1 » AutoCanada 2011
AutoCanada Inc.
Management’s Discussion & Analysis
Consolidated Financial Statements
Corporate Information
1
36
86
AutoCanada Inc.
Management’s Discussion & Analysis of
Financial Conditions and Results of
Operations
For the year ended December 31, 2013
As of March 20, 2014
READER ADVISORIES
The Management’s Discussion & Analysis (“MD&A”) was prepared as of March 20, 2014 to assist readers in understanding AutoCanada
Inc.’s (the “Company” or “AutoCanada”) consolidated financial performance for the year ended December 31, 2013 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 as at and for
the year ended December 31, 2013. 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, 2013 of the Company, and compares these to the operating results of the Company for the three month period and year
ended December 31, 2012. The Company has investments in three General Motors dealerships and account for the investments utilizing
the equity method, whereby the operating results of these investments are included in one line item on the statement of comprehensive
income known as Income from investments in associates. As a result, the Company does not incorporate the consolidated results of its
investments in associates in its discussion and analysis. Management has provided limited discussion and analysis of these investments in
Results from operations – Income from Investments in Associates below.
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, corporations, and investments in associates 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 2013 Annual Information Form dated March 20, 2014, 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 28 wholly-owned franchised
dealerships and managing 5 franchised dealership investments (see “GROWTH, ACQUISITIONS, RELOCATIONS AND REAL
ESTATE”) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia. In 2013, our dealerships
sold approximately 36,000 vehicles and processed approximately 364,000 service and collision repair orders in our 381 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.
The Company’s geographical profile is illustrated below by number of wholly-owned dealerships and revenues by province for the years
ended December 31, 2013 and December 31, 2012.
(Revenue in $000s)
Location of Dealerships
December 31, 2012
December 31, 2013
Number of
Dealerships
Number of
Dealerships
British Columbia
Alberta
Ontario
All other
Total
9
11
3
5
28
Revenue
$
431,519
637,414
105,594
234,513
1,409,040
% of Total
%31
%45
%7
%17
%100
Revenue
$
405,500
467,819
92,110
136,473
9
9
3
3
24
1,101,902
% of Total
%37
%42
%8
%13
%100
2 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:
Calgary, Alberta
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
Winnipeg, Manitoba
Winnipeg, Manitoba
Winnipeg, Manitoba
Moncton, New Brunswick
Dartmouth, Nova Scotia
Cambridge, Ontario
Mississauga, Ontario
Newmarket, Ontario
Dealership Investments:
Sherwood Park, Alberta
Sherwood Park, Alberta
Duncan, British Columbia
Saskatoon, Saskatchewan
Prince Albert, Saskatchewan
(1) Formerly Petersen Pontiac Buick GMC
Seasonality
Courtesy Chrysler Dodge
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
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
St. James Audi
St. James Volkswagen
Eastern Chrysler Jeep Dodge
Moncton Chrysler Jeep Dodge
Dartmouth Chrysler Jeep Dodge
Cambridge Hyundai
401/Dixie Hyundai
Newmarket Infiniti Nissan
Sherwood Park Chevrolet
Sherwood Buick GMC (1)
Peter Baljet Chevrolet GMC Buick
Saskatoon Motor Products
Mann-Northway Auto Source
Chrysler
Chrysler
Chrysler
Chrysler
Hyundai
Subaru
Mitsubishi
Nissan
Volkswagen
Chrysler
Hyundai
Volkswagen
Volkswagen
Chrysler
Chrysler
Volkswagen
Chrysler
Hyundai
Nissan
Hyundai
Audi
Volkswagen
Chrysler
Chrysler
Chrysler
Hyundai
Hyundai
Nissan / Infiniti
General Motors
General Motors
General Motors
General Motors
General Motors
2013
1994
2003
1998
2005
1998
2007
2007
2013
1998
2006
2011
2011
2003
2005
2008
2002
2005
2007
2006
2013
2013
2013
2001
2006
2008
2008
2008
2012
2012
2013
2014
2014
The results from operations historically 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
operating results are 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.
3 OUR PERFORMANCE
Performance vs. the Canadian New Vehicle Market
The Canadian automotive retail sector performed very well in 2013. A combination of a strong performing economy, some pent-up
demand for new vehicles, attractive financing rates and strong manufacturer incentives on new vehicles resulted in record new vehicle
sales volumes during the year. New light vehicle sales in Canada in the year ended December 31, 2013 were up 4.0% when compared to
the same period in 2012 and surpassed 1.7 million in unit sales for the first time since 2002. The Company’s same store unit sales of new
vehicles increased by 16.1% during this period, which includes an increase in new vehicle units retailed of 16.0% in 2013. Management is
very pleased with our dealerships’ collective ability to outperform the market.
New vehicle sales were particularly strong in Alberta and British Columbia, our primary markets, which were up by 7.3% and 4.7%
respectively. The relatively strong economy in Western Canada has contributed to our ability to outperform the overall market and in
particular, the light truck market in these two provinces is very strong, which contributed to the Company’s overall increase in sales and
gross profit during the year.
Regardless of the strength of the particular markets in which we operate, our dealerships have been picking up market share in many sales
regions. We accredit the improvement in market share of many of our dealerships to their 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, leveraging marketing expertise, and sharing of best practices have contributed greatly to their ability to outperform
the market in new vehicle sales.
The following table summarizes Canadian new light vehicle unit sales for the year ended December 31, 2013 by Province:
December Year to Date Canadian New Vehicle Sales by Province 1
British Columbia
Alberta
Saskatchewan
Manitoba
Ontario
Quebec
New Brunswick
PEI
Nova Scotia
Newfoundland
Total
1 DesRosiers Automotive Consultants Inc.
Performance vs. the Prior Year
December Year to Date
2013
2012
Percent
Change
180,163
256,218
57,485
54,476
645,323
414,697
40,300
7,312
51,839
35,299
172,126
238,884
54,728
49,667
617,767
415,694
38,789
6,885
47,985
33,150
1,743,112
1,675,675
%4.7
%7.3
%5.0
%9.7
%4.5
%(0.2)
%3.9
%6.2
%8.0
%6.5
%4.0
Unit Change
8,037
17,334
2,757
4,809
27,556
(997)
1,511
427
3,854
2,149
67,437
AutoCanada’s record sales and earnings in fiscal 2013 is a direct result of acquisitions completed during the year and strong gains in same
store sales and gross profit. The Company completed acquisitions of six dealerships and achieved same store sales and gross profit
increases of 17.2% and 17.5%, respectively. As a result, the Company improved its adjusted earnings before tax (see “NON-GAAP
MEASURES”) by $18.5 million or 56.7% over the prior year. Although the Company issued shares during the year to finance the
increased acquisition activity, adjusted earnings per share improved by $0.61 per share or 50.0% over the prior year.
4 The Company achieved overall sales of $1.4 billion in 2013 as compared to $1.1 billion in 2012, representing an increase of $307.1
million or 27.9%. The increase is a result of same store sales increases of $181.9 million or 17.2% over 2012; as well as revenue from
acquired dealerships. With the exception of our parts, service and collision repair department which had a strong increase in revenue of
$9.8 million or 9.0% on a same store basis, all other departments achieved double-digit same store sales increases. We believe that our
dealerships had very strong sales performances in all departments during the year.
Management typically uses gross profit as its most important measure of top line growth. Overall revenues can vary significantly year over
year as a result of fluctuations in sales mix, as well as, fluctuations in low margin fleet sales and used vehicle wholesale sales. As such,
Management believes that growth is a better indicator of overall corporate performance. Overall gross profit increased by 29.2% as a result
of strong same store sales gross profit and recently completed acquisitions. Same store gross profit increased by 17.5% in 2013 as
compared to the prior year which was comprised of gross profit increases across all four business lines. The Company’s new vehicle
department, as well as its finance and insurance department, achieved over 20% year over year same store gross profit increases.
Management is particularly pleased with the 14.8% increase in same store used vehicle gross profit achieved in 2013. This increase is
partially due to strong used vehicle retail sales during the year as well as improvement in used wholesale gross profit. We believe that the
used vehicle market in Canada has been slowly improving for franchised dealers as increased new vehicle sales volumes over the past three
years have helped to supply franchised dealerships with an increased supply of high quality used vehicles. Management is also pleased
with the 8.6% increase in its parts, service and collision repair same store gross profit during the year. This department is a very important
source of revenue for the Company, as it helps to provide greater earnings stability over the long term. The Company has made
improvements in technology and process in its parts and service departments, and we believe that these improvements are beginning to
produce results.
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 76.6% in fiscal 2013 as compared to 78.3% in the prior year. The Company
did, however, incur additional expense with respect to the six acquisitions that it completed during the year. Management estimates
additional legal and administration expense of approximately $0.2 million for each acquisition that it completes, therefore, we estimate that
we incurred approximately $0.6 million in additional acquisition costs in 2013 over 2012. The Company also completed two syndicated
credit facilities during the fourth quarter which resulted in additional legal and administration costs of approximately $0.5 million during
the year.
The Company’s investments in General Motors dealerships performed very well during the year. The Company earned income from these
investments in the amount of $2.2 million (after-tax) during the 2013 fiscal year. Our General Motors dealerships have been performing
very well and the returns achieved on these investments have been excellent.
The Company’s interest costs, net of interest earned, decreased by $0.6 million or 7.1% during 2013. Although the Company maintained
higher inventory levels during the year, lower financing rates obtained in November of 2012 and late 2013 resulted in a decrease in overall
financing costs.
Overall, management is very pleased with 2013 financial results. We are particularly proud of the performance of our dealership teams,
which is evidenced by double-digit increases in same store sales and gross profit. The dealerships that we acquired during the year are
integrating very well and are providing a good platform for future growth in sales and gross profit. We have begun to develop platforms in
new markets which we plan to expand in the future. The new platforms represent additional geographic areas of growth for the Company
and further solidify our position as the one of the largest and truly coast-to-coast operators of automotive dealerships in Canada.
5 SELECTED ANNUAL FINANCIAL INFORMATION
The following table shows the audited results of the Company for the years ended December 31, 2011, December 31, 2012 and December
31, 2013. 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 and collision repair
Finance, insurance and other
Revenue
New vehicles
Used vehicles
Parts, service and collision
Finance and insurance
Gross profit
Gross Profit %
Operating expenses
Operating exp. as a % of gross profit
Finance costs - floorplan
Finance costs - long term debt
Reversal of impairment of intangibles
Income from investments in associates
Income tax
Net comprehensive income
EBITDA (1)
Basic earnings (loss) per share
Diluted earnings per share
Operating Data
Vehicles (new and used) sold
Vehicles (new and used) sold including GM (4)
New vehicles sold including GM (4)
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 year end
# of dealership investments at year 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
Trade and other receivables
Inventories
Revolving floorplan facilities
The Company
(Audited)
2011
The Company
(Audited)
2012
The Company
(Audited)
2013
640,721
206,030
110,465
51,126
1,008,342
683,034
243,351
114,276
61,241
1,101,902
882,858
300,881
142,343
82,958
1,409,040
47,762
17,395
57,699
46,364
169,220
%16.8
136,846
%80.9
8,473
1,069
(25,172)
-
12,509
36,784
29,070
1.850
1.850
27,998
27,998
19,331
14,499
4,832
8,667
305,298
%88
24
-
21
333
%17.3
%13.9
53,641
-
42,448
137,646
150,816
57,833
16,299
59,898
56,399
190,429
%17.3
149,140
%78.3
9,279
960
(222)
468
8,576
24,236
37,861
1.219
1.219
29,780
31,554
21,501
16,226
4,096
9,458
309,488
%86
24
2
22
333
%8.6
%10.9
34,472
10,000
47,944
199,119
203,525
75,835
20,273
73,755
76,172
246,035
%17.5
188,519
%76.6
7,353
1,007
(746)
2,241
13,696
38,166
58,469
1.829
1.829
35,774
40,136
28,024
20,523
4,876
10,375
364,361
%87
28
3
21
381
%17.2
%17.5
35,113
-
57,771
278,091
264,178
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 Company has investments in General Motors dealerships that are not consolidated. This number includes 100% of vehicles sold by these dealerships in which we have less than 100% investment.
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
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
New vehicles
Used vehicles
Parts, service and collision repair
Finance, insurance and other
Revenue
New vehicles
Used vehicles
Parts, service and collision
Finance and insurance
Gross profit
Gross Profit %
Operating expenses
Operating exp. as a % of gross profit
Finance costs - floorplan
Finance costs - long term debt
Reversal of impairment of intangibles
Income from investments in associates
Income tax
Net earnings (4)
EBITDA (1)(4)
Basic earnings (loss) per share
Diluted earnings per share
Operating Data
Vehicles (new and used) sold
Vehicles (new and used) sold including GM (5)
New vehicles sold including GM (5)
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
Trade and other receivables
Inventories
Revolving floorplan facilities
147,383
60,453
26,953
13,399
248,188
186,560
62,822
28,915
16,139
294,436
190,065
62,816
28,488
16,775
298,144
159,026
57,260
29,920
14,928
261,134
174,278
62,656
29,515
17,602
284,051
254,261
77,113
34,456
22,555
388,385
257,222
85,975
37,104
22,530
402,831
197,097
75,137
41,268
20,271
333,773
12,066
4,420
14,049
12,344
42,879
%17.3
35,381
%82.5
2,053
214
-
-
1,441
4,112
6,792
0.207
0.207
6,836
6,836
4,403
3,434
969
2,433
74,439
%91
24
21
333
%20.2
%18.3
14,684
4,238
15,298
14,842
49,062
%16.7
37,659
%76.8
2,622
239
-
83
2,216
6,712
10,195
0.338
0.338
8,154
8,557
5,964
4,400
1,313
2,441
78,104
%81
24
21
333
%2.4
%7.1
15,556
4,004
15,133
15,428
50,121
%16.8
38,361
%76.5
2,745
250
-
130
2,379
6,806
10,575
0.344
0.344
8,087
8,783
6,178
4,410
1,265
2,412
78,944
%89
24
21
333
%8.0
%7.9
15,527
3,637
15,418
13,785
48,367
%18.5
37,739
%78.0
1,859
257
(222)
255
2,540
6,606
10,299
0.334
0.334
6,703
7,378
4,956
3,982
549
2,172
78,001
%89
24
22
333
%7.4
%11.9
16,022
3,789
15,233
16,096
51,140
%18.0
40,353
%78.9
1,675
237
-
201
2,309
6,822
10,557
0.345
0.345
7,341
8,123
5,665
4,118
1,036
2,187
77,977
%85
25
22
341
%12.9
%16.9
20,793
5,794
17,586
20,676
64,849
%16.7
48,639
%75.0
1,888
244
-
648
3,976
10,823
16,532
0.532
0.532
10,062
11,399
8,246
5,487
1,923
2,652
93,352
%82
27
22
341
%26.2
%25.8
20,694
6,240
20,114
20,666
67,714
%16.8
51,080
%75.4
1,903
139
-
555
3,920
10,968
16,626
0.507
0.507
10,325
11,405
8,023
5,986
1,365
2,974
97,074
%90
29
22
388
%19.9
%18.5
18,326
4,450
20,822
18,734
62,332
%18.7
48,447
%77.7
1,887
387
(746)
837
3,491
9,553
14,754
0.441
0.441
8,046
9,209
6,090
4,932
552
2,562
95,958
%90
28
21
381
%8.9
%9.2
53,403
-
51,364
156,262
178,145
51,198
-
52,042
201,692
221,174
54,255
-
54,148
194,472
212,840
34,472
10,000
47,944
199,119
203,525
41,975
10,000
57,144
217,707
225,387
35,058
10,000
69,136
232,878
246,325
37,940
-
62,105
237,460
228,526
35,113
-
57,771
278,091
264,178
EBITDA has been calculated as described under “NON-GAAP MEASURES”.
1
2 Absorption has been calculated as described under “NON-GAAP MEASURES”.
3
4
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.
The Company has investments in General Motors dealerships that are not consolidated. This number includes 100% of vehicles sold by these dealerships in which we have less than 100% investment.
5
7 RESULTS FROM OPERATIONS
Annual Operating Results
EBITDA for the year ended December 31, 2013 increased by 54.4% to $58.5 million, from $37.9 million when compared to the results of
the Company for the same period in the prior year. The increase in EBITDA for the quarter can be mainly attributed to improvements in
all four business streams and the dealership acquisitions completed during 2013.
The following table reconciles EBITDA to net comprehensive income for the years ended December 31:
(in thousands of dollars)
Net comprehensive income
Impairment of intangible assets
Income tax
Amortization of property and equipment
Interest on long-term indebtedness
EBITDA
2013
38,166
(746)
13,696
6,346
1,007
58,469
2012
24,236
(222)
8,576
4,311
960
37,861
2011
36,784
(25,543)
12,509
4,251
1,069
29,070
Adjusted pre-tax earnings increased by $18.5 million or 56.7% to $51.1 million in 2013 from $32.6 million in the prior year. Adjusted
earnings increased by $13.3 million or 54.7% to $37.6 million in 2013 from $24.3 million in the prior year.
As the pre-tax net effects of reversals of impairment of intangible assets for the year ended December 31, 2013 was $0.7 million, as
compared to total reversals of $0.2 million before taxes in 2012, the variances in the following paragraph include the effects of reversals of
impairments, which resulted in an increase in overall net earnings in 2013 due to the increase in reversals of impairment of intangible
assets compared to the prior year.
Pre-tax earnings increased by $19.1 million or 58.2% to $51.9 million from $32.8 million in 2012. Net earnings increased by $14.0
million or 57.9% to $38.2 million in 2013 from $24.2 million in 2012. Income tax expense increased by $5.1 million to $13.7 million in
2013 from $8.6 million in 2012 due to the increase in pre-tax earnings.
Revenues
Revenues for the year ended December 31, 2013 increased by $307.1 million or 27.9% compared to the prior year. This increase was
driven by increases in same store sales across all four revenue streams and additional revenues from dealerships acquired during the year.
In 2013 new vehicle sales increased by $199.9 million or 29.3% to $882.9 million from $683.0 million in the prior year, mainly due to a
25.0% increase in the number of new vehicles sold. Used vehicle sales increased by $57.5 million or 23.6% to $300.9 million from $243.4
million in the prior year. Finance and insurance revenue increased by $21.7 million or 35.4% for the year ended December 31, 2013. Parts,
service and collision repair revenue increased by $28.1 million or 24.6% for the year ended December 31, 2013.
The tables in the "Same-Store Analysis" sections below summarize the results for the year ended December 31, 2013 on a same store basis
by revenue source and compare
The tables in the “Same-Store Analysis” sections below summarize the results for the year ended December 31, 2013 on a same store basis
by revenue source and compare these results to the same period in 2012. 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, 2010, the results of the acquired entity would be included in quarterly same store comparisons beginning with the
quarter ended March 31, 2013 and in annual same store comparisons beginning with the year ended December 31, 2013. 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 Abbotsford Volkswagen and
Chilliwack Volkswagen (acquired in the fourth quarter of 2011), Grande Prairie Volkwsagen (acquired in the first quarter of 2013), St.
James Audi and Volkswagen (acquired in the second quarter of 2013), Courtesy Chrysler (acquired in the third quarter of 2013), and
Eastern Chrysler (acquired in the third quarter of 2013) 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. The following table summarizes the results for the year ended December 31, 2013 on
a same store basis by revenue source and compare these results to the same period in 2012.
Same Store Revenue and Vehicles Sold
(in thousands of dollars)
Revenue Source
New vehicles
Used vehicles
Finance, insurance and other
Subtotal
Parts, service and collision repair
Total
New retail vehicles sold
New fleet vehicles sold
Used retail vehicles sold
Total
Total vehicles retailed
For the Year Ended
December 31,
2013
December 31,
2012
% Change
782,744
265,177
73,391
1,121,312
118,739
1,240,051
17,949
4,754
9,118
31,821
27,067
656,724
233,832
58,686
949,242
108,957
1,058,199
15,472
4,090
9,111
28,673
24,583
%19.2
%13.4
%25.1
%18.1
%9.0
%17.2
%16.0
%16.2
%0.1
%11.0
%9.2
Same store revenue increased by $181.9 million or 17.2% in the year ended December 31, 2013 when compared to 2012. New vehicle
revenues increased by $126.0 million or 19.2% over the prior year due to an increase in new vehicle sales of 3,141 units or 16.1% and
increase in the average revenue per new vehicle sold of $906 or 2.7%.
Same store used vehicle revenues increased by $31.3 million or 13.4% due to an increase in used vehicle sales of 7 units or 0.1% and an
increase in the average revenue per used vehicle sold of $3,418 or 13.3%.
Same store parts, service and collision repair revenue increased by $9.8 million or 9.0%, due to an increase in overall repair orders
completed of 14,836 and a $14 or 3.8% increase in the average revenue per repair order completed.
Same store finance, insurance and other revenue increased by $14.7 million or 25.1% due to an increase in the average revenue per unit
retailed of $324 or 13.6% and an increase in the number of new and used vehicles retailed of 2,484 units or 10.1% .
Gross Profit
Gross profit increased by $55.6 or 29.2% for the year ended December 31, 2013 when compared to the prior year due to increases in gross
profit across all four revenue streams. Gross profit on the sale of new vehicles increased by $18.0 million or 31.1% for the year ended
December 31, 2013. The increase in new vehicles gross profit can be attributed to increases in new vehicle unit sales of 5,077 units or
25.0% and the average gross profit per new vehicle retailed of $140. Gross profit from the sale of used vehicles sold increased by $4.0
million or 24.5%. This increase can be attributed to increases in the average gross profit per used vehicle retailed of $231 and number of
used vehicles sold of 917. The Company’s finance and insurance gross profit increased by $19.8 million or 35.1% in 2013 due to increases
in the number of vehicles retailed of 5,214 units and average gross profit per vehicle retailed of $269. Parts, service and collision repair
gross profit increased by $13.9 million or 23.2% in 2013 due to an increase of 54,873 in the number of repair orders completed.
9 Gross Profit - Same Store Analysis
The following table summarizes the results for the year ended December 31, 2013, on a same store basis by revenue source, and compare
these results to the same periods in 2012.
Same Store Gross Profit and Gross Profit Percentage
(in thousands of dollars)
Revenue Source
New vehicles
Used vehicles
Finance and insurance
Subtotal
Parts, service and collision
Total
For the Year Ended
Gross Profit
December
31, 2012 % Change
Gross Profit %
December
31, 2012 % Change
December
31, 2013
54,801
15,881
54,072
124,754
57,279
182,033
%21.2
%14.8
%24.1
%21.6
%8.6
%17.5
%8.5
%6.9
%91.5
%13.5
%52.4
%17.3
%8.3
%6.8
%92.1
%13.1
%52.6
%17.2
%0.2
%0.1
%(0.6)
%0.4
%(0.2)
%0.1
December
31, 2013
66,396
18,235
67,119
151,750
62,212
213,962
Same store gross profit increased by $31.9 million or 17.5% for the year ended December 31, 2013 when compared to the prior year. New
vehicle gross profit increased by $11.6 million or 21.2% for the year ended December 31, 2013 when compared to the prior year which
can be mainly attributed to an increase in new vehicle sales of 3,141 units or 16.1% and increase in the average gross profit per new
vehicle sold of $123 or 4.4%.
Used vehicle gross profit increased by $2.4 million or 14.8% for the year ended December 31, 2013 when compared to the prior year
which was mainly due to an increase in the average gross profit per vehicle retailed of $257 or 14.7% and an increase in the number of
vehicles retailed of 7 units.
Parts, service and collision repair gross profit increased by $4.9 million or 8.6% for the year ended December 31, 2013 when compared to
the prior year which can be mainly attributed to an increase in the number of repair orders completed of 14,836 and an increase in the
average gross profit per repair order completed of $7 or 3.6%.
Finance and insurance gross profit increased by $13.0 million or 24.1% for the year ended December 31, 2013 when compared to the prior
year and can be attributed to an increase in the average gross profit per unit sold of $280 and an increase in units retailed of 2,484.
Operating expenses
Operating expenses increased by 26.4% or $39.4 million during the year ended December 31, 2013 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 76.6% in 2013 from 78.3% 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, 2013, employee costs increased by $28.9 million to $121.9 million from $93.0 million in the prior
year period. Employee costs as a percentage of gross profit increased to 49.5% in 2013 from 48.8% in 2012. Management attributes the
increases primarily to an increase in commissions and incentives paid to salespeople based on achieving and exceeding sales targets.
Selling and administrative costs
During the year ended December 31, 2013, selling and administrative costs increased by $8.6 million or 21.5% primarily due to the
dealership acquisitions completed during 2013. Selling and administrative expenses as a percentage of gross profit decreased to 19.7%
from 21.0% in the same period of the prior year. This decrease is mainly due to less semi-variable costs such as advertising and other fixed
costs as a percentage of gross profit.
Facility lease costs
During the year ended December 31, 2013, facility lease costs decreased by $0.2 million or 1.7% to $11.7 million from $11.9 million due
to the purchase of the real estate properties during the fourth quarter of 2013, offset slightly by new acquisitions.
10 Amortization
During the year ended December 31, 2013, amortization increased by $2.0 million or 47.2% to $6.3 million from $4.3 million in the prior
year due to the purchase of real estate properties throughout 2013, including buildings acquired in the Grande Prairie Volkswagen, St.
James Audi and VW, and Eastern Chrysler dealership acquisitions, as well as the purchase of 11 properties in the fourth quarter of 2013.
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 2013. 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 very little
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 $0.7 million
(2012 - $0.2 million).
Income from investments in associates
During the year ended December 31, 2013, the Company earned $2.2 million, including acquisition costs, as a result of its investments in
Dealer Holdings Ltd. ("DHL") and Green Isle G Auto Holdings Inc. ("Green Isle"). In addition to the income from investments in
associates, during the year, the Company also earned $0.2 million in management services revenue from subsidiaries of DHL. The
management services agreements are fixed monthly fees charged to the General Motors dealerships from AutoCanada in return for
marketing, training, technological support, and accounting support. AutoCanada provides support services to all dealerships in which it
owns and operates, however since the three 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 results of its investments in
associates during 2013.
See GROWTH, ACQUISITIONS, RELOCATIONS AND REAL ESTATE for more information related to the investments.
Finance costs
The Company incurs finance costs on its revolving floorplan facilities, long term indebtedness and banking arrangements. During the year
ended December 31, 2013, finance costs on our revolving floorplan facilities decreased by 20.4% to $7.4 million from $9.3 million in
2012, mainly due to the reduction in interest rates obtained on the changeover to Scotiabank in October of 2012 for financing of inventory.
Finance costs on long term indebtedness increased by $0.05 million or 5.2% over the prior year due to additional mortgage debt acquired
at the end of 2013 related to the real estate purchase, which was partially offset by the interest savings from a pooling agreement entered
into in early 2013 whereby the Company may offset its cash balances against its revolving term facility in order to reduce the interest costs
associated with this facility.
On September 30, 2013, the Company completed a syndicated floorplan credit facility with the Bank of Nova Scotia and the Canadian
Imperial Bank of Commerce. As at December 31, 2013, our floorplan interest rate was calculated as Bankers’ Acceptance Rate plus 1.15%
(2.37%).
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, 2013, the floorplan credits earned were $7.0 million
(2012 - $6.1 million). 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 2013.
(in thousands of dollars)
Net floorplan credits
Q1 2013
1,360
Q2 2013
2,154
Q3 2013
1,972
Q4 2013
1,557
For the year ended
December 31, 2013
7,043
11 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:
(in thousands of dollars)
Floorplan financing
Floorplan credits earned
Net carrying cost of vehicle inventory
Income Taxes
For the Year Ended
December 31,
2013
7,353
(7,043)
December 31,
2012
9,279
(6,072)
310
3,207
For the year ended December 31, 2013, income tax expense increased by $5.1 million from $8.6 million to $13.7 million. As a result of the
reversal of impairments of intangible assets, the Company recorded deferred tax expense in the amount of $0.2 million (2012 - $0.06
million) due to the revised temporary differences between the tax basis and carrying value of these assets.
As a result of its improved earnings over the past three years, the Company recorded $11.5 million in current tax expense in 2013, as
compared to $5.8 million in fiscal 2012. As described in further detail below, the Company effectively maintains a one year deferral of its
partnership income (income earned by wholly-owned dealerships). As such, the current income tax expense for 2013 is mainly calculated
based on our dealerships' income from 2012. The income earned by our dealerships in fiscal 2013 will be substantially deferred until next
year; however, as described in further detail below, the Company's current tax payable contains the second instalment payment of its tax
deferral, expected to be fully repaid over the next 3 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 partner, subject to transitional relief over five years. The Company estimates the following amounts to be
recorded as current income tax payable over the next three 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
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 and 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 instalments for corporate tax. In 2013, the Company paid $10.6 million of
cash taxes, which relates to the fiscal 2012 taxation year and instalments toward the 2013 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, prior year levels of adjusted free cash flow will inherently be lowered by cash taxes in the future.
12 RESULTS FROM OPERATIONS
Fourth Quarter Operating Results
EBITDA for the three month period ended December 31, 2013 increased by 43.7% to $14.8 million, from $10.3 million when compared
to the results of the Company for the same period in the prior year. The increase in EBITDA for the quarter can be mainly attributed to
improvements in all four business streams.
The following table illustrates EBITDA for the three month period ended December 31, 2013, for the last three years of operations.
(in thousands of dollars)
Period from October 1, 2013 to December 31, 2013
Net comprehensive income
Impairment of intangible assets
Income tax
Amortization of property and equipment
Interest on long-term indebtedness
EBITDA
2013
9,553
(746)
3,490
2,069
388
2012
6,606
(222)
2,540
1,118
257
14,754
10,299
2011
23,611
(25,543)
8,144
1,106
217
7,535
Adjusted pre-tax earnings increased by $3.4 million or 38.2% to $12.3 million in the fourth quarter of 2013 from $8.9 million in the prior
year. Adjusted earnings increased by $2.3 million or 34.3% to $9.0 million in 2013 from $6.7 million in the prior year.
As previously noted, the Company performed 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) increased in 2013 as
compared to 2012.
Pre-tax earnings increased by $3.9 million or 42.9% to $13.0 million for the three month period ended December 31, 2013 from $9.1
million in the same period of the prior year. Net earnings increased by $3.0 million or 45.5% to a profit of $9.6 million in the fourth
quarter of 2013 from a $6.6 million profit when compared to the prior year. Strong improvements in same store sales and gross profit, as
well as the impact of recently completed acquisitions, contributed to the increase in net earnings. Income tax expense increased by $1.0
million to $3.5 million in the fourth quarter of 2013 from $2.5 million in the same period of 2012 due to the increase in pre-tax earnings.
Revenues
Revenues for the three months ended December 31, 2013 increased by $72.6 million or 27.8%, as compared to the same period of the
prior year. This increase was mainly driven by increases in all four revenue streams. New vehicle sales increased by $38.1 million or
24.0% for the three month period ended December 31, 2013 to $197.1 million from $159.0 million in the same period of the prior year,
mainly due to an increase in new vehicles sold of 953 or 21.0%. The various manufacturer incentives offered on new vehicles, combined
with low interest rates, have made purchasing a new vehicle more affordable for our customers, which we believe to be a critical driver of
new vehicle sales in the industry. Used vehicle sales increased by $17.9 million or 31.3% for the three month period ended December 31,
2013. The increase in new and used vehicle retail sales greatly contributed to the increase in finance and insurance revenue, which
increased by $5.3 million or 35.5% in the three month period ended December 31, 2013. Parts, service and collision repair revenue
increased by $11.3 million or 37.8% for the three month period ended December 31, 2013.
13 Revenues - Same Store Analysis
The following table summarizes the results for the three month period and the year ended December 31, 2013 on a same store basis by
revenue source and compares these results to the same period in 2012.
Same Store Revenue and Vehicles Sold
(in thousands of dollars)
Revenue Source
New vehicles - retail
New vehicles - fleet
New vehicles
Used vehicles - retail
Used vehicles - wholesale
Used vehicles
Finance, insurance and other
Subtotal
Parts, service and collision repair
Total
New retail vehicles sold
New fleet vehicles sold
Used retail vehicles sold
Total
Total vehicles retailed
For the Three Months Ended
December
31, 2013
December
31, 2012
% Change
145,456
16,766
162,222
45,249
16,322
61,571
16,892
240,685
31,302
271,987
4,035
515
2,071
6,621
6,106
134,369
17,879
152,248
43,930
10,925
54,855
14,138
221,241
28,597
249,838
3,781
547
2,091
6,419
5,872
%8.3
%(6.2)
%6.6
%3.0
%49.4
%12.2
%19.5
%8.8
%9.5
%8.9
%6.7
%(5.9)
%(1.0)
%3.1
%4.0
Same store revenue increased by $22.1 million or 8.9% in the three month period ended December 31, 2013 when compared to the same
period in 2012. New vehicle revenues increased by $10.0 million or 6.6% for the fourth quarter of 2013 over the prior year due to an
increase in new vehicle sales of 222 units or 5.1% and an increase in the average revenue per new vehicle sold of $476 or 1.4%.
Same store used vehicle revenues increased by $6.7 million or 12.2% for the three month period ended December 31, 2013 over the same
period in the prior year due to an increase in the average revenue per used vehicle sold of $3,497 or 13.3%, partially offset by a decrease in
used vehicle sales of 20 units or 1.0%.
Same store parts, service and collision repair revenue increased by $2.7 million or 9.5% for the fourth quarter of 2013 compared to the
prior period and was primarily a result of an increase in overall repair orders completed of 965 or 1.3% and a $31 or 8.0% increase in the
average revenue per repair order completed.
Same store finance, insurance and other revenue increased by $2.8 million or 19.5% for the three month period ended December 31, 2013
over the same period in 2012. This was due to an increase in the average revenue per unit retailed of $359 or 14.9% and an increase in the
number of new and used vehicles retailed of 234 units.
Gross Profit
Gross profit increased by $14.0 million or 28.9% for the three month period ended December 31, 2013 when compared to the same period
in the prior year. As with revenues, gross profit increased due to increases across all four revenue streams. Gross profit on the sale of new
vehicles increased by $2.8 million or 18.0% for the three month period ended December 31, 2013. The increase in new vehicle gross profit
can be attributed to an increase in the number of new vehicles sold of 953 or 21.0%, partially offset by a decrease in average gross profit
per new vehicle sold of $85 or 2.5%. During the three month period ended December 31, 2013, gross profit from used vehicles increased
by $0.8 million or 22.4% over the same period in the prior year due to an increase in the number of used vehicles sold of 390 or 18.0% and
an increase in the average gross profit per used vehicle sold of $62 or 3.7%. The Company’s finance and insurance gross profit increased
by $4.9 million or 35.5% during the fourth quarter of 2013. This increase can mainly be attributed to an increase in the total number of
vehicles retailed of 1,340 or 21.8% and an increase in the average gross profit per unit retailed of $260 or 11.6%. Parts, service and
collision repair gross profit increased by $5.4 million or 35.0% in the fourth quarter of 2013, due primarily to an increase in the number of
repair orders completed of 17,957 or 23.0%.
14 Gross Profit - Same Store Analysis
The following table summarizes the results for the three month period and the year ended December 31, 2013, on a same store basis by
revenue source, and compares these results to the same periods in 2012.
Same Store Gross Profit and Gross Profit Percentage
For the Three Months Ended
Gross Profit
December
31, 2012 % Change
December
31, 2013
Gross Profit %
December
31, 2013
December
31, 2012
Change
14,425
339
14,764
3,610
439
4,049
15,489
34,302
16,087
50,389
14,418
292
14,710
3,171
448
3,619
13,050
31,379
14,757
46,136
%-
%16.1
%0.4
%13.8
%(2.0)
%11.9
%18.7
%9.3
%9.0
%9.2
%9.9
%2.0
%9.1
%8.0
%2.7
%6.6
%91.7
%14.3
%51.4
%18.5
%10.7
%1.6
%9.7
%7.2
%4.1
%6.6
%92.3
%14.2
%51.6
%18.5
%(0.8)
%0.4
%(0.6)
%0.8
%(1.4)
%-
%(0.6)
%0.1
%(0.2)
%-
(in thousands of dollars)
Revenue Source
New vehicles - Retail
New vehicles - Fleet
New vehicles
Used vehicles - Retail
Used vehicles - Wholesale
Used vehicles
Finance and insurance
Subtotal
Parts, service and collision
Total
Same store gross profit increased by $4.3 million or 9.2% for the three month period ended December 31, 2013 when compared to the
same period in the prior year. New vehicle gross profit increased by $0.05 million or 0.4% in the three month period ended December 31,
2013 when compared to 2012 as a result of an increase in new vehicle sales of 222 units or 5.1% and a decrease in the average gross profit
per new vehicle sold of $154 or 4.5%.
Used vehicle gross profit increased by $0.4 million or 11.9% in the three month period ended December 31, 2013 over the prior year.
This was due to an increase of $224 in the average gross profit per used vehicle retailed, partially offset by a decrease in the number of
used vehicles sold of 20 units.
Parts, service and collision repair gross profit increased by $1.3 million or 9.0% in the three month period ended December 31, 2013 when
compared to the same period in the prior year as a result of an increase in the number of repair orders completed of 965 and an increase in
the average gross profit per repair order completed of $15 or 7.5%.
Finance and insurance gross profit increased by 18.7% or $2.4 million in the three month period ended December 31, 2013 when
compared to the prior year as a result of an increase in the average gross profit per unit sold of $314 and an increase in units retailed of
234.
Operating expenses
Operating expenses increased by 28.4% or $10.7 million during the three month period ended December 31, 2013 as compared to the
same period in 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
77.7% in the fourth quarter of 2013 from 78.0% in the same period of 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, 2013, employee costs increased by $7.5 million to $30.5 million from $23.0 million in
the prior year period. Employee costs as a percentage of gross profit for the quarter ended December 31, 2013 increased to 49.0%
compared to 47.5% in the same period of the prior year. Employee costs as a percentage of gross profit for the same period in the prior
year. Management attributes the increases mainly to an increase in commissions and incentives paid to salespeople based on achieving and
exceeding sales targets.
15 Selling and administrative costs
During the three month period ended December 31, 2013, selling and administrative costs increased by $2.7 million or 25.3% primarily
due to the acquisitions completed in 2013. Selling and administrative expenses as a percentage of gross profit decreased to 21.4% in the
fourth quarter of 2013 from 22.0% in the comparable period of 2012. These decreases are due to less semi-variable costs such as
advertising and other fixed costs as a percentage of gross profit.
Facility lease costs
During the three month period ended December 31, 2013, facility lease costs decreased by 16.7% to $2.5 million from $3.0 million
primarily due to the real estate purchase completed in the last quarter of 2013.
Amortization
During the three month period ended December 31, 2013, amortization increased to $2.1 million from $1.1 million in the same period of
the prior year. These increases are a result of the real estate purchase in the fourth quarter of 2013 and the dealership acquisitions that
occurred during 2013.
Income from investments in associates
During the three month period ended December 31, 2013, the Company earned $0.8 million, as a result of its investments in Dealer
Holdings Ltd. ("DHL") and Green Isle G Auto Holdings Inc. ("Green Isle"). In addition to the income from investments in associates,
during the three months ended December 31, 2013, the Company also earned $0.05 million, in management services revenue from
subsidiaries of DHL. The management services agreements are fixed monthly fees charged to the General Motors dealerships from
AutoCanada in return for marketing, training, technological support and accounting support. AutoCanada provides support services to all
dealerships in which it owns and operates, however since the three dealerships are not wholly-owned by AutoCanada, the Company
charges a management services fee in order to recover the costs of resources provided.
See GROWTH, ACQUISITIONS, RELOCATIONS AND REAL ESTATE for more information related to the investments.
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, 2013, finance costs on our revolving floorplan facilities remained constant at $1.9 million compared to
the fourth quarter of 2012. Finance costs on long term indebtedness increased by $0.13 million in the fourth quarter of 2013 due to
additional mortgage debt acquired at the end of 2013 related to real estate purchases, which was partially offset by the interest savings
from a pooling agreement entered into in early 2013, whereby the Company may offset its cash balances against its revolving term facility
in order to reduce the interest costs associated with this facility.
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, 2013, the floorplan credits
earned were $1.6 million (2012 - $1.4 million). 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.
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:
(in thousands of dollars)
Floorplan financing
Floorplan credits earned
Net carrying cost of vehicle inventory
For the Three Months Ended
December 31,
2013
1,887
(1,557)
December 31,
2012
1,859
(1,351)
330
508
16 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 33 franchised automotive dealerships, 28 of which are wholly owned, and 5 in which it has an investment with
significant influence.
Acquisitions
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 cash consideration of $2.0 million, which was financed by drawing on the Company’s facilities with VW Credit
Canada Inc. and cash from operations. The purchase of this business complements the Company’s Grande Prairie platform. In addition, the
Company also purchased dealership land and building for $1.8 million.
St. James Audi and Volkswagen
On April 1, 2013, the Company purchased the shares of The St. James Group of Companies (“St. James”), which own and operate two
premium brand franchises, Audi and Volkswagen, located in Winnipeg, Manitoba. Total cash consideration paid for St. James was $22.8
million, which includes the land and building which the Company purchased for approximately $9.3 million. The acquisition was financed
with cash from operations and the revolving term facility. Subsequent to year end, the Company refinanced approximately 65% of the land
and building by way of the real estate debt facility with HSBC (see "Credit Facilities"). Each of the two franchises is equipped with a six
car showroom and is located adjacent to each other on the property. The two franchises share a collision center and service department
consisting of 27 service bays. In 2012, the franchises retailed a combined 642 new vehicles and 252 used vehicles.
Courtesy Chrysler Dodge
On July 1, 2013, the Company purchased substantially all of the operating and fixed assets (except real estate) of Courtesy Chrysler Dodge
(1987) (“Courtesy Chrysler”) located in Calgary, Alberta. Total cash consideration paid for Courtesy Chrysler was $17.2 million. The
acquisition was financed with cash from operations and the revolving term facility. The acquisition has been accounted for using the
acquisition method. The dealership operates out of three facilities with a total size of approximately 52,000 sq. ft., including a body shop,
27 service bays, and a 10 car showroom. The dealership has been in operation for over 45 years and in 2012 retailed 934 new and 561
used vehicles.
Eastern Chrysler Dodge Jeep Ram
On September 9, 2013, the Company purchased all of the net operating assets and real estate of Eastern Chrysler Plymouth Inc. (“Eastern
Chrysler”), located in Winnipeg, Manitoba for total cash consideration of $21.9 million, which includes the land and building purchased
for $6.5 million. Included in the total consideration was $5.7 million relating to a rental and lease vehicle portfolio. The Company expects
to be able to finance this portfolio in the future. Subsequent to year end, the Company refinanced approximately 65% of the land and
building by way of the real estate debt facility with HSBC (see "Credit Facilities"). The acquisition was financed using cash from
operations and the revolving term facility. The acquisition has been accounted for using the acquisition method. The dealership operates
out of a single facility with a total building size of approximately 42,500 square feet, including a service department consisting of 18
service bays, a body shop consisting of 20 service bays, and a six car showroom. The dealership has been in operation for over 66 years
and in 2012 retailed 660 new vehicles and 470 used vehicles.
17 Dealership Investments
Investment in Green Island G Auto Holdings Ltd. (“GIA”)
On March 1, 2013, the Company invested a total of $7.1 million 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 has accounted for its investment in GIA under the equity method. There are no guarantees to GIA or significant
relationships other than those disclosed in note 16 of the consolidated annual financial statements of the Company for the year ended
December 31, 2013.
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 for which it is compensated.
Investment in Prairie Auto Holdings Ltd. ("PAH")
On March 7, 2014, the Company invested a total of $32.5 million and issued 205,000 shares of ACI to acquire an 82.353% non-voting
equity interest in Prairie Auto Holdings Ltd. (“PAH”). PAH is an entity formed between a subsidiary of AutoCanada and Mr. Priestner
which on March 7, 2014 acquired an 85% equity interest in the shares of Saskatoon Motor Products (“SMP"), a Chevrolet dealership in
Saskatoon, Saskatchewan and Mann-Northway Auto Source (“MNAS”), a Chevrolet, GMC, Buick and Cadillac dealership in Prince
Albert, Saskatchewan. The remaining 15% equity interest in the two dealerships is held by Mr. Robert Mann, our Dealer Partner at the
two stores who currently operates the stores. To comply with GM Canada’s approval, Mr. Priestner is required to have 100% voting
control of PAH. The investment in PAH was reviewed and approved by the independent members of AutoCanada’s Board of Directors.
Although the Company holds no voting rights in PAH, the Company exercises significant influence by virtue of its ability to appoint one
member of the board of directors of PAH and the ability to participate in financial and operating policy decisions of PAH. 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 will account for its investment in PAH under the equity method. There are no guarantees to PAH or significant
relationships other than those disclosed in Note 34 of the audited annual consolidated financial statements of the Company for the year
ended December 31, 2013.
Although Mr. Priestner controls PAH, the unanimous shareholder agreement contains certain protective rights for AutoCanada’s
investment in PAH including prohibiting Mr. Priestner, or related parties of Mr. Priestner, from entering into contracts with PAH 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 PAH, if any of the protective clauses in the agreement are breached, AutoCanada has the ability to exit from its
shareholdings and require PAH or Mr. Priestner to pay AutoCanada for its shares based on the valuation of the shares by an independent
chartered business valuator.
18 Integration of New Dealerships and Investments
Over the past year, the Company has acquired a number of dealerships and has been dedicating resources to ensure a successful integration
of its newly acquired dealerships. Management believes that it takes a minimum of two full years in order to successfully integrate a store
and achieve its anticipated performance objectives.
Our Grande Prairie Volkswagen dealership has integrated very well into the organization and is exceeding our expectations in its
performance. Operating under our Grande Prairie platform, our dealership management team has improved sales in all departments and
profitability is very good. We are very pleased with the performance of the dealership.
The Company’s newly acquired St. James Volkswagen and St. James Audi dealerships have also been performing well. This dealership
was the Company’s first dealership in Winnipeg, Manitoba. Operating under a new platform, we believe the dealership will take some
time to achieve our planned performance objectives; however, we are very excited to purchase these dealerships and add the Audi brand to
group. The dealership management team has performed very well and we believe the dealerships have significant future potential.
Courtesy Chrysler Jeep Dodge Ram was acquired on July 1, 2013 and has been performing above our expectations. Calgary, Alberta
represents another new market for the Company and since acquiring this dealership, we are very excited to continue to operate and grow in
this market. The dealership management team at Courtesy has improved sales in all departments and profitability has exceeded our
expectations. We are very encouraged by the success we have had at this dealership and the success of the dealership management team.
Our Eastern Chrysler Jeep Dodge Ram dealership has also been performing well since it was acquired on September 9, 2013. This
dealership represents our third dealership purchase in Winnipeg, Manitoba and we are excited to continue to build a platform in this
region. The dealership management team has increased sales in all departments and has integrated very well in a short period of time. The
dealership has a significant amount of future potential and we believe it will provide good long term returns for the Company.
The Company is also very pleased with the integration of its General Motors dealership investments. Over the past two years the Company
has invested in three General Motors dealerships. The Company’s investment in Dealer Holdings Ltd. (“DHL”), in which it has an indirect
31% equity ownership in both Sherwood Park Chevrolet and Sherwood Buick GMC has performed very well. Both dealerships have
improved in new vehicle market share and profitability. Sherwood Park Chevrolet is now one of the country’s highest performing
dealerships and Sherwood Buick GMC is regularly in the top 25 General Motors dealerships in the country for new vehicle sales volumes.
Management is very pleased with the success of these investments and believes that General Motors dealerships in Canada will continue to
perform well in the future.
The Company is also very satisfied with its investment in Green Isle G Auto Holdings Inc. (“GIA”). Since our initial investment in GIA
on March 1, 2013, the dealership has grown to be one of the top performing General Motors dealerships in British Columbia.
Management believes that this dealership will continue to perform well and is likely to achieve great returns for its investors.
We will continue to dedicate significant resources to newly acquired dealerships in order to successfully integrate acquisitions in an
efficient manner. As noted in our same store analysis, we expect acquisitions to take a minimum of two years in order to meet our expected
performance objectives. As a result, we expect to incur additional selling and administrative costs in the future in order to successfully
integrate new dealerships under our model. The dealership acquisitions that we have made in 2013 have been performing very well and
management is very pleased with the progress made.
Dealership Open Points
In 2012, the Company announced that it had signed a letter of intent with Kia Canada Inc. which awarded AutoCanada an open point
dealership in Edmonton, Alberta. Since this time, AutoCanada was able to purchase an appropriate facility and have begun renovations to
the dealership facility in early 2014. The Company expects to open the new dealership on August 1, 2014. Management is very excited to
open and operate its first Kia dealership in its home market of Edmonton. The Company expects to incur approximately $1.5 million in
renovations to the building prior to its grand opening.
In February of 2014, the Company announced that it had been awarded the right to a Volkswagen open point dealership in Sherwood Park,
Alberta, a community adjacent to Edmonton, Alberta. The Company intends to construct an approximately 45,000 square foot facility in
Sherwood Park, designed to Volkswagen Canada image standards, with construction anticipated to be completed in the first quarter of
2016. The open point has a planning potential of 800 new vehicles annually which the Company anticipates achieving in two to three
years of operation. The Company currently estimates the cost of construction to be approximately $14.6 million for land and building, of
which it expects to finance approximately 70% by way of construction financing. The costs of dealership open points described above
have not been included in the costs described below in the Company’s Capital Plan.
19 Disposition of Dealerships
On December 1, 2013, the Company sold the operating assets of its Thompson Chrysler Jeep Dodge Ram dealership located in Thompson,
Manitoba for total cash proceeds of $1.4 million. Due to the remote location of the dealership and relatively low sales volume of the
dealership, the Company determined it was not able to efficiently dedicate sufficient resources to help the dealership achieve its potential.
The dealership was relatively small and through nine months ended September 30, 2013 represented less than 1% of the Company’s
overall sales. The dealership operations have been removed from same store sales comparisons.
Future Acquisition Opportunities
The Company is very pleased with the continued exceptional performance of its manufacturer partners. Management and the Company
have great relationships with our current manufacturer partners and believe that if we can continue to perform well, we can build upon our
current brand portfolios and hopefully gain the acceptance of other new manufacturers over time.
The Company continues to experience a greater than usual number of expressions of interest in acquisitions than in the past as a result of
an increase in prospective sellers and our expanded brand portfolio. The Company continues to provide guidance on its acquisition
outlook as noted in the Company’s outlook, located further in this document.
Management believes that the Company has a structure in place that is scalable to allow for the increase in acquisition activity; however
the Company does expect to incur some additional administrative and legal costs as the Company adds additional dealerships.
Equity Offering
During the quarter ended June 30, 2013, the Company completed a public offering of common shares. The Company issued 1,840,000
common shares from treasury at a price of $25.00 per share for net proceeds of $43.8 million after deducting $2.2 million of transaction
costs from gross proceeds of the offering. The equity offering allowed the Company to reduce its revolving term facility, which provided
the Company with further liquidity for dealership acquisitions completed in the third quarter.
Land Sale
On July 26, 2013, the Company sold a piece of land that was previously held for future dealership operations for proceeds of $3.2 million.
The Company previously purchased the land in a bid for an open point opportunity which it was unsuccessful in obtaining. The Company
is pleased to have sold the land for the same amount that it had been purchased resulting in no gain or loss on the sale.
Capital Plan
During the fourth quarter of 2013, Management updated its capital plan.
Dealership Relocations
Management estimates the total capital requirements of dealership relocations to be approximately $53.3 million with expected completion
by the end of fiscal 2016. 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 approximately $16.5
million, the majority of which would be incurred in fiscal 2014 as typically the land purchases associated with dealership relocations are
not financed, however construction costs are typically financed throughout the term of the construction project.
Current Dealership Expansion Needs
The Company has identified approximately $8.0 million in capital costs that it may incur in order to expand three of its current locations.
Of these costs, Management believes it can finance approximately $4.0 million utilizing capital lease and its non-revolving term facility.
The remainder of these costs will be financed through a combination of revolver debt and cash from operations.
Open Point Opportunities
Management regularly reviews potential open point opportunities. If successful in being awarded these opportunities, Management would
estimate additional capital costs in order to construct suitable facilities for open points. If awarded in the future, Management will provide
additional cost estimates and timing of construction. In order to be successful in some opportunities, Management may be required to
secure appropriate land for the potential open points, in which case, additional land purchase costs may be incurred over the next two
years.
20 Current relocation of dealerships
Relocation of Northland Chrysler Jeep Dodge and Northland Nissan
In the second quarter of 2013, the Company completed the purchase of land in Prince George, British Columbia for approximately $5.2
million which it will use to relocate its Northland Chrysler Jeep Dodge Ram dealership. The expected total project cost including land is
$18 million of which it expects to finance $12.5 million using mortgage 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
Ram dealerships in the country. As a result, the dealership requires a larger facility to service its expanding customer base over the long
term by adding additional service bays and a larger lot for the display of inventory and used inventory. We began construction of the new
facility in the fourth quarter of 2013 with expected completion in late 2014 or early 2015.
Once the Company has successfully relocated its Northland Chrysler Jeep Dodge Ram dealership, we intend to renovate the 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 early 2015 and will cost approximately $1.0 million to reimage the
building.
Relocation of dealerships provides long-term earnings sustainability and is necessary to meet Manufacturer facility requirements and
further Manufacturer relationships. Historically, the relocation of our dealerships has resulted in significant improvements in revenues and
overall profitability.
Real estate purchase
In November of 2013, the Company purchased eleven dealership real estate properties from CanadaOne Auto Group (see “RELATED
PARTY TRANSACTIONS”) for a total purchase price of $57.8 million, plus transaction costs and taxes. The purchase was financed with
the Company’ non-revolving term facility and revolving operating facility with HSBC (see “Credit Facilities”). The Company had
previously been leasing the properties and decided to purchase the properties as a means to better control the properties and achieve cash
flow savings. The purchase of the real estate also had no impact on general repairs and maintenance expense, insurance or property taxes
associated with the buildings as the Company was responsible for these expenses under its previous lease agreements.
The transaction was reviewed and evaluated by a special committee created by the Board of Directors known as the Real Estate
Committee. The Real Estate Committee, which was comprised of independent members of the Board of Directors, were directly
responsible for the review and evaluation of the potential real estate purchase and directly negotiated with CanadaOne Auto Group (a
related party) as to the terms of the purchase agreement.
LIQUIDITY AND CAPITAL RESOURCES
Our principal uses of funds are for 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. Due to the significant increase in acquisition activity, the Company completed an equity offering during the
second quarter in order to replenish its capital in order to capitalize on future dealership acquisition opportunities. Management believes
that under a high growth scenario, cash generated from operating activities may not be sufficient to meet future capital needs. As such, the
Company may be required to seek additional capital in the form of debt or equity if significant growth opportunities continue to arise.
The Company has been working with its lenders to increase its revolving term facility and refinance various owned properties. The
Company also maintains working capital in excess of manufacturer requirements which may be used for capital expenditures. The
Company’s analysis of its available capital based on the balance sheet at December 31, 2013 is as follows:
! The Company has approximately $48.8 million in working capital. At December 31, 2013, the Company’s aggregate net
manufacturer working capital requirements were $42.0 million. As such, the Company has approximately $6.8 million in
cash available for growth expenditures.
! The Company has drawn $40.1 million on its $50.0 million revolving term facility. The Company has also obtained a
$20.0 million acquisition facility to be used to finance future dealership acquisitions. The Company has drawn $35.3
million on its $60.0 million non-revolving term facility to be used for real estate purposes. As a result, the Company has
approximately $29.9 million available for future acquisitions and $24.7 million available for future real estate purchases.
! The Company also has a $5.0 million capital lease line which it may utilize for future capital expenditures whereby it
may finance the equipment at its current dealerships or future dealership acquisitions.
! The Company is currently in the process of refinancing various properties in which it currently owns. As a result, we
believe the Company may have access to approximately $10.6 million as a result of such initiatives.
21 As a result of the above initiatives, the Company currently has approximately $52.3 million in available liquidity for acquisitions and
capital needs and $24.7 million for future real estate needs, not including future retained cash from operations. The Company believes that
its available liquidity is sufficient to complete its current capital expenditure commitments. The Company regularly reviews it capital
requirements and shall at such time as acquisition opportunities or other capital expenditures arise, review its capital structure and seek
such additional sources of capital which are in the best interests of the Company at that time. .
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,
2013 was $38.0 million (cash provided by operating activities of $48.0 million less net decrease in non-cash working capital of $10.0
million) compared to $21.1 million (cash provided by operating activities of $33.5 million less net decrease in non-cash working capital of
$12.4 million) in the same period of the prior year.
Cash flow from operating activities (including changes in non-cash working capital) of the Company for the three month period ended
December 31, 2013 was $9.7 million (cash provided by operating activities of $12.9 million less net decrease in non-cash working capital
of $3.2 million) compared to $1.8 million (cash provided by operating activities of $9.5 million less net decrease in non-cash working
capital of $7.7 million) in the same period of the prior year.
Cash Flow from Investing Activities
For the year ended December 31, 2013, cash flow from investing activities of the Company was a net outflow of $124.0 million as
compared to a net outflow of $30.9 million in the same period of the prior year. During 2013, the Company completed $65.4 million in
business acquisitions and purchased $67.1 million of real estate, property and equipment. The Company also sold a piece of land for
proceeds of $3.2 million and received proceeds of $1.4 million from the divestiture of Thompson Chrysler. In negotiation of its credit
facilities, the Company was also able to remove a $10 million restriction of its cash in its revolving floorplan facilities.
For the three month period ended December 31, 2013, cash flow from investing activities of the Company was a net outflow of $57.8
million as compared to a net outflow of $13.1 million in the same period of the prior year. In the fourth quarter of 2013, the Company
purchased approximately $59.7 million of real estate, property and equipment and received proceeds of $1.4 million from the divestiture of
Thompson Chrysler.
Cash Flow from Financing Activities
For the year ended December 31, 2013, cash flow from financing activities was a net inflow of $86.6 million as compared to a net outflow
of $9.3 million in the same period of 2012. The increase was due to the proceeds from issuance of treasury shares of $43.8 million and the
increase in long-term indebtedness primarily as a result of the debt related to the real estate purchase of $35.0 million and additional
amounts drawn on the revolving term facility.
For the three month period ended December 31, 2013, cash flow from financing activities was a net inflow of $45.2 million as compared to
a net outflow of $8.4 million in the same period of 2012. The increase was primarily due to increased proceeds from long-term debt related
to the real estate transaction of $35.0 million and additional draws on the revolving term facility.
Economic Dependence
As stated in Note 7 of the annual consolidated financial statements for the period ended December 31, 2013, 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 7 of the consolidated annual financial statements.
Credit Facilities and Floor Plan Financing
Credit Facilities
On November 5, 2013, in conjunction with the signing of the real estate asset purchase agreement with COAG, the Company announced
that it has entered into a syndicated Credit Agreement with HSBC Bank Canada ("HSBC") and Alberta Treasury Branches ("ATB"), with
HSBC acting as administrative agent to the Credit Agreement. The Credit Agreement provides the Company with the following facilities:
!
!
a $50.0 million revolving operating facility that may be used for ongoing working capital and general corporate purposes,
including acquisitions;
a $20.0 million revolving acquisition facility that may be used for the acquisition of auto dealerships and associated real estate;
and
22 !
a $60.0 million non-revolving term facility that may be used to purchase owner occupied real estate, refinance existing real
estate and to fund construction costs of new dealerships.
Fees and interest on borrowings under the credit facility are subject to a pricing grid whereby the pricing level is determined by the funded
debt to EBITDA ratio. Funded debt is defined in the agreement as all indebtedness, as determined in accordance with GAAP, including
indebtedness for borrowed money, interest bearing liabilities, indebtedness secured by purchase money security interests, capital lease
obligations, securities having attributes substantially similar to debt and contingent obligations including letters of credits, but excluding
floor plan debt and subordinated obligations. EBITDA is defined as net income before interest, depreciation, taxes, non-cash charges and
any extraordinary/unusual non-recurring items. For business acquisitions or divestitures completed in the immediately preceding 12-month
period, EBITDA will be calculated as if the acquisition or divestiture had occurred for the previous full four fiscal quarters. As at
December 31, 2013, the Company is in the fourth of five tiers of the pricing grid, with the fourth tier providing the second lowest rate of
interest under the credit facility. The non-revolving term facility bears interest at HSBC's prime rate plus 1.00% (4.00% at December 31,
2013) or Banker's Acceptance Rate plus 2.00% (3.32% at December 31, 2013). Amounts drawn on the HSBC Revolver as at December
31, 2013 are due on June 30, 2015 and may be extended annually for an additional 365 days at the request of the Company and upon
approval by HSBC. The syndicated HSBC Credit Facilities' maturity dates are the second anniversary of the initial drawdowns. The HSBC
Revolver is collateralized by all of the present and future assets of the subsidiaries of AutoCanada Inc. As part of a priority agreement
signed by HSBC, Scotiabank, VCCI, and the Company, the collateral for the HSBC Credit Facilities excludes all new, used and
demonstrator inventory financed with the Scotiabank and VCCI revolving floorplan facilities.
Additional information relating to the Credit Agreement including a copy of the agreement can be found on SEDAR (www.sedar.com).
During 2013, the Company signed a renewal letter from HSBC with respect to its HSBC Term Loan. The HSBC Term Loan has been
extended to June 30, 2014, which if not renewed at the time will become payable on June 30, 2015. The security, covenants, fees, interest
rates and other terms remain consistent with the current HSBC Term Loan. The HSBC Term Loan bears interest at HSBC’s Prime Rate
plus 1.75% (4.75% at December 31, 2013). 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 $3.5 million registered over the Newmarket Infiniti Nissan Property.
In February 2014, the HSBC Term loan was refinanced with the HSBC non-revolving term facility.
In 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 non-revolving demand loan (the “BMO Demand Loan”) which was used to
purchase the Cambridge Hyundai facility located in Cambridge, Ontario in 2008. The BMO Demand Loan bears interest at BMO’s Prime
Rate plus 0.50% (3.50% at December 31, 2013). The BMO Demand 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.
Revolving Floorplan Facilities
During the quarter ended September 30, 2013, the Company completed a $350.0 million syndicated floorplan credit facility (the
"Facility") with the Bank of Nova Scotia ("Scotiabank") and the Canadian Imperial Bank of Commerce ("CIBC") with Scotiabank serving
as administrative agent to the Facility. The Facility can be expanded to $450.0 million in total availability upon credit approval of the
syndicate of lenders. The Facility bears a rate of Bankers' Acceptance plus 1.15% (2.37% as at December 31, 2013) per annum. The
financial covenants and repayment terms of the Facility remain consistent with the Company's previous floorplan facility with Scotiabank.
As a result of the new agreement, the Company is no longer required to maintain a restricted cash balance of $10.0 million.
The facility has been provided to 22 of the 33 dealerships in which AutoCanada operates. The terms and conditions of the facility apply
only to the collective group of 22 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.
23 VW Credit Canada Inc. provides revolving floorplan facilities (“VCCI facilities”) to finance new and used vehicles for the Company's
Volkswagen and Audi dealerships. The VCCI facilities bear interest at the Royal Bank of Canada ("RBC") prime rate for new vehicles and
RBC prime rate plus 0.25-1.00% for used vehicles (RBC prime rate = 3.00% at December 31, 2013). The maximum amount of financing
provided by the VCCI facilities is $30.7 million. The VCCI facilities are collateralized by all 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 and Audi
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.
The VCCI Facilities require maintenance of financial covenants which require all dealerships to maintain minimum cash and equity
balances. At December 31, 2013 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 Covenants
The Company is required by its debt agreements to comply with several financial covenants. The following is a summary of the
Company’s actual performance against its financial covenants as at December 31, 2013:
Financial Covenants
HSBC Facility:
Funded Debt to EBITDA
Adjusted debt to EBITDAR
Debt Service Coverage Ratio
Tangible Net Worth
Scotiabank:
Current Ratio
Tangible Net Worth
Debt to Tangible Net Worth
Requirement
Actual Calculation
Shall not exceed 2.25:1.00
Shall not exceed 4.50:1.00
Shall not be less than 1.20
Shall not drop below $60 million
Shall not be less than 1.10
Shall not be less than $40 million
Shall not exceed 7.50
1.17
2.51
2.47
$117.4 million
1.14
$64.6 million
4.40
The Scotiabank covenants above are based on consolidated financial statements of the dealerships that are financed directly by Scotiabank.
As a result, the actual performance to covenant does not reflect the actual performance to covenant of AutoCanada.
As at December 31, 2013, the Company is in compliance with all of its financial covenants.
Financial Instruments
Details of the Company’s financial instruments, including risks and uncertainties are included in Note 22 of the annual audited
consolidated financial statements for the year ended December 31, 2013.
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, 2013
to December 31,
2013
216
339
13
217
178
January 1, 2013
to December 31,
2013
802
1,003
125
880
348
963
3,158
24 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, 2013, growth capital expenditures of $63.9 million were incurred. These expenditures related
primarily to land that was purchased for future dealership operations during the second quarter of 2013 for $5.2 million and the real estate
purchased completed in the last quarter of 2013 for $58.7 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, 2013
to December 31,
2013
January 1, 2013
to December 31,
2013
59,646
(58,683)
963
67,105
(63,947)
3,158
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 months and year ended December 31, 2013, were $0.8 million and $2.8 million (2012 -
$0.5 million and $2.2 million), respectively.
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.
Contractual Obligations
The Company has operating lease commitments, with varying terms through 2029, to lease premises and equipment used for business
purposes.
The minimum lease payments over the upcoming fiscal years will be as follows:
(in thousands of dollars)
2014
2015
2016
2017
2018
Thereafter
Total
$
6,442
6,086
5,973
5,192
5,285
51,729
80,707
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 22 – Financial Instruments of the Company’s annual consolidated financial statements.
25 Financial Position
The following table shows selected audited balances of the Company (in thousands) for December 31, 2013 and December 31, 2012, as
well as unaudited balances of the Company at September 30, 2013, June 30, 2013, March 31, 2013, September 30, 2012, June 30, 2012,
and March 31, 2012:
(in thousands of dollars)
Cash and cash equivalents
Trade and other receivables
Inventories
Assets
Revolving floorplan facilities
Non-current debt and lease
obligations
Net Working Capital
December
31, 2013
September
30, 2013
35,113
57,771
278,091
619,078
264,178
47,940
62,105
237,460
530,737
228,526
June 30,
2013
45,058
69,136
232,878
504,449
246,325
March 31,
2013
51,975
57,144
217,707
454,852
225,387
December
31, 2012
September
30, 2012
34,472
47,944
199,119
410,362
203,525
54,255
54,148
194,472
420,080
212,840
June 30,
2012
51,198
52,042
201,692
414,033
221,174
March 31,
2012
53,403
51,364
156,262
361,224
178,145
83,580
33,647
8,744
40,340
23,937
26,039
23,027
20,071
The automobile manufacturers represented by the Company require the Company to maintain net working capital for each individual
dealership. At December 31, 2013, the aggregate of net working capital requirements was approximately $42.0 million. At December 31,
2013, 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 interim consolidated financial statements. At
December 31, 2013, the Company had aggregate working capital of approximately $48.8 million.
The net working capital requirements above restrict the Company’s ability to transfer funds up from its subsidiaries, as each subsidiary
dealership is required to be appropriately capitalized as explained above. In addition, our VCCI Facilities required the VW and Audi
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 31 of the annual consolidated financial statements of the Company for the period ended December 31, 2013 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.
26 DIVIDENDS
Dividends to Shareholders
Management reviews the Company’s financial results on a monthly basis. The Board of Directors reviews the financial results periodically
to determine whether a dividend shall be paid based on a number of factors.
The following table summarizes the dividends declared by the Company in 2013 (in thousands of dollars):
Record date
Payment date
February 28, 2013
May 31, 2013
August 30, 2013
November 29, 2013
March 15, 2013
June 17, 2013
September 16, 2013
December 16, 2013
Declared
$
3,579
3,777
4,344
4,561
Paid
$
3,579
3,777
4,344
4,561
On February 14, 2014, the Board declared a quarterly eligible dividend of $0.22 per common share on AutoCanada’s outstanding Class A
common shares, payable on March 17, 2014 to shareholders of record at the close of business on February 28, 2014. The quarterly eligible
dividend of $0.22 represents an annual dividend rate of $0.88 per share. The next scheduled dividend review will be in May 2014.
As per the terms of the HSBC facility, we are restricted from declaring dividends and distributing cash if we are in breach of 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, and 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 dollars, except unit
and per unit amounts)
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Cash provided by operating activities
3,520
6,569
9,235
1,748
6,125
14,391
7,787
9,674
Deduct:
Purchase of property and
equipment
Free cash flow (1)
Weighted average shares outstanding
at end of period
Free cash flow per share
Free cash flow - 12 month trailing
Weighted average shares outstanding
at end of year
Free cash flow per share - 12 month
trailing
(361)
3,159
(410)
6,159
(511)
8,724
(858)
890
(590)
5,535
(905)
13,486
(647)
7,140
(1,319)
8,355
19,880,930
0.159
19,876,139
0.310
19,804,014
0.441
19,802,947
0.045
19,802,048
0.280
20,346,713
0.663
21,638,882
0.330
21,638,433
0.386
26,996
28,474
27,042
18,932
21,308
28,635
27,051
34,516
-
-
-
-
-
-
19,840,802
0.954
-
-
-
-
-
-
20,868,726
1.654
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.
27 The following table summarizes the net increase (decrease) in cash due to changes in non-cash working capital for the years ended
December 31, 2013 and December 31, 2012:
(in thousands of dollars)
Trade and other receivables
Inventories
Prepaid expenses
Trade and other payables
Lease vehicle repurchase obligations
Revolving floorplan facilities
Adjusted Free Cash Flow
January 1, 2013
to December 31,
2013
(7,092)
(43,205)
88
11,023
144
29,074
January 1, 2012
to December 31,
2012
(5,496)
(63,105)
18
3,311
171
52,709
(9,968)
(12,392)
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 dollars, except unit
and per unit amounts)
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Cash provided by operating activities
before changes in non-cash
working capital
Deduct:
Purchase of non-growth property
and equipment
Adjusted free cash flow (1)
Weighted average shares outstanding
at end of period
Adjusted free cash flow per share
Adjusted free cash flow - 12 month
trailing
Weighted average shares outstanding
at end of year
Adjusted free cash flow per share -
12 month trailing
4,391
9,609
10,029
9,435
5,564
14,258
15,234
12,894
(361)
4,030
(366)
9,243
(511)
9,518
(457)
8,978
(573)
4,991
(892)
(608)
(963)
13,366
14,626
11,931
19,880,930
0.203
19,876,139
0.465
19,804,014
0.481
19,802,947
0.453
19,802,048
0.252
20,346,713
0.657
21,638,882
0.676
21,638,433
0.551
28,096
28,453
30,183
31,769
32,730
36,853
41,961
44,914
-
-
-
-
-
-
19,840,802
1.601
-
-
-
-
-
-
20,868,726
2.152
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.
In the year ending December 31, 2013, the Company paid approximately $10.6 million in corporate income 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 affect 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.
28 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 dollars, except unit
and per unit amounts)
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
EBITDA (1)
Deduct:
Amortization of property and
equipment
EBIT (1)
Average long-term debt
Average shareholder's equity
Average capital employed (1)
Return on capital employed (1)
Comparative adjustment (1)
Adjusted average capital employed
(2)
Adjusted return on capital
employed (2)
Adjusted return on capital
employed - 12 month trailing
6,792
10,195
10,575
10,299
10,557
16,532
16,626
14,754
(1,025)
5,767
(1,028)
9,167
(1,140)
9,435
(1,118)
9,181
(1,189)
9,368
(1,489)
15,043
(1,599)
15,027
(2,069)
12,685
23,873
113,794
137,667
%4.2
(15,376)
25,276
116,050
141,326
%6.5
(15,376)
30,390
119,380
149,770
%6.3
(15,376)
31,007
122,877
153,884
%6.0
(15,542)
36,293
126,188
162,481
%5.8
(15,542)
28,871
152,983
181,854
%8.3
(15,542)
25,725
181,576
207,301
%7.2
(15,542)
62,959
187,652
250,611
%5.1
(15,951)
122,290
125,950
134,394
138,425
146,939
166,312
191,759
234,864
%4.7
%7.3
%7.0
%6.6
%6.4
%9.0
%7.8
%5.4
%25.9
%26.1
1 These financial measures are identified and defined under the section "NON-GAAP MEASURES".
2 A 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, 2010 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 3 of the annual
consolidated financial statements for the year ended December 31, 2013.
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 period ended December 31, 2013. 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. In November 2013, this standard was indefinitely
deferred by the IASB and the effective date is not yet known.
29 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, 2013, the Company's management, with 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 (1) 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, 2013, 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, 2013.
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, 2013.
OUTLOOK
The outlook regarding vehicle sales in Canada is difficult to predict. New light vehicle unit sales in Canada are expected to increase by 0.9
percent in 2014 as compared to the prior year.
New Vehicle Sales Outlook by Province *
1994 - 2005
(Average)
2006 - 2011
(Average)
2010
2011
2012
2013
2014F
1,446
1,587
1,557
1,589
102
936
366
570
408
42
36
166
164
119
987
408
579
481
45
45
220
171
122
990
414
576
445
44
46
200
155
119
997
408
589
473
47
50
218
158
1,677
126
1,034
416
618
517
50
55
239
173
1,745
135
1,061
415
646
549
54
58
257
180
1,760
136
1,066
416
650
558
55
59
262
182
Canada
Atlantic
Central
Quebec
Ontario
West
Manitoba
Saskatchewan
Alberta
British Columbia
* Includes cars and light trucks
Source: Scotia Economics - Global Auto Report, March 7, 2014
30 The Canadian new vehicle market continues to perform well. New vehicle sales in Canada performed at record levels in 2013 and are
continuing at a strong pace in 2014. Management believes that at the expected Canadian auto sales levels above 1.7 million units, the
Company is well positioned for strong performance as new vehicle sales typically drive sales of other higher margin opportunities such as
parts and service, as well as, finance and insurance revenues.
Over the past 15 months, it has become apparent to Management that the Canadian dealer succession issue which industry analysts have
been forecasting over the past number of years is beginning to materialize. As such, the Company has experienced a significant increase in
the number of interested sellers of auto dealerships in Canada and has noticed that many of these opportunities are large, more profitable
premium dealerships. In recognition of this increased activity, Management is raising its guidance to ten to twelve dealership acquisitions
over the coming 24 months. Should the Company be able to acquire a larger group, this would increase the guidance.
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. The Company has raised its dividend
for twelve consecutive quarters.
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 2013
Annual Information Form dated March 20, 2014 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 statements and 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 belief that, as the Company continues to grow, operating expenses as a percentage of gross profit should continue to
improve as the Company achieves greater economies of scale;
the impact of income taxes on future cash flow;
the impact of an increase or decrease of one new retail vehicle sold on estimated free cash flow;
expectations to finance the rental and lease vehicle portfolio related to the Eastern Chrysler acquisition;
expectations and future plans regarding our current and other potential GM acquisitions;
expectations of acquisitions to take between one to two years to meet our expected return on investment;
expectations to incur additional selling and administrative costs in the future to successfully integrate new dealerships;
the belief that, if the Company can continue to perform well, it will be able to build upon its current brand portfolios and
hopefully gain the acceptance of other new manufacturers over time;
commitments regarding future investments in additional GM dealerships;
commitments by the Company’s CEO to continue to personally invest in GM dealerships to facilitate the Company’s intention
31 to grow its portfolio of GM dealerships;
expectations to incur additional selling, general, and administrative costs in the future to facilitate the growth anticipated by the
Company due to increased acquisition activity;
estimates, intentions, and expectations regarding the capital plan, potential relocation of certain dealerships, dealership
expansion needs, 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 dealership real estate relocations and purchases and its impact on liquidity, financial performance and the
Company’s capital requirements;
our belief that under a high growth scenario, cash from operating activities may not be sufficient to meet future capital needs
and the potential need to seek additional capital in the form of debt or equity;
our belief that our available liquidity is sufficient to complete our current capital expenditure commitments and to execute on
additional dealership acquisitions;
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 expectation to incur annual non-growth capital expenditures in an amount approximating our amortization of property and
equipment reported in each period;
our expectation that growth expenditures will provide additional future cash flows and future benefit;
our expectation to increase annual capital expenditures and the reasons for this expected increase;
the impact of working capital requirements and its impact on future liquidity;
the belief that a restriction from declaring dividends is not likely in the foreseeable future;
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;
guidance with respect to future acquisition and open point opportunities;
our assumption on the amount of time it may take for an acquisition or open point to achieve normal operating results;
expectations and estimates regarding income taxes and their effect on cash flow and dividends;
assumptions over non-GAAP measures and their impact on the Company; and
management’s assumptions and expectations over the future economic and general outlook.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Although we believe that the expectations reflected by the forward-looking statements presented in this release 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 release 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.
32 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;
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.
33 Adjusted pre-tax earnings
Adjusted 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.
Adjusted net earnings
Adjusted 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.
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 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. 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.
34 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. 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, Absorption Rate, Average Capital Employed, Return on Capital Employed, 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, Absorption Rate, Average Capital Employed, Return on Capital Employed, Adjusted Average Capital Employed and Adjusted
Return on Capital Employed may not be comparable to similar measures presented by other issuers.
35 AutoCanada Inc.
Consolidated Financial Statements
December 31, 2013
March 20, 2014
Independent Auditor’s Report
To the Shareholders of
AutoCanada Inc.
We have audited the accompanying consolidated financial statements of AutoCanada Inc. and its
subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2013
and December 31, 2012 and the consolidated statements of comprehensive income, changes in equity, and
cash flows for the years then ended, 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.
37 Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of AutoCanada Inc. and its subsidiaries as at December 31, 2013 and December 31, 2012 and their
financial performance and their cash flows for the years then ended in accordance with International
Financial Reporting Standards.
Chartered Accountants
Edmonton, Canada
38 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 8)
Cost of sales (Note 9)
Gross profit
Operating expenses (Note 10)
Operating profit before other income
Loss on disposal of assets, net
Recovery of impairment of intangible assets (Note 21)
Income from investments in associates (Note 16)
Operating profit
Finance costs (Note 12)
Finance income (Note 12)
Net comprehensive income for the year before taxation
Income tax (Note 13)
Net comprehensive income for the year
Earnings per share
Basic
Diluted
Weighted average shares
Basic
Diluted
December 31,
2013
$
December 31,
2012
$
1,409,040
1,101,902
(1,163,005)
(911,473)
246,035
(188,519)
190,429
(149,140)
57,516
41,289
(210)
746
2,241
(95)
222
468
60,293
41,884
(9,618)
1,187
51,862
13,696
38,166
(11,045)
1,973
32,812
8,576
24,236
1.829
1.829
1.222
1.222
20,868,726
19,840,802
20,868,726
19,840,802
The accompanying notes are an integral part of these consolidated financial statements.
Approved on behalf of the Company:
(Signed) "Gordon R. Barefoot", Director
(Signed) "Michael Ross", Director
39 AutoCanada Inc.
Consolidated Statements of Financial Position
(in thousands of Canadian dollars)
ASSETS
Current assets
Cash and cash equivalents (Note 17)
Restricted cash (Note 17)
Trade and other receivables (Note 18)
Inventories (Note 19)
Other current assets
Property and equipment (Note 20)
Intangible assets (Note 21)
Goodwill (Note 21)
Other long-term assets (Note 23)
Investments in associates (Note 16)
LIABILITIES
Current liabilities
Trade and other payables (Note 24)
Revolving floorplan facilities (Note 25)
Current tax payable
Current lease obligations (Note 26)
Current indebtedness (Note 25)
Long-term indebtedness (Note 25)
Deferred tax (Note 13)
EQUITY
Commitments and contingencies (Note 27)
The accompanying notes are an integral part of these consolidated financial statements.
December 31,
2013
$
December 31,
2012
$
35,113
-
57,771
278,091
1,603
372,578
122,915
96,985
6,672
6,797
13,131
619,078
50,428
264,178
4,906
1,398
2,866
323,776
83,580
21,480
428,836
190,242
619,078
34,472
10,000
47,944
199,119
1,102
292,637
38,513
66,403
380
7,699
4,730
410,362
35,590
203,525
3,719
1,282
3,000
247,116
23,937
14,809
285,862
124,500
410,362
40 AutoCanada Inc.
Consolidated Statements of Changes in Equity
For the Years Ended
(in thousands of Canadian dollars)
Balance, January 1, 2013
Net comprehensive income
Dividends declared on common shares
(Note 29)
Common shares issued (Note 29)
Common shares repurchased (Note 29)
Restricted share units settled (Note 29)
Share-based compensation
Balance, December 31, 2013
Share
capital
$
190,435
-
-
43,811
-
-
-
Treasury
shares
Contributed
surplus
$
(935)
4,423
-
-
-
(579)
206
-
-
-
-
-
(240)
575
Total
capital
$
193,923
-
-
43,811
(579)
(34)
575
Accumulated
deficit
$
Equity
$
(69,423)
124,500
38,166
38,166
(16,197)
(16,197)
-
-
-
-
43,811
(579)
(34)
575
234,246
(1,308)
4,758
237,696
(47,454)
190,242
Balance, January 1, 2012
Net comprehensive income
Dividends declared on common shares
(Note 29)
Common shares repurchased (Note 29)
Share-based compensation
Balance, December 31, 2012
Share
capital
$
190,435
-
-
-
-
190,435
Treasury
Shares
-
-
-
(935)
-
(935)
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
The accompanying notes are an integral part of these consolidated financial statements.
41 AutoCanada Inc.
Consolidated Statements of Cash Flows
For the Years Ended
(in thousands of Canadian dollars)
Cash provided by (used in)
Operating activities
Net income
Income taxes (Note 13)
Amortization of prepaid rent
Amortization of property and equipment (Note 10)
Loss on disposal of assets
Recovery of impairment of intangible assets (Note 21)
Share-based compensation - equity-settled
Share-based compensation - cash-settled
Income from investment in associate (Note 16)
Income taxes paid
Net change in non-cash working capital (Note 32)
Investing activities
Reduction in (addition to) restricted cash (Note 17)
Investments in associates (Note 16)
Purchases of property and equipment (Note 20)
Disposal (purchase) of other assets
Proceeds on sale of property and equipment
Proceeds on divestiture of dealership (Note 15)
Prepayments of rent
Business acquisitions (Note 14)
Dividends received from investments in associates (Note 16)
Financing activities
Proceeds from long-term indebtedness
Repayment of long-term indebtedness
Common shares repurchased
Dividends paid (Note 29)
Proceeds from issuance of shares (Note 29)
Increase (decrease) in cash
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
December 31,
2013
$
December 31,
2012
$
38,166
13,696
452
6,346
210
(746)
575
2,054
(2,241)
(10,559)
(9,968)
37,985
10,000
(7,057)
(67,105)
-
3,304
1,354
-
(65,368)
897
24,236
8,576
452
4,311
95
(222)
505
235
(468)
(4,255)
(12,392)
21,073
(10,000)
(4,262)
(16,069)
(58)
32
-
(540)
-
-
(123,975)
(30,897)
241,287
(181,757)
(513)
(16,197)
43,811
86,631
79,465
(75,596)
(912)
(12,301)
-
(9,344)
641
(19,168)
34,472
35,113
53,641
34,472
42 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(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 ("IASB") 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 20, 2014.
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, where control is defined as the
power to govern financial and operating policies. 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.
43 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
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 consolidated statement of comprehensive
income. Transaction costs are expensed as incurred.
Investments in associates
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 investees. 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 income statement, 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 is any objective evidence that the investment in
associate is impaired. If this is the case, the Company calculates the amount of impairment as the difference
between the recoverable amount of the associate and its carrying value and recognizes the amount adjacent to
its share of profit or loss of the associate in the consolidated statement of comprehensive income.
44 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
Significant Accounting Policies continued
Investments in associates 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 consolidated 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 consolidated 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.
45 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
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 releated vehicles are sold.
46 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
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.
Financial instruments
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. 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.
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 22 - 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 from Scotiabank. The
restricted cash earns interest income to partially offset the interest expense incurred on the borrowings. (See
Note 22 - Financial instruments - Credit risk for explanation of credit risk associated with restricted cash
balances).
47 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
Significant Accounting Policies continued
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 consolidated 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 consolidated 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.
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 hardware
20%
20%
30%
30%
48 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
Significant Accounting Policies continued
Property and equipment continued
Buildings are amortized on a straight-line basis over the estimated useful lives of the buildings. Useful lives
are determined based on independent appraisals or estimated useful lives for dealerships by independent
appraisers.
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 determined 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.
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.
49 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
Significant Accounting Policies continued
Impairment continued
(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.
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.
50 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
Significant Accounting Policies continued
Leases continued
(a)
Finance leases
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 leases
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 consolidated statement of comprehensive income on a straight-
line basis over the period of the lease.
New accounting policies
During the year ended December 31, 2013 the Company adopted the following standards, along with any
consequential amendments, effective January 1, 2013. These changes were made in accordance with the
applicable transitional provisions:
!
!
!
IAS 1, Amendment, Presentation of Items of Other Comprehensive Income, requires the Company to
group other comprehensive income items by those that will be reclassified subsequently to profit or
loss and those that will not be reclassified. The Company has reclassified comprehensive income
items of the comparative period. These changes did not result in any adjustments to other
comprehensive income or comprehensive income.
IFRS 13, Fair Value Measurement, provides a single framework for measuring fair value. The
measurement of the fair value of an asset or liability is based on assumptions that market participants
would use when pricing the asset or liability under current market conditions, including assumptions
about risk. The Company adopted IFRS 13 on January 1, 2013 on a prospective basis. The adoption of
IFRS 13 did not require any adjustments to the valuation techniques used by the Company to measure
fair value and did not result in any measurement adjustments as at January 1, 2013.
IAS 36, Amendment, Impairment of Assets, removes the requirement to disclose the recoverable
amount of CGUs with significant carrying amounts of goodwill where there is not a recovery or
impairment. The Company has early adopted this amendment on January 1, 2013.
51 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
4 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, 2013. 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. In November 2013, this standard was indefinitely
deferred by the IASB and the effective date is not yet known.
5 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 generally arise from 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 may
record impairment charges in the future.
The Company tests at least annually whether intangible assets and goodwill have 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 (Note 21).
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.
52 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
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:
Investments in associates
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 non-voting equity interests in Dealer Holdings Ltd. ("DHL") and Green Isle G Auto
Holdings Inc. ("Green Isle") for which the voting interests are held 100% by the Company's Chief
Executive Officer ("CEO") (as described in Note 16). When assessing whether the Company has control
of DHL or Green Isle, 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 investments
in DHL and Green Isle. In making this assessment, the Company considered that the CEO has de facto
control over AutoCanada at the dates of the Company's investments; therefore, the CEO should not be
perceived to be a de facto agent of AutoCanada. The following facts were also considered to assess the
relationship between AutoCanada and its CEO:
!
!
!
!
Regardless of employment at AutoCanada, the CEO's interests in DHL and Green Isle would remain
with full ability to control decisions as they pertain to DHL and Green Isle.
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 and Green Isle.
53 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
Critical accounting estimates, judgments & measurement uncertainty continued
When combining these considerations with the fact that the CEO has the casting vote on decisions of the
Boards of DHL and Green Isle, and therefore governs relevant activities of the investees, management
has concluded that the Company does not have power over DHL or Green Isle, and therefore does not
consolidate these investments.
Should the nature of the relationship and/or the relevant agreements between the CEO and the Company
change in the future, this assessment would need to be further evaluated.
6
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.
7 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 nine global automobile manufacturers. The Company’s Chrysler,
Jeep, Dodge, Ram (“CJDR”) dealerships, which generated 71% of the Company’s revenue in the year ended
December 31, 2013 (2012 – 73%), 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, 2013 and December 31, 2012, 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,
2013
$
7,945
177,861
5,334
7,874
December 31,
2012
$
6,655
122,595
4,784
6,043
54 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
7 Economic dependence continued
Chrysler Canada is a subsidiary of Chrysler Group LLC (“Chrysler Group”) in the United States. The Chrysler
Group is wholly owned by Fiat Chrysler Automobiles NV ("Fiat Chrysler"). The viability of Chrysler Canada
is directly dependent on the viability of Chrysler Group and Fiat Chrysler.
8 Revenue
New vehicles
Used vehicles
Finance, insurance and other
Parts, service and collision repair
9 Cost of sales
New vehicles
Used vehicles
Finance, insurance and other
Parts, service and collision repair
10 Operating expenses
Employee costs (Note 11)
Administrative costs (1)
Facility lease costs
Amortization of property and equipment (Note 20)
2013
$
882,858
300,881
82,958
142,343
2012
$
683,034
243,351
61,241
114,276
1,409,040
1,101,902
2013
$
807,023
280,608
6,786
68,588
2012
$
625,201
227,052
4,842
54,378
1,163,005
911,473
2013
$
121,854
48,571
11,748
6,346
2012
$
93,012
39,949
11,868
4,311
188,519
149,140
(1) Administrative costs include professional fees, consulting services, technology-related expenses, selling
and marketing, and other general and administrative costs.
55 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
11 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
12 Finance costs and finance income
Finance costs:
Interest on long-term indebtedness
Floorplan financing
Other interest expense
Finance income:
Short term bank deposits
2013
592
834
173
2012
477
612
138
1,599
1,227
2013
$
113,417
5,196
3,241
121,854
2013
$
1,007
7,353
1,258
9,618
2012
$
86,555
3,903
2,554
93,012
2012
$
960
9,279
806
11,045
(1,187)
(1,973)
Cash interest paid during the year ended December 31, 2013 was $9,556 (2012 - $10,620).
13 Taxation
Components of income tax expense are as follows:
Current
Deferred tax
Total income tax expense
2013
$
11,478
2,218
13,696
2012
$
5,823
2,753
8,576
56 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
13 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
25.7% (2012 - 25.5%)
Effects of:
Change in deferred tax rate
Difference between future and current rate
Non-deductible expenses
Other, net
Total income tax expense
2013
$
51,862
2012
$
32,812
13,329
8,367
(91)
(52)
209
301
11
(14)
259
(47)
13,696
8,576
The movements of deferred tax assets and liabilities are shown below:
Goodwill
and
intangible
assets
$
(5,819)
Deferred
income from
partnerships
$
(6,679)
Property
and
equipment
$
445
Investments
in associates
$
-
Other
$
(3)
Total
$
(12,056)
Deferred tax assets (liabilities)
January 1, 2012
(Expense) benefit to consolidated
statement of comprehensive
income
December 31, 2012
(Expense) benefit to consolidated
statement of comprehensive
income
Deferred tax acquired on
acquisition
(1,630)
(8,309)
(242)
203
(818)
(6,637)
-
-
(63)
(66)
(2,753)
(14,809)
(981)
(928)
(11)
(321)
-
-
(4,453)
-
23
-
(2,218)
(4,453)
December 31, 2013
(9,290)
(725)
(11,101)
(321)
(43)
(21,480)
Changes in the deferred income tax components are adjusted through deferred tax expense. Of the above
components of deferred income taxes, $9,290 of the deferred tax liabilities are expected to be recovered
within 12 months. The increase in standard rate of Canadian corporate tax is due to a small increases in the
corporate tax rate in a couple of the jurisdictions in which the Company operates. The Company applies a
blended rate in determining its overall income tax expense.
57 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
14 Business acquisitions
During the year ended December 31, 2013, the Company completed four business acquisitions (2012 - nil).
All acquisitions have been accounted for using the acquisition method. Acquisitions completed during this
period are as follows:
Grande Prairie Volkswagen
On January 4, 2013, the Company purchased substantially all of the 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 24) in the amount of $1,413 and the remaining
$568 was financed with cash from operations. 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.
St. James Audi and Volkswagen
On April 1, 2013, the Company purchased the shares of The St. James Group of Companies ("St. James"),
which owns and operates an Audi and a Volkswagen franchise in Winnipeg, Manitoba, for total cash
consideration of $22,831, which includes $9,307 paid for real estate assets. The acquisition was financed with
cash from operations and the revolving term facility. The purchase of this business complements the
Company’s other Volkswagen dealerships and is the Company's first Audi franchise.
Courtesy Chrysler
On July 1, 2013, the Company purchased substantially all of the operating and fixed assets, except real estate,
of Courtesy Chrysler Dodge (1987) ("Courtesy Chrysler") for total cash consideration of $17,167. The
acquisition was financed with cash from operations and the revolving term facility. The purchase of this
business complements the Company’s other Chrysler dealerships and is the Company's first dealership in
Calgary, Alberta.
Eastern Chrysler
On September 9, 2013, the Company purchased substantially all of the operating and fixed assets of Eastern
Chrysler Plymouth Inc. (“Eastern Chrysler”) for total cash consideration of $15,349. The acquisition was
financed with cash from operations. The purchase of this business complements the Company’s other Chrysler
dealerships and further expands its presence in Winnipeg, Manitoba. In addition to the business, the Company
also purchased land and a building used for business operations for $6,560.
58 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
14 Business acquisitions continued
The business combinations completed during the year ended December 31, 2013 are summarized as follows:
Grande
Prairie
Volkswagen
$
St. James
Audi and
Volkswagen
$
Courtesy
Chrysler
$
Eastern
Chrysler
$
-
16
1,777
-
1,793
1,897
100
3,790
9
-
9
-
9
3,781
-
3,781
316
1,779
9,323
138
11,556
10,668
8,602
30,826
1,214
8,147
9,361
3,185
12,546
18,280
4,551
22,831
2
581
21,065
4
21,652
731
15,520
37,903
351
20,558
20,909
995
21,904
15,999
1,168
17,167
2
475
8,098
2
8,577
13,527
5,799
27,903
225
5,970
6,195
372
6,567
21,336
573
21,909
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Other current assets
Long term assets
Property and equipment
Intangible assets
Total assets
Current liabilities
Trade and other payables
Revolving floorplan facility
Long term liabilities
Deferred tax liabilities
Total liabilities
Net assets acquired
Goodwill
Total net assets acquired
Total
$
320
2,851
40,263
144
43,578
26,823
30,021
100,422
1,799
34,675
36,474
4,552
41,026
59,396
6,292
65,688
Acquisitions completed during the year ended December 31, 2013 generated revenue and net earnings of
$113,879 and $4,496, respectively, during the year of acquisition. The purchase prices allocated, as presented
above, are estimates and subject to change due to the finalization of the associated allocations.
Goodwill arose on these acquisitions due to the potential future revenue growth and synergies expected to
occur. Goodwill generated on acquisition is not deductible for tax purposes.
59 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
15 Business divestiture
On December 1, 2013, the Company sold the operating assets of its Thompson Chrysler Jeep Dodge
("Thompson") dealership located in Thompson, Manitoba. Total cash proceeds of $1,354 resulted in a loss on
divestiture of $95, which is included in loss on disposal of assets, net in the consolidated statement of
comprehensive income. The break-down of the transaction was as follows:
Current assets
Property and equipment
Intangible assets
Current liabilities
Net assets disposed of
Net loss on divestiture
Net cash inflow on divestiture
16 Investments in associates
Dealer Holdings Ltd.
$
3,821
577
185
(3,134)
1,449
(95)
1,354
During 2012, the Company acquired a 60.8% participating, non-voting common share 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.
During 2012, DHL acquired a 51% voting equity interest in Nicholson Chevrolet (now operating as Sherwood
Park Chevrolet and a 51% voting equity interest in Petersen Buick GMC (now operating as Sherwood Buick
GMC). As a result of DHL's investments, the Company indirectly acquired a 31% interest in Sherwood Park
Chevrolet and a 31% interest in Sherwood Buick GMC.
Green Isle G Auto Holdings Inc.
On March 1, 2013, the Company invested a total of $7,057 to acquire an 80.0% participating, non-voting
common share interest in Green Isle G Auto Holdings Inc. ("Green Isle"). Green Isle is an entity formed
between a subsidiary of AutoCanada and Mr. Patrick Priestner ("Priestner"), the Company's CEO. Green Isle
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 Green Isle and
its interests, based on the percentage of ownership acquired. Green Isle's principal place of business is
Alberta, Canada.
60 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
16 Investments in associates continued
Although the Company holds no voting rights in Green Isle, the Company exercises significant influence by
virtue of its involvement in the board of directors of Green Isle and the ability to participate in financial and
operating policy decisions of Green Isle. 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 Green Isle under the equity method. There are no guarantees to Green Isle or
significant relationships.
On March 1, 2013, a subsidiary of Green Isle acquired 100% of the operating 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 Green Isle 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 Green Isle if minimum working capital requirements are not met.
As a result of Green Isle's investment, the Company has indirectly acquired an 80.0% interest in Peter Baljet.
Summarized information in respect of the investment in Green Isle, at acquisition, 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
Carrying value of Investments in Associates
The following table summarizes the Company's consolidated carrying value of its investments in associates as
at December 31, 2013:
Balance, January 1, 2013
Investment in Green Isle
Income from investment in associate
Dividends received
Dealer Holdings
Ltd.
$
4,730
-
1,224
(593)
Green Isle G
Auto Holdings
Inc.
$
-
7,057
1,017
(304)
Total
$
4,730
7,057
2,241
(897)
Balance, December 31, 2013
5,361
7,770
13,131
61 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
16 Investments in associates continued
The following table summarizes the Company's consolidated carrying value of its investments in associates as
at December 31, 2012:
Balance, January 1, 2012
Investment in DHL
Income from investment in associate
Dealer Holdings
Ltd.
$
-
4,262
468
Green Isle G
Auto Holdings
Inc.
$
-
-
-
Balance, December 31, 2012
4,730
-
Summarized financial information - DHL
Total
$
-
4,262
468
4,730
The following table summarizes the consolidated financial information of DHL as at December 31, 2013:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Carrying amount.
$
54,518
7,400
43,283
8,320
For the year ended December 31, 2013, on a consolidated basis, DHL generated revenue of $173,708 and total
net comprehensive income of $3,948. For the year ended December 31, 2013, $593 dividends have been
received from DHL.
Summarized financial information - Green Isle
The following table summarizes the consolidated financial information of Green Isle as at December 31,
2013:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Carrying amount.
$
9,555
16,975
6,825
-
From the date of acquisition to December 31, 2013, on a consolidated basis, Green Isle generated revenue of
$33,868 and total net comprehensive income of $1,271. For the year ended December 31, 2013, $304
dividends have been received from Green Isle.
62 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
17 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
December 31,
2013
$
27,975
7,138
35,113
-
December 31,
2012
$
13,942
20,530
34,472
10,000
35,113
44,472
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 22 for further detail regarding cash balances held with Scotiabank.
18 Trade and other receivables
Trade receivables
Less: Allowance for doubtful accounts
Net trade receivables
Other receivables
Trade and other receivables
December 31,
2013
$
55,707
(518)
December 31,
2012
$
45,998
(447)
55,189
2,582
57,771
45,551
2,393
47,944
The aging of trade and other receivables at each reporting date was as follows:
Current
Past due 31 - 60 days
Past due 61 - 90 days
Past due 91 - 120 days
Past due > 120 days
December 31,
2013
$
48,819
5,458
1,917
678
899
December 31,
2012
$
41,986
3,473
957
1,201
327
57,771
47,944
63 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
18 Trade and other receivables continued
Included in amounts greater than 120 days are $567 (2012 - $328) 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.
19 Inventories
New vehicles
Demonstrator vehicles
Used vehicles
Parts and accessories
December 31,
2013
$
224,373
9,375
33,454
10,889
December 31,
2012
$
158,211
7,333
25,553
8,022
278,091
199,119
During the year ended December 31, 2013, $1,156,219 of inventory (2012 - $906,631) was expensed as cost
of goods sold which included net write-downs on used vehicle inventory allowances of $630 (2012 - $899).
During the year ended December 31, 2013, $1,314 of demonstrator expense (2012 - $1,150) was included in
selling, general, and administration expense. During the year ended December 31, 2013, demonstrator
reserves increased by $740 (2012 - $207). As at December 31, 2013, the Company had recorded reserves for
inventory write downs of $2,011 (2012 - $2,121).
64 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
20 Property and equipment
Company
& lease
vehicles
$
Leasehold
Improvements
$
Machinery
&
Equipment
$
Land &
buildings
$
Furniture,
fixtures &
other
$
Computer
hardware
$
Total
$
5,065
5,933
11,146
10,226
5,125
3,609
41,104
-
-
-
112
5,177
348
6,458
-
-
(1,164)
10,819
(1,217)
(1,118)
-
814
(1,521)
(1,729)
-
1,350
(1,900)
747
-
(40)
-
6,640
802
384
-
(586)
-
514
-
-
13,928
(90)
-
11,570
1,003
1,684
-
-
-
24,154
-
17,637
63,947
207
-
(70)
-
5,262
125
653
-
673
-
(275)
-
4,007
880
7
-
(459)
(3,248)
(158)
(178)
-
-
-
-
2,141
13,928
(475)
112
56,810
3,158
26,823
63,947
(4,629)
(1,164)
7,240
13,798
102,490
5,882
4,716
144,945
(2,004)
(568)
40
-
(2,532)
(695)
576
-
(5,792)
(1,112)
59
-
(1,205)
(2,543)
(2,368)
(15,129)
(494)
(554)
(465)
(4,311)
-
-
51
-
179
-
329
814
(6,845)
(1,376)
(1,699)
(1,410)
(3,046)
(559)
(2,654)
(577)
(18,297)
(6,346)
455
-
-
-
141
-
91
-
1,263
1,350
(2,651)
(7,766)
(3,109)
(3,464)
(3,140)
(22,030)
3,656
8,919
4,108
4,589
4,725
6,032
22,455
99,381
2,216
2,418
1,353
1,576
38,513
122,915
Cost:
January 1, 2012
Capital expenditures
Acquisitions of real estate
Disposals
Transfer in to inventory, net
December 31, 2012
Capital expenditures
Acquisitions of dealership assets
Acquisitions of real estate
Disposals
Transfer in (out) of inventory, net
December 31, 2013
Accumulated depreciation:
January 1, 2012
Current year depreciation
Disposals
Transfers in to inventory, net
December 31, 2012
Current year depreciation
Disposals
Transfers out of inventory
December 31, 2013
Carrying amount:
December 31, 2012
December 31, 2013
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 consolidated statement of comprehensive income.
Bank borrowings are secured on land and buildings for the value of $6,960 (2012 - $6,960).
65 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
21 Intangible assets and goodwill
Intangible assets consist of rights under franchise agreements with automobile manufacturers ("dealer
agreements").
Cost:
December 31, 2011
December 31, 2012
Acquisitions (Note 14)
Divestiture of Thompson (Note 15)
December 31, 2013
Accumulated impairment:
December 31, 2011
Recovery of impairment of intangible assets
December 31, 2012
Recovery of impairment of intangible assets
Divestiture of Thompson (Note 15)
December 31, 2013
Carrying amount
Intangible
assets
$
Goodwill
$
74,004
74,004
30,021
(1,828)
102,197
7,822
(222)
7,600
(746)
(1,642)
5,212
96,985
380
380
6,292
-
6,672
-
-
-
-
-
-
6,672
Total
$
74,384
74,384
36,313
(1,828)
108,869
7,822
(222)
7,600
(746)
(1,642)
5,212
103,657
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
December 31,
2013
$
21,687
9,431
3,420
9,626
8,497
3,258
1,234
1,413
1,359
-
December 31,
2012
$
21,687
9,431
3,670
9,626
8,497
3,258
1,234
1,413
1,359
955
66 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
21 Intangible assets and goodwill continued
Cash Generating Unit
K
L
M
Other N - W combined
December 31,
2013
$
1,726
2,345
-
32,989
December 31,
2012
$
1,726
394
185
2,968
96,985
66,403
The following table shows the impairments (recoveries of impairment) of indefinite-lived identifiable
intangible assets by cash generating unit:
Cash Generating Unit
C
H
J
L
M
Other N- W combined
December 31,
2013
$
250
-
955
(1,951)
-
-
December 31,
2012
$
(368)
(311)
1,098
(337)
508
(812)
(746)
(222)
The valuation methodology used to assess the recoverable value of the CGUs uses level 2 inputs, indirectly
derived from the market, where possible, for key assumptions such as the discount rate. Where level 2 inputs
are not available, as is the case with the growth rate, the Company uses level 3 inputs, which are unobservable
to the market, but reflect management's best estimates from historical performance and expectations for the
future. The following table shows the recoverable amounts of CGUs with recoveries of impairments recorded
in either the current year or prior year:
Cash Generating Unit
C
H
J
L
M
December 31,
2013
$
4,145
-
133
4,391
-
December 31,
2012
$
4,309
4,399
2,702
1,361
1,205
67 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
21 Intangible assets and goodwill continued
Impairment test of indefinite life intangible assets
The Company performed its annual test for impairment at December 31, 2013. As a result of the test
performed, the Company recorded a net reversal of impairment in the amount of $746 for the year ended
December 31, 2013 (2012 - $222).
The carrying value of intangible assets for each significant CGU is identified separately in the table above. “N
- W combined” comprises intangible assets allocated to the remaining CGUs.
The valuation techniques, significant assumptions and sensitivities applied in the intangible assets impairment
test are described as follows:
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.
68 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
21 Intangible assets and goodwill continued
Discount Rate
The Company applied a discount rate in order 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 CGU's in
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.
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
Other M - W combined
Basis of Recoverable
Amount
FVLCS
FVLCS
VIU
FVLCS
FVLCS
FVLCS
FVLCS
FVLCS
VIU
VIU
FVLCS
VIU
Discount Rate
%
%
%
%
%
%
%
%
%
%
%
%
FVLCS/VIU 11.73 - 12.93%
12.33
12.63
12.18
12.93
13.23
12.33
12.63
13.38
12.03
12.18
12.63
12.78
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
69 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
21 Intangible assets and goodwill continued
Sensitivity
The recoverable amount for the CGUs that were in excess of their carrying values was 363% of the carrying
value of the applicable CGUs based on a weighted average. As there are CGUs that have intangible assets
with original costs that exceed their current year carrying values, the Company expects future impairments
and recoveries 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.
22 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,
2013
$
December 31,
2012
$
35,113
-
57,771
2,866
83,580
264,178
50,429
34,472
10,000
47,944
3,000
23,937
203,525
35,590
70 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
22 Financial instruments continued
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.
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 1.15% (Bankers' Acceptance Rate as at December 31, 2013 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 for new
vehicles and Prime Rate plus 0.25-1.00% for used vehicles. These facilities define Prime Rate as the
Royal Bank of Canada Prime Rate (3.00% as at December 31, 2013).
The HSBC Credit Facilities and the HSBC Term Loan 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% or
Bankers' Acceptance Rate plus 2.25%. The Acquisition Facility bears interest at HSBC Prime Rate plus
2.00% or Bankers' Acceptance Rate plus 3.25%. The HSBC Term Loan bears interest at the HSBC
Prime Rate plus 1.75% (HSBC Prime Rate as at December 31, 2013 is 3.00%).
The BMO Demand Loan bears interest at BMO's Prime Rate plus 0.50% (BMO Prime Rate as at
December 31, 2013 is 3.00%).
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
71 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
22 Financial instruments continued
Interest Rate Risk continued
represent an increase to the reported amount if positive and a decrease to the reported amount 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.
+ 200 Basis Point
2012
$
4,433
360
2013
$
6,899
135
- 200 Basis Point
2012
$
(4,433)
(360)
2013
$
(6,899)
(135)
+ 100 Basis Point
2012
$
2,216
180
2013
$
3,450
68
- 100 Basis Point
2012
$
(2,216)
(180)
2013
$
(3,450)
(68)
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 (see Note 7 for further discussion of the Company’s economic dependence on Chrysler Canada
and associated credit risk). 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 is located in Note 18.
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 18.
Concentration of cash and cash equivalents exist due to the significant amount of cash held with Scotiabank
(see Note 7 for further discussion of the Company’s concentration of cash held on deposit 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 (2.37% at December 31, 2013). These cash
balances are fully accessible by our dealerships at any time, however 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. 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.
72 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
22 Financial instruments continued
Liquidity Risk continued
The Company is exposed to liquidity risk as a result of its economic dependence on certain suppliers and
lenders. (See Note 7 for further information regarding the Company’s economic dependence on Chrysler
Canada and the potential effect on the Company’s liquidity).
The following table details the Company’s remaining contractual maturity for its financial liabilities. The
amounts below have been determined 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.
2014
$
2015
$
2016
$
2017
$
Thereafter
$
Total
$
December 31, 2013
Trade and other payables
Revolving floorplan facilities
HSBC revolving term facility
HSBC ATB syndicated facility
HSBC fixed term loan
BMO fixed rate term loan
Lease obligations
Servus mortgage
Contractual interest payable
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
50,428
264,178
-
-
176
2,469
1,398
221
2,649
-
-
40,124
35,251
2,764
-
-
230
1,696
-
-
-
-
-
-
-
239
830
-
-
-
-
-
-
-
248
785
50,428
-
- 264,178
40,124
-
-
-
-
2,940
2,469
1,398
6,006
12,093
-
-
5,068
6,133
321,519
80,065
1,069
1,033
11,201 379,636
2013
$
2014
$
2015
$
2016
$
Thereafter
$
Total
$
35,590
203,525
-
175
2,604
1,282
213
1,083
-
-
15,000
2,940
-
-
221
511
244,472
18,672
-
-
-
-
-
-
230
221
451
-
-
-
-
-
-
239
212
451
-
35,590
- 203,525
15,000
-
3,115
-
2,604
-
1,282
-
6,218
5,315
3,772
1,745
7,060 271,106
73 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
23 Other long-term assets
Prepaid rent (Note 31)
Other assets
24 Payables, accruals and provisions
Trade payables
Accruals and provisions
Sales tax payable
Wages and withholding taxes payable
December 31,
2013
$
6,742
55
December 31,
2012
$
7,646
53
6,797
7,699
December 31,
2013
$
26,479
7,008
1,354
15,587
December 31,
2012
$
19,779
4,480
276
11,055
50,428
35,590
The following table provides a continuity schedule of all recorded provisions:
December 31, 2012
Provisions arising during the year
Amounts expired or disbursed
December 31, 2013
Finance and
insurance (a)
$
1,053
1,131
(636)
1,548
Other
$
551
689
(273)
967
Total
$
1,604
1,820
(909)
2,515
(a) Represents an estimated chargeback reserve provided by the Company's insurance provider.
74 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
25 Indebtedness
This note provides information about the contractual terms of the Company's interest-bearing debt, which are
measured at amortized cost. For more information about the Company's exposure to interest rate, foreign
currency and liquidity risk, see Note 22.
Current indebtedness
Current portion of indebtedness (iv, v, vi)
Revolving floorplan facilities - Scotiabank (i)
Revolving floorplan facilities - VCCI (ii)
Non-current indebtedness
HSBC revolving term loan (iii)
HSBC non-revolving fixed term loan (iv)
Servus Mortgage (vi)
HSBC non-revolving term facility (iii)
Unamortized deferred financing costs
Total indebtedness
December 31,
2013
$
December 31,
2012
$
2,866
248,329
15,849
267,044
40,124
2,764
5,785
35,251
(344)
3,000
194,791
8,734
206,525
15,000
2,940
5,997
-
-
350,624
230,462
Terms and conditions of outstanding loans were as follows:
i
ii
On September 30, 2013, the Company completed a $350,000 syndicated floorplan credit facility
(the "Facility") with The Bank of Nova Scotia ("Scotiabank") and the Canadian Imperial Bank
of Commerce ("CIBC") with Scotiabank serving as administrative agent to the Facility. The
Facility can be expanded to $450,000 in total availability upon credit approval of the syndicate
of lenders. The Facility bears a rate of Bankers' Acceptance plus 1.15% (2.37% as at December
31, 2013) per annum. The Facility is collateralized by each individual dealership's inventories
that 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. The
financial covenants and repayment terms of the Facility remain consistent with the Company's
previous floorplan facility with Scotiabank. As a result of the new agreement, the Company no
longer has a restricted cash requirement of $10,000.
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 and Audi dealerships. The VCCI facilities bear interest at the greater of Royal
Bank of Canada ("RBC") prime rate for new vehicles and RBC prime rate plus 0.25-1.00% for
used vehicles (RBC prime rate = 3.00% at December 31, 2013). The maximum amount of
financing provided by the VCCI facilities is $30,680. The VCCI facilities are collateralized by
all 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 and
Audi 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.
75 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
25 Indebtedness continued
iii
On November 5, 2013, in conjunction with the signing of the real estate asset purchase
agreement with COAG, the Company announced it entered into a Credit Agreement with HSBC
Bank Canada ("HSBC") and Alberta Treasury Branches ("ATB"), with HSBC acting as
adminstrative agent to the Credit Agreement. The Credit Agreement provides the Company with
the following facilities:
!
!
!
a $50,000 revolving operating facility that may be used for ongoing working capital and
general corporate purposes, including acquisitions;
a $20,000 revolving acquisition facility that may be used for the acquisition of auto
dealerships and associated real estate; and
a $60,000 non-revolving term facility that may be used to purchase owner occupied real
estate, refinance existing real estate and to fund construction costs of new dealerships.
Fees and interest on borrowings under the credit facility are subject to a pricing grid whereby
the pricing level is determined by the funded debt to EBITDA ratio. Funded debt is defined in
the agreement as all indebtedness, as determined in accordance with GAAP, including
indebtedness for borrowed money, interest bearing liabilities, indebtedness secured by purchase
money security interests, capital lease obligations, securities having attributes substantially
similar to debt and contingent obligations including letters of credits, but excluding floor plan
debt and subordinated obligations. EBITDA is defined as net income before interest,
depreciation, taxes, non-cash charges and any extraordinary/unusual non-recurring items. For
business acquisitions or divestitures completed in the immediately preceding 12-month period,
EBITDA will be calculated as if the acquisition or divestiture had occurred for the previous full
four fiscal quarters. As at December 31, 2013, the Company is in the fourth of five tiers of the
pricing grid, with the fourth tier providing the second lowest rate of interest under the credit
facility. The non-revolving term facility bears interest at HSBC's prime rate plus 1.00% (4.00%
at December 31, 2013) or Bankers' Acceptance Rate plus 2.00% (3.32% at December 31, 2013).
Amounts drawn on the HSBC Revolver as at December 31, 2013 are due on June 30, 2015 and
may be extended annually for an additional 365 days at the request of the Company and upon
approval by HSBC. The syndicated HSBC Credit Facilities' maturity dates are the second
anniversary of the initial drawdowns. The HSBC Revolver is collateralized by all of the present
and future assets of the subsidiaries of AutoCanada Inc. As part of a priority agreement signed
by HSBC, Scotiabank, VCCI, and the Company, the collateral for the HSBC Credit Facilities
excludes all new, used and demonstrator inventory financed with the Scotiabank and VCCI
revolving floorplan facilities.
The Company is also provided with an evergreen lease line (the "Capital Lease Line") in the
amount of $5,000 which may be used to finance capital asset purchases for its dealerships. The
Capital Lease Line bears interest at rates determined by HSBC when amounts are drawn.
HSBC provides the Company with a committed, extendible, non-revolving term loan (the
“HSBC Term Loan”). The HSBC Term Loan has a maturity date of June 30, 2014; 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 June 30, 2015. The HSBC Term Loan bears interest at HSBC’s Prime Rate plus 1.75%
(4.75% at December 31, 2013). 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
iv
76 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
25 Indebtedness continued
v
vi
property. At December 31, 2013, the carrying amount of the Newmarket Infiniti Nissan
property was $5,131.
Bank of Montreal ("BMO") provides the Company a non-revolving Demand Loan (the “BMO
Demand Loan”). The BMO Demand Loan bears interest at BMO's Prime Rate plus 0.50%
(3.50% at December 31, 2013). Repayments consist of fixed monthly payments totaling $15
plus interest per month. The BMO Demand 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,
2013, the carrying amount of the Cambridge Hyundai property was $3,081.
Servus Credit Union provides the Company with a mortgage (the "Servus Mortgage"). The
Servus Mortgage bears 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 requires 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, 2013, the carrying amount of the property was $8,244.
26 Leases
This note provides information about the contractual terms of the Company's lease obligations.
Vehicle repurchase obligations (i)
Current finance lease obligations (ii)
Total lease obligations
Terms and conditions of lease obligations were as follows:
December 31,
2013
$
1,397
1
December 31,
2012
$
1,254
28
1,398
1,282
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
operating leases, 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 a 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, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
27 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 certain of the lands and buildings used in its
franchised automobile dealership operations from related parties (Note 31) and other third parties. The future
aggregate minimum lease payments under non-cancellable operating leases are as follows:
2013
2014
2015
2016
2017
2018
Thereafter
December 31,
2013
$
-
6,442
6,086
5,973
5,192
5,285
51,729
December 31,
2012
$
10,605
10,289
9,967
8,205
6,460
5,705
44,673
80,707
95,904
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.
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.
78 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
27 Commitments and contingencies continued
Letters of guarantee
The Company has outstanding letters of guarantee totaling $510 as at December 31, 2013 (2012 - $225) with
various due dates. The Company will settle obligations as they arise for which these letters have been issued
as security and it is not the Company's intent that draws will be made on these letters.
28 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
Settled
Granted
Dividends reinvested
Outstanding, end of the year
Deferred Share Units (DSUs)
2013
Number of
RSUs
92,710
(35,475)
47,608
2,837
107,680
2012
Number of
RSUs
12,245
-
76,916
3,549
92,710
Independent members of the Board of Directors are paid a portion of their annual retainer in the form of
DSUs. They may also elect to receive up to 100% of their remaining cash remuneration in the form of
DSUs. The underlying security of DSUs are the Company's common shares and are valued based on the
Company's average share price for the five business days prior to the date on which Directors' fees are
paid. The DSUs are also entitled to earn additional units based on dividend payments made by the
Company and the share price on 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 earlier 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, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
28 Share-based payments continued
The following table shows the change in the number of DSUs for the years ended:
Outstanding, beginning of the period
Granted
Dividends reinvested
Outstanding, end of the period
2013
Number of
DSUs
3,435
8,515
234
12,184
2012
Number of
DSUs
-
3,397
38
3,435
29 Share capital
Common shares of the Company are voting shares and have no par value. The authorized share capital is an
unlimited number of common shares.
The Company issued 1,840,000 shares on June 3, 2013 (8.5% of the total share capital issued). The common
shares issued have the same rights as the other common shares in issue. The fair value of the shares issued
amounted to $46,000 ($25 per share). The related transaction costs amounting to $2,189 have been recognized
against the gross proceeds.
Restricted Share Unit Trust
In June 2012, the Company established a trust ("Trust") to hedge the risk of future share price increases from
the time Restricted Share Units ("RSU" - see Note 28) 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 third party trustee will administer the distribution of cash and shares to the beneficiaries upon
vesting, as directed by the Company. During the year ended December 31, 2013, the Company contributed
cash to the trustee to purchase a total of 17,925 shares of the Company at a total cost of $513 on the open
market to fund the future payment of awards to eligible individuals under the Plan and directed the trustee to
transfer a total of 16,131 shares to members of the Executive Management Team for fully vested RSUs.
Dividends earned on the shares held in trust of $66 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, 2013. As the Company controls the Trust, it has included the Trust in
its consolidated financial statements for the year ended December 31, 2013.
80 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
29 Share capital continued
The following table shows the change in shareholders' capital from January 1, 2013 to December 31, 2013:
Outstanding, beginning of the year
Common shares issued
Common shares repurchased
Dividends reinvested
Treasury shares settled
Outstanding, end of the year
2013
Number
19,802,149
1,840,000
(17,925)
(2,266)
16,131
21,638,089
2013
Amount
$
189,500
43,811
(513)
(66)
206
232,938
As at December 31, 2013, 82,841 common shares were held in trust for the Restricted Share Unit Plan,
resulting in a total of 21,720,930 common shares issued.
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, 2013, eligible dividends totaling
$0.78 per common share were declared and paid, resulting in a total payment of $16,197 (2012 - $12,301).
On February 14, 2014, the Board of Directors of the Company declared a quarterly eligible dividend of $0.22
per common share on the Company's outstanding Class A common shares, payable on March 17, 2014 to
shareholders of record at the close of business on February 28, 2014.
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
2013
$
38,166
2012
$
24,236
2013
20,868,726
2012
19,840,802
81 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
30 Capital disclosures
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 25)
Equity
December 31,
2013
$
83,580
190,242
December 31,
2012
$
23,937
124,500
273,822
148,437
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.
31 Related party transactions
Transactions with Companies Controlled by the CEO of AutoCanada
During the year period ended December 31, 2013, 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 22.9% 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 significant 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, 2013, 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, 2013 was $nil (2012 - $2,160). The total
unamortized prepayment of rent to the Company as at December 31, 2013 is $7,194 (2012 - $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 (2012 - $452) has been amortized to current period facility lease
costs.
82 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
31 Related party transactions continued
b
Rent paid to companies with common directors
During the year ended December 31, 2013, total rent paid to companies controlled by Mr. Priestner
amounted to $7,061 (2012 - $7,875). The Company currently leases two of its leased facilities from
affiliates from COAG. 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, 2013, total administrative support fees received from companies
controlled by Mr. Priestner amount to $766 (2012 - $432).
d
Purchase of real estate
On November 2013, the Company purchased eleven dealership real estate properties from COAG for a
total purchase price of $57,800, plus transaction costs and taxes. The purchase was financed with
advances from the Company's non-revolving term facility and revolving operating facility with HSBC.
The properties purchased were previously leased from COAG. The Company's Real Estate Committee,
comprised of independent members of the Board of Directors, obtained independent appraisals for each
of the properties to determine their fair market values.
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:
2013
2014
2015
2016
2017
2018
Thereafter
December 31,
2013
$
-
2,589
2,460
2,457
2,458
2,458
25,178
December 31,
2012
$
7,937
7,916
7,821
6,169
5,206
4,459
35,628
37,600
75,136
83 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
31 Related party transactions continued
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
Share-based payments
2013
$
4,484
165
374
5,023
2012
$
3,239
96
271
3,606
32 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, which
excludes the effects of acquisitions, for the years ended December 31, 2013 and December 31, 2012:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Leased vehicle repurchase obligations
Revolving floorplan facility
33 Fair value of financial instruments
December 31,
2013
$
(7,092)
(43,205)
88
11,023
144
29,074
December 31,
2012
$
(5,496)
(63,105)
18
3,311
171
52,709
(9,968)
(12,392)
The Company’s financial instruments at December 31, 2013 are represented by cash and cash equivalents,
trade and other receivables, accounts payable and accrued liabilities, revolving floorplan facilities, lease
obligations and long-term debt. The fair values of cash equivalents, trade and other receivables, accounts
payable and accrued liabilities, and revolving floorplan facilities approximate their carrying values due to
their short-term nature. Although most of the long-term indebtedness has a carrying value that approximates
the fair value due to the floating rate nature of the debt, there is a portion that has a fixed rate. The long-term
indebtedness has a carrying value that is not materially different from its fair value.
84 AutoCanada Inc.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2013 and 2012
(in thousands of Canadian dollars except for share and per share amounts)
33 Fair value of financial instruments continued
The fair value was determined based on the prevailing and comparable market interest rates.
Although there are not any financial instruments that are remeasured to fair value, the fair value concepts and
methods are used to calculate the recoverable amount of CGUs. The different levels have been defined and
applied as follows:
!
!
!
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly (that is, as prices) or indirectly (that is, derived from prices).
Level 3 - Inputs for the asset or liability that are not based on observable market data (that is,
unobservable inputs).
34 Subsequent Events
Volkswagen Open Point
On February 14, 2014, the Company announced that it had been awarded the right to a Volkswagen open
point dealership in Sherwood Park, Alberta, a community adjacent to Edmonton, Alberta. The Company
intends to operate the dealership out of a new facility with construction anticipated to be completed in the first
quarter of 2016. At this time, detailed construction plans and estimates have not been completed; however,
management estimates the cost of construction to be approximately $14,600 for land and building, of which it
expects to finance approximately 70% by way of construction financing.
Investment in Prairie Auto Holdings Inc.
On March 7, 2014, the Company invested a total of $32,259 and issued 205,000 shares of ACI to acquire a
82.353% non-voting equity interest in Prairie Auto Holdings Ltd. (“PAH”). PAH is an entity formed between
a subsidiary of AutoCanada and Mr. Priestner which on March 7, 2014 acquired an 85% equity interest in the
shares of Saskatoon Motor Products Ltd. (“SMP"), a Chevrolet dealership in Saskatoon, Saskatchewan and
Mann-Northway Auto Source (“MNAS”), a Chevrolet, GMC, Buick and Cadillac dealership in Prince Albert,
Saskatchewan. The remaining 15% equity interest in the two dealerships is held by Mr. Robert Mann, our
Dealer Partner at the two stores who currently operates the stores. To comply with GM Canada’s approval,
Mr. Priestner is required to have 100% voting control of PAH. The investment in PAH was reviewed and
approved by the independent members of AutoCanada’s Board of Directors.
85 CORPORATE INFORMATION
AUTOCANADA INC.
Shareholder Information
Head Office
AutoCanada Inc.
Senior Management
Patrick Priestner,
Chairman and Chief Executive Officer
Thomas Orysiuk,
President and Chief Financial Officer
Stephen Rose,
Senior Vice-President, Sales, Marketing
and Corporate Operations
Jeffery Christie,
Vice-President, Finance
Board of Directors
Gordon Barefoot – Lead Director
Michael Ross
Dennis DesRosiers
Christopher Cumming
Patrick Priestner
Thomas Orysiuk
#200 – 15505 Yellowhead Trail
Edmonton, Alberta
T5V 1E5
www.autocan.ca
Investor Relations
Jeffery Christie
780-732-7164
jchristie@autocan.ca
Auditors
PricewaterhouseCoopers, LLP
Edmonton, Alberta
Shares Listed
Toronto Stock Exchange
Trading Symbol: ACQ
Transfer Agent
Valiant Trust Company
Annual General Meeting
Friday, May 9, 2014
10:00 a.m. Mountain Time
AutoCanada Inc. Corporate Head Office
200 – 15505 Yellowhead Trail
Edmonton, Alberta
86
#200 • 15505 Yellowhead Trail • Edmonton, AB • T5V 1E5
www.autocan.ca
5 » AutoCanada 2011