized net earnings increased by $1.9 million to $6.4 million in the fourth quarter of 2012 from $4.5
million in the prior year.
As previously noted, the Company performs its annual test for impairment or reversal of impairment over its intangible assets in
the fourth quarter. As a result, the pre-tax earnings and net earnings of the Company (including reversals of impairment) decreased
in 2012 as compared to 2011.
Pre-tax earnings decreased by $22.7 million to $9.1 million for the three month period ended December 31, 2012 from $31.8
million in the same period of 2011. Net earnings decreased by $17.0 million to $6.6 million from $23.6 million when compared to
the same period of the prior year. Income tax expense decreased to $2.5 million in the fourth quarter of 2012 from $8.1 million in
the same period of 2011 due to lower pre-tax earnings and future income tax expense from the reduction in reversals of impairment
of intangible assets in the current year as compared to 2011.
Revenues
Revenues for the three month period ended December 31, 2012 increased by $23.4 million or 9.8% as compared to the same period
of the prior year. This increase was mainly driven by increases in new and used vehicle sales with modest increases in the finance
and insurance and parts, service and collision repair business. In the fourth quarter of 2012, new vehicle sales increased by $16.3
million or 11.4% to $159.2 million from $142.9 million in the prior period. Used vehicle sales increased by $3.5 million or 6.6%
in the fourth quarter of 2012 as compared to 2011. The increase in new and used vehicle sales contributed to the increase in
finance and insurance revenue of $2.3 million or 17.3% for the three month period ended December 31, 2012. Parts, service and
collision repair revenue increased $1.3 million or 4.4% quarter over quarter.
14
Revenue - Same Store Analysis
The following table summarizes the results for the three-month period ended December 31, 2012 on a same store basis by revenue
source and compares these results to the same period in 2011.
Same Store Revenue and Vehicles Sold
For the Three-Month Period Ended
(In thousands of dollars except %
change and vehicle data)
December 31,
2012
December 31,
2011
% Change
Revenue Source
New vehicles
Used vehicles
Finance, insurance and other
Subtotal
Parts, service and collision repair
Total
New vehicles - retail sold
New vehicles – fleet sold
Used vehicles sold
Total
Total vehicles retailed
154,263
55,472
14,528
224,263
29,163
253,426
3,825
549
2,111
6,485
5,936
141,315
53,245
12,917
207,477
28,403
235,880
3,405
775
2,133
6,313
5,538
9.2%
4.2%
12.5%
8.1%
2.7%
7.4%
12.3%
(29.2)%
(1.0)%
2.7%
7.2%
Same store revenue increased by $17.5 million or 7.4% in the three month period ended December 31, 2012 when compared to the
same period in 2011. New vehicle revenues increased by $12.9 million or 9.2% for the fourth quarter of 2012 over the prior period
due in part to a net increase in new vehicle sales of 194 units consisting of an increase of 420 retail units and a decrease of 226 low
margin fleet units. This increase was supplemented by an increase in the average selling price per new vehicle retailed (“PNVR”)
of $1,461 over the prior year largely as a result of the higher proportionate volume of retail units versus fleet units which typically
sell for less than retail vehicles.
Same store used vehicle revenues increased by $2.2 million or 4.2% for the three month period ended December 31, 2012 over the
same period in the prior year. This increase was due to an increase in the average selling price per used vehicle retailed of $1,315
partially offset by a decrease in the number of used units sold of 22 in the quarter over 2011.
Same store parts, service and collision repair revenue experienced a modest gain of $0.8 million or 2.7% for the fourth quarter of
2012 compared to the prior period and was a result of an increase in the average revenue per work order completed of $13 or 3.5%
partially offset by a decrease in the number of repair orders performed of 536 or 0.7%.
Same store finance, insurance and other revenue increased by $1.6 million or 12.5% for the three month period ended December
31, 2012 over the prior period. This was due to an increase in the average revenue per unit retailed of 4.9% along with an increase
in the number of new and used vehicles retailed of 398 units. The increases we experienced in both new and used retail sales
reflected positively in our finance and insurance revenue for the quarter.
15
Gross profit
Gross profit increased by $6.1 million or 14.4% for the three month period ended December 31, 2012 when compared to the same
period in the prior year. Gross profit increased due to increases in new vehicles, finance and insurance, and parts, service and
collision repair. Gross profit earned on the sale of new vehicles increased by $4.2 million or 36.9% for the fourth quarter of 2012.
The increase in new vehicle gross can be attributed to increases in new vehicle unit sales of 351 units or 8.4% and average gross
profit per new vehicle sold of $709 or 26.3%. The Company’s finance and insurance gross profit increased by $2.3 million or
17.3% during the fourth quarter of 2012. This increase can be mainly attributed to an increase in the average gross profit per unit
retailed of $120 and increases in new and used vehicle sales. The increase in overall gross profit of the Company for the quarter
was partially offset by a decrease in used vehicle gross profit of $0.9 million or 19.8% due to a decrease in the average gross profit
per used vehicle retailed of $455 or 21.2%. Parts, service and collision repair gross profit increased by $0.8 million or 5.4% in the
fourth quarter of 2012.
Gross Profit - Same Store Analysis
The following table summarizes the results for the three-month period ended December 31, 2012 on a same store basis by revenue
source and compares these results to the same period in 2011.
Same Store Gross Profit and Gross Profit Percentage
For the Three-Month Period Ended
Gross Profit
Gross Profit %
(In thousands of dollars except %
change and gross profit %)
Revenue Source
New vehicles
Used vehicles
Dec. 31,
2012
Dec. 31,
2011
%
Change
Dec. 31,
2012
Dec. 31,
2011
Change
14,853
11,064
34.3%
3,594
4,504
(20.2)%
9.6%
6.5%
7.9%
1.8%
8.5%
(2.0)%
Finance, insurance and other
13,260
11,734
13.0%
91.3%
90.8%
0.4%
Subtotal
31,707
27,302
16.1%
Parts, service and collision repair
14,907
14,355
3.8%
51.1%
50.5%
0.6%
Total
46,614
41,657
11.9%
18.4%
17.7%
0.7%
Same store gross profit increased by $5.0 million or 11.9% for the three month period ended December 31, 2012 when compared
to the same period in the prior year. The Company’s gross profit on new vehicles increased by $3.8 million or 34.3% in the fourth
quarter of 2012, when compared to 2011, as a result of increases in new vehicle sales of 194 units and the average gross profit per
new vehicle sold of $749 or 28.3%.
Used vehicle gross profit decreased by $0.9 million or 20.2% in the fourth quarter of 2012 over the prior period. This was due to a
decrease in the number of used vehicles sold of 22 units or 1.0% and a decrease in the average gross profit per used vehicle retailed
of $410 or 19.4%.
Parts, service and collision repair gross profit increased by $0.6 million or 3.8% in the three months ended December 31, 2012
when compared to the same period in the prior year as a result of an increase of $9 in the average gross profit earned per repair
order partially offset by a decrease of 536 in repair orders completed during the quarter.
Finance and insurance gross profit increased by 13.0% or $1.5 million in the three month period ended December 31, 2012 when
compared to the prior period as a result of an increase in the average gross profit per unit sold of $115 and an increase in new and
used vehicle units retailed of 398.
16
Operating expenses
Operating expenses increased by 10.6% or $3.6 million during the three month period ended December 31, 2012 as compared to
the prior period. Since many operating expenses are variable in nature, management considers operating expenses as a percentage
of gross profit to be a good indicator of expense control. Operating expenses as a percentage of gross profit decreased to 78.1% in
the fourth quarter of 2012 from 80.7% in the prior year. Operating expenses consist of four major categories; employee costs,
selling and administrative costs, facility lease costs, and amortization.
Employee costs
During the three month period ended December 31, 2012, employee costs increased by $2.7 million to $23.1 million from $20.4
million in the prior year. Employee costs as a percentage of gross profit decreased to 47.8% from 48.2% in the fourth quarter of
2011. Although commissioned wages generally increase as a percentage of gross profit, salaried wages do not increase with sales
which will generally decrease employee costs as a percentage of gross profit during times of increased sales, as was the case in the
fourth quarter of 2012.
Selling and administrative costs
During the three month period ended December 31, 2012, selling and administrative costs increased by $0.8 million or 8.2% due to
an increase in training costs and other costs related to our ADP system upgrade completed in the fourth quarter of 2012. Selling
and administrative expenses as a percentage of gross profit decreased to 22.1% in the fourth quarter of 2012 from 23.0% in 2011.
This decrease is due to less fixed costs as a percentage of gross profit.
Facility lease costs
During the three month period ended December 31, 2012, facility lease costs increased by 3.4% to $3.0 million from $2.9 million
in the fourth quarter of 2011.
Amortization
During the three month period ended December 31, 2012, amortization remained stable at $1.1 million.
Income from investment in associate
During the three month period ended December 31, 2012, the Company earned $0.26 million as a result of its investment in Dealer
Holdings Ltd. (“DHL”). During the three month period ended December 31, 2012, the Company also earned $0.07 million in
management services fees with subsidiaries of DHL. The management services agreements are fixed monthly fees charged to the
dealerships from AutoCanada in return for marketing, training, technological support and accounting support provided to the two
dealerships. AutoCanada provides support services to all dealerships in which it owns and operates, however since the two
dealerships are not wholly-owned by AutoCanada, the Company charges a management services fee in order to recover the costs of
resources provided. Management is very pleased with the financial results of its investment in DHL for the fourth quarter.
See GROWTH, ACQUISITIONS, RELOCATIONS AND REAL ESTATE for more information related to the investment.
Finance costs
The Company incurs finance costs on its revolving floorplan facilities, long term indebtedness and banking arrangements. During
the three month period ended December 31, 2012, finance costs on our revolving floorplan facilities decreased to $1.7 million from
$1.9 million in 2011. Finance costs on long term indebtedness remained flat at $0.2 million in the fourth quarter of 2012. Finance
costs, net of finance income has remained relatively flat quarter over quarter due in part to the decrease in the Company’s interest
rate on twenty-one of its twenty-four wholly owned dealerships which it refinanced in the latter part of the fourth quarter of 2012,
and partially offset by an increase in the amount of inventory held by its dealerships.
Inventory costs
As previously noted, some of our manufacturers provide non-refundable credits on the finance costs for our revolving floorplan
facilities to offset the dealership’s cost of inventory that, on average, effectively provide the dealerships with interest-free floorplan
financing for the first 45 to 60 days of ownership of each financed vehicle. During the three month period ended December 31,
2012, the floorplan credits earned were $1,351 (2011 - $1,300).
17
Management believes that a comparison of floorplan financing costs to floorplan credits can be used to evaluate the efficiency of
our new vehicle sales relative to stocking levels. The following table details the carrying cost of vehicles based on floorplan
interest net of floorplan assistance earned:
Floorplan financing costs
Floorplan credits earned
Net carrying cost of vehicle inventory
Three months ended
December 31, 2012
1,741
(1,351)
390
Three months ended
December 31, 2011
1,872
(1,300)
572
Sensitivity
Based on our historical financial data, management estimates that an increase or decrease of one new retail vehicle sold (and the
associated finance and insurance income on the sale) would have resulted in a corresponding increase or decrease in our estimated
free cash flow of approximately $1,500 - $2,000 per vehicle. The net earnings achieved per new vehicle retailed can fluctuate
between individual dealerships due to differences between the manufacturers, geographical locations of our dealerships and the
demographic of which our various dealerships’ marketing efforts are directed. The above sensitivity analysis represents an average
of our dealerships as a group and may vary depending on increases or decreases in new vehicles retailed at our various locations.
GROWTH, ACQUISITIONS, RELOCATIONS, AND REAL ESTATE
The Company operates 28 franchised automotive dealerships, 25 of which are wholly owned, and three in which it has an
investment with significant influence.
Acquisitions
Grande Prairie Volkswagen
On January 4, 2013, the Company purchased substantially all the net operating and fixed assets of People’s Automotive Ltd.
(“Grande Prairie Volkswagen”) for cash consideration of $1,981, which was financed by drawing on the Company’s facilities with
VW Credit Canada Inc. and the HSBC Revolver. The purchase of this business complements the Company’s Grande Prairie
platform. In addition, the Company also purchased dealership land and a building for $1,800.
Dealership Investments
Investment in Dealer Holdings Ltd. (“DHL”)
During the year ended December 31, 2012, the Company invested a total of $4,262 to acquire a 60.8% participating, non-voting
equity interest in Dealer Holdings Ltd. (“DHL”). DHL is an entity formed between a subsidiary of AutoCanada and Mr. Patrick
Priestner (“Mr. Priestner”), the Company’s Chief Executive Officer.
DHL was formed to acquire future General Motors of Canada (“GM Canada”) franchised dealerships, whereby Mr. Priestner is
required to maintain voting control of the dealerships, in accordance with the agreement with GM Canada. All shareholders
participate equally in the equity and economic risks and rewards of DHL and its interests, based on the percentage of ownership
acquired. DHL’s principal place of business is Alberta, Canada.
Although the Company holds no voting rights in DHL, the Company exercises significant influence by virtue of its ability to
appoint one member of the board of directors of DHL and the ability to participate in financial and operating policy decisions of
DHL. However, the Company does not have the power to make key decisions or block key decisions due to a casting vote held by
the Company’s CEO. As a result, the Company has accounted for its investment in DHL under the equity method. There are no
guarantees to DHL or significant relationships other than those disclosed in note 30 of the annual consolidated financial statements
of the Company for the year ended December 31, 2012.
Patrick Priestner has a 29.4% equity interest in DHL, and other senior managers of the Company have a 9.8% equity interest in
DHL. In addition, to comply with the terms of GM Canada’s approval, Patrick Priestner has 100% voting control of DHL. Senior
management equity participation in DHL is contingent upon their continued employment with the Company and/or its subsidiaries.
The investments in DHL were reviewed and approved by the independent members of AutoCanada’s Board of Directors.
18
Although Mr. Priestner controls DHL, the unanimous shareholder agreement contains certain protective rights for AutoCanada’s
investment in DHL including prohibiting Mr. Priestner, or related parties of Mr. Priestner, from entering into contracts with DHL
without the consent of AutoCanada. In addition, the agreement contains a number of protective clauses for AutoCanada that may
prevent Mr. Priestner from the ability to dilute the interests of other shareholders, without prior approval of AutoCanada. Since
Mr. Priestner has control over the Board of DHL, if any of the protective clauses in the agreement are breached, AutoCanada has
the ability to exit from its shareholdings and require DHL or Mr. Priestner to pay AutoCanada for its shares based on the valuation
of the shares by an independent chartered business valuator.
During the three month period ended June 30, 2012, DHL acquired a 49% voting equity interest in Nicholson Chevrolet, now
operating as “Sherwood Park Chevrolet (“SPC”) with an option to increase its interest to 51% upon SPC’s successful relocation to
a new facility. SPC relocated to a new facility in Sherwood Park, Alberta, in September 2012. The Company exercised its option to
increase its ownership to 51% during the fourth quarter of 2012. The previous owner of SPC retained a 49% voting interest in SPC.
SPC has been servicing the Edmonton and Sherwood Park area for over thirty-nine years; and in 2011 sold 755 new vehicles and
307 used vehicles. Although DHL’s investment in SPC includes the operations of the dealership beginning May 1, 2012, in the
fiscal 2012 year, the dealership sold 900 new vehicles and 417 used vehicles, representing an improvement in new and used
vehicle sales of 19.2% and 35.0% respectively over the fiscal 2011 year.
In conjunction with the SPC investment, DHL is subject to a put option with Romland Development Holdings Ltd. (“Romland”),
the owner of the SPC dealership and body shop real estate, whereby DHL may be required to purchase up to 49% of Romland.
Upon Romland exercising the put option, DHL will have 180 days to purchase its portion of shares in Romland, which would
require further investment in DHL from its shareholders. Romland not exercised its put option as yet.
During the quarter ended June 30, 2012, DHL acquired a 51% equity interest in Petersen Buick GMC (“Petersen”). Petersen has
been servicing the Sherwood Park and Edmonton area for over twenty-eight years and in 2011 sold 707 new vehicles and 604 used
vehicles. Although DHL’s investment in Petersen only includes the operations of the dealership beginning June 1, 2012, in the
fiscal 2012 year, the dealership sold 817 new vehicles and 518 used vehicles, representing an improvement in new vehicle sales of
15.6% and a decline in used vehicle sales of 14.2%.
The SPC and Petersen dealerships are both subject to financial covenants as part of their borrowing arrangements that may restrict
their ability to transfer funds to the Company if the payment of such funds resulted in a breach of covenants.
As a result of DHL’s investments and the exercise of the option in SPC, the Company has indirectly acquired a 31% interest in
SPC and Petersen. Through management services agreements with SPC and Petersen, the Company provides both dealerships with
operating, accounting, sales, parts and service, marketing, and information technology support.
In respect to future GM dealership acquisitions outside the Sherwood Park area, the Company and Mr. Priestner will seek to
acquire a 100% ownership interest, in which AutoCanada would purchase an 80% non-voting equity interest, with our CEO, Pat
Priestner and other senior managers purchasing a 20% equity interest. To continue to meet GM Canada requirements, Mr. Priestner
would be required to have 100% voting control.
Investment in Green Island G Auto Holdings Ltd. (“GIA”)
On March 1, 2013, the Company invested a total of $7,057 to acquire an 80% non-voting equity interest in Green Island G Auto
Holdings Ltd. (“GIA”). GIA is an entity formed between a subsidiary of AutoCanada, Mr. Priestner and other senior managers of
the Company. GIA was formed to acquire Peter Baljet Chevrolet Buick GMC.
Patrick Priestner has a 15.0% equity interest in GIA and other senior managers of the Company have a 5.0% equity interest in GIA.
To comply with the terms of GM Canada’s approval, Patrick Priestner is required to have 100% voting control of GIA. Senior
management equity participation in GIA is contingent upon their continued employment with the Company and/or its subsidiaries.
The investments in GIA were reviewed and approved by the independent members of AutoCanada’s Board of Directors.
Although the Company holds no voting rights in GIA, the Company exercises significant influence by virtue of its ability to
appoint one member of the board of directors of GIA and the ability to participate in financial and operating policy decisions of
GIA. However, the Company does not have the power to make key decisions or block key decisions due to a casting vote held by
the Company’s CEO. As a result, the Company is expected to account for its investment in GIA under the equity method. There
19
are no guarantees to GIA or significant relationships other than those disclosed in note 30 of the annual consolidated financial
statements of the Company for the year ended December 31, 2012.
Although Mr. Priestner controls GIA, the unanimous shareholder agreement contains certain protective rights for AutoCanada’s
investment in GIA including prohibiting Mr. Priestner, or related parties of Mr. Priestner, from entering into contracts with GIA
without the consent of AutoCanada. In addition, the agreement contains a number of protective clauses for AutoCanada that may
prevent Mr. Priestner from the ability to dilute the interests of other shareholders, without prior approval of AutoCanada. Since
Mr. Priestner has control over the Board of GIA, if any of the protective clauses in the agreement are breached, AutoCanada has
the ability to exit from its shareholdings and require GIA or Mr. Priestner to pay AutoCanada for its shares based on the valuation
of the shares by an independent chartered business valuator.
On March 1, 2013, GIA acquired the operating assets of Peter Baljet Chevrolet Buick GMC (“Peter Baljet”), located in Duncan,
British Columbia. Peter Baljet has been servicing the community of Duncan and Cowichan Valley area of Vancouver Island for
over 26 years; and in 2012 sold 416 new vehicles and 372 used vehicles.
As a result of GIA’s investment in Peter Baljet, the Company has indirectly acquired an 80% interest in Peter Baljet. Through
management services agreements with Peter Baljet, the Company provides the dealership with operating, accounting, sales, parts
and service, marketing, and information technology support.
Future Acquisition Opportunities
The Company has experienced a meaningful increase in potential acquisition opportunities over the past three months and as such
the Company is cautiously optimistic that it may be able to acquire a further three to five dealerships in 2013.
Open Point Opportunities
On April 20, 2012, the Company announced that it had signed a Letter of Intent with Kia Canada for an open point dealership in
Edmonton, Alberta. The opening of the Edmonton Kia dealership will bring the total number of franchises operated by
AutoCanada to twenty-nine; with six franchises in the Edmonton area platform. Open point dealerships generally take one to three
years to achieve normal profitability levels due to the ability to attract new customers to the dealership and the conquest of
customers from other brands and dealerships in its locality. However, management believes open point opportunities to be very
attractive as the Company does not pay any goodwill for the dealership. During the year, the Company purchased land and
building to be used for the Kia open point dealership for $8.7 million, which has been financed in part with mortgage debt provided
by Servus Credit Union. The Company is currently leasing the location to a third party which expires in September of 2013;
however the lessee has an option to extend the lease until December 2013. As a result, operations of the Kia open point dealership
is expected to commence in late 2013 or January 2014.
Relocation of dealerships
Earlier in the year, Management developed a capital plan which included the possible relocation of four of its dealerships.
Management estimates the capital requirements of the relocations to be approximately $27 million with expected completion by the
end of fiscal 2015. Management expects to finance the relocations with a combination of mortgage debt, revolver debt and cash
from operations. Management expects the non-mortgage debt financing requirement related to these relocations to be in the range
of $10-12 million over the same period.
Relocation of Northland Chrysler Jeep Dodge and Northland Nissan
In 2013, the Company intends to purchase land in Prince George, British Columbia for approximately $5.5 million which it will
use to relocate its Northland Chrysler Jeep Dodge dealership. The expected total project cost including land is $18 million of
which it expects to finance $12.5 million using a combination of mortgage financing and capital lease financing. The Northland
Chrysler Jeep Dodge Ram dealership has outgrown its current facility, as the dealership has frequently been in competition as one
of the highest volume Chrysler Jeep Dodge dealerships in the country and thus requires a larger facility to service its expanding
customer base over the long term by adding additional service bays, a larger lot for the display of inventory and in particular used
inventory. We expect to begin construction of the new facility in the third quarter of 2013 with an expected completion date in
2014.
Once the Company has successfully relocated its Northland Chrysler Jeep Dodge Ram dealership, we intend to renovate the
20
building and relocate our Northland Nissan dealership to operate out of the current Northland Chrysler Jeep Dodge Ram facility.
We believe that this facility, which is better situated and larger than Northland Nissan’s current facility, will result in increased
sales and profitability. We would expect the Northland Nissan relocation to be completed in late 2014 or early 2015.
Relocation of dealerships provides long-term earnings sustainability and is necessary to meet Manufacturer facility requirements
and further Manufacturer relationships.
Real estate purchase
On March 26, 2013, the Real Estate Committee, comprised of independent members of the Board of Directors, completed its
evaluation of the purchase of dealership real estate owned by subsidiaries of Canada One Auto Group. Upon determining that the
purchase would be accretive to shareholders and would provide significant positive cash flow to the Company, the Company has
entered into a letter of intent to purchase 11 of these properties currently being leased by the Company. The closing date is
scheduled for 90 days, with the Company having the option to extend a further 90 days. The Company has sufficient short term
liquidity available to fund the non-mortgage financed portion of the transaction.
As previously disclosed; Pat Priestner, CEO, and Tom Orysiuk, President, are shareholders and directors of Canada One Auto
Group and as such are not members of the Real Estate Committee.
The purchase price of the 11 properties will be $58,140,000, not including transaction costs and taxes. Once completed, the
Company will achieve annual lease savings of $4,988,000, not including the impact of future increases in lease costs contained in
the current lease agreements. The Committee estimates annual adjusted free cash flow accretion of $0.10 to $0.12 per share and
earnings per share accretion of $0.02 to $0.04 per share as a result of the transaction; based on the Company’s current cost of
capital and assuming no changes in market rates or assumptions. The purchase of the real estate will have no impact on general
repairs and maintenance expense, insurance or property taxes associated with the buildings as the tenant is currently responsible for
these expenses under the current lease agreements.
21
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of funds are capital expenditures, repayment of debt, funding the future growth of the Company and dividends
to Shareholders. We have historically met these requirements by using cash generated from operating activities and through short
term and long term indebtedness. A significant decline in sales as a result of the inability to procure adequate supply of vehicles
and/or lower consumer demand may reduce our cash flows from operations and limit our ability to fund capital expenditures, repay
our debt obligations, fund future growth internally and/or fund future dividends.
Cash Flow from Operating Activities
Cash flow from operating activities (including changes in non-cash working capital) of the Company for the year ended December
31, 2012 was $21.1 million (cash provided by operating activities of $33.5 million less net change in non-cash working capital of
$12.4 million) compared to $30.0 million (cash provided by operating activities of $28.8 million plus net change in non-cash
working capital of $1.2 million) in the prior year.
Cash flow from operating activities of the Company for the three month period ended December 31, 2012 was $1.8 million (cash
provided by operating activities of $9.5 million less net change in non-cash working capital of $7.7 million) compared to $9.7
million (cash provided by operating activities of $7.8 million plus net change in non-cash working capital of $1.9 million) in the
fourth quarter of 2011.
As previously noted, the Company had refinanced its revolving floorplan facilities with Scotiabank in the fourth quarter of 2012.
Given that the rate of financing on used vehicles was 50 basis points higher than the rate of financing on new vehicles, the
Company did not fully utilize its floorplan facility on used vehicles and decided to finance used vehicles with cash on a short term
basis rather than incur additional interest costs on its used vehicles. Since the Company holds a significant amount of cash in order
to maintain working capital requirements from its manufacturers, the Company determined that reducing its financing on used
vehicles was a more prudent use of its cash on a short term basis. This resulted in the negative change in non-cash working capital
realized in the fourth quarter of 2012. If the Company requires additional cash for liquidity purposes, it may finance used vehicles
in the future to replenish cash balances. At December 31, 2012 the Company had unused floorplan financing availability for used
vehicles of approximately $6.9 million which it could utilize in the future to replenish cash balances.
Cash Flow from Investing Activities
Cash flow from investing activities of the Company for the year ended December 31, 2012 was a net outflow of $30.9 million
compared to $5.3 million in the prior year. In 2012, the Company purchased land and a building to be used for its Kia open point
dealership for $8.7 million, land for potential future dealership operations for $3.2 million, and land adjacent to its Crosstown
Chrysler Jeep Dodge FIAT dealership for $2.4 million. These three purchases plus the addition of $10.0 million of restricted cash
were main contributors to the increase in cash outflows from investing activities in 2012.
For the three month period ended December 31, 2012, cash flow from investing activities of the Company was a net outflow of
$13.1 million as compared to a net outflow of $2.9 million in the same period of the prior year. In the fourth quarter of 2012, the
Company purchased land for $2.4 million, as described above, and added $10.0 million to restricted cash, which contributed to the
increase in net cash outflows.
Cash Flow from Financing Activities
Cash flow from financing activities of the Company for the year ended December 31, 2012 was a net outflow of $9.3 million
compared to $8.6 million in the prior year. In 2012, the Company obtained mortgage financing of $6.3 million, which partially
offset the $0.9 million paid to purchase treasury shares and additional $6.1 million in dividends paid when compared to the same
period in the prior year.
For the three month period ended December 31, 2012, cash flow from financing activities was a net outflow of $8.4 million as
compared to $2.5 million in the same period of 2011. In the fourth quarter of 2012, the Company paid $3.4 million in dividends
and repaid $5.1 million of debt, which are the main contributors to this increase in cash outflow.
22
Economic Dependence
As stated in Note 8 of the annual audited consolidated financial statements, the Company has significant commercial and economic
dependence on Chrysler Canada. As a result, the Company is subject to significant risk in the event of the financial distress of
Chrysler Canada, one of our major vehicle manufacturers and parts suppliers. Details of this relationship and balances of assets
with Chrysler Canada are described in Note 8 of the annual consolidated financial statements for the year ended December 31,
2012.
Credit Facilities and Floor Plan Financing
Credit Facilities
HSBC Bank Canada (“HSBC”) provides AutoCanada with a $40 million revolving term loan (the “HSBC Revolver”) that may be
increased to $50 million subject to credit approval by HSBC. The HSBC Revolver is a 365 day fully committed, extendible
revolving term loan. The HSBC Revolver’s maturity date is June 30, 2014, however the facility may be extended for an additional
365 days prior to the maturity of the facility at the request of AutoCanada and upon approval by HSBC. The HSBC Revolver
contains an annual renewal fee of $15. The HSBC Revolver bears interest at HSBC Prime Rate plus 0.75% per annum (currently
3.75% at the date of this MD&A).
The HSBC Revolver is secured by all of the present and future assets of the Company, the various Limited Partnerships and the
General Partners of each dealership within AutoCanada. As part of priority agreements signed by HSBC and the Company, the
collateral for the HSBC Revolver excludes all new, used, and demonstrator inventory financed with the Revolving Floorplan
Facilities (discussed further below).
The HSBC Revolver requires maintenance of certain financial covenants as indicated below:
(i)
(ii)
(iii)
(iv)
The Debt to Tangible Net Worth ratio, including floorplan, must not exceed 7.50:1. Intangible assets to be
deducted from Tangible Net Worth, and shareholder loans to be added to tangible net worth and deducted from
debt, if postponed to HSBC; tested quarterly
The Debt to Tangible Net Worth ratio, excluding floorplan, must not exceed 2.50:1. Intangible assets to be
deducted from Tangible Net Worth, and shareholder loans to be added to tangible net worth and deducted from
debt, if postponed to HSBC; tested quarterly
The Current Ratio, net of flooring, shall not be less than 1.20:1 at any time; tested quarterly
The Fixed Charge Ratio shall not be less than 1.20:1 at any time.
Additional information relating to the HSBC Revolver including a copy of the agreement can be found on SEDAR
(www.sedar.com).
During the quarter ended December 31, 2012, the Company signed a renewal letter from HSBC with respect to its HSBC Term
Loan. The HSBC Term Loan has been extended to January 31, 2013, which if not renewed at the time will become payable on
January 31, 2014. The security, covenants, fees, interest rates and other terms remain consistent with the current HSBC Term Loan.
HSBC has indicated to the Company that repayment will not be required on January 31, 2014 as the Company is currently in the
renewal process for the HSBC Term Loan and expects to renew the loan for an additional term.
On August 30, 2012, the Company arranged a mortgage agreement with Servus Credit Union (“Servus”), whereby Servus would
provide the Company a $6.25 million commercial mortgage to facilitate the purchase of land and building to be used for the
operations of the Kia open point dealership. The mortgage bears an annual interest rate of 3.90%, fixed, payable and calculated
monthly in arrears, originally amortized over a 20 year period with term expiring 5 years after the fund date. The Servus Mortgage
requires certain reporting requirements and is collateralized by general security agreement consisting of a first fixed charge over
the land and building. With respect to financial covenants, a subsidiary of the Company is required to maintain a minimum annual
Debt Service Coverage ratio of 1.25:1.
The Bank of Montreal (“BMO”) provided the Company with a fixed rate term loan (the “BMO Term Loan”) which was used to
purchase the Cambridge Hyundai facility located in Cambridge, Ontario in 2008. The BMO Term Loan matured on September 30,
2012 and bears interest at a fixed rate of 5.11%. The BMO Term Loan requires maintenance of certain financial covenants and is
collateralized by a general security agreement consisting of a first fixed charge in the amount of $3.5 million registered over the
Cambridge Hyundai property. The Company is currently in the renewal process for the BMO Term Loan.
23
Revolving Floorplan Facilities
During the fourth quarter of 2012, The Bank of Nova Scotia (“Scotiabank”) provided the Company a revolving floorplan facility to
finance new and used vehicle inventory in the total amount of $240 million to refinance the Ally facilities previously used to
finance new and used vehicles at twenty-one of its twenty-four wholly owned dealerships. The facility for new vehicle inventory
bears interest at Bankers’ Acceptance rate plus 1.40% per annum (2.62% at December 31, 2012). The facility for used vehicle
inventory bears interest at Scotiabank prime rate plus 1.90% (3.12% at December 31, 2012). The facility is collateralized by the
individual dealerships’ inventory, which are directly financed by Scotiabank, and a guarantee from AutoCanada Holdings Inc., a
subsidiary of the Company.
On March 22, 2013, the Company announced that its revolving floorplan facility agreement with Scotiabank had been increased by
$50 million to accommodate the growing inventory requirements of its dealerships. The total amount available under the
Scotiabank facility is now $290 million. In addition to the increase, the Company received a 50 basis point interest rate reduction in
both its new and used vehicle floorplan facilities with Scotiabank. Under the facility, the interest rates have been revised to
Bankers’ Acceptance plus 1.30% (currently 2.50%) for new vehicles and Bankers’ Acceptance plus 1.80% (currently 3.00%) for
used vehicles.
The facility has been provided to 21 of the 26 dealerships in which AutoCanada operates. The terms and conditions of the facility
apply only to the collective group of 21 dealerships which are to be funded (the “Borrowers”). With respect to financial covenants,
the Borrowers are required to maintain the following covenants:
(i)
(ii)
(iii)
The ratio of consolidated current assets to current liabilities of the Borrowers is to be maintained at all times at
1.1:1 or better;
Consolidated Tangible Net Worth of the Borrowers is to be maintained in excess of $40 million at all times; and
The ratio of Consolidated Debt to Tangible Net Worth of the Borrowers is not to exceed 7.5:1.
The facility also contains a requirement for Mr. Pat Priestner, CEO of AutoCanada, to maintain an indirect ownership interest in
AutoCanada Inc. of a minimum of 10%. As noted previously, the facility also requires AutoCanada to maintain a minimum of $10
million in bulk offset accounts with Scotiabank which may be used as security repayment in the event of default on its revolving
floorplan facilities. The bulk offset accounts earn interest equal to the rate of interest charged on new vehicles.
VW Credit Canada Inc. (“VCCI Facilities”) provides revolving floorplan facilities for all of the Company’s Volkswagen
dealerships. The VCCI Facilities consist of an aggregate of $12.025 million in revolving floorplan facilities to finance new and
demonstrator vehicles from Volkswagen Canada (“VW Canada”). The new and demonstrator vehicle facilities are due on demand
and bear interest at Royal Bank of Canada (“RBC”) prime rate plus 0.50% per annum (3.50% at December 31, 2012) and is
payable monthly in arrears. The VCCI Facilities also provide the three dealerships with used vehicle floorplan financing to a
maximum of $3.965 million during peak selling season. The used vehicle facilities are due on demand and bear interest between
Royal Bank of Canada prime plus 0.75 - 1.00% depending on the type of used vehicles financed (3.75% - 4.00% at December 31,
2012). In February 2013, the rate on the new vehicle facilities was lowered to RBC prime rate.
The VCCI Facilities are collateralized by all new, used and demonstrator inventory financed by VCCI and a general security
agreement with each of the three dealerships. The individual notes payable of the VCCI Facilities are due when the related vehicle
is sold or according to an aging based repayment policy as mandated by VCCI.
The VCCI Facilities require maintenance of financial covenants which require all dealerships to maintain minimum cash and
equity balances. At December 31, 2012 the financial covenants had been met.
Our ability to finance our new, used and demonstrator inventory is a significant factor in the Company’s liquidity management.
The Company is generally able to increase or decrease the number of vehicles it finances, subject to limits imposed by floorplan
lenders, as part of its treasury management function. If floorplan limits are reduced, the Company may not be able to maintain its
current level of inventories which may impact our future results.
Financial Instruments
Details of the Company’s financial instruments, including risks and uncertainties are included in Note 21 of the annual
consolidated financial statements for the year ended December 31, 2012.
24
Growth vs. Non-growth Capital Expenditures
Non-growth capital expenditures are capital expenditures incurred during the period to maintain existing levels of service. These
include capital expenditures to replace property and equipment and any costs incurred to enhance the operational life of existing
property and equipment. Non-growth capital expenditures can fluctuate from period to period depending on our needs to upgrade
or replace existing property and equipment. Over time, we expect to incur annual non-growth capital expenditures in an amount
approximating our amortization of property and equipment reported in each period.
Additional details on the components of non-growth property and equipment purchases are as follows:
(In thousands of dollars)
Leasehold improvements
Machinery and equipment
Furniture and fixtures
Computer equipment
Company & lease vehicles
October 1, 2012 to
December 31, 2012
January 1, 2012 to
December 31, 2012
$
44
215
23
155
20
457
339
541
160
609
46
1,695
Amounts relating to the expansion of sales and service capacity are considered growth expenditures. Growth expenditures are
discretionary, represent cash outlays intended to provide additional future cash flows and are expected to provide benefit in future
periods. During the year ended December 31, 2012 growth capital expenditures of $14.4 million were incurred. These
expenditures related primarily to three pieces of land and a building that were purchased for future dealership operations during the
last three quarters of 2012 for a total of $13.9 million. Dealership relocations are included as growth expenditures if they contribute
to the expansion of sales and service capacity of the dealership.
The following table provides a reconciliation of the purchase of property and equipment as reported on the Statement of Cash
Flows to the purchase of non-growth property and equipment as calculated in the free cash flow section below.
(In thousands of dollars)
Purchase of property and equipment from the Statement of Cash Flows
Less: Amounts related to the expansion of sales and service capacity
Purchase of non-growth property and equipment
October 1, 2012 to
December 31, 2012
January 1, 2012 to
December 31, 2012
$
2,918
(2,461)
457
$
16,069
(14,374)
1,695
Repairs and maintenance expenditures are expensed as incurred and have been deducted from earnings for the period. Repairs and
maintenance expense incurred during the three-month period and year ended December 31, 2012, were $0.5 million and $2.2
million, respectively (2011 - $0.5 million and $1.9 million).
Planned Capital Expenditures
Our capital expenditures consist primarily of leasehold improvements, the purchase of furniture and fixtures, machinery and
equipment, service vehicles, computer hardware and computer software. Management expects that our annual capital expenditures
will increase in the future, as a function of increases in the number of locations requiring maintenance capital expenditures, the cost
of opening new locations and increased spending on information systems.
For further information regarding planned capital expenditures, see “GROWTH, ACQUISITIONS, RELOCATIONS, AND REAL
ESTATE” above.
25
Contractual Obligations
The Company has operating lease commitments, with varying terms through 2029, to lease premises and equipment used for
business purposes. The Company leases the majority of the lands and buildings used in its franchised automobile dealership
operations from related parties and other third parties.
The minimum lease payments over the upcoming fiscal years will be as follows:
2013
2014
2015
2016
2017
Thereafter
Total
$
10,605
10,289
9,967
8,205
6,460
50,378
95,904
Information regarding our contractual obligations with respect to long-term debt, capital lease obligations and other long-term
obligations is included in the Liquidity Risk section of Note 21 – Financial Instruments of the Company’s annual consolidated
financial statements.
Financial Position
The following table shows selected audited balances of the Company (in thousands) for December 31, 2012 and December 31,
2011 as well as unaudited balances of the Company at September 30, 2012, June 30, 2012, March 31, 2012, September 30, 2011,
June 30, 2011 and March 31, 2011.
Balance Sheet
Data
Cash and cash
equivalents and
restricted cash
Accounts
receivable
Inventories
Total assets
Revolving
floorplan
facilities
Non-current debt
and lease
obligations
December
31, 2012
September
30, 2012
June
30, 2012
March
31, 2012
December
31, 2011
September
30, 2011
June
30, 2011
March
31, 2011
44,472
54,255
51,198
53,403
53,641
49,366
43,837
39,337
47,944
54,148
52,042
51,380
42,448
44,172
51,539
42,260
199,226
193,990
201,302
155,778
137,016
159,732
149,481
134,865
410,469
420,050
414,061
361,307
334,370
327,568
318,956
291,291
203,525
212,840
221,174
178,145
150,816
175,291
172,600
152,075
23,937
26,039
23,027
20,071
20,115
20,210
24,895
24,989
Net Working Capital
The automobile manufacturers represented by the Company require the Company to maintain net working capital for each
individual dealership. At December 31, 2012, the aggregate of net working capital requirements was approximately $32.7 million.
At December 31, 2012, all working capital requirements had been met by each dealership. The working capital requirements
imposed by the automobile manufacturers’ may limit our ability to fund capital expenditures, acquisitions, dividends, or other
commitments in the future if sufficient funds are not generated by the Company. Net working capital, as defined by automobile
manufacturers, may not reflect net working capital as determined using GAAP measures. As a result, it is possible that the
Company may meet automobile manufacturers’ net working capital requirements without having sufficient aggregate working
capital using GAAP measures. The Company defines net working capital amounts as current assets less current liabilities as
presented in the annual consolidated financial statements. At December 31, 2012, the Company had aggregate working capital of
26
approximately $45.5 million.
The net working capital requirements above restrict the Company’s ability to transfer funds up from its subsidiary’s as each
subsidiary dealership is required to be appropriately capitalized as explained above. In addition, our VCCI Facilities required the
three VW dealerships to maintain minimum cash and equity, which also restricts our ability to transfer up funds.
Off Balance Sheet Arrangements
The Company has not entered into any material off balance sheet arrangements.
Related Party Transactions
Note 30 of the annual consolidated financial statements of the Company for the year ended December 31, 2012 summarize the
transactions between the Company and its related parties.
Administrative support fees
The Company currently earns administrative support fees from companies controlled by the CEO of AutoCanada. The
administrative support fees consist of a portion of human resource and fixed costs associated with providing technological and
accounting support to these companies. The Company believes that providing support services to these companies provides value
to both the companies supported and AutoCanada. By providing support, AutoCanada is able to reduce its overall fixed costs
associated with accounting and information technology.
Management services agreements
The Company currently earns management services fees from companies in which AutoCanada has significant influence. The
management services agreements are fixed monthly fees charged to subsidiaries of DHL from AutoCanada in return for marketing,
training, technological support and accounting support provided to the dealerships. AutoCanada provides support services to all
dealerships in which it owns and operates, however since the two dealerships are not wholly-owned by AutoCanada, the Company
charges a management services fee in order to recover the costs of resources provided. Management believes that, as a result of the
support provided, the dealerships have improved in sales volumes and profitability since being acquired by DHL. The services
provided also allow both the dealerships and AutoCanada to share in savings as a result of negotiating group rates on services such
as advertising and purchasing.
These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of
consideration established and agreed to by the related parties and have been reviewed and approved by the independent members
of our Board of Directors and where considered necessary are supported by independent appraisals.
DIVIDENDS
Dividends to Shareholders
Management reviews the Company’s financial results on a monthly basis. The Board of Directors reviews the financial results on
a quarterly basis, or as requested by Management, and determine whether a dividend shall be paid based on a number of factors.
The following table summarizes the dividends declared and paid by the Company in 2012:
(In thousands of dollars)
Record date
Payment date
February 29, 2012
May 31, 2012
August 31, 2012
November 30, 2012
March 15, 2012
June 15, 2012
September 17, 2012
December 17, 2012
Total
Declared
$
2,783
2,982
3,181
3,380
Paid
$
2,783
2,982
3,181
3,380
On February 15, 2013, the Board declared a quarterly eligible dividend of $0.18 per common share on AutoCanada’s outstanding
common shares, payable on March 15, 2013 to shareholders of record at the close of business on February 28, 2013. The quarterly
eligible dividend of $0.18 represents an annual dividend rate of $0.72 per share. The next scheduled dividend review will be in
May 2013.
27
As per the terms of the HSBC facility, we are restricted from declaring dividends and distributing cash if we are in breach of our
financial covenants or our available margin and facility limits or if such dividend would result in a breach of our covenants or our
available margin and facility limits. At this time, the Company is well within its covenants, as such, Management does not believe
that a restriction from declaring dividends is likely in the foreseeable future.
Free Cash Flow
The Company has defined free cash flow to be cash flows provided by operating activities (including changes in non-cash
operating working capital) less capital expenditures (excluding capital assets acquired by acquisitions or purchases of real estate).
(In thousands of $ except share
and per share amounts)
Cash provided by operating
activities
Deduct:
Purchase of property and equipment
Free Cash Flow 1
Weighted average shares
outstanding at end of period
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
4,166
5,292
10,851
9,718
3,520
6,569
9,235
1,748
(930)
3,236
(612)
4,680
(694)
10,157
(718)
9,000
(361)
3,159
(410)
6,159
(511)
8,724
(858)
890
19,880,930
19,880,930
19,880,930
19,880,930
19,880,930
19,876,139
19,804,014
19,802,947
Free cash flow per share
0.163
0.235
0.511
0.453
0.159
0.310
0.441
0.045
Free cash flow – 12 month trailing
26,553
18,007
23,753
27,073
26,996
28,474
27,042
18,932
1 These financial measures are identified and defined under the section “NON-GAAP MEASURES”.
Management believes that the free cash flow (see “NON-GAAP MEASURES”) can fluctuate significantly as a result of historical
fluctuations in our business operations that occur on a quarterly basis as well as the resulting fluctuations in our trade receivables
and inventory levels and the timing of the payments of trade payables and revolving floorplan facilities.
Changes in non-cash working capital consist of fluctuations in the balances of trade and other receivables, inventories, other
current assets, trade and other payables and revolving floorplan facilities. Factors that can affect these items include seasonal sales
trends, strategic decisions regarding inventory levels, the addition of new dealerships, and the day of the week on which period end
cutoffs occur.
The following table summarizes the net increase (decrease) in cash due to changes in non-cash working capital for the years ended
December 31, 2012 and December 31, 2011.
(In thousands of dollars)
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Leased vehicle repurchase obligations
Revolving floorplan facilities
January 1, 2012 to
December 31, 2012
$
January 1, 2011 to
December 31, 2011
$
(5,496)
(63,105)
18
3,311
171
52,709
(12,392)
(9,808)
(26,080)
33
5,305
340
31,441
1,231
28
Adjusted Free Cash Flow
The Company has defined adjusted free cash flow to be cash flows provided by operating activities (before changes in non-cash
operating working capital) less non-growth capital expenditures.
(In thousands of $ except share
and per share amounts)
Cash provided by operating
activities before changes in non-
cash working capital
Deduct:
Purchase of non-growth property and
equipment
Adjusted Free Cash Flow1
Weighted average shares outstanding
at end of period
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
3,882
9,076
8,032
7,799
4,391
9,609
10,029
9,435
(232)
(188)
(244)
(407)
(361)
(366)
(511)
(457)
3,650
8,888
7,788
7,392
4,030
9,243
9,518
8,978
19,880,930
19,880,930
19,880,930
19,880,930
19,880,930
19,876,139
19,804,014
19,802,947
Adjusted Free Cash Flow / Share
0.184
0.447
0.392
0.372
0.203
0.465
0.481
0.453
Adjusted Free Cash flow – 12
Month Trailing
15,097
18,757
23,074
27,718
28,096
28,453
30,183
31,769
1 These financial measures are identified and defined under the section “NON-GAAP MEASURES”.
Management believes that non-growth property and equipment is necessary to maintain and sustain the current productive capacity
of the Company’s operations and cash available for growth. Management believes that maintenance capital expenditures should be
funded by cash flow provided by operating activities. Capital spending for the expansion of sales and service capacity is expected
to improve future free cash and as such is not deducted from cash flow provided by operating activities before changes in non-cash
working capital in arriving at adjusted free cash flow. Adjusted free cash flow is a measure used by management in forecasting
and determining the Company’s available resources for future capital expenditure, repayment of debt, funding the future growth of
the Company and dividends to Shareholders.
During the year ended December 31, 2012, the Company paid approximately $4.3 million in corporate taxes and tax installments.
Accordingly, this reduced our adjusted free cash flow by this amount. The Company expects the payment of corporate income
taxes to have a more significant negative effect on free cash flow and adjusted free cash flow. See “RESULTS FROM
OPERATIONS – Annual Operating Results – Income Taxes” for further detail regarding the impact of corporate income taxes on
cash flow.
29
Adjusted Return on Capital Employed
The Company has defined Adjusted Return on Capital Employed to be EBIT (EBITDA, as defined in “NON-GAAP
MEASURES”, less depreciation and amortization) divided by Average Capital Employed in the Company (average of
shareholders’ equity and interest bearing debt, excluding floorplan financing, for the period, less the comparative adjustment
defined below). Calculations below represent the results on a quarterly basis, except for the adjusted return on capital employed –
12 month trailing which incorporates the results based on the trailing 12 months for the periods presented.
(In thousands of $ except share and
per share amounts)
EBITDA1
Add (deduct):
Amortization
EBIT1
Average long-term debt
Average shareholders’ equity
Average capital employed1
Return on capital employed1
Comparative adjustment2
Q1 2011
Q2 2011
Q3 2011
Q4 2011 Q1 2012
Q2 2012 Q3 2012
Q4 2012
4,047
9,321
8,216
7,553
6,809
10,208
10,592
10,276
(1,079)
2,967
26,201
82,973
(1,018)
8,303
26,071
85,056
(1,044)
7,172
25,201
89,156
(1,110)
6,443
(1,024)
5,785
(1,027)
9,181
(1,139)
9,453
(1,121)
9,155
24,282
102,383
23,873
113,794
25,276
116,050
30,390
119,380
31,007
122,877
109,174
111,127
114,357
126,665
137,666
141,326
149,770
153,884
2.7%
7.5%
6.3%
5.1%
4.2%
6.5%
6.3%
5.9%
3,579
3,579
3,579
(15,376)
(15,376)
(15,376)
(15,376)
(15,542)
Adjusted average capital employed2
112,753
114,706
117,936
120,766
122,290
125,950
134,394
138,425
Adjusted return on capital employed2
2.6%
7.2%
6.1%
5.3%
4.7%
7.3%
7.0%
6.6%
Adjusted return on capital employed -
12 month trailing
21.3%
25.9%
1These financial measures are identified and defined under the section “NON-GAAP MEASURES
2A comparative adjustment has been made in order to adjust for impairments and reversals of impairments of intangible assets. Due to the increased frequency of
impairments and reversals of impairments, management has provided an adjustment in order to freeze intangible assets at the pre-IFRS amount of $43,700. As a
result, all differences from January 1, 2011 forward under IFRS have been adjusted at the post-tax rate at the time the adjustment to the intangible asset carrying
amount was made. Management believes that the adjusted return on capital employed provides more useful information about the return on capital employed.
Management believes that Adjusted Return on Capital Employed (see “NON-GAAP MEASURES”) is a good measure to evaluate
the profitability of our invested capital. As a corporation, management of AutoCanada may use this measure to compare potential
acquisitions and other capital investments against our internally computed cost of capital to determine whether the investment shall
create value for our shareholders. Management may also use this measure to look at past acquisitions, capital investments and the
Company as a whole in order to ensure shareholder value is being achieved by these capital investments.
CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICY DEVELOPMENTS
A complete listing of critical accounting policies, estimates, judgments and measurement uncertainty can be found in Note 6 of the
annual consolidated financial statements for the year ended December 31, 2012.
Certain new standards, interpretations, amendments and improvements to existing standards were issued by the IASB or
International Financial Reporting Interpretations Committee (“IFRIC”) that are not yet effective for the financial year ended
December 31, 2012. The standards impacted that are applicable to the Company are as follows:
•
•
IFRS 9, Financial Instruments – The new standard will ultimately replace IAS 39, Financial Instruments:
Recognition and Measurement. The replacement of IAS 39 is a multi-phase project with the objective of improving
and simplifying the reporting for financial instruments and the issuance of IFRS 9 is part of the first phase. This
standard becomes effective on January 1, 2015.
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and disclosure for use
across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an
asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date.
30
•
Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards
requiring fair value measurements and does not always reflect a clear measurement basis or consistent disclosures.
This standard becomes effective on January 1, 2013.
IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items presented in OCI
into two groups, based on whether or not items may be recycled in the future. Entities that choose to present OCI
items before tax will be required to show the amount of tax related to the two groups separately. The amendment is
effective for annual periods beginning on or after July 1, 2012 with earlier application permitted.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
Disclosure Controls & Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports
filed with securities regulatory authorities is recorded, processed, summarized and reported on a timely basis, and is accumulated
and communicated to the Company’s management, including the CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure.
As of December 31, 2012, the Company’s management, with the participation of the CEO and CFO, evaluated the effectiveness of
the design and operation of its disclosure controls and procedures, as defined in National Instrument 52-109 of the Canadian
Securities Administrators, and have concluded that the Company's disclosure controls and procedures are effective.
Internal Controls over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal controls over financial reporting.
These controls include policies and procedures that (l) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and
expenditures are being made only in accordance with authorizations of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
All control systems contain inherent limitations, no matter how well designed. As a result, the Company's management
acknowledges that its internal controls over financial reporting will not prevent or detect all misstatements due to error or fraud. In
addition, management's evaluation of controls can provide only reasonable, not absolute, assurance that all control issues that may
result in material misstatements, if any, have been detected.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, based
on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on this assessment, management concluded that the company maintained effective
internal control over financial reporting as of December 31, 2012.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over financial reporting during the year ended December 31,
2012.
31
OUTLOOK
The outlook regarding vehicle sales in Canada is difficult to predict. New light vehicle unit sales in Canada are expected to
increase by 0.8 percent in 2013 as compared to the prior year.
New Vehicle Sales Outlook by Province*
(thousands of units, annual rates)
Canada
Atlantic
Central
Quebec
Ontario
West
Manitoba
Saskatchewan
Alberta
British Columbia
1994-2005
Average
1,446
2006-08
Average
1,637
2009
2010
2011
2012
1,461
1,557
1,589
1,677
102
936
366
570
408
42
36
166
164
119
1,002
411
591
516
45
43
239
189
115
927
392
535
419
43
44
182
150
122
990
414
576
445
44
46
200
155
119
997
408
589
473
47
50
218
158
126
1,034
416
618
517
50
55
239
173
* Includes cars and light trucks
Source: Scotia Economics - Global Auto Report, March 6, 2013
During 2012, the Company continued to benefit from the general improvement in the Canadian economy. Inflation and vehicle
pricing are expected to be relatively stable. The unemployment rate and consumer confidence indices are generally good indicators
of the health of the auto industry and these continue to improve, all of which support the increase in retail new and used vehicle
sales and finance and insurance revenues (an indicator of improved credit conditions).
It was within this context that on July 10, 2012, the Board of Directors held its annual strategic review meeting. As a result of the
continued improvement in the above macroeconomic conditions, the recently announced investment in two GM dealerships and a
Kia open point, together with 2012 PwC Trendsetter report which indicates a dealership succession issue in the coming years due
to an aging dealer body and ever increasing facility capital requirements, the Board believes that there will be greater growth
opportunities over the coming years than previously considered, as independent owners exit the business. In July 2012,
Management anticipated that the bulk of these growth opportunities would come in the latter two to five years more so than in the
short term. However, as noted above, the Company has begun to experience a significant increase in acquisition opportunities and
is cautiously optimistic that it may complete an additional three to five acquisitions in 2013.
As previously disclosed, however, the Company has not convinced a number of Manufacturers to accept the public ownership
model. Although the Company is not privy to the reasons, it appears that some Manufacturers strongly prefer a model that favours
a single vested owner who controls the dealership, as evidenced by the GM Canada requirement in respect to the Company’s
investments in GM Canada dealerships that Mr. Priestner, CEO of AutoCanada, retain 100 percent voting control of the GM
dealership entity as well as invest personally in the dealership, a prerequisite which may or may not be imposed by other brands the
Company currently does not represent. The Company may also limited in its ability to purchase automotive dealership groups in
that many dealership groups contain dealership brands which have not accepted the public ownership model to date.
Regarding dividends, the Board of Directors remain committed to providing investors with an attractive dividend which it
continues to review on a regular basis in the context of a number of factors, including acquisition opportunities.
32
RISK FACTORS
We face a number of business risks that could cause our actual results to differ materially from those disclosed in this MD&A (See
“FORWARD LOOKING STATEMENTS”) Investors and the public should carefully consider our business risks, other
uncertainties and potential events as well as the inherent uncertainty of forward looking statements when making investment
decisions with respect to AutoCanada. If any of the business risks identified by AutoCanada were to occur, our business, financial
condition, results of operations, cash flows or prospects could be materially adversely affected. In such case, the trading price of
our shares could decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may
also adversely affect our business and operations. A comprehensive discussion of the known risk factors of AutoCanada and
additional business risks is available in our 2012 Annual Information Form dated March 26, 2013 available on the SEDAR website
at www.sedar.com.
Additional information
Additional information relating to the Company, including all public filings, is available on SEDAR (www.sedar.com). The
Company’s shares trade on the Toronto Stock Exchange under the symbol ACQ.
FORWARD LOOKING STATEMENTS
Certain statements contained in management’s discussion and analysis are forward-looking information (collectively “forward-
looking statements”), within the meaning of the applicable Canadian securities legislation. We hereby provide cautionary
statements identifying important factors that could cause our actual results to differ materially from those projected in these
forward-looking statements. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, through the use of words or phrases such as “will likely
result”, “are expected to”, “will continue”, “is anticipated”, “projection”, “vision”, “goals”, “objective”, “target”, “schedules”,
“outlook”, “anticipate”, “expect”, “estimate”, “could”, “should”, “expect”, “plan”, “seek”, “may”, “intend”, “likely”, “will”,
“believe” and similar expressions are not historical facts and are forward-looking and may involve estimates and assumptions and
are subject to risks, uncertainties and other factors some of which are beyond our control and difficult to predict. Accordingly,
these factors could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.
Therefore, any such forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this
document.
•
•
•
•
•
•
In particular, material forward-looking statements in management’s discussion and analysis include:
the future level of performance based incentives and its effect on our profitability;
expectations regarding finance costs savings as a result of the floorplan refinancing;
expectations and estimates regarding income taxes and their effect on cash flow and dividends;
estimates regarding the impact on free cash flow of an increase or decrease of one new retail vehicle sold (and the
associated finance and insurance income on the sale);
expectations and future plans regarding Nicholson Chevrolet, Petersen GMC Buick, Peter Baljet, and other potential GM
acquisitions;
expectations, estimates and assumptions regarding the Real Estate Committee’s analysis of the real estate purchase from
Canada One Auto Group including purchase price, lease cost savings, timing, financial and other metrics;
expectations and future plans regarding the Kia open point dealership;
our assumption on the amount of time it may take for an acquisition or open point to achieve normal operating results;
guidance with respect to future acquisition and open point opportunities;
our belief that relocation of certain dealerships may provide incremental long-term earnings growth and better align some
of our dealerships with the growth expectations of our manufacturer partners;
the impact of and estimates related to dealership real estate relocations and purchases and its impact on liquidity, financial
performance and the Company’s capital requirements;
the impact of a significant decline in sales as a result of the inability to procure adequate supply of vehicles and/or lower
consumer demand on cash flows from operations and our ability to fund capital expenditures;
our plans to finance used vehicles in the future if additional cash is needed for liquidity purposes;
the impact of floorplan limits on inventory levels and our results;
the impact of working capital requirements and its impact on future liquidity;
our expectations regarding annual non-growth capital expenditures;
our expectations regarding growth expenditures and their related impact:
•
•
•
•
•
•
•
•
•
•
•
33
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our expectation to increase annual capital expenditures and the reasons for this expected increase;
our expectations regarding the potential purchase of real estate properties and the reasons for the purchase;
our belief that free cash flow can fluctuate significantly and the impact of these fluctuations on our operations and
performance;
our belief that maintenance capital expenditures should be funded by cash flow provided by operating activities;
our potential use of Adjusted Return on Capital Employed as a measure for comparison and analysis;
our expectation that inflation and vehicle pricing is to be relatively stable;
our expectations regarding the reasons for and timing of future growth opportunities;
our expectation that if the business landscape changes and new brands consider the acceptance of the public ownership
model, that Management and the Board may revise the dividend policy to better align the Company’s capital structure to
fund future growth expectations;
• management’s assessment of our dividend policy and its effect on liquidity;
•
•
•
• management’s assumptions and expectations over the future economic and general outlook.
our assumptions regarding financial covenants and our ability to meet covenants in the future;
expectations and assumptions regarding the Company’s ability to pay future dividends and growth;
assumptions over non-GAAP measures and their impact on the Company;
Although we believe that the expectations reflected by the forward-looking statements presented in this MD&A are reasonable, our
forward-looking statements have been based on assumptions and factors concerning future events that may prove to be inaccurate.
Those assumptions and factors are based on information currently available to us about ourselves and the businesses in which we
operate. Information used in developing forward-looking statements has been acquired from various sources including third-party
consultants, suppliers, regulators, and other sources. In some instances, material assumptions are disclosed elsewhere in this
MD&A in respect of forward-looking statements. We caution the reader that the following list of assumptions is not exhaustive.
The material factors and assumptions used to develop the forward-looking statements include but are not limited to:
no significant adverse changes to the automotive market, competitive conditions, the supply and demand of vehicles, parts
and service, and finance and insurance products or the political, economic and social stability of the jurisdictions in which
we operate;
no significant construction delays that may adversely affect the timing of dealership relocations and open points;
no significant disruption of our operations such as may result from harsh weather, natural disaster, accident, civil unrest,
or other calamitous event;
no significant unexpected technological event or commercial difficulties that adversely affect our operations;
continuing availability of economical capital resources; demand for our products and our cost of operations;
no significant adverse legislative and regulatory changes; and
stability of general domestic economic, market, and business conditions
Because actual results or outcomes could differ materially from those expressed in any forward-looking statements, investors
should not place undue reliance on any such forward-looking statements. By their nature, forward-looking statements involve
numerous assumptions, inherent risks and uncertainties, both general and specific, which contribute to the possibility that the
predicted outcomes will not occur. The risks, uncertainties and other factors, many of which are beyond our control, that could
influence actual results include, but are not limited to:
rapid appreciation or depreciation of the Canadian dollar relative to the U.S. dollar;
a sustained downturn in consumer demand and economic conditions in key geographic markets;
adverse conditions affecting one or more of our automobile manufacturers;
the ability of consumers to access automotive loans and leases;
competitive actions of other companies and generally within the automotive industry;
our dependence on sales of new vehicles to achieve sustained profitability;
our suppliers ability to provide a desirable mix of popular new vehicles;
the ability to continue financing inventory under similar interest rates;
our suppliers ability to continue to provide manufacturer incentive programs;
the loss of key personnel and limited management and personnel resources;
the ability to refinance credit agreements in the future;
changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are
interpreted and enforced
risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations
the ability to obtain automotive manufacturers’ approval for acquisitions;
34
The Company’s Annual Information Form and other documents filed with securities regulatory authorities (accessible through the
SEDAR website www.sedar.com describe the risks, material assumptions and other factors that could influence actual results and
which are incorporated herein by reference.
Further, any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by
applicable law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the
date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time,
and it is not possible for management to predict all of such factors and to assess in advance the impact of each such factor on our
business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
NON-GAAP MEASURES
Our MD&A contains certain financial measures that do not have any standardized meaning prescribed by Canadian GAAP.
Therefore, these financial measures may not be comparable to similar measures presented by other issuers. Investors are cautioned
these measures should not be construed as an alternative to net earnings (loss) or to cash provided by (used in) operating, investing,
and financing activities determined in accordance with Canadian GAAP, as indicators of our performance. We provide these
measures to assist investors in determining our ability to generate earnings and cash provided by (used in) operating activities and
to provide additional information on how these cash resources are used. We list and define these “NON-GAAP MEASURES”
below:
EBITDA
EBITDA is a measure commonly reported and widely used by investors as an indicator of a company’s operating performance and
ability to incur and service debt, and as a valuation metric. The Company believes EBITDA assists investors in comparing a
company’s performance on a consistent basis without regard to depreciation and amortization and asset impairment charges which
are non-cash in nature and can vary significantly depending upon accounting methods or non-operating factors such as historical
cost. References to “EBITDA” are to earnings before interest expense (other than interest expense on floorplan financing and
other interest), income taxes, depreciation, amortization and asset impairment charges.
EBIT
EBIT is a measure used by management in the calculation of Return on capital employed (defined below). Management’s
calculation of EBIT is EBITDA (calculated above) less depreciation and amortization.
Normalized Earnings
Normalized earnings are calculated by adding back the after-tax effect of impairment or reversals of impairment of intangible
assets and impairments of goodwill. Adding back these non-cash charges to net earnings allows management to assess the net
earnings of the Company from ongoing operations.
Normalized Pre-Tax Earnings
Normalized pre-tax earnings are calculated by adding back the impairment or reversals of impairment of intangible assets and
impairments of goodwill. Adding back these non-cash charges to pre-tax net earnings allows management to assess the pre-tax net
earnings of the Company from ongoing operations.
Free Cash Flow
Free cash flow is a measure used by management to evaluate its performance. While the closest Canadian GAAP measure is cash
provided by operating activities, free cash flow is considered relevant because it provides an indication of how much cash
generated by operations is available after capital expenditures. It shall be noted that although we consider this measure to be free
cash flow, financial and non-financial covenants in our credit facilities and dealer agreements may restrict cash from being
available for distributions, re-investment in the Company, potential acquisitions, or other purposes. Investors should be cautioned
that free cash flow may not actually be available for growth or distribution of the Company. References to “Free cash flow” are to
cash provided by (used in) operating activities (including the net change in non-cash working capital balances) less capital
35
expenditure (not including acquisitions of dealerships and dealership facilities).
Adjusted Free Cash Flow
Adjusted free cash flow is a measure used by management to evaluate its performance. Adjusted free cash flow is considered
relevant because it provides an indication of how much cash generated by operations before changes in non-cash working capital is
available after deducting expenditures for non-growth capital assets. It shall be noted that although we consider this measure to be
adjusted free cash flow, financial and non-financial covenants in our credit facilities and dealer agreements may restrict cash from
being available for distributions, re-investment in the Company, potential acquisitions, or other purposes. Investors should be
cautioned that adjusted free cash flow may not actually be available for growth or distribution of the Company. References to
“Adjusted free cash flow” are to cash provided by (used in) operating activities (before changes in non-cash working capital
balances) less non-growth capital expenditures.
Absorption Rate
Absorption rate is an operating measure commonly used in the retail automotive industry as an indicator of the performance of the
parts, service and collision repair operations of a franchised automobile dealership. Absorption rate is not a measure recognized by
GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, absorption rate may not be comparable to
similar measures presented by other issuers that operate in the retail automotive industry. References to ‘‘absorption rate’’ are to
the extent to which the gross profits of a franchised automobile dealership from parts, service and collision repair cover the costs of
these departments plus the fixed costs of operating the dealership, but does not include expenses pertaining to our head office. For
this purpose, fixed operating costs include fixed salaries and benefits, administration costs, occupancy costs, insurance expense,
utilities expense and interest expense (other than interest expense relating to floor plan financing) of the dealerships only.
Average Capital Employed
Average capital employed is a measure used by management to determine the amount of capital invested in AutoCanada and is
used in the measure of Return on Capital Employed (described below). Average capital employed is calculated as the average
balance of interest bearing debt for the period (including current portion of long term debt, excluding revolving floorplan facilities)
and the average balance of shareholders equity for the period. Management does not include future income tax, non-interest
bearing debt, or revolving floorplan facilities in the calculation of average capital employed as it does not consider these items to
be capital, but rather debt incurred to finance the operating activities of the Company.
Adjusted Average Capital Employed
Adjusted average capital employed is a measure used by management to determine the amount of capital invested in AutoCanada
and is used in the measure of Adjusted Return on Capital Employed (described below). Adjusted average capital employed is
calculated as the average balance of interest bearing debt for the period (including current portion of long term debt, excluding
revolving floorplan facilities) and the average balance of shareholders equity for the period, adjusted for impairments of intangible
assets, net of deferred tax. Management does not include future income tax, non-interest bearing debt, or revolving floorplan
facilities in the calculation of adjusted average capital employed as it does not consider these items to be capital, but rather debt
incurred to finance the operating activities of the Company.
Return on Capital Employed
Return on capital employed is a measure used by management to evaluate the profitability of our invested capital. As a
corporation, management of AutoCanada may use this measure to compare potential acquisitions and other capital investments
against our internally computed cost of capital to determine whether the investment shall create value for our shareholders.
Management may also use this measure to look at past acquisitions, capital investments and the Company as a whole in order to
ensure shareholder value is being achieved by these capital investments. Return on capital employed is calculated as EBIT
(defined above) divided by Average Capital Employed (defined above).
Adjusted Return on Capital Employed
Adjusted return on capital employed is a measure used by management to evaluate the profitability of our invested capital. As a
corporation, management of AutoCanada may use this measure to compare potential acquisitions and other capital investments
against our internally computed cost of capital to determine whether the investment shall create value for our shareholders.
36
Management may also use this measure to look at past acquisitions, capital investments and the Company as a whole in order to
ensure shareholder value is being achieved by these capital investments. Adjusted return on capital employed is calculated as
EBIT (defined above) divided by Adjusted Average Capital Employed (defined above).
Cautionary Note Regarding Non-GAAP Measures
EBITDA, EBIT, Free Cash Flow, Adjusted Free Cash Flow, Absorption Rate, Average Capital Employed, Return on Capital
Employed, Normalized Earnings, Normalized Pre-tax Earnings, Adjusted Average Capital Employed and Adjusted Return on
Capital Employed are not earnings measures recognized by GAAP and do not have standardized meanings prescribed by GAAP.
Investors are cautioned that these non-GAAP measures should not replace net earnings or loss (as determined in accordance with
GAAP) as an indicator of the Company's performance, of its cash flows from operating, investing and financing activities or as a
measure of its liquidity and cash flows. The Company's methods of calculating EBITDA, EBIT, Free Cash Flow, Absorption Rate,
Average Capital Employed, Return on Capital Employed. Adjusted Average Capital Employed and Adjusted Return on Capital
Employed may differ from the methods used by other issuers. Therefore, the Company's EBITDA, EBIT, Free Cash Flow,
Adjusted Free Cash Flow, Absorption Rate, Average Capital Employed, Return on Capital Employed, Normalized Earnings,
Normalized Pre-tax Earnings, Adjusted Average Capital Employed and Adjusted Return on Capital Employed may not be
comparable to similar measures presented by other issuers.
37
AutoCanada Inc.
Consolidated Financial Statements
December 31, 2012
S
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March 26, 2013
Independent Auditor’s Report
To the Shareholders of
AutoCanada Inc.
We have audited the accompanying consolidated financial statements of AutoCanada Inc., which comprise
the consolidated statements of financial position as at December 31, 2012 and December 31, 2011, and the
consolidated statements of comprehensive income, statement of changes in equity, and statements of cash
flow for the years ended at December 31, 2012 and December 31, 2011, and the related notes, which
comprise a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
PricewaterhouseCoopers LLP
TD Tower, 10088 102 Avenue NW, Suite 1501, Edmonton, Alberta, Canada T5J 3N5
T: +1 780 441 6700, F: +1 780 441 6776
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
39 Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of AutoCanada Inc. as at December 31, 2012 and December 31, 2011 and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting
Standards.
Chartered Accountants
40 AutoCanada Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended
(in thousands of Canadian dollars except for share and per share amounts)
Revenue (Note 9)
Cost of sales (Note 10)
Gross profit
Operating expenses (Note 11)
Operating profit before other income
Loss on disposal of assets
Reversal of impairment of assets (Note 20)
Income from investment in associate (Note 15)
Operating profit
Finance costs (Note 13)
Finance income (Note 13)
Net income for the year before taxation
Income tax (Note 14)
Net comprehensive income for the year
Earnings per share
Basic
Diluted
Weighted average shares
Basic
Diluted
December 31,
2012
$
December 31,
2011
$
1,103,913
1,009,326
(913,548)
(840,165)
190,365
(149,140)
169,161
(136,846)
41,225
32,315
(95)
222
468
41,820
(10,583)
1,575
32,812
8,576
24,236
(41)
25,543
-
57,817
(9,848)
1,324
49,293
12,509
36,784
1.222
1.222
1.850
1.850
19,840,802
19,880,930
19,840,802
19,880,930
The accompanying notes are an integral part of these consolidated financial statements.
Approved on behalf of the Company:
(Signed) "Gordon R. Barefoot", Director
(Signed) "Robin Salmon", Director
41 AutoCanada Inc.
Consolidated Statements of Financial Position
(in thousands of Canadian dollars)
ASSETS
Current assets
Cash and cash equivalents (Note 16)
Restricted cash (Note 16)
Trade and other receivables (Note 17)
Inventories (Note 18)
Other current assets
Property and equipment (Note 19)
Intangible assets (Note 20)
Goodwill
Other long-term assets (Note 22)
Investment in associate (Note 15)
LIABILITIES
Current liabilities
Trade and other payables (Note 23)
Revolving floorplan facilities (Note 24)
Current tax payable (Note 14)
Current lease obligations (Note 25)
Current indebtedness (Note 24)
Long-term indebtedness (Note 24)
Deferred tax (Note 14)
EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
December 31,
2012
$
December 31,
2011
$
34,472
10,000
47,944
199,226
1,102
292,744
38,513
66,403
380
7,699
4,730
410,469
35,697
203,525
3,719
1,282
3,000
247,223
23,937
14,809
285,969
124,500
410,469
53,641
-
42,448
137,016
1,120
234,225
25,975
66,181
380
7,609
-
334,370
32,279
150,816
2,046
1,204
2,859
189,204
20,115
12,056
221,375
112,995
334,370
42 AutoCanada Inc.
Consolidated Statements of Changes in Equity
For the Years Ended
(in thousands of Canadian dollars)
Balance, January 1, 2012
Net comprehensive income
Dividends declared on common shares
(Note 28)
Common shares repurchased (Note 28)
Share-based compensation
Balance, December 31, 2012
Balance, January 1, 2011
Net comprehensive income
Dividends declared on common shares
(Note 28)
Balance, December 31, 2011
Share
capital
$
190,435
-
-
-
-
190,435
Share
capital
$
190,435
-
-
190,435
Treasury
shares
-
-
-
(935)
-
(935)
Treasury
Shares
-
-
-
-
Contributed
surplus
$
3,918
-
-
-
505
4,423
Total
capital
$
194,353
-
-
(935)
505
Accumulated
deficit
$
Equity
$
(81,358)
112,995
24,236
24,236
(12,301)
(12,301)
-
-
(935)
505
193,923
(69,423)
124,500
Contributed
surplus
$
3,918
Total
capital
$
194,353
-
-
-
-
Accumulated
deficit
$
(111,979)
36,784
Equity
$
82,374
36,784
(6,163)
(6,163)
3,918
194,353
(81,358)
112,995
The accompanying notes are an integral part of these consolidated financial statements.
43 AutoCanada Inc.
Consolidated Statements of Cash Flows
For the Years Ended
(in thousands of Canadian dollars)
Cash provided by (used in)
Operating activities
Net comprehensive income
Income taxes (Note 14)
Amortization of prepaid rent
Amortization of property and equipment (Note 11)
Loss on disposal of assets
Reversal of impairment of assets (Note 20)
Share-based compensation
Income from investment in associate (Note 15)
Income taxes paid
Net change in non-cash working capital (Note 31)
Investing activities
Addition to restricted cash (Note 16)
Business acquisitions
Investment in associate (Note 15)
Purchases of property and equipment
Disposal (purchase) of other assets
Proceeds on sale of property and equipment
Proceeds on divestiture of dealership
Prepayments of rent (Note 30)
Financing activities
Proceeds from long-term indebtedness (Note 24)
Repayment of long-term indebtedness
Common shares repurchased (Note 28)
Dividends paid (Note 28)
December 31,
2012
$
December 31,
2011
$
24,236
8,576
452
4,311
95
(222)
739
(468)
(4,255)
(12,392)
21,072
(10,000)
-
(4,262)
(16,069)
(58)
32
-
(540)
(30,897)
6,218
(2,349)
(912)
(12,301)
(9,344)
36,784
12,509
452
4,251
41
(25,543)
302
-
-
1,231
30,027
-
(1,753)
-
(2,954)
11
68
1,464
(2,160)
(5,324)
-
(2,440)
-
(6,163)
(8,603)
Increase (decrease) in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(19,169)
16,100
53,641
34,472
37,541
53,641
44 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
1 General Information
Entity information
AutoCanada Inc. (“AutoCanada” or “The Company”) is a corporation from Alberta, Canada with common
shares listed on the Toronto Stock Exchange ("TSX") under the symbol of "ACQ". The business of
AutoCanada, held in its subsidiaries, is the operation of franchised automobile dealerships in British
Columbia, Alberta, Manitoba, Ontario, Nova Scotia and New Brunswick. The Company offers a diversified
range of automotive products and services, including new vehicles, used vehicles, vehicle parts, vehicle
maintenance and collision repair services, extended service contracts, vehicle protection products and other
after-market products. The Company also arranges financing and insurance for vehicle purchases by its
customers through third-party finance and insurance sources. The address of its registered office is 200, 15505
Yellowhead Trail, Edmonton, Alberta, Canada, T5V 1E5.
2 Basis of presentation
These consolidated financial statements have been prepared in accordance with International Financial
Reporting Standards ("IFRS") as issued by the International Accounting Standards Board and Canadian
Generally Accepted Accounting Principles ("GAAP") as issued by the Canadian Institute of Chartered
Accountants.
The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting
estimates. It also requires management to exercise judgment in applying the Company’s accounting policies.
The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are
significant to the financial statements are described in Note 5.
These financial statements were approved by the Board of Directors for issue on March 26, 2013.
3
Significant Accounting Policies
The significant accounting policies used in the preparation of these consolidated financial statements are as
follows:
Basis of measurement
The consolidated financial statements have been prepared under the historical cost convention, except for the
revaluation of certain financial assets and financial liabilities to fair value, including liabilities for cash-settled
share-based payment arrangements.
Principles of consolidation
The consolidated financial statements comprise the financial statements of AutoCanada and all of its
subsidiaries. Subsidiaries are all entities over which the Company has control, either legally or in substance
through power, exposure to variable returns, and the ability to use its power over the entity to affect the
Company's returns. The Company has a shareholding of 100% of the voting rights in its subsidiaries.
Subsidiaries are fully consolidated from the date control is transferred to the Company, and are no longer
consolidated on the date control ceases.
45 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
3
Significant Accounting Policies continued
Principles of consolidation continued
Intercompany transactions, balances, income and expenses, and gains or losses on transactions are eliminated.
Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the
accounting policies adopted by the Company.
Business combinations
Business combinations are accounted for using the acquisition method of accounting. This involves
recognizing identifiable assets (including intangible assets not previously recognised by the acquiree) and
liabilities (including contingent liabilities) of acquired businesses at fair value at the acquisition date. The
excess of acquisition cost over the fair value of the identifiable net assets acquired is recorded as goodwill. If
the acquisition cost is less than the fair value of the net assets acquired, the fair value of the net assets is re-
assessed and any remaining difference is recognized directly in the statement of comprehensive income.
Transaction costs are expensed as incurred.
Investment in associate
An associate is an entity over which the Company has significant influence, but not control, generally
accompanying a shareholding of between 20% and 50% of the voting rights, but with considerations over the
relationships between the investors and the investee. Investments in associates are accounted for using the
equity method of accounting. Under the equity method, the investment is initially recognized at cost, and the
carrying amount is increased or decreased to recognize the investor's share of the profit or loss of the investee
after the date of acquisition. The Company's investment in associate includes goodwill identified on
acquisition.
If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate
share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss,
where appropriate.
The Company's share of post-acquisition profit or loss is recognized in the statement of comprehensive
income, and its share of post-acquisition movements in other comprehensive income is recognized in other
comprehensive income with a corresponding adjustment to the carrying amount of the investment. When the
Company's share of losses in an associate equals or exceeds its interest in the associate, including any other
unsecured receivables, the Company does not recognize further losses, unless it has incurred legal or
constructive obligations or made payments on behalf of the associate.
The Company determines at each reporting date whether there are any indicators of impairment to the
associate whereby there is a significant or prolonged decline in the investment's fair value or other objective
evidence of impairment. If this is the case, the Company calculates the amount of impairment as the difference
between the recoverable amount, which is calculated based on the higher of value-in-use or fair value less
costs to sell, of the associate and its carrying value and recognizes the amount adjacent to its share of profit or
loss of the associate in the statement of comprehensive income.
46 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
3
Significant Accounting Policies continued
Investment in associate continued
Profits and losses resulting from upstream and downstream transactions between the Company and its
associate are recognized in the Company's financial statements only to the extent of unrelated investors'
interests in the associate. Unrealized losses are eliminated unless the transaction provides evidence of an
impairment of the assets transferred. Accounting policies of associates have been changed where necessary to
ensure consistency with the policies adopted by the Company. Dilution gains and losses arising from the
investment in the associate are recognized in the statement of comprehensive income.
Revenue recognition
(a) Vehicles, parts, service and collision repair
Revenue from the sale of goods and services is measured at the fair value of the consideration
receivable, net of rebates and any discounts and includes finance and insurance commissions. It
excludes sales related taxes and intercompany transactions.
Revenue is recognized when the risks and rewards of ownership have been transferred to the customer
and the revenue and costs can be reliably measured and it is probable that economic benefits will flow
to the Company. In practice, this means that revenue is recognized when vehicles are invoiced and
physically delivered to the customer and payment has been received or credit approval has been
obtained by the customer. Revenue for parts, service and collision repair is recognized when the service
has been performed.
(b)
Finance and insurance
The Company arranges financing for customers through various financial institutions and receives a
commission from the lender based on the difference between the interest rate charged to the customer
and the interest rate set by the financing institution, or a flat fee. This revenue is included in vehicle
revenue on the statement of comprehensive income.
The Company also receives commissions for facilitating the sale of third-party insurance products to
customers, including credit and life insurance policies and extended service contracts. These
commissions are recorded as revenue at the time the customer enters into the contract and the Company
is entitled to the commission. The Company is not the obligor under any of these contracts. In the case
of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the
contract. Customers may also terminate extended service contracts, which are fully paid at purchase,
and become eligible for refunds of unused premiums. In these circumstances, a portion of the
commissions the Company receives may be charged back to the Company based on the terms of the
contracts. The revenue the Company records relating to commissions is net of an estimate of the amount
of chargebacks the Company will be required to pay. This estimate is based upon historical chargeback
experience arising from similar contracts, including the impact of refinance and default rates on retail
finance contracts and cancellation rates on extended service contracts and other insurance products.
47 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
3
Significant Accounting Policies continued
Taxation
(a) Deferred tax
Deferred tax is recognized, using the liability method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in the statement of financial position. Deferred
tax is calculated using tax rates and laws that have been enacted or substantively enacted at the end of
the reporting period, and which are expected to apply when the related deferred income tax asset is
realized or the deferred income tax liability is settled.
Deferred tax liabilities:
!
!
are generally recognized for all taxable temporary differences; and
are not recognized on temporary differences that arise from goodwill which is not deductible
for tax purposes.
Deferred tax assets:
!
!
are recognized to the extent it is probable that taxable profits will be available against which
the deductible temporary differences can be utilized; and
are reviewed at the end of the reporting period and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be
recovered.
Deferred tax assets and liabilities are not recognized in respect of temporary differences that arise on
initial recognition of assets and liabilities acquired other than in a business combination.
(b)
Current tax
Current tax expense is based on the results for the period as adjusted for items that are not taxable or not
deductible. Current tax is calculated using tax rates and laws that were enacted or substantively enacted
at the end of the reporting period. Management periodically evaluates positions taken in tax returns with
respect to situations in which applicable tax regulation is subject to interpretation. Provisions are
established where appropriate on the basis of amounts expected to be paid to the tax authorities.
Manufacturer incentives and other rebates
Various incentives from manufacturers are received based on achieving certain objectives, such as specified
sales volume targets. These incentives are typically based upon units sold to retail or fleet customers. These
manufacturer incentives are recognized as a reduction of new vehicle cost of sales when earned, generally at
the latter of the time the related vehicles are sold or upon attainment of the particular program goals.
Manufacturer rebates to our dealerships and assistance for floorplan interest are reflected as a reduction in the
carrying value of each vehicle purchased by us. These incentives are recognized as a reduction to the cost of
sales as the related vehicles are sold.
48 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
3
Significant Accounting Policies continued
Manufacturer incentives and other rebates continued
Advertising
Manufacturer advertising rebates that are reimbursements of costs associated with specific advertising
expenses are earned in accordance with the respective manufacturers' reimbursement-based advertising
assistance programs, which is typically after the corresponding advertising expenses have been incurred, and
are reflected as a reduction in advertising expense included in selling, general and administrative expense in
the statement of comprehensive income.
Share-based compensation
(a)
Restricted Share Units (RSUs)
The Company grants RSUs to designated management employees entitling them to receive a combination of
cash and common shares based on the Company's share price at each vesting date. The RSUs are also entitled
to earn additional units based on dividend payments made by the Company and the share price on the date of
payment. The RSUs granted are scheduled to vest evenly over three years conditional upon continued
employment with the Company.
(b) Deferred Share Units (DSUs)
The Company grants DSUs to independent directors of the Company which are cash-settled. DSUs are granted
based on the Company's average share price for the five business days prior to the date on which quarterly
directors' fees are paid. The DSUs granted are scheduled to vest upon the termination date of the director, at
which time, the DSUs will be settled in cash no sooner than the termination date and no later than December
15 of the calendar year following the director's termination date.
Financial instruments
Financial instruments are recognized when the Company becomes a party to the contractual provisions of the
instrument. Financial assets are recognized on the settlement date, which is the date on which the asset is
delivered to or by the Company. Financial assets are derecognized when the rights to receive cash flows from
the investments have expired or were transferred and the Company has transferred substantially all risks and
rewards of ownership. Financial liabilities are derecognized when the obligation is discharged, cancelled or
expired. The Company's financial assets, including cash and cash equivalents and trade and other receivables,
are classified as loans and receivables at the time of initial recognition. Loans and receivables are non-
derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans
and receivables are initially recognized at fair value plus transaction costs and subsequently carried at
amortized cost using the effective interest method. The Company's financial liabilities, including accounts
payable and accrued liabilities, revolving floorplan facilities, lease obligations and long-term debt, are
classified as other liabilities at the time of initial recognition. Other liabilities are non-derivative financial
liabilities and are initially recognized at fair value and subsequently carried at amortized cost using the
effective interest method.
49 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
3
Significant Accounting Policies continued
Cash and cash equivalents
Cash and cash equivalents include amounts on deposit with financial institutions and amounts with the Bank
of Nova Scotia ("Scotiabank") that are readily available to the Company (See Note 21 - Financial instruments
- Credit risk for explanation of credit risk associated with amounts held with Scotiabank).
Restricted cash
Restricted cash is cash held in a segregated account in connection with the facility from Scotiabank. The
restricted cash earns interest income to partially offset the interest expense incurred on the borrowings. (See
Note 21 - Financial instruments - Credit risk for explanation of credit risk associated with restricted cash
balances).
Trade and other receivables
Trade and other receivables are amounts due from customers, financial institutions and suppliers from
providing services or sale of goods in the ordinary course of business. Trade and other receivables are
recognized initially at fair value and subsequently measured at amortized cost using the effective interest
method, less provision for impairment. A provision for impairment of trade and other receivables is
established when there is objective evidence that the Company will not be able to collect all amounts due
according to the original terms of the receivables. Significant financial difficulties of the debtor, probability
that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments (more
than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the
provision is the difference between the asset’s carrying amount and the present value of estimated future cash
flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the
use of an allowance account, and the amount of the loss is recognized in the statement of comprehensive
income within operating expenses.
When a trade and other receivable is uncollectible, it is written off against the allowance account for trade and
other receivables. Subsequent recoveries of amounts previously written off are credited against operating
expenses in the statement of comprehensive income.
Inventories
New, used and demonstrator vehicle inventories are recorded at the lower of cost and net realizable value with
cost determined on a specific item basis. Parts and accessories inventories are valued at the lower of cost and
net realizable value. Inventories of parts and accessories are accounted for using the “weighted-average cost”
method.
In determining net realizable value for new vehicles, the Company primarily considers the age of the vehicles
along with the timing of annual and model changeovers. For used vehicles, the Company considers recent
market data and trends such as loss histories along with the current age of the inventory. Parts inventories are
primarily assessed considering excess quantity and continued usefulness of the part. The risk of loss in value
related to parts inventories is minimized since excess or obsolete parts can generally be returned to the
manufacturer.
50 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
3
Significant Accounting Policies continued
Property and equipment
Property and equipment are stated at cost less accumulated amortization and any accumulated impairment
losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Residual values,
useful lives and methods of amortization are reviewed, and adjusted if appropriate, at each financial year end.
Land is not amortized. Other than as noted below, amortization of property and equipment is provided for
over the estimated useful life of the assets on the declining balance basis at the following annual rates:
Machinery and equipment
Furniture, fixtures and other
Company vehicles
Computer equipment
20%
20%
30%
30%
Buildings are amortized on a straight-line basis over 25-41 years based on the estimated useful lives of the
buildings. The useful lives are determined based on the Company's understanding and experience as to how
the related assets depreciate.
The useful life of leasehold improvements is determined to be the lesser of the lease term or the estimated
useful life of the improvement. Leasehold improvements are amortized using the straight-line method if
useful life is determined to be the lease term and declining balance method if other than the lease term is used.
Amortization of leased vehicles is based on a straight line amortization of the difference between the cost and
the estimated residual value at the end of the lease over the term of the lease. Leased vehicle residual values
are regularly reviewed to determine whether amortization rates are reasonable.
Goodwill and intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Company's share
of the identifiable net assets of the acquired subsidiary at the date of acquisition. Goodwill is tested
annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on
the disposal of a cash-generating unit ("CGU") include the carrying amount of goodwill relating to the
CGU sold.
(b)
Intangible assets
Intangible assets consist of rights under franchise agreements with automobile manufacturers (“dealer
agreements”). The Company has determined that dealer agreements will continue to contribute to cash
flows indefinitely and, therefore, have indefinite lives due to the following reasons:
!
!
Certain of our dealer agreements continue indefinitely by their terms; and
Certain of our dealer agreements have limited terms, but are routinely renewed without
substantial cost to the Company.
51 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
3
Significant Accounting Policies continued
Goodwill and intangible assets continued
(b)
Intangible assets continued
Intangible assets are carried at cost less impairment losses. When acquired in a business combination,
the cost is determined in connection with the purchase price allocation based on their respective fair
values at the acquisition date. When market value is not readily determinable, cost is determined using
generally accepted valuation methods based on revenues, costs or other appropriate criteria.
Impairment
Impairments are recorded when the recoverable amount of assets are less than their carrying amounts. The
recoverable amount is the higher of an asset’s fair value less cost to sell or its value in use. Impairment losses,
other than those relating to goodwill, are evaluated for potential reversals of impairment when events or
changes in circumstances warrant such consideration.
(a) Non-financial assets
The carrying values of non-financial assets with finite lives, such as property and equipment are
assessed for impairment whenever events or changes in circumstances indicate that their carrying
amounts may not be recoverable. For the purposes of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash flows.
(b)
Intangible assets and goodwill
The carrying values of all intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. Additionally, the carrying
values of identifiable intangible assets with indefinite lives and goodwill are tested annually for
impairment. Specifically:
!
!
Our dealership franchise agreements with indefinite lives are subject to an annual impairment
assessment. For purposes of impairment testing, the fair value of our franchise agreements is
determined using a combination of a discounted cash flow approach and earnings multiple
approach.
For the purpose of impairment testing, goodwill is allocated to cash-generating units (“CGU”)
based on the level at which management monitors it, which is not higher than an operating
segment. Goodwill is allocated to those CGU's that are expected to benefit from the business
combination in which the goodwill arose.
Trade Payables
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of
business. Trade payables are recognized initially at fair value and subsequently measured at amortized cost,
and are classified as current liabilities if payment is due within one year or less.
52 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
3
Significant Accounting Policies continued
Provisions
Provisions represent liabilities to the Company for which the amount or timing is uncertain. Provisions are
recognized when the Company has a present legal or constructive obligation as a result of past events, it is
probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably
estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present
value of the expected expenditures to settle the obligation using a discount rate that reflects current market
assessments of the time value of money and the risks specific to the obligation. The increase in provision due
to passage of time is recognized as interest expense.
Leases
Leases are classified as either operating or finance, based on the substance of the transaction at inception of
the lease. Classification is re-assessed if the terms of the lease are changed.
(a)
Finance lease
Leases in which substantially all the risks and rewards of ownership are transferred to the Company are
classified as finance leases. Assets meeting finance lease criteria are capitalized at the lower of the
present value of the related lease payments or the fair value of the leased asset at the inception of the
lease. Minimum lease payments are apportioned between the finance charge and the liability. The
finance charge is allocated to each period during the lease term so as to produce a constant periodic rate
of interest on the remaining balance of the liability.
(b) Operating lease
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are
classified as operating leases. Payments under an operating lease (net of any incentives received from
the lessor) are recognized in the statement of comprehensive income on a straight-line basis over the
period of the lease.
New Accounting Policies
During the year ended December 31, 2012, the Company elected to early adopt the following standards:
!
!
IFRS 10, Consolidated financial statements, replaces all the guidance on control and consolidation
in IAS 27, Consolidated and separate financial statements, and SIC-12, Consolidation - special
purpose entities. Full retrospective application is required in accordance with the transition
provisions of the standard, unless impracticable, in which case the Company applies it from the
earliest practicable date.
IAS 27 was amended following the issuance of IFRS 10. The revised IAS 27 deals only with the
accounting for subsidiaries, associates and joint ventures in the separate financial statements of the
parent company.
53 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
3
Significant Accounting Policies continued
New Accounting Policies continued
!
!
!
IFRS 11, Joint Arrangements, supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly
Controlled Entities - Non-monetary Contributions by Venturers. Under IAS 31, entities have the
choice to proportionately consolidate or equity account for interests in jointly controlled entities.
IFRS 11 requires an entity to classify its interest in a joint arrangement as a joint venture or joint
operation. Joint ventures are accounted for using the equity method of accounting whereas for a
joint operation the venturer will recognize its share of the assets, liabilities, revenue and expenses
of the joint operation.
IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests
in other entities, such as subsidiaries, joint arrangements, associates, and unconsolidated structured
entities. The standard carries forward existing disclosures and also introduces significant
additional disclosure that address the nature of, and risks associated with, an entity's interest in
other entities.
IAS 28 was amended following the issuance of IFRS 11. The revised IAS 28 prescribes the
accounting for investments in associates and sets out the requirements for the application of the
equity method when accounting for investments in associates and joint ventures.
The Company has applied the above standards retrospectively. The above standards did not result in
significant changes to the Company's previously filed financial statements and related disclosures.
4 Changes in significant accounting estimates
On October 1, 2012, the Company changed the method of amortizing buildings from declining balance to
straight line over the estimated useful life of the building to reflect the change in the Company's evaluation of
the nature of depreciation of buildings. The Company believes buildings depreciate evenly over time as
opposed to declining balance depreciation that is more applicable to other types of assets. The change in
amortization method has been applied prospectively beginning on October 1, 2012. As a result of the change
in amortization method, amortization expense for the year ended December 31, 2012 is $128 lower than under
the declining balance method.
5 Accounting standards and amendments issued but not yet adopted
Certain new standards, interpretations, amendments and improvements to existing standards were issued by
the IASB or International Financial Reporting Interpretations Committee (“IFRIC”) that are not yet effective
for the financial year ended December 31, 2012. The standards issued that are applicable to the Company are
as follows:
•
IFRS 9, Financial Instruments - The new standard will ultimately replace IAS 39, Financial
Instruments: Recognition and Measurement. The replacement of IAS 39 is a multi-phase project
with the objective of improving and simplifying the reporting for financial instruments and the
issuance of IFRS 9 is part of the first phase. This standard becomes effective on January 1, 2015.
54 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
5 Accounting standards and amendments issued but not yet adopted continued
•
•
IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and
disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price
that would be received to sell an asset, or paid to transfer a liability in an orderly transaction
between market participants, at the measurement date. Under existing IFRS, guidance on
measuring and disclosing fair value is dispersed among the specific standards requiring fair value
measurements and does not always reflect a clear measurement basis or consistent disclosures.
This standard becomes effective on January 1, 2013.
IAS 1, Presentation of Financial Statements, has been amended to require entities to separate
items presented in OCI into two groups, based on whether or not items may be recycled in the
future. Entities that choose to present OCI items before tax will be required to show the amount of
tax related to the two groups separately. The amendment is effective for annual periods beginning
on or after July 1, 2012 with earlier application permitted.
6 Critical accounting estimates, judgments & measurement uncertainty
The preparation of financial statements requires management to make estimates and judgments about the
future. Estimates and judgments are continuously evaluated and are based on historical experience and other
factors, including expectations of future events that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates.
Critical estimates and assumptions in determining the value of assets and liabilities:
Intangible assets and goodwill
Intangible assets and goodwill arise out of business combinations. The Company applies the acquisition
method of accounting to these transactions, which involves the allocation of the cost of an acquisition to
the underlying net assets acquired based on their respective estimated fair values. As part of this
allocation process, the Company must identify and attribute values to the intangible assets acquired.
These determinations involve significant estimates and assumptions regarding cash flow projections,
economic risk and weighted average cost of capital.
These estimates and assumptions determine the amount allocated to intangible assets and goodwill. If
future events or results differ significantly from these estimates and assumptions, the Company could
record impairment charges in the future.
The Company tests at least annually whether indefinite life intangible assets and goodwill has suffered
impairment, in accordance with its accounting policies. The recoverable amounts of CGU's have been
estimated based on the greater of fair value less costs to sell and value-in-use calculations.
Inventories
Inventories are recorded at the lower of cost and net realizable value with cost determined on a specific
item basis for new and used vehicles. In determining net realizable value for new vehicles, the Company
primarily considers the age of the vehicles along with the timing of annual and model changeovers. For
used vehicles, the Company considers recent market data and trends such as loss histories along with the
current age of the inventory. The determination of net realizable value for inventories involves the use of
estimates.
55 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
6 Critical accounting estimates, judgments & measurement uncertainty continued
Allowance for doubtful accounts
The Company must make an assessment of whether accounts receivable are collectible from customers.
Accordingly, management establishes an allowance for estimated losses arising from non-payment and
other sales adjustments, taking into consideration customer creditworthiness, current economic trends
and past experience. If future collections differ from estimates, future earnings would be affected.
Estimated useful life of property and equipment
The Company estimates the useful life and residual values of property and equipment and reviews these
estimates at each financial year end. The Company also tests for impairment when a trigger event occurs.
Critical judgments in applying accounting policies:
Investment in associate
When assessing control over an investee, an investor considers the nature of its relationship with other
parties and whether those other parties are acting on the investor's behalf; that is, acting as a de facto
agent. The determination of whether other parties are acting as de facto agents requires judgment,
considering not only the nature of the relationship but also how those parties interact with each other and
the investor.
AutoCanada has a non-voting equity interest in an entity, Dealer Holdings Ltd. ("DHL"), for which the
voting interests are held 100% by the Company's Chief Executive Officer ("CEO") (as described in Note
17). When assessing whether the Company has control of DHL, management has considered the
Company's relationship with its CEO and whether the Company has the ability to direct decision-making
rights of the CEO pertaining to their investment in DHL. In making this assessment, the Company
considered that the CEO has de facto control over AutoCanada; therefore, the CEO should not be
perceived to be a de facto agent of AutoCanada. The following facts were considered to assess the
relationship between AutoCanada and its CEO:
!
!
!
!
Regardless of employment at AutoCanada, the CEO's interest in DHL would remain with full
ability to control decisions as they pertain to DHL.
The CEO has not relied on any financial support from the Company in making his investment,
and therefore the risk of loss and reward to the CEO personally is significant.
There are no contractual rights providing the Company with decision making power over the
CEO.
The CEO's level of expertise and knowledge in operating DHL.
When combining these considerations with the fact that the CEO has the casting vote on decisions of the
Board of DHL, and therefore governs relevant activities of the investee, management has concluded that
the Company does not have power over DHL, and therefore does not consolidate this investment.
56 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
6 Critical accounting estimates, judgments & measurement uncertainty continued
Should the nature of the relationship between the CEO and the Company change in the future, this
assessment would need to be further evaluated.
7
Segment information
Operating segments are reported in a manner consistent with the internal reporting provided to the Chief
Operating Decision Maker (“CODM”), the Company's CEO, who is responsible for allocating resources and
assessing performance of the operating segment. The Company has identified one reportable business
segment since the Company is operated and managed on a dealership basis. Dealerships operate a number of
business streams such as new and used vehicle sales, parts, service and collision repair and finance and
insurance products. Management is organized based on the dealership operations as a whole rather than the
specific business streams.
These dealerships are considered to have similar economic characteristics and offer similar products and
services which appeal to a similar customer base. As such, the results of each dealership have been
aggregated to form one reportable business segment. The CODM assesses the performance of the operating
segment based on a measure of both revenue and gross profit.
8 Economic dependence
The Company has significant commercial and economic dependence on Chrysler Canada. As a result, the
Company is subject to significant risk in the event of the financial distress of Chrysler Canada, one of the
Company's major vehicle manufacturers and parts suppliers.
The Company’s consolidated financial statements include the operations of franchised automobile dealerships,
representing the product lines of eight global automobile manufacturers. The Company’s Chrysler, Jeep,
Dodge, Ram (“CJDR”) dealerships, which generated 73% of the Company’s revenue in the period-ended
December 31, 2012 (2011 – 74%), purchase all new vehicles, a significant portion of parts and accessories and
certain used vehicles from Chrysler Canada. In addition to these inventory purchases, the Company is eligible
to receive monetary incentives from Chrysler Canada if certain sales volume targets are met and is also
eligible to receive payment for warranty service work that is performed for eligible vehicles.
At December 31, 2012 and December 31, 2011, the Company had recorded the following assets that relate to
transactions it has entered into with Chrysler Canada:
Accounts receivable
New vehicle inventory
Demonstrator vehicle inventory
Parts and accessories inventory
December 31,
2012
$
6,655
122,595
4,784
6,043
December 31,
2011
$
5,032
72,749
4,338
6,081
Chrysler Canada is a subsidiary of Chrysler Group LLC (“Chrysler Group”) in the United States. The viability
of Chrysler Canada is directly dependent on the viability of Chrysler Group.
57 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
9 Revenue
New vehicles
Used vehicles
Finance, insurance and other
Parts, service and collision repair
10 Cost of sales
New vehicles
Used vehicles
Finance, insurance and other
Parts, service and collision repair
11 Operating expenses
Employee costs (Note 12)
Administrative costs (1)
Facility lease costs
Depreciation
2012
$
683,375
243,351
62,587
114,600
2011
$
640,722
206,030
51,896
110,678
1,103,913
1,009,326
2012
$
625,800
227,040
5,751
54,957
2011
$
593,017
188,649
5,301
53,198
913,548
840,165
2012
$
93,012
39,949
11,868
4,311
2011
$
82,381
38,655
11,559
4,251
149,140
136,846
(1) Administrative costs include professional fees, consulting services, technology-related expenses, selling and
marketing, and other general and administrative costs.
58 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
12 Employees
The average number of people employed by the Company in the following areas was:
Sales
Service
Administration
Operating expenses incurred in respect of employees were:
Wages, salaries and commissions
Withholding taxes and insurance
Employee benefits and other
13 Finance costs and finance income
Finance costs:
Long-term debt
Floorplan financing
Other interest expense
Finance income:
Short term bank deposits
2012
477
612
138
2011
442
605
123
1,227
1,170
2012
$
86,555
3,903
2,554
93,012
2012
$
984
8,832
767
10,583
2011
$
76,016
3,652
2,713
82,381
2011
$
1,136
8,057
655
9,848
(1,575)
(1,324)
Cash interest paid during the year ended December 31, 2012 was $10,620 (2011 - $9,812).
14 Taxation
Components of income tax expense are as follows:
Current
Deferred tax
Total income tax expense
2012
$
5,823
2,753
8,576
2011
$
2,046
10,463
12,509
59 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
14 Taxation continued
Factors affecting tax expense for the year:
Income before taxes
Income before tax multiplied by the standard rate of Canadian
corporate tax of 25.5% (2011 - 27.0%)
Effects of:
Change in deferred tax rate
Difference between future and current rate
Non-deductible expenses
Other, net
Total income tax expense
The movements of deferred tax assets and liabilities are shown below:
2012
$
32,812
2011
$
49,293
8,367
13,309
11
(14)
259
(47)
(200)
(717)
74
43
8,576
12,509
Deferred tax assets (liabilities)
January 1, 2011
(Expense) benefit to income
statement
Deferred tax acquired on
acquisition
December 31, 2011
Benefit (expense) to income
statement
Deferred
income from
partnerships
$
(4,260)
Property and
equipment
$
643
Goodwill and
intangible
assets
$
1,671
Other
$
394
Total
$
(1,552)
(2,419)
(198)
(7,490)
(356)
(10,463)
-
(6,679)
-
445
-
(5,819)
(1,630)
(242)
(818)
(41)
(3)
(63)
(41)
(12,056)
(2,753)
December 31, 2012
(8,309)
203
(6,637)
(66)
(14,809)
Changes in the deferred income tax components are adjusted through deferred tax expense. Of the above
components of deferred income taxes, $8,309 of the deferred tax liabilities is expected to be recovered within
12 months. The decrease in standard rate of Canadian corporate tax is due to general decreases in the
corporate tax rate in the jurisdictions in which the Company operates. The Company applies a blended rate in
determining its overall income tax expense.
60 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
15 Investment in associate
During 2012, the Company invested a total of $4,262 to acquire a 60.8% participating, non-voting equity
interest in Dealer Holdings Ltd. ("DHL"). DHL is an entity formed between a subsidiary of AutoCanada and
Mr. Patrick Priestner ("Priestner"), the Company's CEO. DHL was formed to acquire future General Motors of
Canada ("GM Canada") franchised dealerships, whereby Priestner is required to maintain voting control of the
dealerships, in accordance with the agreement with GM Canada. All shareholders participate equally in the
equity and economic risks and rewards of DHL and its interests, based on the percentage of ownership
acquired. DHL's principal place of business is Alberta, Canada.
Although the Company holds no voting rights in DHL, the Company exercises significant influence by virtue
of its ability to appoint one member of the board of directors of DHL and its ability to participate in financial
and operating policy decisions of DHL. However, the Company does not have the power to make key
decisions or block key decisions due to a casting vote held by Priestner. As a result, the Company has
accounted for its investment in DHL under the equity method. There are no guarantees to DHL or significant
relationships other than those disclosed in Note 30.
During the second quarter of 2012, DHL acquired a 49% voting equity interest in Nicholson Chevrolet
("Nicholson") with an option to increase its interest to 51% upon Nicholson's successful relocation to a new
facility. DHL exercised this option in the fourth quarter of 2012 subsequent to Nicholson's relocation to
Sherwood Park, Alberta and change in operating name to Sherwood Park Chevrolet. In conjunction with the
Nicholson investment, DHL is subject to a put option with Romland Development Holdings Ltd. ("Romland"),
the owner of the dealership and body shop real estate used in Sherwood Park Chevrolet's operations, whereby
DHL may be required to purchase up to 49% of Romland at fair value. Upon Romland exercising the put
option, DHL will have 180 days to purchase its portion of shares of Romland, which would require further
investment in DHL from its shareholders.
During the second quarter of 2012, DHL also acquired a 51% voting equity interest in Petersen Buick GMC
("Petersen").
The Sherwood Park Chevrolet and Petersen dealerships are both subject to financial covenants as part of its
borrowing arrangements that may restrict their ability to transfer funds to DHL if the payment of such funds
resulted in a breach of covenants. The dealerships are also subject to minimum working capital requirements
imposed by GM Canada, which may restrict the dealerships' ability to transfer funds to DHL if minimum
working capital requirements are not met.
61 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
15 Investment in associate continued
As a result of DHL's investments, the Company has indirectly acquired a 31% interest in Sherwood Park
Chevrolet and a 31% interest in Petersen. Summarized information in respect of the investment in DHL is as
follows:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Equity attributable to DHL
Equity
Carrying
amount
$
29,837
18,072
24,611
10,050
13,248
4,107
Fair value
adjustments
$
(92)
592
-
-
500
155
Fair value
$
29,745
18,664
24,611
10,050
13,748
4,262
Interest in Dealer
Holdings Ltd.
$
9,221
5,786
7,629
3,116
4,262
From the date of acquisition to December 31, 2012, on a consolidated basis, DHL generated revenue of
$88,045 and total net comprehensive income of $784. For the year ended December 31, 2012, no dividends
have been received from DHL. The fair value of the Company's investment in DHL approximates the carrying
value presented below. The following table summarizes the Company's carrying value of its investment in
DHL:
Balance, beginning of the year
Investment in Dealer Holdings Ltd.
Income from investment in associate
Balance, end of year
16 Cash, cash equivalents and restricted cash
Cash at bank and on hand
Short-term deposits
Cash and cash equivalents
Restricted cash
Cash and cash equivalents and restricted cash
Year ended
December 31, 2012
$
-
4,262
468
4,730
December 31,
2012
$
13,992
20,480
34,472
10,000
December 31,
2011
$
14,911
38,730
53,641
-
44,472
53,641
62 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
16 Cash, cash equivalents and restricted cash continued
Short-term deposits consist of cash held with Scotiabank. The Company's revolving floorplan facility
agreements allow the Company to hold excess cash in accounts with Scotiabank, which is used to offset our
finance costs on our revolving floorplan facilities. Restricted cash relates to cash required by Scotiabank to be
held in a separate account, which would be used to repay our facilities if we are in default of our facilities. See
Note 21 for further detail regarding cash balances held with Scotiabank.
17 Trade and other receivables
Trade receivables
Less: Allowance for doubtful accounts
Net trade receivables
Other receivables
Trade and other receivables
December 31,
2012
$
45,998
(447)
December 31,
2011
$
41,294
(359)
45,551
2,393
47,944
40,935
1,513
42,448
The aging of trade and other receivables at each reporting date was at follows:
Current
Past due 31 - 60 days
Past due 61 - 90 days
Past due 91 - 120 days
Past due > 120 days
December 31,
2012
$
41,986
3,473
957
1,201
327
December 31,
2011
$
36,741
3,165
613
602
1,327
47,944
42,448
Included in amounts greater than 120 days are $327 (2011 - $559) of receivables related to corporate fleet
leasing arrangements.
The Company is exposed to normal credit risk with respect to its accounts receivable and maintains provisions
for potential credit losses. Potential for such losses is mitigated because there is limited exposure to any single
customer and because customer creditworthiness is evaluated before credit is extended.
63 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
18 Inventories
New vehicles
Demonstrator vehicles
Used vehicles
Parts and accessories
December 31,
2012
$
158,251
7,333
25,622
8,020
December 31,
2011
$
101,135
6,302
21,531
8,048
199,226
137,016
During the year ended December 31, 2012, $913,548 of inventory (2011 - $840,165) was expensed as cost of
goods sold which included net write-downs on used vehicle inventory of $899 (2011 - $85). During the year
ended December 31, 2012, $1,150 of demonstrator expense (2011 - $1,219) was included in selling, general,
and administration expense. During the year ended December 31, 2012, demonstrator reserves increased by
$207 (2011 - $237). As at December 31, 2012, the Company had recorded reserves for inventory write downs
of $2,121 (2011 - $1,429).
64 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
19 Property and equipment
Company
& lease
vehicles
$
Leasehold
Improvements
$
Machinery
&
Equipment
$
Land &
buildings
$
Furniture,
fixtures &
other
$
Computer
hardware
$
Total
$
Cost:
December 31, 2010
Capital expenditures
Acquisitions of dealership assets
Disposals
Transfer in to inventory, net
December 31, 2011
Capital expenditures
Acquisitions of real estate
Disposals
Transfer in to (from) inventory, net
December 31, 2012
Accumulated depreciation:
December 31, 2010
Current year depreciation
Disposals
Transfers in to inventory
December 31, 2011
Current year depreciation
Disposals
Transfers in to (from) inventory,
net
3,751
-
546
-
768
5,065
-
-
-
112
5,177
(1,078)
(961)
-
822
(1,217)
(1,118)
-
814
6,900
1,124
9
(2,100)
-
5,933
747
-
(40)
-
10,605
10,226
4,497
3,126
39,105
811
117
(387)
-
11,146
514
-
(90)
-
-
-
-
-
10,226
-
13,928
-
-
539
102
(13)
-
5,125
207
-
(70)
-
480
27
2,954
801
(24)
(2,524)
-
768
3,609
673
-
(275)
-
41,104
2,141
13,928
(475)
112
6,640
11,570
24,154
5,262
4,007
56,810
(1,833)
(1,884)
(13,515)
(3,419)
(543)
1,958
-
(2,004)
(568)
40
-
(4,623)
(1,258)
89
-
(678)
(527)
-
-
(568)
(142)
-
(5,792)
(1,112)
(1,205)
(494)
(2,543)
(554)
59
-
-
-
51
-
(394)
(90)
-
(2,368)
(465)
179
-
(4,251)
1,815
822
(15,129)
(4,311)
329
814
December 31, 2012
(1,521)
(2,532)
(6,845)
(1,699)
(3,046)
(2,654)
(18,297)
Carrying amount:
December 31, 2011
December 31, 2012
3,848
3,656
3,929
4,108
5,354
4,725
9,021
22,455
2,582
2,216
1,241
1,353
25,975
38,513
Fully depreciated assets are retained in cost and accumulated depreciation accounts until such assets are
removed from service. Proceeds from disposals are netted against the related assets and the accumulated
depreciation and included in the statement of operations and comprehensive income.
Bank borrowings are secured on land and buildings for the value of $6,960 (2011 - $6,960).
65 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
20 Intangible assets
Intangible assets consist of rights under franchise agreements with automobile manufacturers ("dealer
agreements").
Cost:
Opening balance
Acquisitions
Divestitures
Closing balance
Accumulated impairment:
Opening balance
Recovery of impairment of intangible assets
Divestitures
Closing balance
Carrying amount
December 31,
2012
$
December 31,
2011
$
74,003
-
-
74,003
7,822
(222)
-
7,600
66,403
77,130
620
(3,747)
74,003
37,112
(25,543)
(3,747)
7,822
66,181
Cash generating units have been determined to be individual dealerships. The following table shows the
carrying amount of dealer agreements by cash generating unit:
Cash Generating Unit
A
B
C
D
E
F
G
H
I
J
K
L
M
December 31,
2012
$
21,687
9,431
3,670
9,626
8,497
3,258
1,234
1,413
1,359
955
1,726
394
185
December 31,
2011
$
21,687
9,431
3,303
9,626
8,497
3,258
1,234
1,102
1,359
2,053
1,726
57
693
66 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
20 Intangible assets continued
Cash Generating Unit
Other N - T combined
December 31,
2012
$
2,968
December 31,
2011
$
2,155
66,403
66,181
The following table shows the impairments (recoveries of impairment) of dealer agreements by cash
generating unit:
Cash Generating Unit
A
B
C
D
E
F
G
H
I
J
K
L
M
Other N - T combined
December 31,
2012
$
-
-
(368)
-
-
-
-
(311)
-
1,098
-
(337)
508
(812)
December 31,
2011
$
(11,313)
(2,397)
(122)
-
(4,712)
(3,258)
(371)
(1,102)
(1,013)
-
-
(57)
693
(1,891)
(222)
(25,543)
Impairment test of dealer agreements
The Company performed its annual test for impairment at December 31, 2012. As a result of the test
performed, the Company recorded a net reversal of impairment in the amount of $222 for the year ended
December 31, 2012 (2011 - $25,543).
The carrying value of dealer agreements for each significant CGU is identified separately in the table above.
“N - T combined” comprises dealer agreements allocated to the remaining CGUs.
The valuation techniques, significant assumptions and sensitivities applied in the intangible assets impairment
test are described as follows:
67 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
20 Intangible assets continued
Valuation Techniques
The Company did not make any changes to the valuation methodology used to assess impairment since the
impairment test on transition to IFRS. The recoverable amount of each CGU was based on the greater of fair
value less cost to sell and value in use.
Value in Use
Value in use ("VIU") is predicated upon the value of the future cash flows that a business will generate
going forward. The discounted cash flow (“DCF”) method was used which involves projecting cash
flows and converting them into a present value equivalent through discounting. The discounting process
uses a rate of return that is commensurate with the risk associated with the business or asset and the
time value of money. This approach requires assumptions about revenue growth rates, operating
margins, and discount rates.
Fair value less costs to sell
Fair value less costs to sell ("FVLCS") assumes that companies operating in the same industry will
share similar characteristics and that company values will correlate to those characteristics. Therefore, a
comparison of a CGU to similar companies may provide a reasonable basis to estimate fair value. Under
this approach, fair value is calculated based on EBITDA ("Earnings before interest, taxes, depreciation
and amortization") multiples comparable to the businesses in each CGU. Data for EBITDA multiples
was based on recent comparable transactions and management estimates. Multiples used in the test for
impairment for each CGU were in the range of 4.0 to 6.0 times forecasted EBITDA.
Significant Assumptions for Value in Use
Growth
The assumptions used were based on the Company’s internal budget which is approved by the Board of
Directors. The Company projected revenue, gross margins and cash flows for a period of one year, and
applied growth rates for years thereafter commensurate with industry forecasts. Management applied a
2% terminal growth rate in its projections. In arriving at its forecasts, the Company considered past
experience, economic trends and inflation as well as industry and market trends.
Discount Rate
The Company applied a discount rate to calculate the present value of its projected cash flows. The
discount rate represented the Company's internally computed weighted average cost of capital
(“WACC”) for each CGU with appropriate adjustments for the risks associated with the CGUs to which
intangible assets are allocated. The WACC is an estimate of the overall required rate of return on an
investment for both debt and equity owners and serves as the basis for developing an appropriate
discount rate. Determination of the discount rate requires separate analysis of the cost of equity and debt
and considers a risk premium based on an assessment of risks related to the projected cash flows of each
CGU.
68 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
20 Intangible assets continued
Significant Assumptions for Fair Value Less Costs to Sell
EBITDA
The Company's assumptions for EBITDA were based on the Company's internal budget which is
approved by the Board of Directors. The Company projected EBITDA for a period of one year and
reduced the amount for allocation of corporate overhead based on a percentage of gross profit for each
CGU as compared to the gross profit of the Company. As noted above, data for EBITDA multiples was
based on recent comparable transactions and management estimates.
Costs to sell
Management applied a percentage of 5% of the estimated purchase price in developing an estimate of
costs to sell, based on historical transactions.
Additional Assumptions
The key assumptions used in performing the impairment test, by CGU, were as follows:
A
B
C
D
E
F
G
H
I
J
K
L
M
N - T combined
Basis of Recoverable
Amount
VIU
VIU
VIU
VIU
VIU
VIU
FVLCS
FVLCS
VIU
VIU
VIU
VIU
FVLCS
Discount Rate
%
%
%
%
%
%
%
%
%
%
%
%
%
VIU/FVLCS 14.00 - 15.36 %
14.68
15.02
14.51
15.36
15.70
14.68
15.02
15.87
14.68
14.51
15.02
15.19
16.04
Perpetual
Growth Rate
%2.00
%2.00
%2.00
%2.00
%2.00
%2.00
%2.00
%2.00
%2.00
%2.00
%2.00
%2.00
%2.00
%2.00
69 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
20 Intangible assets continued
Sensitivity
The recoverable amount for the CGUs that were in excess of their carrying values was 289.7% of the carrying
value of the applicable CGUs based on a weighted average. On a weighted-average basis, the fair value for the
CGUs that were below their carrying values was 10.7% of the carrying value of the applicable CGUs. As a
result, the Company expects future impairments and reversals of impairments to occur as market conditions
change and risk premiums used in developing the discount rate change.
Based on sensitivity analysis, no reasonably possible change in growth rate assumptions would cause the
recoverable amount of any CGU to have a significant change from its current valuation. A 1% change in the
discount rate would not have a significant impact on the recoverable amounts of CGUs. The recoverable
amount of each CGU is sensitive to changes in market conditions and could result in material changes in the
carrying value of intangible assets in the future.
21 Financial instruments
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the
basis of measurement and the basis on which income and expenses are recognised, in respect of each class of
financial asset and financial liability are disclosed in the accounting policies. The Company's financial assets
have been classified as loans and receivables. The Company's financial liabilities have been classified as other
financial liabilities. Details of the Company's financial assets and financial liabilities are disclosed below:
Financial assets
Cash and cash equivalents
Restricted cash
Trade and other receivables
Financial liabilities
Current indebtedness
Long-term indebtedness
Revolving floorplan facilities
Trade and other payables
December 31,
2012
$
December 31,
2011
$
34,472
10,000
47,944
3,000
23,937
203,525
35,697
53,641
-
42,448
2,859
20,115
150,816
32,279
Financial Risk Management Objectives
The Company’s activities are exposed to a variety of financial risks of varying degrees of significance which
could affect the Company’s ability to achieve its strategic objectives. AutoCanada’s overall risk management
program focuses on the unpredictability of financial and economic markets and seeks to reduce potential
adverse effects on the Company’s financial performance. Risk management is carried out by financial
management in conjunction with overall corporate governance. The principal financial risks to which the
Company is exposed are described below.
70 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
21 Financial instruments continued
Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because
of changes in foreign currency and interest rates.
Foreign Currency Risk
Foreign currency risk arises from fluctuations in foreign exchange rates and the degree of volatility of
these rates relative to the Canadian dollar. The Company is not directly exposed to significant foreign
currency risk with respect to its financial instruments.
Interest Rate Risk
The Scotiabank revolving floorplan facilities ("Scotiabank facilities") are subject to interest rate
fluctuations and the degree of volatility in these rates. The Company does not currently hold any
financial instruments that mitigate this risk. The Scotiabank facilities bear interest at Bankers'
Acceptance Rate plus 1.40%-1.90% (Bankers' Acceptance Rate as at December 31, 2012 is 1.22%).
The VW Credit Canada, Inc. revolving floorplan facilities ("VCCI facilities") are subject to interest rate
fluctuations and the degree of volatility in these rates. The Company does not currently hold any
financial instruments that mitigate this risk. The VCCI facilities bear interest at Prime Rate plus 0.50%
for new vehicles and Prime Rate plus 0.75-1.00% for used vehicles. These facilities define Prime Rate
as the Royal Bank of Canada Prime Rate (3.00% as at December 31, 2012).
The HSBC Revolver and the HSBC Term Loan (the “HSBC Facilities”) are also subject to interest rate
fluctuations and the degree of volatility in these rates. The Company does not currently hold any
financial instruments that mitigate this risk. The HSBC Revolver bears interest at the HSBC Prime Rate
plus 0.75% and the HSBC Term Loan bears interest at the HSBC Prime Rate plus 1.75% (HSBC Prime
Rate as at December 31, 2012 is 3.00%).
The BMO Term Loan is a fixed rate term loan that matured on September 30, 2012, at which time
became subject to market rates of interest until the amount is refinanced.
The Servus Mortgage is a fixed rate mortgage bearing interest at an annual rate of 3.90%.
The Company’s exposures to interest rates on financial assets and financial liabilities are detailed in the
liquidity risk management section of this note. The sensitivity analysis below has been determined
based on the exposure to interest rates at the reporting date and stipulated change taking place at the
beginning of the financial year and held constant throughout the reporting period. The amounts below
represent an increase to the reported account if positive and a decrease to the reported account if
negative. A 100 basis point change and 200 basis point change is used when reporting interest risk
internally to key management personnel and represents management’s assessment of the possible
change in interest rates.
71 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
21 Financial instruments continued
Interest Rate Risk continued
+ 200 Basis Point
2011
$
1,936
387
2012
$
4,433
360
- 200 Basis Point
2011
$
(450)
-
2012
$
(4,433)
(360)
+ 100 Basis Point
2011
$
225
-
2012
$
2,216
180
- 100 Basis Point
2011
$
(225)
-
2012
$
(2,216)
(180)
Finance costs
Finance income
Credit Risk
The Company’s exposure to credit risk associated with its accounts receivable is the risk that a customer will
be unable to pay amounts due to the Company or its subsidiaries. Concentration of credit risk with respect to
contracts-in-transit and accounts receivable is limited primarily to automobile manufacturers and financial
institutions. Credit risk arising from receivables with commercial customers is not significant due to the large
number of customers dispersed across various geographic locations comprising our customer base. Details of
the aging of the Company's trade and other receivables are located in Note 17.
The Company evaluates receivables for collectability based on the age of the receivable, the credit history of
the customer and past collection experience. Allowances are provided for potential losses that have been
incurred at the balance sheet date. The amounts disclosed on the balance sheet for accounts receivable are net
of the allowance for bad debts. Details of the allowances for doubtful accounts are located in Note 17.
Concentration of cash and cash equivalents exist due to the significant amount of cash held with Scotiabank.
The Revolving floorplan facilities allow our dealerships to hold excess cash (used to satisfy working capital
requirements of our various OEM partners) in an account with Scotiabank which bears interest equal to the
interest rates of the Scotiabank facilities for new vehicles (2.62% at December 31, 2012). In the event of a
default by a dealership in its floorplan obligation, the cash may be used to offset unpaid balances under the
Scotiabank facilities. Additionally, the restricted cash balance is held at a Canadian chartered bank with a
credit rating of A+ as at December 31, 2012, and as a result, credit risk is considered nominal. As a result,
there is a concentration of cash balances risk to the Company in the event of a default under the Scotiabank
facilities.
Liquidity Risk
Liquidity risk is the risk that the Company is not able to meet its financial obligations as they become due or
can do so only at excessive cost. The Company’s activity is financed through a combination of the cash flows
from operations, borrowing under existing credit facilities and the issuance of equity. Prudent liquidity risk
management implies maintaining sufficient cash and cash equivalents and the availability of funding through
adequate amounts of committed credit facilities. One of management’s primary goals is to maintain an
optimal level of liquidity through the active management of the assets and liabilities as well as cash flows.
The Company is exposed to liquidity risk as a result of its economic dependence on suppliers. (See Note 8 for
further information regarding the Company’s economic dependence on Chrysler Canada and the potential
effect on the Company’s liquidity).
72 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
21 Financial instruments continued
Liquidity Risk continued
The following table details the Company’s remaining contractual maturity for its financial liabilities. The
tables below have been drawn up based on the undiscounted contractual maturities of the financial liabilities.
Contractual interest payable includes interest that will accrue to these liabilities except where the Company is
entitled and intends to repay the liability before its maturity.
December 31, 2012
Trade and other payables
Revolving floorplan facilities
HSBC revolving term facility
HSBC fixed term loan
BMO fixed rate term loan
Lease obligations
Servus Mortgage
Contractual interest payable
December 31, 2011
Trade and other payables
Revolving floorplan facilities
HSBC revolving term facility
HSBC fixed term loan
BMO fixed rate term loan
Lease obligations
Contractual interest payable
2013
$
2014
$
2015
$
2016
$
2017
$
Total
$
35,697
203,525
-
175
2,604
1,282
221
1,083
-
-
15,000
2,940
-
-
221
511
244,587
18,672
-
-
-
-
-
-
230
221
451
-
-
-
-
-
-
239
212
-
35,697
- 203,525
15,000
-
3,115
-
2,604
-
1,282
-
6,218
5,307
3,772
1,745
451
7,052 271,213
2012
$
2013
$
Total
$
32,279
150,816
-
176
2,683
1,204
890
-
32,279
- 150,816
17,000
3,291
2,683
1,204
1,274
17,000
3,115
-
-
384
188,048
20,499 208,547
73 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
22 Other long-term assets
Prepaid rent (Note 30)
Other assets
23 Payables, accruals and provisions
Trade payables
Accruals and provisions
Sales tax payable
Wages and withholding taxes payable
December 31,
2012
$
7,646
53
December 31,
2011
$
7,558
51
7,699
7,609
December 31,
2012
$
19,255
5,091
282
11,069
December 31,
2011
$
15,111
5,284
2,239
9,645
35,697
32,279
The following table provides a continuity schedule of all recorded provisions included in accruals and
provisions above. Refer to Note 26 for additional information on litigation provisions:
January 1, 2012
Provisions arising during the year
Amounts disbursed
Finance and
insurance (a)
$
928
125
-
Litigation
$
-
-
-
Severance (b)
$
360
-
(360)
December 31, 2012
1,053
-
-
Other
$
351
200
-
551
Total
$
1,639
325
(360)
1,604
(a) Represents an estimated chargeback reserve provided by the Company's insurance provider.
(b) For terminated employees.
74 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
24 Indebtedness
This note provides information about the contractual terms of the Company's interest-bearing debt, which is
measured at amortized cost. For more information about the Company's exposure to interest rate, foreign
currency and liquidity risk, see Note 21.
Current indebtedness
Current portion of indebtedness (iii, iv, v)
Revolving floorplan facilities - Scotiabank (vi)
Revolving floorplan facilities - Ally Credit (vii)
Revolving floorplan facilities - VCCI (i)
Non-current indebtedness
HSBC revolving term loan (ii)
HSBC non-revolving fixed term loan (iii)
Servus Mortgage (v)
Total indebtedness
December 31,
2012
$
December 31,
2011
$
3,000
199,001
-
4,524
206,525
15,000
2,940
5,997
2,859
-
148,587
2,228
153,674
17,000
3,115
-
230,462
173,789
Terms and conditions of outstanding loans were as follows:
i
ii
The revolving floorplan facilities (“VCCI facilities”) are available to the Company from VW
Credit Canada, Inc. ("VCCI") to finance new and used vehicles for all of the Company's
Volkswagen dealerships. The VCCI facilities bear interest at the Royal Bank of Canada
("RBC") prime rate (3.00% at December 31, 2012) plus 0.50% for new vehicles and 0.75-1.00%
for used vehicles. The maximum amount of financing provided by the VCCI facilities is
$15,990. The VCCI facilities are collateralized by both of the dealerships’ assets financed by
VCCI and all cash and other collateral in the possession of VCCI and a general security
agreement from the Company's Volkswagen dealerships. The individual notes payable of the
VCCI facilities are due when the related vehicle is sold, as outlined in the agreement with VW
Credit Canada, Inc. In February 2013, VCCI further reduced the interest rate on the new vehicle
facilities to RBC Prime Rate.
HSBC Bank Canada (“HSBC”) provides the Company with a fully committed, extendible
revolving term loan (the “HSBC Revolver”) in the amount of $40,000 and may be increased by
$10,000 subject to approval from HSBC. The facility is repayable on June 30, 2014 and may be
extended for an additional 365 days at the request of the Company and upon approval by HSBC.
The HSBC Revolver bears interest at HSBC’s Prime Rate plus 0.75% (3.75% at December 31,
2012). The HSBC Revolver is collateralized by all of the present and future assets of the
subsidiaries of AutoCanada Inc., the various Limited Partnerships and the General Partners of
each dealership within the Company. As part of a priority agreement signed by HSBC and the
Company, the collateral for the HSBC Revolver excludes all new, used and demonstrator
inventory financed with the Scotiabank and VCCI revolving floorplan facilities.
75 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
24 Indebtedness continued
iii
iv
v
vi
HSBC provides the Company with a committed, extendible non-revolving term loan (the
“HSBC Term Loan”). The HSBC Term Loan’s maturity date is January 31, 2013, however the
facility may be extended at the request of the Company and upon approval by HSBC. If the
HSBC Term Loan is not extended by HSBC, repayment of the outstanding amount is not due
until January 31, 2014. The HSBC Term Loan bears interest at HSBC’s Prime Rate plus 1.75%
(4.75% at December 31, 2012). Repayments are based on a 20 year amortization of the original
loan amount; consisting of fixed monthly principal repayments of $15 plus applicable interest.
The HSBC Term Loan requires maintenance of certain financial covenants and is collateralized
by a first fixed charge in the amount of $3,510 registered over the Newmarket Infiniti Nissan
property. At December 31, 2012, the carrying amount of the Newmarket Infiniti Nissan property
was $5,370. The Company is currently in the renewal process for the HSBC Term Loan.
Bank of Montreal provides the Company a Fixed Rate Term Loan (the “BMO Term Loan”).
The BMO Term Loan matured September 30, 2012 and bears interest at a fixed rate of 5.11%.
Repayments consist of fixed monthly payments totaling $20 per month. The BMO Term Loan
requires maintenance of certain financial covenants and is collateralized by a general security
agreement consisting of a first fixed charge in the amount of $3,450 registered over the
Cambridge Hyundai property. At December 31, 2012, the carrying amount of the Cambridge
Hyundai property was $3,232. The Company is currently in the renewal process for the BMO
Term Loan.
Servus Credit Union provides the Company with a mortgage (the "Servus Mortgage"). The
Servus Mortgage bears interest at a fixed annual rate of 3.90% and is repayable with monthly
blended instalments of $38, originally amortized over a 20 year period with term expiring
September 27, 2017. The Servus Mortgage has certain reporting requirements and financial
covenants and is collateralized by a general security agreement consisting of a first fixed charge
over the property. At December 31, 2012, the carrying amount of the property was $8,575.
During the year, the Bank of Nova Scotia ("Scotiabank") provided the Company a revolving
floorplan facility in the amount of $240,000 to refinance the Ally facilities previously used to
finance new and used vehicle inventory. The facility for the new vehicle inventory bears interest
at Bankers' Acceptance Rate plus 1.40% per annum (2.62% at December 31, 2012). The facility
for used vehicle inventory bears interest at Bankers' Acceptance Rate plus 1.90% per annum
(3.12% at December 31, 2012). The facility is collateralized by the individual dealership's
inventories which are directly financed by Scotiabank, a general security agreement with each
dealership financed, and a guarantee from AutoCanada Holdings Inc., a subsidiary of the
Company.
76 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
24 Indebtedness continued
vii
The Revolving floorplan facilities - Ally Credit ("Ally facilities") available to the Company to
finance new, demonstrator, and used vehicles bear interest at Prime Rate plus 0.20% (4.20% at
December 31, 2011) and are payable monthly in arrears. Prime Rate is defined as the greater of
the Royal Bank of Canada ("RBC") prime rate (3.00% at December 31, 2011) or 4.00%. The
maximum amounts of financing provided by the Ally facilities are based on a maximum number
of new, used, and demonstrator vehicles to be financed on an individual dealership basis. The
Ally facilities are collateralized by all of the dealerships' new, used, and demonstrator inventory
financed by the Ally facilities and a general security agreement and cross guarantee from each
of the Company's dealerships financed by Ally Credit. The individual notes payable of the Ally
facilities are due when the related vehicle is sold or according to an aging based repayment
policy as mandated by Ally Credit.
25 Leases and vehicle repurchase obligations
This note provides information about the contractual terms of the Company's lease obligations.
Current
Vehicle repurchase obligations (i)
Current finance lease obligations (ii)
Total lease obligations
December 31,
2012
$
December 31,
2011
$
1,254
28
1,282
1,082
122
1,204
Terms and conditions of lease obligations were as follows:
i
ii
The Company provides a corporate fleet customer with vehicles for individual terms not to
exceed six months, at which time the Company has an obligation to repurchase each vehicle at a
predetermined amount. The Company has determined that the transactions shall be treated as
vehicle repurchase obligations, whereby the Company acts as lessor. As a result, the Company
has recorded the contractual repurchase amounts as outstanding vehicle repurchase obligations
and have classified the liability as current due to the short term nature of the instruments.
A number of equipment leases are classified as finance leases. At inception of the leases, the
Company recognized an asset and a liability at an amount equal to the estimated fair value of the
equipment. The imputed finance costs on the liability were determined based on the lower of the
Company's incremental borrowing rate and the rates implicit in each lease.
77 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
25 Leases and vehicle repurchase obligations continued
Other leasing arrangements
In conjunction with the acquisition of Valley Autohouse in 2011, the Company acquired an in-house leased
vehicle portfolio in which the Company acts as lessor. The vehicles are leased to third parties pursuant to non-
cancellable operating lease agreements. As at December 31, 2012, the lease terms for the remaining vehicle
leases range from 36 to 48 months. The future aggregate minimum lease payments to be received under the
non-cancellable operating leases are $37 within 1 year and $11 thereafter. The Company intends to wind-down
the in-house lease program at this location over the next 24 months.
26 Commitments and Contingencies
Commitments
The Company has operating lease commitments, with varying terms through 2029, to lease premises and
equipment used for business purposes. The Company leases the majority of the lands and buildings used in its
franchised automobile dealership operations from related parties (Note 30) and other third parties. The future
aggregate minimum lease payments under non-cancellable operating leases are as follows:
2012
2013
2014
2015
2016
2017
Thereafter
December 31,
2012
$
-
10,605
10,289
9,967
8,205
6,460
50,378
December 31,
2011
$
10,109
8,611
8,307
7,984
6,881
5,689
50,792
95,904
98,373
Lawsuits and legal claims
The Company’s operations are subject to federal, provincial and local environmental laws and regulations in
Canada. While the Company has not identified any costs likely to be incurred in the next several years, based
on known information for environmental matters, the Company’s ongoing efforts to identify potential
environmental concerns in connection with the properties it leases may result in the identification of additional
environmental costs and liabilities. The magnitude of such additional liabilities and the costs of complying
with environmental laws or remediating contamination cannot be reasonably estimated at the balance sheet
date due to lack of technical information, absence of third party claims, the potential for new or revised laws
and regulations and the ability to recover costs from any third parties. Thus the likelihood of any such costs or
whether such costs would be material cannot be determined at this time.
78 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
26 Commitments and Contingencies continued
Lawsuits and legal claims continued
In addition to the matters described above, the Company is engaged in various legal proceedings and claims
that have arisen in the ordinary course of business. The outcome of all of the proceedings and claims against
the Company, including those described above, is subject to future resolution, including the uncertainties of
litigation. Based on information currently known to the Company and after consultation with outside legal
counsel, management believes that it is not probable that the ultimate resolution of any such proceedings and
claims, individually or in the aggregate, would have a material adverse effect on the financial condition of the
Company, taken as a whole.
27 Share-based payments
The Company operates a cash and equity-settled compensation plan under which it receives services from
employees as consideration for cash and share payments. The plan is described below:
Restricted Share Units (RSUs)
The Company grants RSUs to designated management employees entitling them to receive a
combination of cash and common shares based on the Company's share price at each vesting date. The
RSUs are also entitled to earn additional units based on dividend payments made by the Company and
the share price on date of payment. The RSUs granted are scheduled to vest evenly over three years
conditional upon continued employment with the Company.
The following table shows the change in the number of RSUs for the following years:
Outstanding, beginning of the year
Granted
Dividends reinvested
Outstanding, end of the year
Deferred Share Units (DSUs)
2012
Number of
RSUs
12,245
76,916
3,549
92,710
2011
Number of
RSUs
-
11,752
493
12,245
Independent members of the Board of Directors are entitled to receive up to 100% of their cash
remuneration in the form of DSUs based on the Company's average share price for the five business
days prior to the date on which quarterly directors' fees are paid. The DSUs are also entitled to earn
additional units based on dividend payments made by the Company and the Company's share price on
the date of payment. The DSUs granted are scheduled to vest upon the termination date of the director,
at which time, the DSUs will be settled in cash no sooner than the termination date and no later than
December 15 of the calendar year following the director's termination date.
79 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
27 Share-based payments continued
The following table shows the change in the number of DSUs for the following years:
Granted
Dividends reinvested
Outstanding, end of the period
28 Share capital
2012
Number of
DSUs
3,397
38
3,435
2011
Number of
DSUs
-
-
-
Common shares of the Company are voting shares and have no par value. The authorized share capital is an
unlimited number of common shares.
RSU Trust
In June 2012, the Company established a share purchase trust ("Trust") to hedge the risk of future share price
increases from the time Restricted Share Units ("RSU" - see Note 27) are granted to when they are fully vested
and can be exercised. The beneficiaries of the Trust are members of the Executive Management Team who
participate in the long-term incentive compensation plan called the Restricted Share Unit Plan (the "Plan").
Under the Trust Agreement, the trustee will administer the distribution of cash and shares to the beneficiaries
upon vesting, as directed by the Company. The Company contributed cash to the trustee to purchase a total of
76,916 shares of the Company at a total cost of $912 on the open market to fund the future payment of awards
to eligible individuals under the Plan. Dividends earned on the shares held in trust of $23 are reinvested to
purchase additional shares. The shares held in the Trust are accounted for as treasury shares and have been
deducted from the Company's consolidated equity as at December 31, 2012. As the Company controls the
Trust, it has included the Trust in its consolidated financial statements for the year ended December 31, 2012.
The following table shows the change in shareholders' capital from January 1, 2012 to December 31, 2012:
Outstanding, beginning of the year
Common shares repurchased
Outstanding, end of the year
2012
Number
19,880,930
(78,781)
19,802,149
2012
Amount
$
190,435
(935)
189,500
80 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
28 Share capital continued
Dividends
Dividends are discretionary and are determined based on a number of factors. Dividends are subject to
approval of the Board of Directors. During the year ended December 31, 2012, eligible dividends totaling
$12,301 (2011 - $6,163) were declared and paid. On February 15, 2013, the Board of Directors of the
Company declared a quarterly eligible dividend of $0.18 per common share on the Company's outstanding
Class A common shares, payable on March 15, 2013 to shareholders of record at the close of business on
February 28, 2013.
Earnings per share
Basic earnings per share was calculated by dividing earnings attributable to common shares by the sum of the
weighted-average number of shares outstanding during the period. The Company does not have any dilutive
stock options or other securities. Earnings used in determining earnings per share from continuing operations
are presented below:
Earnings attributable to common shares
The weighted-average number of shares outstanding is presented below:
Weighted-average number of shares outstanding, opening
Weighted-average common shares held in treasury
Weighted-average number of shares outstanding, closing
29 Capital disclosures
2012
$
24,236
2012
19,881
(40)
19,841
2011
$
36,784
2011
19,881
-
19,881
The Company's objective when managing its capital is to safeguard the Company's assets and its ability to
continue as a going concern while at the same time maximize the growth of the business, returns to
shareholders, and benefits for other stakeholders. The Company views its capital as the combination of long-
term indebtedness, long-term lease obligations and equity.
The calculation of the Company's capital is summarized below:
Long-term indebtedness(Note 24)
Equity
December 31,
2012
$
23,937
124,500
December 31,
2011
$
20,115
112,995
148,437
133,110
81 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
29 Capital disclosures continued
The Company manages its capital structure in accordance with changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or adjust its capital structure, the Company may
assume additional debt, refinance existing debt with different characteristics, sell assets to reduce debt, issue
new shares or adjust the amount of dividends paid to its shareholders.
30 Related party transactions
Transactions with Companies Controlled by the CEO of AutoCanada
During the year ended December 31, 2012, the Company had financial transactions with entities controlled by
the Company's CEO. Mr. Priestner is the controlling shareholder of Canada One Auto Group ("COAG") and
its subsidiaries, which beneficially own approximately 42.3% of the Company's shares. In addition to COAG,
Mr. Priestner is the controlling shareholder of other companies in which AutoCanada earns administrative
fees. These transactions are measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties. All transactions between AutoCanada and companies
controlled by Mr. Priestner are approved by the Company's independent members of the Board of Directors.
a
Prepaid rent
During the year ended December 31, 2012, the Company prepaid rent to a company controlled by Mr.
Priestner as part of an agreement for a long-term rent reduction, which was entered into in 2009. Total
prepayments of rent for the period ended December 31, 2012 was $540 (2011 - $2,160). The total
unamortized prepayment of rent to the Company as at December 31, 2012 is $7,646, which is included
in "Other long term assets" on the Consolidated Statement of Financial Position. Prepayments of rent
are amortized straight-line over the term of the lease as an increase in facilities lease costs. As such, a
total of $452 (2011 - $452) has been amortized to current period facility lease costs.
b
Rent paid to companies with common directors
During the year ended December 31, 2012, total rent paid to companies controlled by Mr. Priestner
amounted to $7,875 (2011 - $7,906). The Company currently leases thirteen of twenty-six properties in
which the Company operates from COAG, a company controlled by Mr. Priestner. The Company's
independent Board of Directors has received advice from a national real estate appraisal company that
the market rents at each of the COAG properties were at fair market value rates when the leases were
entered into.
c
Administrative support fees
During the year ended December 31, 2012, total administrative support fees received from companies
controlled by Mr. Priestner amount to $432 (2011 - $201). Administrative support fees consist of a fixed
monthly fee in exchange for information technology, accounting, and other administrative support. The
fees are determined annually based on the estimated cost of services provided.
82 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
30 Related party transactions continued
Commitments with Companies controlled by the CEO of AutoCanada
The Company has operating lease commitments, with varying terms through 2029, to lease the lands and
buildings used in certain of its franchised automobile dealerships from COAG, a company controlled by Mr.
Priestner. The future aggregate minimum lease payments under non-cancelable operating leases with COAG
are as follows:
2012
2013
2014
2015
2016
2017
Thereafter
December 31,
2012
$
-
7,937
7,916
7,821
6,169
5,206
40,087
December 31,
2011
$
7,811
6,320
6,299
6,204
5,211
4,435
40,087
75,136
76,367
Key management personnel compensation
Key management personnel consists of the Company's executive officers and directors. Key management
personnel compensation is as follows:
Employee costs (including directors)
Short-term employee benefits
Termination benefits
Share-based payments
2012
$
3,239
96
-
701
4,036
2011
$
3,106
117
(265)
302
3,260
83 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
31 Net change in non-cash working capital
Changes in non-cash working capital consist of fluctuations in the balances of trade and other receivables,
inventories, other current assets, trade and other payables and revolving floorplan facilities. Factors that can
affect these items include seasonal sales trends, strategic decisions regarding inventory levels, the addition of
new dealerships, and the day of the week on which period end cutoffs occur.
The following table summarizes the net increase in cash due to changes in non-cash working capital for the
years ended December 31, 2012 and 2011:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Leased vehicle repurchase obligations
Revolving floorplan facility
32 Subsequent Events
Real Estate
December 31,
2012
$
(5,496)
(63,105)
18
3,311
171
52,709
December 31,
2011
$
(9,808)
(26,080)
33
5,305
340
31,441
(12,392)
1,231
On March 26, 2013, the Real Estate Committee, comprised of independent members of the Board of Directors,
completed its evaluation of the purchase of dealership real estate owned by subsidiaries of Canada One Auto
Group. The Company has entered into a letter of intent to purchase 11 of these properties. The closing date is
scheduled for 90 days from March 26, 2013, with the Company having the option to extend a further 90 days.
Scotiabank Floorplan Increase and Interest Rate Reduction
On March 22, 2013, the Company announced that its revolving floorplan facility agreement with The Bank of
Nova Scotia ("Scotiabank") had been increased by $50 million to accommodate the growing inventory
requirements of its dealerships. The total amount available under the Scotiabank facility is now $290 million.
In addition to the increase, the Company received a 50 basis point interest rate reduction in both its new and
used vehicle floorplan facilities with Scotiabank. Under the facility, the interest rates on the floorplan facility
have been revised to Bankers' Acceptance plus 1.30% (currently 2.50%) on new vehicles and Bankers'
Acceptance plus 1.80% (currently 3.00%) on used vehicles.
84 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
32 Subsequent Events continued
Peter Baljet Chevrolet Buick GMC
On March 1, 2013, the Company invested a total of $7,057 to acquire an 80.0% participating, non-voting
equity interest in Green Isle G Auto Holdings Inc. ("GIA"). GIA is an entity formed between a subsidiary of
AutoCanada and Mr. Patrick Priestner ("Priestner"), the Company's Chief Executive Officer. GIA was formed
to acquire future General Motors of Canada ("GM Canada") franchised dealerships, whereby Priestner is
required to maintain voting control of the dealerships, in accordance with the agreement with GM Canada. All
shareholders participate equally in the equity and economic risks and rewards of GIA and its interests, based
on the percentage of ownership acquired.
Although the Company holds no voting rights in GIA, the Company exercises significant influence by virtue
of its ability to appoint one member of the board of directors of GIA and its ability to participate in financial
and operating policy decisions of GIA. However, the Company does not have the power to make key decisions
or block key decisions due to a casting vote held by Priestner. As a result, the Company is expected to account
for its investment in GIA under the equity method. There are no guarantees to GIA or significant relationships.
On March 1, 2013, GIA purchased substantially all of the net operating and fixed assets of Peter Baljet
Chevrolet Buick GMC ("Peter Baljet") in Duncan, British Columbia.
The dealership is subject to financial covenants as part of its borrowing arrangements that may restrict its
ability to transfer funds to GIA if the payment of such funds resulted in a breach of covenants. Peter Baljet is
also subject to minimum working capital requirements imposed by GM Canada, which may restrict the
dealership's ability to transfer funds to GIA if minimum working capital requirements are not met.
As a result of GIA's investment, the Company has indirectly acquired an 80.0% interest in Peter Baljet.
Summarized information in respect of the investment in GIA is as follows:
Current assets
Non-current assets
Net assets
Carrying
amount
$
1,527
7,294
8,821
Fair value
adjustments
$
-
-
Interest in Green
Isle G Auto
Holdings Ltd.
$
1,222
5,835
Fair value
$
1,527
7,294
-
8,821
7,057
The financial information presented above is an estimate, based on the preliminary conclusion that Peter
Baljet will be accounted for as an investment in associate. Such estimates and judgments may be subject to
change.
85 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2012 and 2011
(in thousands of Canadian dollars except for share and per share amounts)
32 Subsequent Events continued
Grande Prairie Volkswagen
On January 4, 2013, the Company purchased substantially all of the net operating and fixed assets of People's
Automotive Ltd. (“Grande Prairie Volkswagen”) for total cash consideration of $1,981. The acquisition was
funded by drawing on the Company’s VCCI facilities (Note 26) in the amount of $1,413 and the remaining
$568 was financed with the HSBC Revolver (Note 26). The acquisition will be accounted for using the
acquisition method. The purchase of this business complements the Company’s other dealerships in Grande
Prairie. In addition to the business, the Company also purchased land and a building used for business
operations for $1,800.
The purchase price allocated to the assets acquired and the liabilities assumed, based on their fair values, is as
follows:
Carrying
amount
$
Fair value
adjustments
$
Fair value
$
Current assets
Trade and other receivables
Inventories
Long term assets
Property and equipment
Total assets
Current liabilities
Trade and other payables
Long term liabilities
Total liabilities
Net assets acquired
Intangible - franchise agreement
Total net assets acquired
16
1,777
1,793
1,897
3,690
9
9
9
3,681
-
3,681
-
-
-
-
-
-
-
-
-
100
100
16
1,777
1,793
1,897
3,690
9
9
9
3,681
100
3,781
The purchase price allocated, as presented above, is an estimate and subject to change.
86 CORPORATE INFORMATION
AUTOCANADA INC.
Shareholder Information
Head Office
AutoCanada Inc.
Senior Management
Patrick Priestner,
Chief Executive Officer
Thomas Orysiuk,
President and Chief Financial Officer
#200 – 15505 Yellowhead Trail
Edmonton, Alberta
T5V 1E5
www.autocan.ca
Investor Relations
Jeffery Christie
780-732-7164
jchristie@autocan.ca
Stephen Rose,
Executive Vice-President, Corporate Services
Auditors
Jeffery Christie,
Vice-President, Finance
PricewaterhouseCoopers, LLP
Edmonton, Alberta
Board of Directors
Shares Listed
Gordon Barefoot – Chairman
Michael Ross
Dennis DesRosiers
Christopher Cumming
Patrick Priestner
Thomas Orysiuk
Toronto Stock Exchange
Trading Symbol: ACQ
Transfer Agent
Valiant Trust Company
Annual General Meeting
Tuesday, May 7, 2013
10:00 a.m. Mountain Time
AutoCanada Inc. Corporate Head Office
200 – 15505 Yellowhead Trail
Edmonton, Alberta
87
#200 - 15505 Yellowhead Trail • Edmonton, AB • T5V 1E5
www.autocan.ca
5 » AutoCanada 2011