CERVUS EQUIPMENT CORPORATION
2018Annual Report MESSAGE TO THE SHAREHOLDERS
Each year I am reminded of the privileged trust our Customers place in us to deliver the equipment, service and support
their businesses rely on. I am also humbled by the commitment our employees and employee shareholders demonstrate
in delivering on our customers’ expectations each day. We are fortunate to meet this challenge while representing our
market leading Original Equipment Manufacturers (“OEMs”), who are key partners in the solutions we deliver.
Reflecting on 2018, I am pleased with the financial results of the year. We end the year with a 32% increase in adjusted
net income before tax and a strong balance sheet prepared for growth. At the beginning of the year we also set out to
deliver efficiencies in our business. I am pleased to report our absorption, a measure of the ability to cover all dealership
expenses, increased two percent. This reflects the efficiencies found in streamlining processes, reducing rework, and
controlling expenses. Service optimization is one of these processes: improving our customer’s experience while also
increasing our efficiency. It has also been profitable, with service gross profit margin increasing six percent since we
started service optimization in 2015.
The changes we have made and continue to refine are culturally significant for Cervus, as we tie our actions to what
our customers value today and will require in the future. It’s also satisfying to see these efforts translating directly into
improved financial results. At this time last year, we committed to profitability in Ontario for 2018. This was achieved, with
Ontario net income before tax increasing $7.0 million compared to 2017.
As we look forward, we see opportunities to grow the customer solutions area of our business. To me, customer solutions
are about the services we provide before and after the equipment sale. Today our customer solutions are parts, service,
training, rentals, and most recently storage solutions. It is in the delivery of these solutions that our people are most
excited and highly engaged in solving the issues that matter to our customers. Building on the foundational systems and
platforms in place, we see opportunities to refine and develop innovative processes, better use of technology, and new
product service offerings, all guided by our customers’ needs and expectations.
In terms of growth, our strong balance sheet provides a solid foundation. Organic growth will occur as we deepen
relationships with customers and extend additional services into our markets. Growth by acquisition continues to be
a long-term focus for Cervus. To this end, the process and system work we have undertaken enhances our ability to
integrate acquisitions efficiently and effectively. I am confident that our progress in 2018 has positioned Cervus well as
we enter 2019.
Sincerely,
Graham Drake
President & Chief Executive Officer
Cervus Equipment Corporation
This page contains certain forward-looking statements. Please read the “Note Regarding Forward-Looking Information” contained in the Management
Discussion and Analysis of Cervus for the year ended December 31, 2018 available on SEDAR at www.sedar.com under Cervus’ issuer profile.
1
Cervus Annual Report 2018
Cervus Equipment
Cervus Equipment
Corporation
Corporation
Management’s
Management’s
Discussion +
Discussion +
Analysis
Analysis
Cervus Equipment
Corporation
Management’s
Discussion +
Analysis
For the period from January 1, 2018 to December 31, 2018
The following Management’s Discussion & Analysis (“MD&A”) was prepared as of March 14, 2019 and is provided
to assist readers in understanding Cervus Equipment Corporation’s (“Cervus” or the “Company”) financial
performance for the three and twelve-month periods ended December 31, 2018, and significant trends that may
affect the future performance of Cervus. This MD&A should be read in conjunction with the accompanying
Audited Consolidated Financial Statements for the year ended December 31, 2018, and notes contained therein.
The accompanying Audited Consolidated Financial Statements have been prepared in accordance with
International Financial Reporting Standards (“IFRSs”) and Cervus’ functional and reporting currency is the
Canadian dollar. Cervus’ common shares trade on the Toronto Stock Exchange under the symbol “CERV”.
Additional information relating to Cervus, including Cervus’ current annual information form, is available on the
System for Electronic Document Analysis and Retrieval (“SEDAR”) web site at www.sedar.com.
This MD&A contains forward-looking statements. Please see the section “Note Regarding Forward-Looking
Statements” for a discussion of the risks, uncertainties and assumptions relating to those statements. This MD&A
also makes reference to certain non-IFRS financial measures to assist users in assessing Cervus’ performance. Non-
IFRS financial measures do not have any standard meaning prescribed by IFRS and are therefore unlikely to be
comparable to similar measures presented by other issuers. These measures are identified and described under
the section “Non-IFRS Financial Measures.”
For the period from January 1, 2018 to December 31, 2018
For the period from January 1, 2018 to December 31, 2018
The following Management’s Discussion & Analysis (“MD&A”) was prepared as of March 14, 2019 and is provided
to assist readers in understanding Cervus Equipment Corporation’s (“Cervus” or the “Company”) financial
The following Management’s Discussion & Analysis (“MD&A”) was prepared as of March 14, 2019 and is provided
performance for the three and twelve-month periods ended December 31, 2018, and significant trends that may
to assist readers in understanding Cervus Equipment Corporation’s (“Cervus” or the “Company”) financial
affect the future performance of Cervus. This MD&A should be read in conjunction with the accompanying
performance for the three and twelve-month periods ended December 31, 2018, and significant trends that may
Audited Consolidated Financial Statements for the year ended December 31, 2018, and notes contained therein.
affect the future performance of Cervus. This MD&A should be read in conjunction with the accompanying
The accompanying Audited Consolidated Financial Statements have been prepared in accordance with
Audited Consolidated Financial Statements for the year ended December 31, 2018, and notes contained therein.
International Financial Reporting Standards (“IFRSs”) and Cervus’ functional and reporting currency is the
The accompanying Audited Consolidated Financial Statements have been prepared in accordance with
Canadian dollar. Cervus’ common shares trade on the Toronto Stock Exchange under the symbol “CERV”.
International Financial Reporting Standards (“IFRSs”) and Cervus’ functional and reporting currency is the
Additional information relating to Cervus, including Cervus’ current annual information form, is available on the
Canadian dollar. Cervus’ common shares trade on the Toronto Stock Exchange under the symbol “CERV”.
System for Electronic Document Analysis and Retrieval (“SEDAR”) web site at www.sedar.com.
Additional information relating to Cervus, including Cervus’ current annual information form, is available on the
This MD&A contains forward-looking statements. Please see the section “Note Regarding Forward-Looking
System for Electronic Document Analysis and Retrieval (“SEDAR”) web site at www.sedar.com.
Statements” for a discussion of the risks, uncertainties and assumptions relating to those statements. This MD&A
This MD&A contains forward-looking statements. Please see the section “Note Regarding Forward-Looking
also makes reference to certain non-IFRS financial measures to assist users in assessing Cervus’ performance. Non-
Statements” for a discussion of the risks, uncertainties and assumptions relating to those statements. This MD&A
IFRS financial measures do not have any standard meaning prescribed by IFRS and are therefore unlikely to be
also makes reference to certain non-IFRS financial measures to assist users in assessing Cervus’ performance. Non-
comparable to similar measures presented by other issuers. These measures are identified and described under
IFRS financial measures do not have any standard meaning prescribed by IFRS and are therefore unlikely to be
the section “Non-IFRS Financial Measures.”
comparable to similar measures presented by other issuers. These measures are identified and described under
the section “Non-IFRS Financial Measures.”
Overview of Cervus
For the year ended December 31, 2018, Cervus operated under three segments: Agriculture, Transportation, and
Overview of Cervus
Commercial and Industrial, based on the industries which they serve. These segments are managed separately,
For the year ended December 31, 2018, Cervus operated under three segments: Agriculture, Transportation, and
and strategic decisions are made on the basis of their respective operating results. On February 26, 2018, the
Commercial and Industrial, based on the industries which they serve. These segments are managed separately,
Company announced it had entered into a definitive agreement to sell its Commercial operations, composed of
and strategic decisions are made on the basis of their respective operating results. On February 26, 2018, the
four dealership locations in Calgary, Red Deer, Edmonton and Fort McMurray, Alberta. The dealerships represent
Company announced it had entered into a definitive agreement to sell its Commercial operations, composed of
the construction brands Bobcat, CMI and JCB. In 2018, Cervus will continue to report under three operating
four dealership locations in Calgary, Red Deer, Edmonton and Fort McMurray, Alberta. The dealerships represent
segments: Agriculture, Transportation, and Industrial.
the construction brands Bobcat, CMI and JCB. In 2018, Cervus will continue to report under three operating
The Agricultural equipment segment consists of interests in 36 John Deere dealership locations with 15 in Alberta,
segments: Agriculture, Transportation, and Industrial.
5 in Saskatchewan, 1 in British Columbia, 9 in New Zealand and 6 in Australia.
The Agricultural equipment segment consists of interests in 36 John Deere dealership locations with 15 in Alberta,
5 in Saskatchewan, 1 in British Columbia, 9 in New Zealand and 6 in Australia.
The Transportation segment consists of 19 dealership locations with 4 Peterbilt truck dealerships and 1 Collision
Centre operating in Saskatchewan, 12 Peterbilt truck dealerships operating in Ontario, and 2 parts and service
The Transportation segment consists of 19 dealership locations with 4 Peterbilt truck dealerships and 1 Collision
locations operating in Ontario.
Centre operating in Saskatchewan, 12 Peterbilt truck dealerships operating in Ontario, and 2 parts and service
locations operating in Ontario.
Overview of Cervus
For the year ended December 31, 2018, Cervus operated under three segments: Agriculture, Transportation, and
Commercial and Industrial, based on the industries which they serve. These segments are managed separately,
and strategic decisions are made on the basis of their respective operating results. On February 26, 2018, the
Company announced it had entered into a definitive agreement to sell its Commercial operations, composed of
four dealership locations in Calgary, Red Deer, Edmonton and Fort McMurray, Alberta. The dealerships represent
the construction brands Bobcat, CMI and JCB. In 2018, Cervus will continue to report under three operating
segments: Agriculture, Transportation, and Industrial.
The Agricultural equipment segment consists of interests in 36 John Deere dealership locations with 15 in Alberta,
5 in Saskatchewan, 1 in British Columbia, 9 in New Zealand and 6 in Australia.
The Transportation segment consists of 19 dealership locations with 4 Peterbilt truck dealerships and 1 Collision
Centre operating in Saskatchewan, 12 Peterbilt truck dealerships operating in Ontario, and 2 parts and service
locations operating in Ontario.
(1) - Refer to Non-IFRS Measures herein
(1) - Refer to Non-IFRS Measures herein
(1) - Refer to Non-IFRS Measures herein
2
Cervus Annual Report 2018
For the year ended December 31, 2018, the Industrial equipment segment consisted of 8 dealership locations with
5 Clark, Sellick, Doosan, JLG, Baumann material handling and forklift equipment dealerships operating in Alberta,
2 Clark, Sellick, Doosan, JLG, Baumann dealerships operating in Saskatchewan and 1 Clark, Sellick, JLG, Baumann
dealership in Manitoba.
3
Cervus Annual Report 2018
Revenue by Segment
Revenue by Geography
Note Regarding Forward-Looking Statements
Certain statements contained in this MD&A constitute “forward-looking statements”. These forward-looking
statements may include words such as “anticipate”, “believe”, “could”, “expect”, “may”, “objective”, “outlook”,
“plan”, “should”, “target” and “will”. All statements, other than statements of historical fact, that address activities,
events, or developments that Cervus or a third party expects or anticipates will or may occur in the future,
including our future growth, results of operations, performance and business prospects and opportunities, and
the assumptions underlying any of the foregoing, are forward-looking statements. These forward-looking
statements reflect our current beliefs and are based on information currently available to us and on assumptions
we believe are reasonable. Actual results and developments may differ materially from the results and
developments discussed in the forward-looking statements as they are subject to a number of significant risks and
uncertainties, including those discussed under “Business Risks and Uncertainties” and elsewhere in this MD&A.
Certain of these risks and uncertainties are beyond our control. Consequently, all of the forward-looking
statements made in this MD&A are qualified by these cautionary statements and other cautionary statements or
factors contained herein, and there can be no assurance that the actual results or developments will be realized
or, even if substantially realized, that they will have the expected consequences to, or effects on, Cervus. These
forward-looking statements are made as of the date of this MD&A, and we assume no obligation to update or
revise them to reflect subsequent information, events, or circumstances unless otherwise required by applicable
securities legislation.
The most recent quarterly dividend payment of $0.10 per share was made to the shareholders of record as of
December 31, 2018, on January 15, 2019. See “Capital Resources - Cautionary note regarding dividends” for a
cautionary note regarding future dividends.
4
Cervus Annual Report 2018
Highlights of the Year
•
•
•
•
•
•
•
The Company generated adjusted income before income tax expense (1) of $36.5 million, an $8.8 million
increase compared to $27.7 million of adjusted income before income tax expense (1) in 2017.
The Company generated income of $26.6 million in 2018, a $6.7 million increase compared to income of
$19.9 million in 2017.
The Company reported income per basic share of $1.70 in 2018, a $0.43 per share increase compared to
income of $1.27 per basic share in 2017.
The Transportation segment achieved a $9.4 million increase in adjusted income before income tax
expense(1) compared to 2017, largely due to the performance of our Ontario dealerships.
Cervus achieved record new equipment revenue in our Agriculture segment, increasing 10% over the
prior year, while marketing associated used equipment trades in season decreased used equipment
margins by 2% in the year.
Total service gross profit margin percentage increased by 3.4% compared to 2017, due to continued
service optimization improvement.
Selling, general, and administrative (“SG&A”) expenses decreased $3.2 million in the year, despite a $128.8
million increase in revenue, decreasing to 12.8% as a percentage of revenue compared to 14.4% in 2017.
• Dividends of $0.40 per share were declared to shareholders of record during 2018.
•
•
Cervus completed the acquisition of an adjacent John Deere dealership located in Red Deer, Alberta.
Cervus’ Saskatchewan John Deere dealerships were awarded John Deere’s Leaders Club status, an award
recognizing the top John Deere dealers in Canada.
(1) - Refer to Non-IFRS Measures herein
5
Cervus Annual Report 2018
ANNUAL CONSOLIDATED RESULTS
($ thousands, except per share amounts)
Revenue
Cost of sales
Gross profit
Other income
Unrealized foreign exchange (loss) gain
Total other income
Selling, general and administrative expense
Income from operating activities
Finance income
Finance costs
Share of profit (loss) of equity accounted investees, net of income tax
Income before income tax expense
Income tax expense
Income for the year
Income attributable to shareholders
EBITDA(1)
EBITDA margin(1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
Income per share
Basic
Diluted
Basic - adjusted(1)
Reconciliation of adjusted income before income tax expense:
Income before income tax expense
Adjustments:
Unrealized foreign exchange loss (gain)
Gain on sale of Commercial operations
Gain on sale of land and building
Insurance proceeds received in excess of building cost
Adjusted income before income tax expense(1)
(1) - Refer to Non-IFRS Measures herein
% Change
Compared
to 2017
11%
13%
1%
(235%)
210%
(2%)
22%
76%
8%
26%
10%
33%
33%
10%
34%
35%
40%
2018
1,350,037
(1,138,517)
211,520
4,642
(1,199)
3,443
(173,045)
41,918
854
(6,352)
124
36,544
(9,965)
26,579
26,579
59,170
4.4%
15.7%
12.8%
1.70
1.62
1.70
2017
1,221,285
(1,011,857)
209,428
222
890
1,112
(176,199)
34,341
484
(5,863)
(4)
28,958
(9,046)
19,912
19,917
53,840
4.4%
17.1%
14.4%
1.27
1.20
1.21
36,544
26%
28,958
1,199
(480)
-
(765)
36,498
(235%)
100%
(100%)
100%
32%
(890)
-
(417)
-
27,651
6
Cervus Annual Report 2018
Operating Summary – Year Ended December 31, 2018
Adjusted income before income tax expense(1) increased $8.8 million to $36.5 million compared to $27.7 million
in 2017. This was achieved due to a $9.4 million increase in our Transportation segment, a $1.4 million increase in
our Agriculture segment, partially offset by a $2.0 million decrease in the Industrial segment due to non-
continuance of four construction dealerships. Income before income tax expense increased $7.6 million compared
to 2017, comprised of a $7.6 million increase in our Transportation segment, and a $1.7 million increase in our
Agriculture segment, partially offset by a $1.7 million decrease in our Industrial segment.
In analyzing financial results, Cervus considers adjusted income before income tax expense as a relevant
supplementary non-IFRS measure of financial performance. Year over year fluctuations in unrealized foreign
exchange gains and losses reduced income in 2018 by $2.1 million compared to 2017, while gains on insurance
recoveries increased $0.8 million in 2018 compared to the year ended 2017. Adjusted income before income tax
expense excludes gains and losses from the sale of real estate and insurance recoveries, as well as unrealized gains
and losses on foreign exchange. It is our view that this non-IFRS measure is useful for comparing the period to
period financial performance of our underlying dealership operations.
Adjusted income before income tax expense increased by $8.8 million in 2018, compared to 2017. The principal
factor in this performance was the substantial increase in our Ontario transportation dealership profitability
compared to 2017, increasing $8.2 million. The results of our Agriculture segment also improved, achieving record
new equipment sales partially offset by a 2% reduction in used equipment gross margin percentage. Our Industrial
segment also generated $0.6 million of additional adjusted income before income tax on a same store basis.
Within our Agriculture segment, adjusted income before income tax expense increased $1.4 million. This
performance reflects the record agricultural equipment sales achieved in 2018, with new and used equipment
increasing 13% overall compared to 2017. The overall results were comprised of a 10% increase in new equipment
sales which accelerated the amount of used equipment taken on trade. In turn, focused sales efforts achieved a
19% increase in used equipment sales, compared to 2017, while marketing this increased used inventory in-season
reduced used gross profit margin compared to 2017. Organic growth in parts and service revenue, along with
improved gross profit, also positively contributed to the financial performance of the year. Income before income
tax expense increased $1.7 million for the segment compared to 2017.
Our Transportation segment delivered a $9.4 million increase in adjusted income before income tax expense, with
our Ontario dealerships generating $8.2 million of the increase. The Ontario reorganization undertaken in 2017
provided the framework to support a 23% increase in overall revenue, while growing gross margin and reducing
SG&A expenses. Income before income tax expense mirrored these trends, increasing $7.6 million compared to
2017, of which $3.5 million related to non-recurring reorganization costs incurred in 2017, and includes a $1.8
million decrease in unrealized foreign exchange gains compared to 2017.
Within our Industrial segment, same store adjusted income before income tax expense improved $0.6 million,
while overall segment results decreased $2.0 million, due to the non-continuance of the Construction dealerships,
which had generated $2.6 million of adjusted income in 2017. On a same store basis, a 15% increase in revenue
reflected improving market sentiment, while internal efficiencies delivered increased gross profit. Same store
income before income tax expense also increased $0.4 million, while overall segment results decreased $1.7
million, of which $2.1 million related to prior year income from the Construction dealerships.
(1) Refer to Non-IFRS measures herein
7
Cervus Annual Report 2018
ANNUAL BUSINESS SEGMENT RESULTS
For the year ended December 31, 2018 the Company had three reportable segments: Agricultural, Transportation,
and Industrial, each supported by a single shared resources function. The Company allocates the expenditures of
shared resources to each individual segment according to specific identification and metrics to estimate use as
outlined in Note 27 of the accompanying Audited Consolidated Annual Financial Statements.
Agricultural Segment Results
($ thousands, except per share amounts)
Equipment
New equipment
Used equipment
Total equipment revenue
Parts
Service
Rental and other
Total revenue
Cost of sales
Gross profit
Other income
Selling, general and administrative expense
Income from operating activities
Income before income tax expense
EBITDA(1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
Reconciliation of adjusted income before income tax expense:
Income before income tax expense
Adjustments:
Gain on sale of land and building
Insurance proceeds received in excess of building cost
Adjusted income before income tax expense(1)
(1) - Refer to Non-IFRS Measures herein
% Change
Compared
to 2017
2018
2017
490,524
293,264
783,788
95,925
42,724
4,449
926,886
(792,691)
134,195
1,857
(102,367)
33,685
31,188
42,040
14.5%
11.0%
10% 447,268
19% 246,784
13% 694,052
2% 93,627
5% 40,839
(14%)
5,159
11% 833,677
13%
(703,484)
3% 130,193
62%
3%
4%
6%
5%
1,143
(98,915)
32,421
29,479
40,106
15.6%
11.9%
31,188
6%
29,479
-
(100%)
(417)
(765)
30,423
100%
-
5% 29,062
Operating Summary – Year Ended December 31, 2018
Within our Agriculture segment, adjusted income before income tax expense increased $1.4 million in 2018, as
focused sales efforts drove record equipment sales in the year. This increase in new equipment sales accelerated
the amount of used equipment taken on trade, which was successfully reconditioned and sold in the year, as
indicated by the 19% increase in used equipment sales. Income before income tax expense increased $1.7 million,
driven by a gross profit increase of $4.0 million, partially offset by SG&A expenses increasing $3.5 million.
8
Cervus Annual Report 2018
Income before income tax expense increased $1.7 million, driven by the $89.7 million increase in equipment sales.
Record new equipment sales resulted in the achievement of additional manufacturer incentives, which supported
overall new equipment gross profit margin in the year. This new equipment sales activity increased the used
equipment taken on trade. The late seeding and difficult harvest in 2018 compressed producers’ field time and
increased demand for used equipment capacity, particularly in the third and fourth quarters. This provided an
opportunity to successfully market the additional used inventory in season, although at lower profit margins. As
a result, used equipment gross profit margin percentage decreased 2% in the year, partially offsetting increased
new and used equipment revenue. Parts and service sales experienced modest growth, while service department
efficiencies increased service gross profit margin by 3.9%. The increased equipment sales, combined with parts
and service margin growth, generated the $4.0 million increase in gross profit partially offset by $3.5 million of
increased SG&A expenses.
Within our two agriculture geographies, the $1.4 million increase in adjusted income before income tax expense
was comprised of a $0.7 million increase in our Canadian dealerships, and a $0.7 million increase in our Australia
and New Zealand dealerships.
9
Cervus Annual Report 2018
Transportation Segment Results
($ thousands, except per share amounts)
Equipment
New equipment
Used equipment
Total equipment revenue
Parts
Service
Rental and other
Total revenue
Cost of sales
Gross profit
Other income (loss)
Unrealized foreign exchange (loss) gain
Total other income (loss)
Selling, general and administrative expense
Income (loss) from operating activities
Income (loss) before income tax expense
EBITDA(1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
Reconciliation of adjusted income (loss) before income tax
expense:
Income (loss) before income tax expense
Adjustments:
Unrealized foreign exchange loss (gain)
Adjusted income (loss) before income tax expense(1)
(1) - Refer to Non-IFRS Measures herein
% Change
Compared
to 2017
2018
2017
215,674
12,895
228,569
96,118
31,078
6,391
362,156
(302,846)
39% 155,480
43% 9,005
39% 164,485
4% 92,559
6% 29,367
(8%)
6,958
23% 293,369
26%
(240,885)
59,310
13% 52,484
199%
(256%)
157%
(0%)
556%
214%
85%
1,591
(1,070)
521
(52,989)
6,842
4,064
13,768
16.4%
14.6%
(1,604)
685
(919)
(53,065)
(1,500)
(3,562)
7,442
17.9%
18.1%
4,064
214%
(3,562)
1,070
5,134
(256%)
(685)
221% (4,247)
Operating Summary – Year Ended December 31, 2018
Within our Transportation segment, adjusted income before income tax expense increased $9.4 million year over
year, facilitated by the reorganization efforts initiated in 2017. Of this $9.4 million improvement, $3.5 million
relates to the non-recurrence of the reorganization costs incurred in 2017. Income before income tax expense
mirrored these trends, increasing $7.6 million compared to 2017, including a $1.8 million decrease in unrealized
foreign exchange gains in the year.
The reorganization efforts initiated in 2017 facilitated accelerated process efficiency, disciplined cost management
and revenue growth throughout 2018. The actions delivered the capacity and processes required to profitably
capture the significant increase in market activity experienced in 2018. This enabled the Ontario dealerships’ $8.2
million increase in adjusted net income before income tax expense in 2018, while Saskatchewan dealerships also
increased $1.2 million. Further, the process and discipline groundwork started in 2017 facilitated a reduction in
2018 SG&A expenses, while overall revenue increased 23%.
10
Cervus Annual Report 2018
Increased North American market demand for trucks facilitated overall revenue growth, particularly in our Ontario
dealerships. Equipment sales increased 39%, while parts and service sales increased 4% and 6%, respectively.
Increased gross profit margin percentage in both equipment sales and service departments, accelerated the
impact of revenue growth, and together generated the $6.8 million increase in total gross profit dollars. Overall
gross margin percentage decreased despite increased profitability across revenues streams, due to the sales mix
impact of additional equipment sales.
Within our two transportation geographies, income before income tax expense increased $7.6 million, of which
$7.0 million related to our Ontario and $0.6 million related to our Saskatchewan operations.
11
Cervus Annual Report 2018
Industrial Segment Results
($ thousands, except per share amounts)
Equipment
New equipment
Used equipment
Total equipment revenue
Parts
Service
Rental and other
Total revenue
Cost of sales
Gross profit
Other income
Unrealized foreign exchange (loss) gain
Total other income
Selling, general and administrative expense
Income from operating activities
Income before income tax expense
EBITDA(1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
Reconciliation of adjusted income before income tax expense:
Income before income tax expense
Adjustments:
Unrealized foreign exchange loss (gain)
Gain on sale of Commercial operations
Adjusted income before income tax expense(1)
(1) - Refer to Non-IFRS Measures herein
% Change
Compared
to 2017
2018
2017
25,485
3,993
29,478
14,085
12,700
4,732
60,995
(42,980)
(43%)
44,398
(55%)
8,846
(45%)
53,244
(38%)
22,677
(11%)
14,258
17% 4,060
(35%)
(36%)
94,239
(67,488)
18,015
(33%)
26,751
75%
(163%)
20%
(27%)
(59%)
(58%)
(47%)
1,194
(129)
1,065
(17,689)
1,391
1,292
3,362
29.5%
29.0%
683
205
888
(24,219)
3,420
3,041
6,292
28.4%
25.7%
1,292
(58%)
3,041
129
(163%)
(205)
(480)
941
100%
(67%)
-
2,836
Operating Summary – Year Ended December 31, 2018
Within our Industrial segment, same store adjusted income before income tax expense improved $0.6 million.
Due to the disposition of the four Construction dealerships in the first quarter of 2018, segment results for 2018
are not directly comparable to 2017. To aid in comparability of the ongoing Industrial segment, a same store
analysis is presented on the following page.
On an overall basis, segment results decreased $2.0 million, due to the non-continuance of the Construction
dealerships, which generated $2.6 million of prior year income, partially offset by a $0.6 million improvement in
the ongoing Industrial operations.
12
Cervus Annual Report 2018
Industrial Segment Same Store Highlights
($ thousands, except per share amounts)
Equipment
New equipment
Used equipment
Total equipment revenue
Parts
Service
Rental and other
Total revenue
Cost of sales
Gross profit
Other income
Unrealized foreign exchange (loss) gain
Total other income
Selling, general and administrative expense
Income from operating activities
Income before income tax expense
EBITDA(1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
Reconciliation of adjusted income before income tax expense:
Income before income tax expense
Adjustments:
Unrealized foreign exchange loss (gain)
Adjusted income before income tax expense(1)
(1) - Refer to Non-IFRS Measures herein
% Change
Compared to
2017
2018
2017
Same Store
18,062
2,841
20,903
11,251
11,877
4,732
48,763
(32,493)
16,270
28% 14,135
7% 2,662
24% 16,797
1% 11,120
14% 10,376
17% 4,060
15% 42,353
17%
(27,768)
12% 14,585
557
(14%)
644
(97)
460
(15,773)
957
889
2,942
(199%)
(38%)
8%
46%
75%
5%
33.4%
32.3%
98
742
(14,672)
655
509
2,813
34.4%
34.6%
889
75%
509
97
986
(199%) (98)
411
140%
On a same store basis, our Industrial segment’s adjusted net income before income tax expense and net income
before income tax expense increased $0.6 million and $0.4 million, respectively. Equipment sales increased 24%,
while parts, service and rental and other (which includes training, storage solutions) increased 9%. The revenue
increase did not directly translate to increased margin, as $4.0 million of equipment withheld from the
Construction sale was liquidated, compressing margins. SG&A expenses increased 8%, due to administrative
expenses incurred to establish the storage and racking solutions business line, and retention of key senior
personnel previously shared between the Construction and Industrial dealerships.
13
Cervus Annual Report 2018
Annual Cash Flows
Cash and Cash Equivalents – Year Ended December 31, 2018
Cervus’ primary sources and uses of cash flow for the year ended December 31, 2018, are as follows:
Operating Activities
Net cash provided from operating activities was $12.7 million for the year ended December 31, 2018, compared
to $33.6 million in 2017, a decrease of $20.9 million. The decrease in net cash from operating activities primarily
resulted from a $32.6 million increase in net cash used in working capital items. The $32.6 million increase in net
cash used in working capital items was primarily driven by the $42.5 million increase in inventory.
Investing Activities
During the year ended December 31, 2018, the Company’s net cash used in investing activities was $4.1 million,
compared to a source of cash of $3.6 million in 2017, a decrease of $7.7 million. This decrease is primarily due to
the significant $12.6 million outflow of cash related to the acquisition of Deermart Equipment Sales Ltd., as well
as a $4.7 million increase in cash used to purchase property and equipment and a $5.7 million decrease in cash
received for disposal of property and equipment. This was partially offset by proceeds received from the sale of
the Company’s Commercial operations of $14.2 million in 2018.
Financing Activities
During the year ended December 31, 2018, the Company used $17.8 million of cash related to financing activities
compared to $37.5 million in 2017, a net reduction in use of cash for financing activities of $19.7 million. This
decrease is primarily due to the significant 2017 cash outflow of $34.5 million related to the Company’s repayment
and extinguishment of the convertible debenture; partially offset by a $12.0 million increase in net repayment on
the Company’s term debt in 2018.
14
Cervus Annual Report 2018
Fourth Quarter Consolidated Performance
($ thousands, except per share amounts)
Revenue
Cost of sales
Gross profit
Other income (loss)
Unrealized foreign exchange loss
Total other income (loss)
Selling, general and administrative expense
Income from operating activities
Finance income
Finance costs
Share of loss of equity accounted investees, net of income tax
Income before income tax expense
Income tax expense
Income for the period
Income attributable to shareholders
EBITDA(1)
EBITDA margin(1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
Income per share
Basic
Diluted
Basic - adjusted (1)
Reconciliation of adjusted income before income tax expense:
Income before income tax expense
Adjustments:
Unrealized foreign exchange loss
Insurance proceeds received in excess of building cost
Adjusted income before income tax expense(1)
(1) - Refer to Non-IFRS Measures herein
% Change
Compared
to 2017
10%
13%
(3%)
197%
568%
122%
(3%)
32%
603%
57%
(100%)
34%
32%
35%
35%
(2%)
2018
300,248
(248,249)
51,999
1,674
(1,256)
418
(43,534)
8,883
443
(1,684)
-
7,642
(2,611)
5,031
5,031
13,367
4.5%
17.3%
14.5%
2017
272,726
(218,996)
53,730
(1,728)
(188)
(1,916)
(45,094)
6,720
63
(1,070)
(4)
5,709
(1,982)
3,727
3,727
13,622
5.0%
19.7%
16.5%
0.32
0.31
0.35
33% 0.24
35% 0.23
40% 0.25
7,642
34%
5,709
1,256
568%
188
(765)
8,133
100%
-
38% 5,897
15
Cervus Annual Report 2018
Operating Summary – Three Months Ended December 31, 2018
For the fourth quarter of 2018, adjusted income before income tax expense increased $2.2 million compared to
the same period in 2017. This was achieved through a $3.7 million increase in our Transportation segment, partially
offset by a $1.1 million decrease in our Agriculture segment, and a $0.4 million decrease in our Industrial segment.
Income before income tax expense increased $1.9 million, which includes a $0.8 million gain on insurance
recoveries recognized in the fourth quarter of 2018, and a $1.1 million increase in unrealized foreign exchange
losses in the year.
Within our Agriculture segment, adjusted income before income tax expense decreased $1.1 million, of which
$1.4 million relates to the timing of manufacturer incentive recognition within the year. Due to heightened new
equipment sales earlier in 2018, the Company was able to estimate and recognize a portion of annual
manufacturer incentives earlier in the year, resulting in a $1.4 million decrease in OEM incentives recognized in
the fourth quarter. Focused sales efforts on marketing the additional used equipment taken on trade resulted in
used equipment sales increasing by 34% over the fourth quarter of 2017, although used gross profit margin
decreased 2.9%. The later 2018 harvest was positive for parts and service opportunities, with associated revenue
increasing 16% and 9%, respectively. Income before income tax expense decreased $0.4 million, which includes
$0.8 million in gain on insurance recoveries recognized in the fourth quarter of 2018.
In our Transportation segment, adjusted income before income tax expense increased $3.7 million compared to
the three months ended December 31, 2017. This includes the non-recurrence of $2.9 million of prior period
reorganization costs and lease fleet valuation adjustments. The 51% increase in equipment sales and 3% increase
in service sales resulted in a $1.1 million increase in gross profit, while SG&A expenses were limited to a 1% increase
during the quarter. Loss before income tax expense improved $3.0 million compared to the fourth quarter of 2017,
which includes the reorganization and lease valuation adjustments in 2017 noted above.
Within our Industrial segment, same store adjusted income before income tax expense increased $0.3 million,
while overall segment results decreased $0.4 million, due to the non-continuance of the Construction dealerships,
which generated $0.7 million of income in the fourth quarter of 2017. Same store loss before income tax expense
also improved $0.1 million, while overall segment results decreased $0.7 million, of which $0.8 million related 2017
fourth quarter income from the Construction dealerships.
16
Cervus Annual Report 2018
Fourth Quarter Business Segment Performance
Agricultural Segment Results
($ thousands, except per share amounts)
Equipment
New equipment
Used equipment
Total equipment revenue
Parts
Service
Rental and other
Total revenue
Cost of sales
Gross profit
Other income
Selling, general and administrative expense
Income from operating activities
Income before income tax expense
EBITDA (1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
% Change
Compared
to 2017
2018
2017
95,835
73,713
169,548
22,694
11,452
1,525
205,219
(171,125)
(3%)
98,393
34% 55,060
10% 153,453
16% 19,511
9% 10,520
(18%)
1,851
11% 185,335
13%
(151,018)
34,094
(1%)
34,317
632
(25,864)
8,862
8,283
11,260
16.6%
12.6%
48%
1%
(4%)
(4%)
1%
426
(25,541)
9,202
8,635
11,131
18.5%
13.8%
Reconciliation of adjusted income before income tax expense:
Income before income tax expense
Adjustments:
8,283
(4%)
8,635
Insurance proceeds received in excess of building cost
Adjusted income before income tax expense(1)
(765)
7,518
100%
(13%)
-
8,635
(1) - Refer to Non-IFRS Measures herein
Operating Summary – Three Months Ended December 31, 2018
Within our Agriculture segment, adjusted income before income tax expense decreased $1.1 million in the
quarter. Record new equipment sales in the year provided greater visibility regarding the achievement of
performance incentives, and therefore a portion of these incentives were recognized earlier in 2018 compared to
2017, with $1.4 million fewer incentives recognized in the fourth quarter. Income before income tax expense
decreased $0.4 million, which includes a $0.8 million gain on insurance recoveries recognized in the fourth quarter
of 2018.
During 2018, the Company achieved record new equipment sales, heavily weighted to the first three quarters of
the year, providing additional visibility into attaining certain manufacturer incentives. As a result, a portion of the
annual incentives were quantifiable and recognized prior to the fourth quarter, resulting in fewer incentives
recognized in the fourth quarter of 2018, compared to 2017. The record new equipment sales increased the
amount of used equipment taken on trade during the year, and maintaining used equipment inventory turns was
a focus throughout the year. The challenging 2018 harvest created producer demand for additional machine
17
Cervus Annual Report 2018
hours in a compressed harvest window, evidenced by the 34% increase in fourth quarter used equipment sales.
The ability to refurbish and remarket the used inventory in season was an achievement, although placed pressure
on used gross profit margin which decreased 2.9%.
The difficult harvest also provided additional opportunities to support our customers equipment uptime, evident
in the 16% and 9% increase in our fourth quarter parts and service revenue respectively, while SG&A expense
increases were limited to 1% or $0.3 million. Within our two agriculture geographies, the $1.1 million decrease in
adjusted income before income tax expense for the quarter was comprised of a $2.1 million decrease in our
Canada dealerships, partially offset by a $1.0 million increase in our Australia and New Zealand dealerships.
18
Cervus Annual Report 2018
Transportation Segment Results
($ thousands, except per share amounts)
Equipment
New equipment
Used equipment
Total equipment revenue
Parts
Service
Rental and other
Total revenue
Cost of sales
Gross profit
Other income (loss)
Unrealized foreign exchange loss
Total other loss
Selling, general and administrative expense
Income (loss) from operating activities
Loss before income tax expense
EBITDA (1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
% Change
Compared
to 2017
2018
2017
44,564
3,522
48,086
24,303
7,677
1,472
81,538
(67,708)
51% 29,416
39% 2,533
51% 31,949
7% 22,654
3% 7,489
2% 1,446
28% 63,538
33%
(50,755)
13,830
8% 12,783
709
(940)
(231)
(13,397)
202
(420)
1,834
17.0%
16.4%
130%
408%
(91%)
1%
107%
(88%)
52%
(2,381)
(185)
(2,566)
(13,209)
(2,992)
(3,418)
1,205
20.1%
20.8%
Reconciliation of adjusted income (loss) before income tax
expense:
Loss before income tax expense
Adjustments:
Unrealized foreign exchange loss
Adjusted income (loss) before income tax expense(1)
(420)
(88%)
(3,418)
940
520
408%
185
116% (3,233)
(1) - Refer to Non-IFRS Measures herein
Operating Summary – Three Months Ended December 31, 2018
Within our Transportation segment, adjusted income before income tax expense increased $3.7 million. A 28%
increase in total revenue, combined with limiting SG&A increases to 1%, were significant factors in the
performance of the quarter. Loss before income tax expense improved $3.0 million compared to the fourth
quarter of 2017, reflecting the $2.9 million of reorganization costs and lease fleet valuation adjustments incurred
in 2017.
The $3.7 million increase in adjusted income before income tax expense includes a $1.1 million increase in gross
profit, due to increased equipment and service sales in the quarter. Other income increased by $3.1 million, as $2.9
million of 2017 reorganizing costs were non-recurring. The $3.0 million increase in income before income tax
expense, includes the reorganization and revaluation expenses in 2017, and also includes the $0.8 million increase
in unrealized foreign exchange losses quarter over quarter.
19
Cervus Annual Report 2018
($ thousands, except per share amounts)
2018
to 2017
2017
Transportation Segment Results
Equipment
New equipment
Used equipment
Total equipment revenue
Parts
Service
Rental and other
Total revenue
Cost of sales
Gross profit
Other income (loss)
Unrealized foreign exchange loss
Total other loss
Selling, general and administrative expense
Income (loss) from operating activities
Loss before income tax expense
EBITDA (1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
% Change
Compared
44,564
3,522
48,086
24,303
7,677
1,472
81,538
(67,708)
51% 29,416
39% 2,533
51% 31,949
7% 22,654
3% 7,489
2% 1,446
28% 63,538
33%
(50,755)
13,830
8% 12,783
(13,397)
709
(940)
(231)
202
(420)
1,834
17.0%
16.4%
130%
408%
(91%)
1%
107%
(88%)
52%
(2,381)
(185)
(2,566)
(13,209)
(2,992)
(3,418)
1,205
20.1%
20.8%
(420)
(88%)
(3,418)
940
408%
185
520
116% (3,233)
Reconciliation of adjusted income (loss) before income tax
Loss before income tax expense
expense:
Adjustments:
Unrealized foreign exchange loss
Adjusted income (loss) before income tax expense(1)
(1) - Refer to Non-IFRS Measures herein
Operating Summary – Three Months Ended December 31, 2018
Within our Transportation segment, adjusted income before income tax expense increased $3.7 million. A 28%
increase in total revenue, combined with limiting SG&A increases to 1%, were significant factors in the
performance of the quarter. Loss before income tax expense improved $3.0 million compared to the fourth
quarter of 2017, reflecting the $2.9 million of reorganization costs and lease fleet valuation adjustments incurred
in 2017.
The $3.7 million increase in adjusted income before income tax expense includes a $1.1 million increase in gross
profit, due to increased equipment and service sales in the quarter. Other income increased by $3.1 million, as $2.9
million of 2017 reorganizing costs were non-recurring. The $3.0 million increase in income before income tax
expense, includes the reorganization and revaluation expenses in 2017, and also includes the $0.8 million increase
in unrealized foreign exchange losses quarter over quarter.
20
Cervus Annual Report 2018
Industrial Segment Results
($ thousands, except per share amounts)
Equipment
New equipment
Used equipment
Total equipment revenue
Parts
Service
Rental and other
Total revenue
Cost of sales
Gross profit
Other income
Unrealized foreign exchange loss
Total other income
Selling, general and administrative expense
(Loss) income from operating activities
(Loss) income before income tax expense
EBITDA (1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
% Change
Compared
to 2017
2018
2017
5,493
945
6,438
2,840
3,061
1,152
13,491
(9,416)
(50%)
10,980
(66%)
2,763
(53%)
13,743
(48%)
5,501
(15%)
3,591
13% 1,018
(43%)
(45%)
23,853
(17,223)
4,075
(39%)
6,630
47%
(92%)
(33%)
(135%)
(145%)
(79%)
333
(316)
17
(4,273)
(181)
(221)
273
30.2%
31.7%
227
(3)
224
(6,344)
510
492
1,286
27.8%
26.6%
Reconciliation of adjusted income before income tax expense:
(Loss) income before income tax expense
Adjustments:
Unrealized foreign exchange loss
Adjusted income before income tax expense(1)
(1) - Refer to Non-IFRS Measures herein
(221)
(145%)
492
316
95
(81%)
3
495
Operating Summary – Three Months Ended December 31, 2018
Within our Industrial segment, same store adjusted income before income tax expense improved $0.3 million in
the quarter. Due to the inclusion of the four Construction dealerships in the fourth quarter of 2017, overall
segment results for the fourth quarter of 2018 are not comparable to the prior period on an overall basis. To aid
in comparability of the ongoing Industrial segment, a same store analysis is presented on the following page.
On an overall basis, segment adjusted net income before income tax decreased $0.4 million, due to the non-
continuance of the Construction dealerships, which generated $0.7 million of prior year income, partially offset
by the $0.3 million improvement in the ongoing Industrial operations.
21
Cervus Annual Report 2018
Industrial Segment Same Store Highlights
($ thousands, except per share amounts)
Equipment
New equipment
Used equipment
Total equipment revenue
Parts
Service
Rental and other
Total revenue
Cost of sales
Gross profit
Other income
Unrealized foreign exchange loss
Total other income
Selling, general and administrative expense
Loss from operating activities
Loss before income tax expense
EBITDA(1)
Ratios as a percentage of revenue:
Gross profit margin
Selling, general and administrative
Reconciliation of adjusted income (loss) before income tax
expense:
Loss before income tax expense
Adjustments:
Unrealized foreign exchange loss
Adjusted income (loss) before income tax expense(1)
(1) - Refer to Non-IFRS Measures herein
% Change
Compared
to 2017
2017
Same Store
2018
5,493
945
6,438
2,840
3,061
1,152
13,491
(9,416)
4,075
50% 3,668
15% 822
43% 4,490
4% 2,733
15% 2,655
13% 1,018
24% 10,896
28%
(7,344)
15% 3,552
333
45%
(316)
229
(1)
17
(93%)
228
(4,273)
(181)
(221)
273
6%
(26%)
(6%)
(14%)
30.2%
31.7%
(4,023)
(243)
(236)
316
32.6%
36.9%
(221)
(6%)
(236)
316
95
140%
1
(235)
On a same store basis, the Industrial segment’s adjusted net income before income tax expense increased $0.3
million, and loss before income tax expense also improved $0.1 million, when compared to the fourth quarter of
2017. Equipment sales increased 43%, while parts, service and rental and other (which includes training, storage
solutions) increased 10%, increasing gross profit margin by $0.5 million. Continued expense diligence resulted in
a 5.2% decrease in SG&A expenses as a percentage of revenue quarter over quarter.
22
Cervus Annual Report 2018
Fourth Quarter Cash Flows
Cash and Cash Equivalents – Three Months Ended December 31, 2018
Cervus’ primary sources and uses of cash flow for the three months ended December 31, 2018, are as follows:
Operating Activities
Net cash provided from operating activities was $25.9 million, compared to net cash provided of $21.6 million for
the same period of 2017, an increase of $4.3 million. The primary reason for the increase is $14.8 million of net
cash provided from working capital items in the quarter, compared to $8.7 million of net cash provided in 2017.
This $6.1 million change in net cash from working capital items primarily relates to a decrease in inventory in the
fourth quarter, related to increased new and used equipment sales in the year.
Investing Activities
The Company used $14.8 million of cash in investing activities in the quarter, compared to cash used of $0.2 million
in 2017, a change of $14.6 million. The net change relates primarily to the $12.6 million cash outflow used to
acquire Deermart Equipment Sales Ltd. in the fourth quarter of 2018, and a $2.9 million increase in cash used to
purchase property and equipment.
Financing Activities
Financing activities used $13.5 million of cash in the period, compared to a use of $10.1 million of cash in 2017.
The difference is primarily due to a $1.9 million increase in common shares repurchased through the Company’s
Normal Course Issuer Bid in the fourth quarter of 2018 compared to same period in 2017.
Consolidated Financial Position & Liquidity
($ thousands, except ratio amounts)
Current assets
Total assets
Current liabilities
Long-term financial liabilities
Shareholders’ equity
Working capital(1)
Working capital ratio(1)
(1) - Refer to Non-IFRS Measures herein
December 31,
2018
408,702
540,669
253,701
32,624
245,501
155,001
December 31,
2017
384,835
514,055
236,262
42,586
225,253
148,573
1.61 1.63
Working Capital
Cervus’ working capital increased by $6.4 million to $155.0 million at December 31, 2018, when compared to
$148.6 million at December 31, 2017. As at the date of this report, the Company is in compliance with all of its
covenants.
Based on inventory levels at December 31, 2018, the Company had the ability to floor plan an additional $33.5
million of inventory and held $418.4 million of undrawn floor plan capacity.
23
Cervus Annual Report 2018
The Company’s ability to maintain sufficient liquidity is driven by revenue, gross profit, and judicious allocation of
resources. At this time, there are no known factors that management is aware of that would affect its short and
long-term objectives of meeting the Company’s obligations as they come due. Working capital may fluctuate from
time to time based on the use of cash and cash equivalents related to the seasonal nature of our business, and
funding potential future business acquisitions. Cash resources can typically be restored by accessing floor plan
monies from unencumbered equipment inventories or accessing undrawn credit facilities. Also, the seasonality of
our business requires greater use of cash resources in the first and fourth quarter of each year to fund general
operations caused by the seasonal nature of our sales activity.
Liquidity Risk
The Company's exposure to liquidity risk is dependent on the collection of accounts receivable and the ability to
raise funds to meet purchase commitments, financial obligations, and to sustain operations. The Company
controls its liquidity risk by managing its working capital, cash flows, and the availability of borrowing facilities.
The Company's contractual obligations and availability of borrowing facilities at December 31, 2018 are described
further in the sections below.
The Company has guaranteed the net residual value of certain customer leases, for leases between customers and
John Deere Financial (“JDF”) as set out in Note 28 to the Audited Consolidated Financial Statements for the year
ended December 31, 2018. The Company regularly assesses the residual value of the JDF lease portfolio relative
to wholesale values for comparable equipment. On the maturity of customer’s leases, the equipment can be
returned to the Company and if so, it is sold as used equipment. Upon the return of equipment, JDF will provide
the Company floor planning based on John Deere’s pricing guide. Of the lease portfolio at December 31, 2018,
leases with a residual value of $32.1 million are scheduled to mature in 2019.
Contractual Obligations
The Company has certain contractual obligations including payments under long-term debt agreements, finance
and operating lease commitments. A summary of the Company’s principal contractual obligations are as follows:
($ thousands)
Term debt payable
Total
Carrying
Value
39,087
Contractual
principle
repayments
39,617
12 months
or less
13,964
1 - 2 years
2,532
2 - 5 years
23,121
5+ Years
-
Finance lease obligation
11,271
11,271
Operating leases
-
-
Total
50,358
50,888
3,770
12,087
29,821
2,253
11,925
16,710
5,248
-
24,379
52,748
82,192
82,192
24
Cervus Annual Report 2018
Inventories
The nature of the business has a significant impact on the amount of equipment that is owned by our various
dealerships. The majority of our Agricultural equipment sales come with a trade-in, a limited portion of our
Transportation sales come with a trade-in, and our Industrial equipment sales usually do not have trade-ins. This
results in a higher amount of used Agriculture equipment than used Transportation and Industrial equipment. In
addition, the majority of our new John Deere equipment is on consignment from John Deere, whereas we
purchase the new equipment from our other manufacturers. These factors directly impact the amount of new and
used equipment in inventory. The majority of our product lines, in all segments, are manufactured in the US with
pricing based in US dollars, but invoiced in Canadian dollars. Inventory by segment for the year ended December
31, 2018 compared to December 31, 2017 is as follows:
($ thousands)
Agricultural
Transportation
Industrial
Total
December 31, 2018 December 31, 2017
226,664
56,211
7,649
290,524
257,698
63,459
9,470
330,627
As at December 31, 2018, inventories increased by $40.1 million when compared to $290.5 million at December
31, 2017. The $40.1 million increase is primarily comprised of a $36.0 million increase in used equipment, and a
$5.1 million increase in parts inventory. New inventory decreased by $1.4 million, and work in progress inventory
increased by $0.4 million.
Used inventory levels within the Agriculture segment increased $32.5 million, as record new equipment sales in
the 2018 came with used equipment taken on trade. The $7.2 million increase in inventory in the Transportation
segment is due to increased customer orders in the period.
At December 31, 2018, the Company believes that the recoverable value of new and used equipment inventories
exceeds its respective carrying value. For the year ended December 31, 2018, the Company recognized inventory
valuation adjustments through cost of goods sold of $11.5 million (2017 - $5.6 million).
Accounts Receivable
For the years ended December 31, 2018 and 2017, the average time to collect the Company’s outstanding
accounts receivable was approximately 13 days. At December 31, 2018 no single outstanding customer balance,
excluding sales contract financing receivables, represented more than 10% of total accounts receivable. The
Company closely monitors the amount and age of balances outstanding on an on-going basis and establishes
provisions for bad debts based on account aging, combined with specific customers’ credit risk, historical trends,
and other economic information.
The Company’s allowance for doubtful collections was $1.1 million at December 31, 2018 (2017 - $1.6 million),
which represents 2.9% (2017 – 5.1%) of outstanding trade accounts receivable and 0.1% (2017 - 0.1%) of gross
revenue on an annual basis. Bad debt expense for the year ended December 31, 2018 amounted to a $0.2 million
recovery (2017 - $0.9 million expense).
25
Cervus Annual Report 2018
Capital Resources
We use our capital to finance current operations and growth strategies. Our capital consists of both debt and
equity and we believe the best way to maximize shareholder value is to use a combination of equity and debt
financing to leverage our operations. A summary of the Company’s available credit facilities as at December 31,
2018 are as follows:
($ thousands)
Operating and other bank credit
facilities
Capital facilities (a)
Floor plan facilities and rental
equipment term loan financing (b)
Total borrowing
December 31, 2018
December 31, 2017
Total Limits Borrowings
Letters of
Credit
Amount
Available Total Limits Borrowings
Letters of
Credit
Amount
Available
122,867 21,071
9,942
2,400 99,396 101,925
166,219
197,232
2,400
73,936
25,589
12,082
133,119
170,790
(a) For capital facilities, the amount available under the facilities is limited to the lesser of the pre-approved
credit limit of $9.9 million (2017 - $55.8 million) or the available unencumbered assets which is estimated
at $2.4 million as at December 31, 2018 (2017 - $1.5 million).
(b) For floorplan facilities, the amount available under the facilities is limited to the lesser of the pre-approved
credit limit of $418.4 million (2017 - $453.0 million) or the available unencumbered assets which is
estimated at $33.5 million as at December 31, 2018 (2017 - $28.9 million).
Operating and Other Bank Credit Facilities
At December 31, 2018, the Company has a revolving credit facility with a syndicate of underwriters. The principal
amount available under this facility is $120 million. The facility was amended and extended on December 18, 2018.
The facility is committed for a four-year term, but may be extended on or before the anniversary date with the
consent of the lenders. The facility contains an $80.0 million accordion which the Company may request as an
increase to the total available facility, subject to lender approval. As at December 31, 2018 there was $20.5 million
drawn on the facility and $2.4 million had been utilized for outstanding letters of credit to John Deere.
We believe that the credit facilities available to the Company outlined above are sufficient to meet our sales targets
and working capital requirements for 2019.
The Company must meet certain financial covenants as part of its current credit facilities, as at the date of this
report, the Company is in compliance with all its covenants as follows:
Total liabilities to net worth ratio(1) (not exceeding 4.0:1.0)
Fixed charge coverage ratio(2) (greater than or equal to 1.10:1.00)
Asset coverage ratio(3) (greater than 3.0:1.0)
December 31, 2018
2.39
2.39
11.82
December 31, 2017
2.55
1.69
10.01
(1) – Calculated using an adjusted liability value over an adjusted equity value. Full definitions of adjusted liabilities and
adjusted equity are defined in the Syndicate Credit Agreement filed as a material document on SEDAR.
26
Cervus Annual Report 2018
(2) – Calculated as an adjusted EBITDA figure over the sum of interest expense, scheduled principal payments, operating lease
payments and distributions paid to shareholders in the twelve months prior to the calculation date. Full definitions of this
calculation are defined in the Syndicate Credit Agreement filed as a material document on SEDAR.
(3) – Calculated as net tangible total assets less consolidated debt excluding floorplan plan liabilities, plus debt due under the
credit facility over the amount due under the credit facility. Full definitions of this calculation are defined in the Syndicate Credit
Agreement filed as a material document on SEDAR.
Capital Facilities
Capital facilities consist of capital asset financing primarily through credit facilities with Farm Credit Canada and
Affinity Credit Union. The Company’s financial covenants under its mortgages with Farm Credit Canada were
amended to align with certain of the Company’s financial covenants under its committed operating facility,
discussed above.
Floor Plan Facilities
Floor plan payables consist of financing arrangements for the Company’s inventories and rental equipment
financing with John Deere Canada ULC, Wells Fargo Equipment Finance Company, ECN Capital Corp., PACCAR
Financial Ltd., US Bank, and Canadian Imperial Bank of Commerce. At December 31, 2018, floor plan payables
related to inventories were $157.6 million.
Floor plan payables at December 31, 2018 represented approximately 47.7% of our inventories (December 31,
2017 – 43.2%). Floor plan payables fluctuate significantly from quarter to quarter based on the timing between
the receipt of equipment inventories and their actual repayment so that the Company may take advantage of any
programs made available to the Company by its key suppliers.
Interest on floor plans at the contractual rate were largely offset by dealer rebates and interest free periods. Total
Agricultural segment interest otherwise payable on John Deere floor plans approximates $3.1 million for the year
ended December 31, 2018. This amount was offset by rebates applied during the year ended December 31, 2018,
of $2.6 million. At December 31, 2018, approximately 27% (2017 – 59%) of the Industrial segment’s and 3% (2017
– 12%) of the Transportation segment’s outstanding floor plan balances were non-interest bearing due to various
incentives and interest free periods in place.
Outstanding Share Data
As of the date of this MD&A, there are 15,536 thousand common shares and 807 thousand deferred share units
outstanding.
On August 21, 2017, the Company announced a Normal Course Issuer Bid (the “August 2017 Bid”), which
commenced on August 23, 2017, to purchase up to a maximum of 806 thousand common shares (the “Shares”)
for cancellation before August 22, 2018. Cervus appointed Raymond James Ltd. as its broker, who conducted the
Bid on behalf of the Company. All purchases were made in accordance with the August 2017 Bid at the prevailing
market price of the Shares at the time of purchase. This normal course issuer bid expired on August 22, 2018. Prior
to expiry, Cervus repurchased and cancelled 292 thousand common shares through the bid at a weighted average
price of $13.44 per share.
On September 10, 2018, the Company announced a Normal Course Issuer Bid (the “September 2018 Bid”), which
commenced on September 13, 2018 to purchase up to a maximum of 1,031 thousand common shares (the
“Shares”) for cancellation before September 12, 2019. Cervus appointed Raymond James Ltd. as its broker, who
will conduct the Bid on behalf of the Company. All purchases are to be made in accordance with the September
2018 Bid at the prevailing market price of the Shares at the time of purchase. As at December 31, 2018, the
Company had repurchased 52 thousand common shares at a weighted average price of $13.48 per share under
the August 2017 Bid, and 146 thousand common shares at a weighted average price of $13.03 per share under
the September 2018 NCIB.
27
Cervus Annual Report 2018
As at December 31, 2018 and 2017, the Company had the following weighted average shares outstanding:
(thousands)
Basic weighted average number of shares outstanding
Dilutive impact of deferred share plan
Dilutive impact of convertible debenture
Diluted weighted average number of shares outstanding
The above table includes all dilutive instruments held by the Company.
December 31,
2018
December 31,
2017
15,656
15,744
801 696
- 1,319
17,759
16,457
28
Cervus Annual Report 2018
Dividends Paid and Declared to Shareholders
The Company, at the discretion of the Board of Directors, is entitled to make cash dividends to its shareholders.
The following table summarizes our dividends paid for the period ended December 31, 2018:
($ thousands, except
per share amounts)
Record Date
March 30, 2018
June 30, 2018
September 28, 2018
December 31, 2018
Total
Dividend per Share
0.1000
Dividend Payable
1,570
Dividends
Reinvested
0.1000
0.1000
0.1000
0.4000
1,567
1,568
1,556
6,261
Net Dividend Paid
1,353
1,338
1,465
1,334
5,490
217
229
103
222
771
As of the date of this MD&A, all dividends as described above were paid (see “Capital Resources – Cautionary note
regarding dividends”).
Dividend Reinvestment Plan (“DRIP”)
The DRIP was implemented to allow shareholders to reinvest quarterly dividends and receive Cervus shares. For
shareholders who elect to participate, their periodic cash dividends are automatically reinvested in Cervus shares
at a price equal to 95% of the volume-weighted average price of all shares for the ten trading days preceding the
applicable record date. Eligible shareholders can participate in the DRIP by directing their broker, dealer, or
investment advisor holding their shares to notify the plan administrator, Computershare Trust Company of
Canada Ltd., through the Clearing and Depository Services Inc. (“CDS”), or directly where they hold the certificates
personally.
During the year ended December 31, 2018, 52 thousand common shares were issued through the Company’s
dividend reinvestment plan.
Taxation
Cervus’ 2018 dividends declared and paid through December 31, 2018 are considered to be eligible dividends for
tax purposes on the date paid.
Cautionary Note Regarding Dividends (see “Note Regarding Forward-Looking Statements”)
The payment of future dividends is not assured and may be reduced or suspended. Our ability to continue to
declare and pay dividends will depend on our financial performance, debt covenant obligations, and our ability
to meet our debt obligations and capital requirements. In addition, the market value of the Company’s common
shares may decline if we are unable to meet our cash dividend targets in the future, and that decline may be
significant. Under the terms of our credit facilities, we are restricted from declaring dividends or distributing cash
if the Company is in breach of its debt covenants. As at the date of this report, the Company is not in violation of
any of its covenants.
29
Cervus Annual Report 2018
SUMMARY OF RESULTS
Annual Results Summary
($ thousands, except per share amounts)
Total revenues
Income for the year
Income for the year attributable to shareholders
Net income per share - basic
Net income per share - diluted
Cash provided by operating activities
EBITDA (1)
Total assets
Total long-term liabilities
Total liabilities
Shareholders' equity
Net book value per share - diluted
Dividends declared to shareholders
Dividends declared per share
Weighted average shares outstanding
Basic
Diluted
Actual shares outstanding
(1) - Refer to Non-IFRS Measures herein
2018
2017
2016
1,350,037
26,579
26,579
1.70
1.62
31,655
59,170
540,669
41,467
295,168
245,501
14.92
6,261
0.400
15,656
16,457
15,559
1,221,285
19,912
19,917
1,109,939
23,524
23,712
1.27
1.20
33,593
53,840
514,055
52,540
288,802
225,253
12.68
4,399
0.280
15,744
17,759
15,675
1.51
1.44
16,164
61,025
476,852
42,963
263,013
213,839
13.02
4,394
0.280
15,683
16,428
15,750
30
Cervus Annual Report 2018
Summary of Quarterly Results
($ thousands, except per share
amounts)
Revenues
Income (loss) attributable to the
shareholders
Gross profit
Gross profit margin
EBITDA(1)
Income (loss) per share:
Basic
Diluted
Adjusted income (loss) per share(1)
Basic
Diluted
Weighted average shares outstanding
December 31,
2018
300,248
September 30,
2018
392,499
5,031
12,180
June 30,
2018
408,584
9,514
March 31,
2018
248,706
(145)
51,999
17.3%
13,367
59,882
15.3%
21,285
57,846
14.2%
41,793
16.8%
19,383 5,136
0.32
0.31
0.35
0.33
0.78
0.74
0.74
0.71
0.61
0.58
0.61
0.58
Basic
Diluted
15,593
16,393
15,679
16,498
15,672
16,483
($ thousands, except per share
amounts)
Revenues
Income (loss) attributable to the
shareholders
Gross profit
Gross profit margin
EBITDA(1)
Income (loss) per share:
Basic
Diluted
Adjusted income (loss) per share(1)
Basic
Diluted
Weighted average shares outstanding
December 31,
2017
272,726
September 30,
2017
360,087
June 30,
2017
357,361
March 31,
2017
231,110
3,727
9,453
8,365
(1,628)
53,730
19.7%
13,622
58,552
16.3%
18,688
56,759
15.9%
40,387
17.5%
17,478 4,052
0.24
0.23
0.25
0.24
0.60
0.57
0.58
0.55
0.53
0.50
0.46
0.44
Basic
Diluted
15,638
16,335
15,792
16,614
15,792
16,619
(1) - Refer to Non-IFRS Measures herein
Sales activity for the Agricultural segment is normally highest between April and September during growing
seasons in Canada and the impact on the growing seasons for New Zealand and Australia has not materially
impacted the above results. Activity in the Transportation sector generally increases in winter months, while the
Commercial and Industrial sector generally slows in the winter months. As a result, income or losses may not
accrue uniformly from quarter to quarter.
31
(0.01)
(0.01)
(0.00)
(0.00)
15,686
15,686
(0.10)
(0.10)
(0.12)
(0.12)
15,762
15,762
Cervus Annual Report 2018
MARKET OUTLOOK (see “Note Regarding Forward-Looking Statements”)
The Company’s three operational segments are subject to broad market forces in addition to the underlying
economic factors specific to the industries they serve. Further, the geographical diversity of the Company’s
operations may temper or accelerate broader market forces in their significance region to region. The following
provides an overview of Management’s market outlook as it relates to the Company’s operations at time of writing.
Alberta & Saskatchewan
Agriculture remains the driving variable in the Company’s Western Canadian operations. Canadian producers
manage complex, capital intensive businesses, and yet remain heavily influenced by seasonal weather conditions.
In this environment, the availability of capital is critical for producers to invest in the equipment, systems, and
capacity to optimize yields while minimizing costs. In turn, capital availability is generally determined by
cumulative annual farm profitability. In this respect, Canadian agriculture is well positioned. The 2018 growing
season was characterized by a delayed crop harvest, however this timing did not significantly reduce yields or
crop quality.(2) Final calculations for 2018 Canadian net cash farm income show a slight decrease from prior year
as a result of commodity price volatility, higher operating costs, and the weather-related challenges experienced
across the country. Net cash farm income is expected to plateau in 2019,(3) which could result in a decline or delay
in farmer purchasing decisions for new equipment. However, Agriculture and Agri-Food Canada (“AAFC”)
forecasts continued growth for the Canadian agriculture sector in the medium term, and anticipates this growth
being steadier than it has been in the past decade.(4)
This tempered growth of Canadian net cash farm income, combined with a weaker Canadian dollar, and pricing
pressures on new equipment due to rising manufacturing costs are likely to soften demand for new agricultural
equipment sales into 2019.(5) Additionally, international tensions resulting in tariffs and trade barriers continue to
persist into the new year, which could impact demand for Canadian agriculture products,(3) and in turn reduce
farmer sentiment towards capital reinvestment in new equipment. With these factors materializing, Canadian
producers are generally well positioned with the balance sheet strength to make required equipment
replacements. Further, these factors could increase demand for the significant Canadian supply of late model used
equipment. Cervus is focused on continuing to deliver our OEM’s market leading equipment, while also providing
compelling used equipment solutions as producers plan equipment needs for the 2019 growing season.
The Saskatchewan component of our Transportation segment continues its stable performance, despite
persistent uncertainty in the resource sector. In this market, we are focused on expanding Peterbilt’s presence in
on highway markets, while leveraging our standing as a trusted provider of equipment and solutions for the
Saskatchewan transportation market. Turning to our Industrial segment, our current dealerships offer a wide
breadth of value-added services to customers, from initial equipment sales through to operator and safety
training. We have also established and began operating our new storage and racking solutions. This is a
complimentary business line to our Industrial and Transportation divisions, which leverages our existing customer
base while expanding our breadth of service to new customer markets, providing storage, shelving and
warehouse organization solutions. We look to long term opportunities to leverage the high customer interaction
of the material handling markets, while focusing on maintaining internal efficiencies in the near term.
Ontario
The North American trucking market ended 2018 with total class 8 truck sales of 285,000 units, a 30% increase
compared to the 218,000 class 8 trucks sold in 2017. This is consistent with the 39% increase in new truck sales
within our Transportation segment for the twelve months ended December 31, 2018, compared to the same
period in 2017. For 2019, PACCAR’s fourth quarter outlook is anticipating North American class 8 truck demand to
range between 285,000 and 310,000 units sold.(6) Existing market strength is a favorable tailwind for our
transportation dealerships, while our focus remains on continuing to implement the internal efficiencies and
discipline to translate sales activity into efficient and mutually beneficial long-term customer relationships. The
(2) Agriweek, StatsCan Says 2018 Harvest Matched 2017, February 2019, www.agriweek.com
(3) Farm Credit Canada, FCC Watching five top economic trends in 2019, January 2019, www.fcc-fac.ca
(4)Agriculture and Agri-Food Canada, Medium Term Outlook for Canadian Agriculture 2018, September 2018, www.agr.gc.ca
(5) Farm Credit Canada, Canadian farm equipment market expected to be softer in second half of 2018, August 2018, www.fcc-fac.ca
(6) PACCAR, PACCAR Achieves Record Annual Revenues and Net Income, January 29, 2019, www.paccar.com
32
Cervus Annual Report 2018
continued profitable growth of our Ontario dealership group is our primary short-term objective, building on the
accomplishments of 2018.
New Zealand & Australia
In New Zealand, agriculture outlook remains stable. Dairy prices are profitable for producers, and concerns over
drier conditions mid year have eased with good precipitation received entering the corn harvest window. Sheep
producers’ confidence has softened due to uncertainty surrounding distribution of sheep meat to the United
Kingdom and Europe pending Brexit,(7) while prices for fruit and vegetable producers are positive, supporting
capital investment in this sector. Overall, dairy prices above the cost of the production and favorable weather
conditions are positive for producers, as well as the underlying capital equipment replacement and maintenance
requirements.
In Australia, record drought across much of the country has resulted in many areas of the East coast not producing
a crop due to these dry conditions.(8) However, where Cervus is located in south east Australia, moisture has been
adequate, and many farms in our area enjoyed strong crop yields. Further, dairy prices are profitable for producers,
supporting capital investment. The Australian Department of Agriculture and Water Resources(9) is forecasting
average precipitation in our region, and notes that overall farm cash income remains above the long term average.
Producers in our region remain cautious, but profitable, and we see continued opportunities to deliver the
equipment and uptime required to support their businesses.
(7) Rabobank, Agribusiness Monthly November 2018 New Zealand, November 2018, www.rabobank.co.nz
(8) Rabobank, Agricultural sector confidence showing early signs of recovery, but drought concerns linger, December 2018,
www.rabobank.com.au
(9) ABARES, Agriculture Commodities Commodity Forecasts and Outlook, March 2019, www.agriculture.gov.au/abares/research-
topics/agricultural-commodities/mar-2019
33
Cervus Annual Report 2018
Off-Balance Sheet Arrangements
In the normal course of business, we enter agreements that include indemnities in favor of third parties, such as
engagement letters with advisors and consultants, and service agreements. We have also agreed to indemnify our
directors, officers, and employees and those of our subsidiaries, in accordance with our governing legislation, our
constating documents and other agreements. Certain agreements do not contain any limits on our liability and,
therefore, it is not possible to estimate our potential liability under these indemnities. In certain cases, we have
recourse against third parties with respect to these indemnities. Further, we also maintain insurance policies that
may provide coverage against certain claims under these indemnities.
John Deere Credit Inc. (“Deere Credit”) provides financing to certain of the Company’s customers. A portion of this
financing is with recourse to the Company if the amounts are uncollectible. At December 31, 2018, payments in
arrears by such customers aggregated $829 thousand (2017 - $226 thousand). In addition, the Company is
responsible for assuming the net residual value of all customer lease obligations held with Deere Credit, at the
maturity of the contract, should the customer not elect to buy out the equipment at maturity. At December 31,
2018, the net residual value of such leases aggregated $320.6 million (2017 - $269.1 million) of which the Company
believes all are recoverable.
The Company is liable for a potential deficiency in the event that the customer defaults on their lease obligation
or retail finance contract. Deere Credit retains 1% of the face amount of the finance or lease contract for amounts
that the Company may owe Deere Credit under this obligation. The deposits are capped at between 1% and 3%
of the total dollar amount of the lease and finance contracts outstanding. The maximum liability that can arise
related to these arrangements is limited to the deposits of $2.9 million at December 31, 2018 (2017 - $2.2 million).
Deere Credit reviews the deposit account balances quarterly and if the balances exceed the minimum
requirements, Deere Credit refunds the difference to the Company.
The Company has issued irrevocable standby Letters of Credit to Deere Credit and another supplier in the
aggregate amount of $2.4 million. The Letters of Credit were issued in accordance with the dealership
arrangements with the suppliers that would allow the supplier to draw upon the letter of credit if the Company
was in default of any of its obligations.
34
Cervus Annual Report 2018
Transactions with Related Parties
Key Management Personnel Compensation
In addition to their salaries, the Company also provides non-cash benefits to its directors and executive officers.
The Company contributes to the deferred share plan on behalf of directors and executive officers, and to the
employee share purchase plan on behalf of executive officers, if enrolled, in accordance with the terms of the
plans. The Company has no retirement or post-employment benefits available to its directors and executive
officers, aside from permitting unvested deferred share units earned during employment to continue vesting
upon retirement.
Total remuneration of key management personnel and directors during the year ended December 31, 2018 and
2017 was:
($ thousands)
Short-term benefits
Share-based payments
Total
2018
2017
3,050 2,895
694
1,184
4,234 3,589
Other Related Party Transactions
Certain officers and dealer managers of the Company have provided guarantees to John Deere as required by
John Deere aggregating $6.8 million (2017 - $5.4 million). During the year ended December 31, 2018 and 2017,
the Company paid those individuals $190 thousand and $170 thousand, respectively, for providing these
guarantees which represents a similar amount to guarantee fees otherwise paid to financial institutions. These
transactions were recorded at the amount agreed to between the Company and the guarantors and are included
in selling, general and administrative expenses.
35
Cervus Annual Report 2018
Business Risks and Uncertainties
Risk Management Framework
The Board of Directors (“Board”) has overall responsibility for the establishment and oversight of the Company’s
risk management framework. The Board, together with the Audit Committee are responsible for monitoring and
oversight of the Company’s risk management policies. The Company’s risk management policies are established
to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor
risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in
market conditions and the Company’s activities. The Company, through its training and management standards
and procedures, aims to develop a disciplined and constructive control environment in which all employees
understand their roles and obligations.
The Company’s Audit Committee oversees how management monitors compliance with the Company’s risk
management policies and procedures, and reviews the adequacy of the risk management framework in relation
to the risks faced by the Company.
The Company’s objective is to manage operational risk in order to balance the avoidance of financial losses and
damage to the Company’s reputation with overall cost-effectiveness and to avoid control procedures that restrict
innovation and creativity. The primary responsibility for the development and implementation of controls to
address operational risk is assigned to senior management within each business unit. This responsibility is
supported by the development of overall Company standards for the management of operational risk.
The following are considered the primary categories of business risks and uncertainties faced by the business:
Market Risk
Market risk is the risk that changes in the marketplace such as foreign exchange rates, interest rates and
commodity prices that will affect the Company’s income or the value of its holdings of financial instruments. The
objective of market risk management is to manage and control market risk exposures within acceptable
parameters while optimizing return. The Company’s primary approach to market risk is managing the quantity, type,
and applicability of its inventory, to facilitate regular inventory turnover in line with market demand.
Commodity Price
The Company is primarily a business to business equipment retailer. Many of our customers’ businesses are very
capital intensive, and can be significantly affected by swift changes to external market factors beyond their
control. Commodity prices can be one of the most significant factors to our customers’ businesses, as rapid
changes in food input pricing, cattle pricing, or petroleum product pricing including carbon taxes, as examples,
can have a material adverse effect on a large number of our customers. The Company’s financial success can be
largely impacted by changes in these business cycle factors in its customer base. These factors would potentially
impact the Company’s operating results through eroding margins on the products it sells, and valuation concerns
over the inventory it holds.
Monitoring inventory levels, periodic review of inventory valuation across segments, and increasing the
geographic distribution and industry alignments of our dealer network assist in reducing the impact of a
significant market downturn in one particular region or industry. However, the majority of sales continue to be
derived from the Agricultural sector. Consequently, market factors affecting the liquidity and outlook for our
Agriculture customers can significantly impact demand for equipment sales, and to a lesser extent, parts & service.
Ongoing focus on internal efficiencies and excellence in after-market service to our customers assist in
maintaining gross margin in periods where our customers are not focused on capital investment.
36
Cervus Annual Report 2018
Foreign Currency Exposure
Many of our products, including equipment and parts, are based on a U.S. dollar price as they are supplied
primarily by U.S. manufacturers but are settled in Canadian dollars as they are received. This may cause
fluctuations in the sales values assigned to equipment and parts inventories, as inventory is recorded based on
Canadian dollar cost at the time of receipt, but is sold to the customer based on market pricing prevailing at the
time of sale. Both sales revenues and gross profit margins may fluctuate based on differences in foreign exchange
rates between the purchase of inventory and sale of inventory. Certain of the Company’s manufacturers also have
programs in place to facilitate and/or reduce the effect of foreign currency fluctuations, primarily on the
Company’s new equipment inventory purchases.
Further, a portion of the Company’s owned inventory is floor planned in U.S. dollars. As such, U.S. dollar
denominated floor plan payables are exposed to fluctuations in the U.S. dollar exchange rate until the unit is sold
and the floorplan is repaid. At the time of sale, the Company determines a margin based on the replacement cost
of the inventory at the time of sale, not the initial cost of the inventory at the time of purchase. In so doing, the
Company’s objective is to obtain a target margin on the sale of inventory, by calculating the sale margin based on
the cost of repaying the U.S. dollar floorplan as at the sale date. If the Company was unable to recapture
fluctuations in the U.S./CAD dollar in the sales price for equipment floor planned in U.S. dollars, a $0.01 change in
the U.S. exchange rate would have increased (decreased) comprehensive income by $141 thousand (2017 - $108
thousand), based on the U.S. dollar floor plan balances at December 31, 2018. From time to time the Company
also enters into foreign exchange forward contracts to provide the Company Canadian dollar cost certainty for
equipment ordered for the Customer from the manufacturer in U.S. dollars, having quoted the customer a fixed
Canadian dollar price at the time the order was placed.
In addition, the Company is exposed to foreign currency fluctuation related to translation adjustments upon
consolidation of its Australian and New Zealand operations. These foreign subsidiaries report operating results in
Australia and New Zealand dollars, respectively. Movements in these currencies relative to the Canadian dollar will
impact the consolidated results of these operations. Based on the Company’s results reported from its foreign
subsidiaries, a strengthening or weakening of the Canadian dollar by 5% against the New Zealand dollar at
December 31, 2018 would have increased (decreased) comprehensive income by $427 thousand (2017 - $768
thousand). A strengthening or weakening of the Canadian dollar by 5% against the Australian dollar at December
31, 2018 would have increased (decreased) comprehensive income by $377 thousand (2017 -$302 thousand).
Interest Rate Risk
The Company’s cash flow is exposed to changes in interest rates on its floor plan arrangements and certain term
debt which bear interest at variable rates. The cash flows required to service these financial liabilities will fluctuate
as a result of changes in market interest rates. The Company mitigates its exposure to interest rate risk by utilizing
excess cash resources to buy-down or pay-off interest bearing contracts, and by managing its floor plan payables
and inventory levels (turnover) to maximize the benefit of interest-free periods, where available.
Based on the Company’s outstanding long-term variable rate debt at December 31, 2018, a change in 100 basis
points in interest rates would impact the Company’s annual interest expense by approximately $2.0 million (2017
- $1.7 million).
37
Cervus Annual Report 2018
Reliance on our Key Manufacturers and Dealership Arrangements
Cervus’ primary source of income is from the sale of agricultural, transportation, and industrial equipment and
products and services pursuant to agreements to act as an authorized dealer. The agreement with John Deere
Limited (“JDL”) provides a framework under which JDL can terminate a John Deere dealership if such dealership
fails to maintain certain performance and equity covenants. Each contract also provides a one-year remedy period
whereby the Company has one year to restore any deficiencies.
The dealership agreements with John Deere obligate the Company to assume leased equipment at residual value
upon the maturity of Customer’s leases with John Deere. This equipment is then sold by Cervus as used
equipment. In the unlikely event of a severe market shock, residual values set at the beginning of a 5-year lease
term may exceed market value of the equipment upon lease maturity. Cervus routinely reviews the residual values
and maturity of customers’ leases with John Deere, and is satisfied with the residual values reflected in the leases
and the Company’s ability to profitably market the equipment as leases mature. At December 31, 2018, customer
equipment leases with John Deere represented residual values of $320,617 thousand, maturing over the next five
years.
The Company also has dealership agreements in place with Peterbilt, Clark, Sellick, Doosan, JLG, and a distribution
agreement with Baumann. These agreements are generally one to three-year agreements and are normally
renewed annually, except for unusual situations such as bankruptcy or fraud.
The success of our dealerships depends on the timely supply of equipment and parts from our manufacturers to
ensure the timely delivery of products and services to our customers. We also depend on our suppliers to provide
competitive prices and quality products. Currently, all of our dealership contracts are in good standing with our
suppliers. There can be no guarantee that:
(i)
(ii)
circumstances will not arise which give these equipment manufacturers the right to terminate their
dealership agreements, or
one or more of the equipment manufacturers will decide not to renew their dealership agreements
with us upon expiry.
Inventory Risk
The Company’s inventory consists primarily of new and used equipment related to our Agriculture, Transportation
and Industrial segments. We acquire new inventory from our OEMs for retail sale. Used inventory, particularly in
our Agriculture Segment, is primarily acquired in the form of trade-ins on the sale of existing inventory. While the
Company believes it has appropriate inventory management systems in place, variations in market demand for
the products we sell, as well as external market conditions beyond our control, can result in certain items in our
inventory becoming obsolete, or otherwise requiring a write-down of our inventory balance.
Industry Competitive Factors
Authorized John Deere agricultural dealerships sell John Deere agricultural, turf, and sport products and
equipment. The majority of the Company’s sales are derived from the Agricultural sector. The retail agricultural
equipment industry is very competitive. The Company faces a number of competitors, including other “in-line”
John Deere dealerships and other competitors including authorized Agco, CLAAS, Case, Kubota and New Holland
dealerships that may be located in and around communities in which the Company’s dealerships are located.
Deere & Company has a reputation for the manufacture and delivery of high quality, competitively priced
products. John Deere has the largest market share of manufacturing and sales of farm equipment in North
America. There can be no assurance that John Deere will continue to maintain its market share in the future.
The Transportation equipment group primarily sells transport equipment through PACCAR, which manufacturers
Peterbilt and Kenworth trucks. The major competitors to Peterbilt are Kenworth, International, Freightliner, Volvo,
and Mack trucks. The segment is highly dependent on consumer and commercial transportation of goods, as well
as service-based industries including oil and gas in western Canada, and manufacturing in eastern Canada. This
diverse customer base does mitigate a portion of the risks inherent in any one of those customer segments.
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Cervus Annual Report 2018
The Industrial segment sells industrial equipment from several manufacturers, with Clark, Sellick, and Doosan
being the major suppliers. Their major competitors are Toyota, Hyster, Crown, and Caterpillar. Industrial
equipment is primarily sold to building supply companies, warehousing, food processors, oilfield supply
companies, and the grocery industry. This customer diversity mitigates to some degree the risks inherent in any
one of these customer segments.
Presently the majority of the Transportation and Industrial equipment segment revenues are derived from the sale
of Peterbilt, Sellick, and Doosan equipment and products. All these equipment manufacturers have established
themselves as industry leaders in our markets for the manufacture and delivery of on-highway, vocational and
medium duty Transportation equipment and light Industrial equipment. There can be no assurance however that
these suppliers will continue to manufacture high quality, competitively priced products or maintain their market
share in the future.
Seasonality and Cyclicality
Weather has a direct impact on our customers’ earnings, particularly in the Agricultural segment, which in turn
affects their need and ability to purchase equipment. The Transportation and Industrial segments are not as
seasonal when compared to the agricultural business on an annual basis, but can fluctuate based on equipment
replacement cycles and market factors beyond our control.
Human Resources
The ability to provide high-quality services to our customers depends on our ability to attract and retain well-
trained, experienced employees. Certain of the geographic areas in which we operate are experiencing a very high
demand for and corresponding shortage of quality employees. We need to attract and retain quality employees,
or our long-term success and ability to take advantage of growth opportunities could be threatened. We have
established a number of human resource initiatives and compensation strategies to address this risk.
Legislative
The Company is subject to comply with a broad range of legislation, regulation and government policies. A change
in existing legislation could negatively impact operations.
Increased political pressure on carbon emissions has led to the institution of provincial and federal carbon taxes.
The impact to our immediate business is the cash flow implications for our customers. While the full impact of
carbon pricing cannot yet be determined, the Company is managing this risk by increased focus on emissions
control features in the products we sell and being knowledgeable regarding recent developments in new
techniques for reducing carbon emissions for our farm customers.
Political changes in the U.S. may have an impact on duties charged for goods sold to the U.S. At this point, the
Company is an importer of goods from the U.S. and the overall impact of tariffs has not been significant, although
it could become so depending on the legislative actions of national governments.
Environmental Risks
Our dealerships routinely handle hazardous and non-hazardous waste as part of their day-to-day operations and
though the Company believes it is in full compliance with applicable laws, from time-to-time, the Company may
be involved in, and subject to, incidents and conditions that render us in non-compliance with environmental laws
and regulations. The Company has established safety programs to help reduce these risks. The Company is not
aware of any material environmental liabilities at this time.
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Cervus Annual Report 2018
Acquisition and Integration Risks
Strategic acquisitions have been an important element of Cervus’ business strategy, and Cervus expects to
continue to pursue such acquisitions in the future. Although Cervus engages in discussions with, and submits
proposals to acquisition candidates, suitable acquisitions may not be available in the future on reasonable terms.
If Cervus does identify an appropriate acquisition candidate, Cervus may not be able to successfully negotiate the
terms of the acquisition, finance the acquisition or, if the acquisition occurs, effectively integrate the acquired
business into Cervus’ existing business. In addition, the negotiation of a potential acquisition and the integration
of an acquired business may require a disproportionate amount of management's attention and resources.
Cervus’ inability to successfully identify, execute, or effectively integrate future or previous acquisitions may
negatively affect its results of operations. Even though Cervus performs a due diligence review of the businesses
it acquires that it believes is consistent with industry practices, such reviews are inherently incomplete. Even an
in-depth due diligence review of a business may not necessarily reveal existing or potential problems or permit
Cervus to become familiar enough with the business to fully assess its deficiencies and potential. Even when
problems are identified, Cervus may assume certain risks and liabilities in connection with the acquired business.
Credit Risk
By granting credit sales to customers, it is possible these customers may experience financial difficulty and be
unable to fulfill their repayment obligations. The Company’s revenue is generated from customers in the farming,
industrial, and transportation industries, resulting in a concentration of credit risk from customers in these
industries. The strength of our Agricultural segment is influenced by the prices of crop inputs, commodity prices,
as well as local and global weather patterns in a growing season. Our Industrial equipment segment is influenced
by general economic and warehouse activity, and due to location, oil prices for Western Canadian crude oil. Our
Transportation segment is influenced by regional, national, and North American economic activity, particularly
factors impacting oil and gas activity, manufacturing and the demand for, and transportation of, consumer and
industrial goods.
A significant decline in economic conditions within these industries would increase the risk that customers will
experience financial difficulty and be unable to fulfill their obligations to the Company. The Company’s exposure
to credit risk arises from granting credit sales and is limited to the carrying value of accounts receivable, and
deposits and guarantees with John Deere. The Company’s revenues are normally invoiced with payment terms of
net, 30 days. The average time to collect the Company’s outstanding accounts receivable was approximately 13
days for the years ended December 31, 2018 and 2017 and no single outstanding customer balance, excluding
sales contract financing receivables, represented more than 10% of total accounts receivable. The Company
mitigates its credit risk by assessing the credit worthiness of its customers on an ongoing basis. The Company
closely monitors the amount and age of balances outstanding on an on-going basis and establishes provisions for
bad debts based on specific customers’ credit risk, historical trends, and other economic information.
Capital Risk Management
The Company’s objective when managing its capital is to safeguard its ability to continue as a going concern, so
that it generates returns for Shareholders, expands business relationships with stakeholders, and identifies risk
and allocates its capital accordingly. In the management of capital, the Company considers its capital to comprise
long- term debt, the current portion of long-term debt and all components of equity.
The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and
makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the
underlying assets. In order to maintain or adjust the capital structure, the Company may issue or repurchase
shares, raise or retire term debt, and/or adjust the amount of distributions paid to the Shareholders.
The Company uses the following ratios in determining its appropriate capital levels:
a) Debt to Total Capital ratio (long-term debt plus current portion of long term debt divided by long-term
debt plus current portion of long-term debt plus book value of equity);
40
Cervus Annual Report 2018
b) Return on Invested Capital ratio (income before income tax expense plus interest on long-term debt
divided by total capital);
c) Debt to Tangible Assets ratio (calculated as total debt divided by total assets less goodwill and
intangibles); and,
d) Fixed Charge Coverage ratio (calculated as adjusted earnings divided by contractual principle, interest,
shareholder distributions, and lease payments).
There were no changes in the Company’s approach to capital management in the period.
Debt Financing
The ability of the Company to pay dividends or make other payments or advances, will be subject to applicable
laws and contractual restrictions contained in the instruments governing the Company’s indebtedness. The
degree to which the Company is leveraged could have important consequences to the holders of the Common
Shares, including:
The Company’s ability to obtain additional financing for working capital, capital expenditures or
acquisitions in the future may be limited;
A significant portion of the Company’s cash flow from operations may be dedicated to the payment of
the principal and interest on its indebtedness, thereby reducing funds available for future operations and
distributions; and
Certain of the Company’ borrowings may be at variable rates of interest, which exposes it to the risk of
increased interest rates; and that the Company may be vulnerable to economic downturns including the
Company’s ability to retain and attract customers.
Also, there can be no assurance that the Company will continue to generate sufficient cash flow from operations
to meet required interest and principal payments. Further, the Company is subject to the risk that any of its existing
indebtedness may not be able to be refinanced upon maturity or that the terms of such financing may not be as
favourable as the terms of its existing indebtedness. These factors may adversely affect the frequency or amounts
of dividends paid by the Company.
The Company’s various credit facilities provide first charge security interests on all of its assets to its various
lenders. These credit facilities contain numerous terms and covenants that limit the discretion of management
with respect to certain business matters. These covenants place restrictions on, among other things, the ability of
the Company to create liens or other encumbrances, to pay dividends on its securities or make certain other
payments, investments, loans and guarantees and to sell or otherwise dispose of assets and merge or consolidate
with another entity. In addition, the credit facilities contain a number of financial covenants that require the
Company to meet certain financial ratios and financial condition tests. A failure to comply with the obligations in
the credit facilities could result in a default which, if not cured or waived, could result in a reduction or termination
of the Company’s dividends, and may permit acceleration of the relevant indebtedness. If the indebtedness under
the credit facilities were to be accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full that indebtedness.
Although the Company intends to pay quarterly dividends to the holders of the Company’s Common Shares, these
dividends are not assured and may be reduced or suspended in order to comply with the credit facilities of the
Company. The market value of the Common Shares may decline if the Company is unable to meet its dividend
targets in the future, and that decline may be significant.
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Cervus Annual Report 2018
Cyber Security and Terrorism
The Company may be threatened by problems such as cyber
attacks, computer viruses, or terrorism that may
disrupt operations and harm operating results. The Company’s business requires the continued operation of
information technology systems and network infrastructure. Despite the implementation of security measures,
technology systems are vulnerable to disability or failures due to hacking, viruses, acts of war or terrorism, and
other causes. If the Company’s information technology systems were to fail and the Company was unable to
recover in a timely way, the Company might be unable to fulfill critical business functions or be exposed to legal
claims and liabilities, which could have a material adverse effect on its business, reputation, financial condition,
and results of operations.
‐
The Company maintains cyber risk insurance, but this insurance may not be sufficient to cover all of our losses
from any breaches of our information technology systems and network infrastructure.
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Cervus Annual Report 2018
Critical Accounting Estimates and Judgments
Preparation of Unaudited and Audited Consolidated Financial Statements requires that we make assumptions
regarding accounting estimates for certain amounts contained within the unaudited and audited consolidated
financial statements. We believe that each of our assumptions and estimates is appropriate to the circumstances
and represents the most likely future outcome. However, because of the uncertainties inherent in making
assumptions and estimates regarding unknown future outcomes, future events may result in significant
differences between estimates and actual results.
Determination of Fair Values
A number of the Company’s accounting policies and disclosures require the determination of fair value, for both
financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or
disclosure purposes based on the following methods.
Fair Value of Assets and Liabilities Acquired in Business Combinations
The value of acquired assets and liabilities on the acquisition date require the use of estimates to determine the
purchase price allocation. Estimates are made as to the valuations of property, plant, and equipment, intangible
assets, and goodwill, among other items. These estimates have been discussed further below.
Property, Plant and Equipment
The fair value of property, plant and equipment recognized as a result of a business combination or when
determined in an impairment test is the estimated amount for which a property could be exchanged on the
measurement date between a willing buyer and a willing seller in an arm’s length transaction after proper
marketing wherein the parties had each acted knowledgeably. The fair value of items of plant, equipment, fixtures
and fittings is based on the market approach and cost approaches using quoted market prices for similar items
when available and depreciated replacement cost when appropriate. Depreciated replacement cost reflects
adjustments for physical deterioration as well as functional and economic obsolescence.
Intangible Assets
The fair value of dealership distribution agreements and trade names acquired in a business combination is based
on the incremental discounted estimated cash flows realized post-acquisition, or expenditures avoided, as a result
of owning the intangible assets. The fair value of customer lists acquired in a business combination is determined
using income based approaches, whereby the subject asset is valued after deducting a fair return on all other
assets that are part of creating the related cash flows. The fair value of other intangible assets including non-
competition agreements is based on the discounted cash flows expected to be derived from the use and any
residual value of the assets.
Inventories
The fair value of inventories acquired in a business combination is determined based on the estimated selling
price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit
margin based on the effort required to complete and sell the inventories.
Trade and Other Receivables
The fair value of trade and other receivables is estimated at the present value of the future cash flows, discounted
at the market rate of interest at the reporting date. The fair value is determined for disclosure purposes or when
such assets are acquired in a business combination.
Other Non-Derivative Financial Liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal
and interest cash flows, discounted at the market rate of interest at the reporting date. In respect of the liability
component of convertible debentures, the market rate of interest is determined by reference to similar liabilities
that do not have a conversion option.
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Cervus Annual Report 2018
Derivative Financial Instruments
The fair value of foreign currency derivative financial instruments is calculated based on a market comparison
technique. The fair value is based on similar contracts in an active market and based on quotes using the prevailing
foreign exchange translation rate from the Bank of Canada or similar sources.
Taxation Matters
Income tax provisions, including current and future income tax assets and liabilities, require estimates and
interpretations of federal and provincial income tax rules and regulations, and judgements as to their
interpretation and application to our specific situation. Estimates are also made as to the availability of future
taxable profit against which carryforward tax losses can be used.
Lease Arrangements
In determining classification of leases as an operating or finance lease, the Company applies judgement to
determine whether substantially all of the significant risks and rewards of ownership are transferred to the
customer or remain with the Company; or where the Company is the lessee, whether substantially all the
significant risks and rewards of ownership are transferred to the Company or remain with the lessor. These
judgements can be significant as to how the Company classifies amounts related to the arrangements as rental
equipment, net investment in finance lease, or lease obligation of these arrangements.
Net Realizable Value of Inventories
Inventories are recorded at the lower of cost and net realizable value. The most significant area of accounting
estimate involves our evaluation of used equipment inventory net realizable value. We perform ongoing quarterly
reviews of our used equipment inventories based upon local market conditions and the changes in the U.S.
currency exchange rates to determine whether any adjustments are required to our carrying cost of inventory
balances to ensure they are properly stated.
Asset Impairment
We assess the carrying value of long-lived assets, which include property, plant, and equipment and intangible
assets, for indications of impairment when events or circumstances indicate that the carrying amounts may not
be recoverable from estimated cash flows. Estimating future cash flows requires assumptions about future
business conditions and technological developments. Significant, unanticipated changes to these assumptions
could require a provision for impairment in the future.
Judgement is used in identifying impairment triggers and the cash generating unit or group of cash generating
units at which goodwill, intangible assets, and property and equipment are monitored for internal management
purposes and identifying an appropriate discount rate for these calculations.
Goodwill is assessed for impairment at least annually. This assessment includes a comparison of the carrying value
of the Cash Generating Unit (“CGU”) to its estimated recoverable amount to ensure that the recoverable amount
is greater than the carrying value. The recoverable amount of an asset or cash-generating unit is the greater of its
value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset. These valuation methods employ a variety of assumptions,
including future revenue growth, expected profit, and profit multiples. Estimating the recoverable amount of a
CGU is a subjective process and requires the use of our best estimates. If our estimates or assumptions change
from those used in our current valuation, we may be required to recognize an impairment loss in future periods.
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Cervus Annual Report 2018
Future Accounting Standards
Certain new or amended standards or interpretations have been issued by the IASB or IFRIC that are required to
be adopted in the future periods. The new standards and amendments to existing standards, which have not been
applied in preparing the Audited Consolidated Financial Statements as at December 31, 2018, are:
IFRS 16 Leases
The Company is required to adopt IFRS 16 Leases from January 1, 2019 onwards. The Company has assessed the
estimated impact that initial application of IFRS 16 will have on its consolidated financial statements, as described
below. The actual impacts of adopting the standard on January 1, 2019, may change because:
The new accounting policies are subject to change until the Company presents its first financial
statements that include the date of initial application.
New leases may be entered into or lease terms modified after the date in which the assessment was
completed for year-end disclosure, and before the date of the first interim financial statements that report
under the new standard.
Actual foreign currency translation on Australia and New Zealand leases will vary from what was
calculated using forecasted rates at the time of assessment.
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognizes a right-of-
use asset representing its right to use the underlying asset and a lease liability representing its obligation to make
lease payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor
accounting remains similar to the current standard – i.e., lessors continue to classify leases as finance or operating
leases.
IFRS 16 replaces existing lease guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement
contains a Lease, SIC-15 Operating Leases – Incentives and SIC 27 Evaluating the Substance of Transactions
Involving the Legal Form of a Lease.
i. Leases in which the Company is Lessee
The Company will recognize new assets and liabilities for its operating leases of buildings, vehicles, and office
equipment. The nature of expenses related to those leases will now change because the Company will
recognize a depreciation charge for right-of-use assets and interest expense on lease liabilities.
Previously, the Company recognized operating lease expense on a straight-line basis over the term of the
lease, and recognized assets and liabilities only to the extent that there was a timing difference between
actual lease payments and the expense recognized.
No significant impact is expected for the Company’s existing finance leases.
Based on the information available, the Company estimates that it will recognize additional lease liabilities
and additional lease assets of approximately $82 million, on initial adoption of IFRS 16 as at January 1, 2019.
The Company does not expect the adoption of IFRS 16 to impact its ability to comply with its bank
covenants described in Note 26 of the accompanying Audited Consolidated Annual Financial Statements.
II. Leases in which the Company is Lessor
The Company will reassess the classification of sub-leases in which the Company is lessor. Based on the
information currently available, the Company expects that it will reclassify certain sub-leases as finance leases,
resulting in the recognition of a finance lease receivable of approximately $6 million, the derecognition of
approximately $5 million in lease assets, with the difference recorded as an adjustment to opening retained
earnings. No significant impact is expected for other leases in which the Company is lessor.
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Cervus Annual Report 2018
III. Transition
The Company plans to apply IFRS 16 initially on January 1, 2019, using the modified retrospective approach.
Therefore, the cumulative effect of adopting IFRS 16 will be recognized as an adjustment to the opening
balance of retained earnings on January 1, 2019, with no restatement of comparative information.
The Company plans to apply the practical expedient to grandfather the definition of a lease on transition. This
means that it will apply IFRS 16 to all contracts entered into before January 1, 2019 and identified as leases in
accordance with IAS 17 and IFRIC 4.
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Cervus Annual Report 2018
Responsibility of Management and Board
Disclosure Controls
The CEO and the CFO are also responsible for establishing and maintaining adequate disclosure controls and
procedures (“DC&P”). Disclosure controls and procedures are controls and other procedures designed to provide
reasonable assurance that information required to be disclosed in documents filed or submitted under securities
legislation is recorded, processed, summarized and reported within the time periods specified in securities
legislation and includes controls and procedures designed to ensure that information required to be disclosed in
documents filed or submitted under securities legislation is accumulated and communicated to the Company’s
management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
The CEO and the CFO evaluated, or caused to be evaluated under their supervision, the effectiveness of our
disclosure controls and procedures and based on this evaluation, the CEO and the CFO concluded that, as of
December 31, 2018, Cervus’ disclosure controls and procedures are effective.
Internal Controls over Financial Reporting
The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of Cervus are responsible for establishing
and maintaining adequate internal control over financial reporting (“ICFR”). Internal control over financial
reporting is a process designed by, or under the supervision of, the CEO and the CFO and effected by the Board of
Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with IFRS.
The CEO and the CFO evaluated, or caused to be evaluated under their supervision, the effectiveness of the
Corporation’s internal control over financial reporting as of December 31, 2018, based on the criteria set forth in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”), (2013). Based on this assessment, the CEO and the CFO concluded that, as of December 31,
2018, Cervus’ internal control over financial reporting are effective. There was no change to the Company’s ICFR
that occurred during the most recent interim period that has materially affected, or is reasonably likely to
materially affect the Company’s ICFR.
It should be noted a control system, including the Company’s DC&P and ICFR, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that the objective of the control system will be
met, and it should not be expected that DC&P and ICFR will prevent all errors or fraud.
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Cervus Annual Report 2018
Additional IFRS Financial Measures
This MD&A contains certain financial measures that do not have any standardized meaning prescribed by IFRS.
Therefore, these financial measures may not be comparable to similar measures presented by other issuers. These
measures are identified and defined below:
Gross Profit
Gross profit refers to the Company’s total revenue less costs directly attributed to generating the related sales
revenue. This additional IFRS measure is identified in our Audited Consolidated Financial Statements on the
statement of comprehensive income. Gross profit provides a measure to assess the Company’s profitability and
efficiency of revenue generated, prior to considering selling, general and administrative expenses.
Gross profit margin is the percentage resulting from dividing Gross Profit from a transaction by the revenue
generated by the same transaction.
Income (Loss) from Operating Activities
Income from operating activities refers to income (loss) excluding: general interest expense recognized outside of
cost of goods sold, interest income, share of profit (loss) from equity investees, and income tax. This additional
IFRS measure is identified in our Audited Consolidated Financial Statements on the statement of comprehensive
income. Income from operating activities is a useful supplemental earnings measure as it provides an indication
of the financial results generated by our principal business activities prior to consideration of how these activities
are financed or how the results are taxed in various jurisdictions and the effects of earnings from equity investees.
Non-IFRS Financial Measures
This MD&A contains certain financial measures that do not have any standardized meaning prescribed by IFRS.
Therefore, these financial measures may not be comparable to similar measures presented by other issuers.
Investors are cautioned that these measures should not be construed as an alternative to profit or to cash flow
from operating, investing, and financing activities determined in accordance with IFRS as indicators of our
performance. These measures are provided to assist investors in determining our ability to generate profit and
cash flow from operations and to provide additional information on how these cash resources are used. These
financial measures are identified and defined below:
Adjusted Income
Adjusted income is provided to aid in the comparison of the Company’s results from one period, to the Company’s
results from another period. The Company calculates Adjusted Income as follows:
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Cervus Annual Report 2018
Three month periods
ended December 31
Year ended December 31
2018
5,031
2017
3,727
2018
26,579
2017
19,917
1,256
188
-
-
(765)
(132)
5,390
0.35
0.33
-
-
-
(50)
3,865
0.25
0.24
1,199
(480)
-
(765)
12
(890)
-
(417)
-
365
26,545
18,975
1.70
1.61
1.21
1.14
Adjusted Income Attributed to Shareholders
($ thousands, except per share amounts)
Income attributed to shareholders
Adjustments:
Unrealized foreign exchange loss (gain)(1)
Gain on sale of Commercial operations
Gain on sale of land and building
Insurance proceeds received in excess of building cost
Tax impact of adjustments
Adjusted income attributed to shareholders
Adjusted income per share:
Basic
Diluted
Adjusted Income Before Income Tax Expense
Three Months Ended December 31, 2018
Reconciliation of Adjusted Income Before Income
Tax Expense ($ thousands)
Three months ended December 31, 2018
Income (loss) before income tax expense
Total
7,642
Agricultural
8,283
Transportation
(420)
Industrial
(221)
Adjustments:
Unrealized foreign exchange loss(1)
Insurance proceeds received in excess of building cost
1,256
(765)
Adjusted income before income tax expense
8,133
7,518
520
-
940
316
(765)
-
-
95
Year Ended December 31, 2018
Reconciliation of Adjusted Income Before Income
Tax Expense ($ thousands)
Year ended December 31, 2018
Income before income tax expense
Adjustments:
Unrealized foreign exchange loss(1)
Gain on sale of Commercial operations
Insurance proceeds received in excess of building cost
Total
36,544
Agricultural
31,188
Transportation
4,064
Industrial
1,292
1,199
-
1,070
-
-
129
(480)
(765)
-
-
(480)
(765)
Adjusted income before income tax expense
36,498
30,423
5,134
941
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Cervus Annual Report 2018
Three Months Ended December 31, 2017
Reconciliation of Adjusted Income (Loss) Before
Income Tax Expense ($ thousands)
Three months ended December 31, 2017
Income (loss) before income tax expense
Adjustments:
Unrealized foreign exchange loss (1)
Total
5,709
Agricultural
8,635
Transportation
(3,418)
Industrial
492
Adjusted income (loss) before income tax expense
5,897
8,635
(3,233)
188
-
185
3
495
Year Ended December 31, 2017
Reconciliation of Adjusted Income (Loss) Before
Income Tax Expense ($ thousands)
Year ended December 31, 2017
Income (loss) before income tax expense
Adjustments:
Unrealized foreign exchange gain (1)
Gain on sale of land and building
Adjusted income (loss) before income tax expense
Total
28,958
Agricultural
29,479
Transportation
(3,562)
Industrial
3,041
(890)
(417)
27,651
-
(685)
(205)
(417)
29,062
-
(4,247)
-
2,836
(1) – Unrealized foreign exchange gains and losses are due to changes in fair value of our derivative financial asset and from
period close translation of floorplan payables and cash denominated in US dollars. The unrealized foreign currency gains and
losses are treated as an adjustment to the Company’s adjusted income calculation as these foreign currency gains and losses
are not realized until settlement. Until settlement occurs, there may be large fluctuations period to period on movement of the
foreign exchange rate, making comparison of operating performance period over period difficult.
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Cervus Annual Report 2018
EBITDA
Throughout the MD&A, reference is made to EBITDA, which Cervus’ management defines as earnings before
interest, income taxes and depreciation and amortization. Management believes that EBITDA is a key performance
measure in evaluating the Company’s operations and is important in enhancing investors’ understanding of the
Company’s operating performance. As EBITDA does not have a standardized meaning prescribed by IFRS, it may
not be comparable to similar measures presented by other companies. As a result, we have reconciled profit as
determined in accordance with IFRS to EBITDA, as follows:
Three Months Ended December 31, 2018
EBITDA ($ thousands)
Three months ended December 31, 2018
Net income (loss) attributable to shareholders
Add:
Interest
Income taxes
Depreciation and Amortization
EBITDA(1)
Reconciliation of adjusted EBITDA(1):
EBITDA(1)
Adjustments:
Unrealized foreign exchange loss
Insurance proceeds received in excess of
building cost
Adjusted EBITDA(1)
Year Ended December 31, 2018
EBITDA ($ thousands)
Year ended December 31, 2018
Net income attributable to shareholders
Add:
Interest
Income taxes
Depreciation and Amortization
EBITDA(1)
Reconciliation of adjusted EBITDA(1):
EBITDA(1)
Adjustments:
Unrealized foreign exchange loss
Gain on sale of Commercial operations
Insurance proceeds received in excess of
building cost
Adjusted EBITDA(1)
Total
5,031
Agricultural Transportation
(388)
5,607
Industrial
(188)
1,956
2,611
3,769
13,367
1,045
2,676
1,932
11,260
836
(32)
1,418
1,834
13,367
11,260
1,834
1,256
-
940
75
(33)
419
273
273
316
(765)
13,858
(765)
-
-
10,495
2,774
589
Total
26,579
Agricultural Transportation
2,955
22,684
Industrial
940
7,515
9,965
15,111
59,170
3,557
8,504
7,295
42,040
3,735
1,109
5,969
13,768
59,170
42,040
13,768
-
-
1,070
-
1,199
(480)
(765)
(765)
-
-
59,124
41,275
14,838
3,011
51
223
352
1,847
3,362
3,362
129
(480)
Cervus Annual Report 2018
Three Months Ended December 31, 2017
EBITDA ($ thousands)
Three months ended December 31, 2017
Net income (loss) attributable to shareholders
Add:
Interest
Income taxes
Depreciation and Amortization
EBITDA(1)
Reconciliation of adjusted EBITDA(1):
EBITDA(1)
Adjustments:
Unrealized foreign exchange loss
Adjusted EBITDA(1)
Year Ended December 31, 2017
EBITDA ($ thousands)
Year ended December 31, 2017
Net income (loss) attributable to shareholders
Add:
Interest
Income taxes
Depreciation and Amortization
EBITDA(1)
Reconciliation of adjusted EBITDA(1):
EBITDA(1)
Adjustments:
Unrealized foreign exchange gain
Gain on sale of land and building
Adjusted EBITDA(1)
Total
3,727
Agricultural Transportation
(2,349)
5,760
Industrial
316
1,392
1,982
6,521
13,622
652
2,875
1,844
11,131
13,622
11,131
188
13,810
-
11,131
679
(1,070)
3,945
1,205
1,205
185
1,390
61
177
732
1,286
1,286
3
1,289
Total
19,917
Agricultural Transportation
(2,449)
20,276
Industrial
2,090
7,289
9,046
17,588
53,840
3,593
9,208
7,029
40,106
3,152
(1,113)
7,852
7,442
544
951
2,707
6,292
53,840
40,106
7,442
6,292
(890)
(417)
52,533
-
(417)
39,689
(685)
-
6,757
(205)
-
6,087
(1) – EBITDA is defined as profit before interest, taxes, depreciation, and amortization. We believe, in addition to
income (loss), EBITDA is a useful supplemental earnings measure as it provides an indication of the financial results
generated by our principal business activities prior to consideration of how these activities are financed or how the
results are taxed in various jurisdictions and before non-cash amortization expense.
Adjusted EBITDA is defined as profit before interest, taxes, depreciation, and amortization, adjusted for unrealized
(gains) losses from foreign currency, (gains) losses from sale of minority interests and real estate, and insurance
proceeds received in excess of building cost.
EBITDA Margin
EBITDA margin is calculated as EBITDA divided by gross revenue.
Working Capital
Working capital is calculated as current assets less current liabilities. Working capital ratio is calculated as current
assets divided by current liabilities.
52
Cervus Annual Report 2018
Consolidated Financial
Statements of
CERVUS EQUIPMENT
CORPORATION
For the years ended December 31, 2018 and 2017
53
Cervus Annual Report 2018
KPMG LLP
205 5th Avenue SW
Suite 3100
Calgary AB T2P 4B9
Tel (403) 691-8000
Fax (403) 691-8008
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Cervus Equipment Corporation
Opinion
We have audited the consolidated financial statements of Cervus Equipment Corporation,
(the Entity), which comprise:
− the consolidated statements of financial position as at December 31, 2018 and 2017
− the consolidated statements of comprehensive income for the years then ended
− the consolidated statements of changes in equity for the years then ended
− the consolidated statements of cash flows for the years then ended
− and notes to the consolidated financial statements, including a summary of significant
accounting policies
(Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects,
the consolidated financial position of the Entity as at December 31, 2018 and 2017, and its
consolidated financial performance and its consolidated cash flows for the years then ended
in accordance with International Financial Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in the “Auditors’
Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our other
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
Other Information
Management is responsible for the other information. Other information comprises:
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG
LLP.
54
Cervus Annual Report 2018 − the information included in Management’s Discussion and Analysis filed with the
relevant Canadian Securities Commissions.
− the information, other than the financial statements and the auditors’ report thereon,
included in a document likely to be entitled “2018 Annual Report”.
Our opinion on the financial statements does not cover the other information and we do not
and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our knowledge obtained in the audit
and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis as at the
date of this auditors’ report. If, based on the work we have performed on this other
information, we conclude that there is a material misstatement of this other information, we
are required to report that fact in the auditors’ report. We have nothing to report in this
regard.
Information, other than the financial statements and the auditors’ report thereon, included in
a document likely to be entitled “2018 Annual Report” is expected to be made available to
us after the date of this auditors’ report. If, based on the work we will perform on this other
information, we conclude that there is a material misstatement of this other information, we
are required to report that fact to those charged with governance.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with International Financial Reporting Standards (IFRS), and for
such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Entity’s
ability to continue as a going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends
to liquidate the Entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial
reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditors’ report that includes our opinion.
552
Cervus Annual Report 2018 Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we
exercise professional judgment and maintain professional skepticism throughout the audit.
We also:
−
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than
for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
− Obtain an understanding of internal control relevant to the audit 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.
− Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
− Conclude on the appropriateness of management's use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Entity's
ability to continue as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditors’ report to the related disclosures in
the financial statements or, if such disclosures are inadequate, to modify our opinion.
Our conclusions are based on the audit evidence obtained up to the date of our
auditors’ report. However, future events or conditions may cause the Entity to cease
to continue as a going concern.
− Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
− Communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
563
Cervus Annual Report 2018 − Provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and communicate with them
all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
− Obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the group Entity to express an opinion on the
financial statements. We are responsible for the direction, supervision and
performance of the group audit. We remain solely responsible for our audit opinion.
The engagement partner on the audit resulting in this auditors’ report is Shane Doig.
Chartered Professional Accountants
Calgary, Canada
March 14, 2019
574
Cervus Annual Report 2018 CERVUS EQUIPMENT CORPORATION
Consolidated Statements of Financial Position
As at December 31, 2018 and 2017
($ thousands)
Assets
Current assets
Cash and cash equivalents
Trade and other accounts receivable
Inventories
Assets held for sale
Total current assets
Non-current assets
Other long-term assets
Property and equipment
Intangible assets
Goodwill
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other liabilities
Floor plan payables
Current portion of term debt
Liabilities directly associated with assets held for sale
Total current liabilities
Non-current liabilities
Term debt
Finance lease obligation
Deferred income tax liability
Total non-current liabilities
Total liabilities
Equity
Shareholders’ capital
Deferred share plan
Other reserves
Accumulated other comprehensive (loss) income
Retained earnings
Total equity
Total liabilities and equity
Approved by the Board:
“Peter Lacey” Director
“Angela Lekatsas” Director
December 31,
2018
December 31,
2017
Note
6
7
8
9
10
11
11
12
13
13
8
13
14
15
17
21
$ 6,106 $ 14,502
53,529
290,524
26,280
384,835
71,969
330,627
-
408,702
9,375
58,328
42,640
21,624
131,967
8,423
62,175
39,742
18,880
129,220
$ 540,669 $ 514,055
$ 82,122 $ 87,317
125,573
11,122
12,250
236,262
157,615
13,964
-
253,701
25,123
7,501
8,843
41,467
295,168
32,170
10,416
9,954
52,540
288,802
86,540
8,693
5,195
506
144,567
245,501
88,163
7,455
5,195
191
124,249
225,253
$ 540,669 $ 514,055
The accompanying notes are an integral part of these consolidated financial statements.
58
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2018 and 2017
($ thousands)
Revenue
Note
2018
2017
19
20
Equipment sales
Parts
Service
Rentals
Total revenue
Cost of sales
Gross profit
Other income
Selling, general and administrative expense
Income from operating activities
Finance income
Finance costs
Net finance costs
Share of profit of equity accounted investees, net of income tax
Income before income tax expense
Income tax expense
Income for the year
Other comprehensive income:
Foreign currency translation differences for foreign operations, net of tax
Total comprehensive income for the year
Income attributable to:
Shareholders of the Company
Non-controlling interest
Income for the year
22
15
Total comprehensive income attributable to:
Shareholders of the Company
Non-controlling interest
Total comprehensive income for the year
Net income per share attributable to shareholders of the Company:
Basic
Diluted
23
23
$ 1,041,835 $
206,128
86,502
15,572
1,350,037
(1,138,517)
211,520
3,443
(173,045)
41,918
854
(6,352)
(5,498)
124
36,544
(9,965)
26,579
911,781
208,863
84,464
16,177
1,221,285
(1,011,857)
209,428
1,112
(176,199)
34,341
484
(5,863)
(5,379)
(4)
28,958
(9,046)
19,912
315
26,894
26,579
-
26,579
26,894
-
26,894 $
(1,028)
18,884
19,917
(5)
19,912
18,889
(5)
18,884
1.70 $
1.62 $
1.27
1.20
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
59
Cervus Annual Report 2018
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Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Consolidated Statement of Cash Flows
For the years ended December 31, 2018 and 2017
($ thousands)
Income for the year
Adjustments for:
Income tax expense
Depreciation
Amortization of intangibles
Equity-settled share-based payment transactions
Net finance costs
Unrealized foreign exchange loss (gain)
Non-cash write-down of inventories
(Gain) on sale of property and equipment
(Gain) on sale of Commercial operations
(Gain) on de-recognition of Rosthern capital assets
Share of (profit) of equity accounted investees, net of tax
Distributions from equity investments
Change in non-cash working capital
Cash generated from operating activities
Cash taxes paid
Interest paid
Net cash provided from operating activities
Cash flows from investing activities
Interest received
Business acquisitions (net of cash received)
Purchase of property and equipment
Payments for intangible assets
Insurance proceeds for property and equipment
Proceeds from disposal of property and equipment
Proceeds from sale of Commercial operations
Proceeds from dissolution of Deerstar Systems Inc.
Net cash (used in) provided from investing activities
Cash flows from financing activities
Net (repayments) proceeds of term debt
Dividends paid
Payment of finance lease liabilities
(Payment) receipt of deposits with manufacturers
Repayment of debenture payable
Purchase of common shares
Net cash (used in) financing activities
Net decrease in cash and cash equivalents
Effect of foreign currency translation on cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Note
$
2018
26,579 $
15
10
11
22
19
7
19
8
19
25
5
10
11
8
17
17
9,965
10,856
4,255
1,514
6,661
1,199
11,513
(644)
(480)
(765)
(124)
-
(38,874)
31,655
(11,454)
(7,512)
12,689
854
(12,595)
(12,854)
(622)
1,971
4,911
14,218
-
(4,117)
(4,355)
(5,093)
(5,249)
(447)
-
(2,609)
(17,753)
(9,181)
785
14,502
$
6,106 $
2017
19,912
9,046
12,355
5,302
692
6,805
(890)
5,624
(1,680)
-
-
4
148
(6,264)
51,054
(10,593)
(6,868)
33,593
484
-
(8,181)
(451)
-
10,604
-
1,179
3,635
7,692
(3,626)
(4,373)
521
(34,500)
(3,235)
(37,521)
(293)
253
14,542
14,502
61
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
1. Reporting Entity
Cervus Equipment Corporation (“Cervus” or the “Company”) is an incorporated entity under the Canada Business
Corporations Act and is domiciled in Canada. The registered office of the Company is situated at 5201 – 333, 96th
Avenue N.E., Calgary, Alberta, Canada, T3K 0S3. The consolidated financial statements of the Company as at and for
the year ended December 31, 2018, comprise the Company and its subsidiaries (“the Group”). The Company is
primarily involved in the sale, after-sale service and maintenance of agricultural, transportation, and industrial
equipment. The Company also provides equipment rental, primarily in the transportation, and industrial equipment
segments. The Company wholly owns and operates 63 dealerships in Canada, New Zealand, and Australia. The
primary equipment brands represented by Cervus
include John Deere agricultural equipment; Peterbilt
transportation equipment; and Clark, Sellick, Doosan, JLG, and Baumann material handling equipment. The common
shares of Cervus are listed on the Toronto Stock Exchange and trade under the symbol "CERV".
2. Basis of Preparation
Statement of Compliance
The consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRSs”) as issued by the International Accounting Standards Board (“IASB”).
The Board of Directors authorized the issue of these consolidated financial statements on March 14, 2019.
Basis of Measurement
The consolidated financial statements have been prepared under a going concern assumption on a historical cost
basis, with the exception of items that IFRS requires to be measured at fair value.
Presentation Currency
These consolidated financial statements are presented in Canadian dollars. All financial information has been
rounded to the nearest thousand except for per share amounts.
Basis of Consolidation
These consolidated financial statements include the accounts of the parent company Cervus Equipment Corporation
and its subsidiaries, all of which are wholly owned.
Control is achieved where the Company has the power to govern the financial and operating policies of an entity so
as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included
in the consolidated statements of comprehensive income from the effective date of acquisition and up to the effective
date of disposal, as appropriate.
62
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
2. Basis of Preparation (continued)
Details of the Company’s subsidiaries at December 31, 2018 and December 31, 2017 are as follows:
Proportion of Ownership Interest and Voting Power Held
Cervus AG Equipment LP
Cervus AG Equipment Ltd
Evergreen Equipment Ltd.
Cervus Collision Center LP
Cervus Contractors Equipment LP
Cervus Contractors Equipment Ltd
Cervus Equipment NZ Ltd.
101169185 Saskatchewan Ltd
520781 Alberta Ltd
Cervus Equipment Holdings Australia Pty Ltd.
Cervus Equipment Australia Pty Ltd.
2018
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
2017
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Use of Judgements and Estimates
In preparing these consolidated financial statements, management has made judgements, estimates and
assumptions that affect the application of the Company’s accounting policies and the reported amounts of assets,
liabilities, revenues and expenses. By their very nature, estimates may differ from actual future results and the impact
of such changes could be material.
Estimates and underlying assumptions are reviewed on an ongoing basis, with revisions to accounting estimates
recognized prospectively.
Judgements
Information about judgements made in applying accounting policies that have the most significant effects on the
amounts recognized in these consolidated financial statements are:
Classification of a lease arrangement as an operating or finance lease; judgement is required to determine
whether substantially all of the significant risks and rewards of ownership are transferred to the customer or
remain with the Company; or where the Company is the lessee, whether substantially all the significant risks
and rewards of ownership are transferred to the Company or remain with the lessor. (Note 14 & 24)
Impairment tests; judgement is used in identifying impairment triggers and the cash generating unit or
group of cash generating units at which goodwill, intangible assets, and property and equipment are
monitored for internal management purposes and identifying an appropriate discount rate for these
calculations. (Note 11)
Assumptions and Estimation Uncertainties
Information about assumptions and estimation uncertainties which could have a significant effect on the carrying
amounts of assets and liabilities within the next fiscal year are included in the following notes:
Recoverability of inventories and key assumptions regarding the net realizable value of inventory. (Note 7)
Impairment tests (including intangible assets and goodwill); estimates on key assumptions related to the
future operating results and cash generating ability of the assets. (Note 11)
63
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
2. Basis of Preparation (continued)
Depreciation and amortization expense; assumptions on the useful lives of property and equipment and
intangible assets. (Note 10 and 11)
Determination of Fair Values
A number of the group’s accounting policies and disclosures require the determination of fair value, for both
financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or
disclosure purposes based on the methods outlined below. When applicable, further information about the
assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
Property, Plant and Equipment
The fair value of property, plant and equipment recognized as a result of a business combination or when
determined in an impairment test is the estimated amount for which a property could be exchanged on the
measurement date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing
wherein the parties had each acted knowledgeably. The fair value of items of plant, equipment, fixtures and fittings
is based on the market approach and cost approaches using quoted market prices for similar items when available
and depreciated replacement cost when appropriate. Depreciated replacement cost reflects adjustments for
physical deterioration as well as functional and economic obsolescence.
Intangible Assets
The fair value of dealership distribution agreements and trade names acquired in a business combination is based
on the incremental discounted estimated cash flows realized post acquisition, or expenditures avoided, as a result
of owning the intangible assets. The fair value of customer lists acquired in a business combination is determined
using income-based approaches, whereby the subject asset is valued after deducting a fair return on all other assets
that are part of creating the related cash flows. The fair value of other intangible assets including non-competition
agreements is based on the discounted cash flows expected to be derived from the use and any residual value of
the assets.
Inventories
The fair value of inventories acquired in a business combination is determined based on the estimated selling price
in the ordinary course of business less the estimated costs of completion and costs related to sale of the inventories
Trade and Other Receivables
The fair value of trade and other receivables is estimated at the present value of the future cash flows, discounted at
the market rate of interest at the reporting date. The fair value is determined for disclosure purposes or when such
assets are acquired in a business combination.
Other Non-Derivative Financial Liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal
and interest cash flows, discounted at the market rate of interest at the reporting date.
Derivative Financial Instruments
The fair value of foreign currency derivative financial instruments is calculated based on a market comparison
technique. The fair value is based on similar contracts in an active market and based on quotes using the prevailing
foreign exchange translation rate from the Bank of Canada or similar sources.
64
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies
The accounting policies set out below have been applied consistently by all the Group’s entities and to all years
presented in these consolidated financial statements.
Business Segments
The Company operates three distinct business segments: Agricultural, Transportation and Industrial, based on the
industry which they serve. These segments are managed separately and strategic decisions are made on the basis of
their respective operating results.
The Agricultural equipment segment consists of John Deere dealership locations in Alberta, Saskatchewan, British
Columbia, New Zealand, and Australia. The Transportation equipment segment consists of Peterbilt dealership
locations in Saskatchewan and Ontario. The Industrial equipment segment consists of Clark, Sellick, Doosan, and JLG
dealership locations in Alberta, Saskatchewan, and Manitoba.
Each of these business segment operations are supported by a single corporate head office. Certain corporate head
office expenses are allocated to the business segments according to both specific identification and metrics to
estimate usage. The corporate head office also incurs certain costs which are not considered directly related to store
level operations, such as interest cost on general corporate borrowings, corporate personnel costs, and public
company costs. These corporate costs are allocated to the segments based on the gross profit of the segments.
Business Combinations
Acquisitions of subsidiaries are accounted for using the acquisition method. The cost of the acquisition is measured
at the aggregate of the fair values, at the date of exchange, of assets given, liabilities and contingent liabilities incurred
or assumed, and equity instruments issued by the Company in exchange for control of the acquiree. Transaction costs
are expensed as incurred. Goodwill arising on acquisitions is recognized as an asset and initially measured at cost,
being the excess of the consideration of the business combination over the Company's interest in the net fair value
of the identifiable assets, liabilities and contingent liabilities recognized.
Foreign Currency Translation
Foreign Currency Transactions
The individual financial statements of each subsidiary are stated in the currency of the primary economic environment
in which it operates (its functional currency). Transactions in currencies other than companies’ functional currency are
recorded at the rate of exchange at the date of the transaction. At the statement of financial position date, monetary
assets and liabilities denominated in a currency other than subsidiaries’ functional currency, are translated into the
subsidiaries’ functional currency at the rates of exchange prevailing at that date. Foreign currency differences are
recognized in profit or loss.
Foreign Operations
For the purpose of presenting consolidated financial statements, the results of entities denominated in currencies
other than Canadian dollars are translated at the average rate of exchange for the period and their assets and liabilities
at the rates in effect at the statement of financial position date. Foreign exchange differences are recognized in other
comprehensive income and accumulated in the cumulative translation account.
65
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, balances with banks, and short-term deposits with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the specific identification
method for new and used equipment, average cost for parts and a specific job basis for work-in-progress. Net
realizable value approximates the estimated selling price less all estimated cost of completion and necessary cost to
complete the sale. Previous write-downs of inventory are reversed when economic changes support an increased
value. Where a previous write-down is reversed, the reversal is limited to the amount of the original write-down, so
that the new carrying amount is the lower of the cost and the revised net realizable value.
Property and Equipment
Items of property and equipment are recorded at cost, less any accumulated depreciation and accumulated
impairment losses. Properties under construction are measured at cost less any accumulated impairment. Assets are
moved from the construction phase and begin depreciation when the asset is available for use. Assets under finance
leases are measured initially at an amount equal to the lower of their fair value and the present value of minimum
lease payments.
Any gain or loss arising on the disposal or retirement of an item of property and equipment is recognized in profit or
loss.
Depreciation is provided for using both the declining balance and straight-line methods at annual rates intended to
depreciate the cost of each significant component of an asset, less its residual values over its estimated useful lives.
Assets under finance leases are depreciated on the same basis as owned assets, or where shorter, the term of the lease.
Land is not depreciated.
The estimated useful lives, residual values and depreciation methods are reviewed at each reporting period, with the
effect of any changes in estimate accounted for on a prospective basis.
The following methods and rates are used in the calculation of depreciation:
Assets
Buildings
Leasehold improvements
Short-term rental equipment
Method
Straight-line
Straight-line
Straight-line
Estimated
Useful Life
15 to 40 years
Over period of lease
5 to 10 years
Automotive and trucks and computers
Declining balance
Furniture and fixtures, parts and shop equipment
Declining balance
30%
20%
66
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies (continued)
Intangible Assets
Intangible Assets
Intangible assets include software, dealership distribution agreements, customer lists and non-competition
agreements and are recorded at cost less accumulated amortization and any accumulated impairment losses.
Software costs under development are measured at cost less any accumulated impairment, software moves from the
development phase and amortization commences when the asset is available for use.
Costs of internally generated intangible assets are capitalized only if the expenditure can be measured reliably, the
product or process is technically and commercially feasible, future economic benefits are probable and the Company
intends to complete development to use the asset. Otherwise, it is recognized in profit or loss as incurred.
The estimated useful life and amortization method are reviewed at the end of each period, with the effect of any
changes in estimate being accounted for on a prospective basis.
The following are the typical useful lives that are used in the calculation of amortization for each intangible asset.
Dealership distribution agreements
Customer lists and non-competition agreements
Software costs
20 years
5 years
5 years
Goodwill
Goodwill is the excess of the consideration of a business combination over the Company's interest in the net fair value
of the identifiable assets, liabilities and contingent liabilities recognized. Goodwill is measured at cost less
accumulated impairment.
67
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies (continued)
Assets Held for Sale
Non-current assets, or disposal groups comprising assets and liabilities, are classified as held for sale when it is highly
probable that an asset or disposal group in its present condition will be recovered principally through sale instead of
its continued use. Assets held for sale are measured at the lower of the carrying amount and fair value less costs to
sell. Once classified as held-for-sale, plant and equipment are no longer depreciated.
Lease Arrangements
At the inception of an arrangement, the Company considers whether the arrangement, is or contains, a lease. The
Company must determine whether the fulfilment of the arrangement is dependent on the use of a specific asset and
if the arrangement conveys the right to use the asset. Where it is determined that the arrangement contains a lease,
the Company classifies the lease as either an operating or finance lease dependent on whether substantially all of the
risks or rewards of ownership of the asset have been transferred.
a) The Company as the Lessee
Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the
lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the
lease.
At the inception of a finance lease, the asset and finance lease liability is recorded at the lower of its fair value and the
present value of minimum lease payments. Minimum lease payments made under finance leases are apportioned
between the finance expense and the reduction of the outstanding liability. The finance expense 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) The Company as the Lessor
An operating lease effectively establishes that the lessor shall retain the rewards and associated risks of ownership of
that asset for a period of time or use. Where the Company’s equipment rentals and leases to customers are classified
as operating leases, the payments received are included in revenue on a straight-line basis over the term of the lease.
Revenue related to lease arrangements accounted for as finance leases are recognized using an approach for a
constant rate of return on the net investment in the lease. The net investment in the finance lease is the aggregate of
net minimum lease payments and unearned finance income discounted at the interest rate implicit in the lease.
Unearned finance income is deferred and recognized in net income over the lease term.
68
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies (continued)
Income Tax
Income tax expense represents the sum of the tax currently payable and deferred tax. Current income taxes are
recorded based on the estimated income taxes payable on taxable income for the year and any adjustment to tax
payable in respect of previous years. The Company’s liability for current tax is calculated using tax rates that have been
substantively enacted by the end of the reporting period.
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates
that are expected to be applied to temporary differences when they reverse, based on the laws that have been
enacted or substantively enacted by the reporting date. A deferred tax asset is recognized if it is more likely than not
to be realized. The effect of a change in tax rates on deferred income tax assets and liabilities is recorded in the period
in which the change occurs.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past
event, it is probable that the Company will be required to settle the obligation, and a reliable estimate can be made
of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration
required to settle the present obligation at the end of the reporting period, taking into account the risks and
uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the
present obligation, its carrying amount is the present value of those cash flows.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third
party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and measured
reliably.
Financial Instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument to another entity. Financial assets and financial liabilities, including derivatives, are recognized on the
consolidated statement of financial position at the time the Company becomes a party to the contractual provisions.
The Company adopted IFRS 9 Financial Instruments effective January 1, 2018. IFRS 9 relates to the accounting and
presentation of financial instruments and applies a principal-based approach to the classification and measurement
of financial assets and financial liabilities, including an expected credit loss model for calculating impairment, and
includes new requirements for hedge accounting.
The adoption of IFRS 9 has not had a significant impact on the amounts reported in the financial statements.
Classification and Measurement of Financial Assets and Financial Liabilities
A financial asset is classified and is measured at: amortised cost; fair value through other comprehensive income
(OCI); or fair value through profit or loss. The classification of financial assets is generally based on the business
model in which a financial asset is managed and its contractual cash flow characteristics. Derivatives embedded
in contracts where the host is a financial asset in the scope of the standard are not separated. Instead, the hybrid
financial instrument as a whole is assessed for classification.
69
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies (continued)
Classification and Measurement of Financial Assets and Financial Liabilities (continued)
Trade receivables without a significant financing component are initially measured at the transaction price.
Otherwise, a financial asset is initially measured at:
Fair value; or
Fair value, plus transaction costs that are directly attributable to its acquisition, for items not at fair value
through profit or loss.
Subsequent measurement of financial assets is described below.
Financial assets at
fair value through
profit or loss
Financial assets at
amortised cost
These assets are subsequently measured at fair value. Gains and losses, including any interest
or dividend income, are recognized in profit or loss.
These assets are subsequently measured at amortised cost using the effective interest
method. The amortised cost is reduced by impairment losses. Interest income, foreign
exchange gains and losses and impairment are recognized in profit or loss. Any gain or loss
on derecognition is recognized in profit or loss.
Debt investments
at fair value
through OCI
These assets are subsequently measured at fair value. Interest income calculated using the
effective interest method, foreign exchange gains and losses and impairment are recognized
in profit or loss. Other net gains and losses are recognized in OCI. On derecognition, gains
and losses accumulated in OCI are reclassified to profit or loss.
Equity
investments at
fair value through
OCI
These assets are subsequently measured at fair value. Dividends are recognized as income
in profit or loss unless the dividend clearly represents a recovery of part of the cost of the
investment. Other net gains and losses are recognized in OCI and are never reclassified to
profit or loss.
For the Company, the effect of adopting IFRS 9 on the carrying amounts of financial assets at January 1, 2018 relates
solely to the new impairment requirements, as described further below.
70
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies (continued)
The following table explains the original measurement categories under IAS 39 and the new measurement categories
under IFRS 9 for each class of the Company’s financial assets and liabilities as at January 1, 2018. There are no changes
in the carrying amounts under IAS 39 and IFRS 9.
($ thousands)
Financial Assets
Cash and cash equivalents
Trade and other accounts receivable
Derivative financial instruments
Other investments
Other long-term assets
Finance lease receivables
Financial Liabilities
Trade and other liabilities
Floor plan payables
Term debt
Derivative financial liability
Finance lease obligation
Original Classification
Under IAS 39
New Classification
Under IFRS 9
Loans and receivable
Loans and receivable
Held-for-trading
Available for sale
Loans and receivable
Loans and receivable
Other liabilities
Other liabilities
Other liabilities
Held-for-trading
Other liabilities
Amortised cost
Amortised cost
Fair value through profit and loss
Fair value through profit and loss
Amortised cost
Amortised cost
Other liabilities
Other liabilities
Other liabilities
Held-for-trading
Other liabilities
Impairment
Financial Assets (Including Receivables)
IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ (ECL) model. The new impairment
model applies to financial assets measured at amortised cost, contract assets and debt investments at FVOCI, but not
to investments in equity instruments.
ECLs are a probability weighted estimate of credit losses the Company expects to incur. Under the expected credit
loss model, the Company calculates the allowance for credit losses by determining, on a discounted basis, the cash
shortfalls it would incur in various probability-weighted default scenarios for prescribed future periods and
multiplying these shortfalls by the probability of each scenario occurring. The allowance is the sum of these
probability weighted outcomes.
Under IFRS 9, loss allowances are measured on either of the following bases:
a) 12-month expected credit losses: These are expected credit losses that could result from possible default
events within the 12 months after the reporting date; and
b) Lifetime expected credit losses: These are expected credit losses that could result from all possible default
events over the expected life of a financial instrument.
71
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies (continued)
Impairment (continued)
Non-Financial Assets
Property and equipment, intangible assets and goodwill are reviewed at each reporting period to identify if there are
indicators of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The carrying
values of intangible assets and goodwill with indefinite lives must be tested at least annually. We have selected
December 31st as our annual impairment test date, although impairment tests are conducted more frequently if
indicators of impairment are present at dates other than December 31st.
When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the
recoverable amount of the cash-generating unit (CGU) to which the asset belongs. The CGU corresponds to the
smallest identifiable group of assets whose continuing use generates cash inflows that are largely independent of the
cash inflows from other assets or groups of assets. The Company has determined that its CGUs comprise groups of
stores which provide the same or similar product within a geographic market.
Goodwill acquired in a business combination is allocated to the CGU which it relates. Intangible assets with indefinite
useful lives and assets held at the parent level are allocated to the CGU to which they relate.
Impairment losses are recognized in profit or loss. Any impairment loss is allocated first to reduce the carrying amount
of any goodwill allocated to the CGU and then to the other assets of the CGU pro rata based on the carrying amount
of each asset in the CGU. An impairment loss is recognized when the carrying amount of an asset, or of the CGU to
which it belongs, exceeds the recoverable amount. The recoverable amount of an asset or cash-generating unit is the
greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset.
Reversals of Previously Recognized Impairments
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in
prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists.
An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation or amortization, if no impairment loss had been
recognized.
72
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies (continued)
Revenue Recognition
The Company adopted IFRS 15 Revenue from Contracts with Customers effective January 1, 2018. Revenue from
Contracts with Customers, was issued in May 2014 and replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC
13 Customer Loyalty Programs, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets
from Customers and SIC-31 Revenue – Barter Transactions Involving Advertising Services.
The Company has adopted IFRS 15 using the cumulative effective method (without practical expedients), with the
effect of initially applying this standard recognized at the date of initial application (i.e. January 1, 2018). Accordingly,
the information presented for 2017 has not been restated.
The application of IFRS 15 has not had any significant impact on the recognition of revenue in 2018.
Under IFRS 15, revenue is recognized when a customer obtains control of the goods or services. Determining the
timing of the transfer of control, whether at a point in time or over time, requires judgment.
Type of product/
service
Equipment
Revenue
Nature, timing and satisfaction of performance obligations, significant payment terms
Revenue is recognized when the customer obtains control of the equipment product.
Revenue is not recognized before there are indicators that control has passed, including the
customer having: a present obligation to pay, physical possession or legal title, risks and
rewards of ownership and accepted the asset. The Company considers a customer has
accepted the asset and risks and rewards of ownership when delivery has occurred, required
deposits have been received, and a formal contract is signed.
For bill-and-hold arrangements, revenue is recognized before delivery when the customer
obtains control of the equipment, and Cervus has received payment. Control is transferred
to the customer when the reason for the bill-and-hold arrangement is substantive, the
Company cannot sell the equipment to another customer, the equipment can be identified
separately and is ready for physical transfer to the customer.
Invoices are usually payable when financing has been agreed upon along with the signed
bill of sale, or within 30 days from the invoice date.
Parts Revenue
Parts revenue is recognized when the customer receives the part. Payment is due upon
receipt of the invoice, or net 30 days from the invoice date for the Industrial segment.
Service Revenue
Service revenue is recognized upon completion of the service work. Payment is due upon
receipt of the invoice, or net 30 days from the invoice date for the Industrial segment.
Rentals and
Operating Lease
Revenue
Rentals and operating lease revenue are recorded at the time the service is provided,
recognized evenly over the term of the rental or lease agreement with the customer.
Payment is due when the rental contract is signed at the beginning of each month, and
within 30 days for the Industrial segment.
73
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
3. Significant Accounting Policies (continued)
Finance Income and Finance Costs
Finance income comprises interest income on funds invested.
Finance costs comprise interest expense on borrowings and impairment losses recognized on financial assets.
Borrowing costs that are not directly attributable to the construction, acquisition or production of a qualifying asset
are recognized in profit or loss as incurred.
Changes in the fair value of financial assets at fair value through profit or loss are included in Other Income or Loss.
Per Share Amounts
Basic per share amounts are computed by dividing earnings (loss) by the weighted average number of shares
outstanding for the period. Diluted earnings per share are calculated giving effect to the potential dilution that would
occur if share options or other dilutive instruments were exercised or converted to shares. The treasury stock method
is used to determine the dilutive effect of share options and other similar dilutive instruments. This method assumes
that any proceeds upon the exercise or conversion of dilutive instruments, for which market prices exceed exercise
price, would be used to purchase shares at the average market price of the shares during the period. Diluted earnings
per share may include the number of shares that were issuable on conversion of the debentures, if determined to be
dilutive. The net earnings are adjusted for the after-tax interest expense that would not have been incurred had the
debentures been converted at the beginning of the period.
Short-Term Employee Benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related
service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-
sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past
service provided by the employee, and the obligation can be estimated reliably.
Share-Based Payment Transactions
The grant date fair value as determined by the Black-Scholes model for share option awards granted to employees is
recognized as an employee expense, with a corresponding increase in equity, over the period that the employees
unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the
number of awards for which the related service and non-market vesting conditions are expected to be met, such that
the amount ultimately recognized as an expense is based on the number of awards that do meet the related service
and non-market performance conditions at the vesting date. Amounts for share option payment transactions are
recognized in contributed surplus as they vest, which is captured in other reserves.
74
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
4. Standards Issued But Not Yet Effective
Certain new or amended standards or interpretations have been issued by the IASB or IFRIC that are required to be
adopted in the future periods. The new standards and amendments to existing standards which have not been applied
in preparing these consolidated financial statements are:
IFRS 16 Leases
The Company is required to adopt IFRS 16 Leases from January 1, 2019, onwards. The Company has assessed the
estimated impact that initial application of IFRS 16 will have on its consolidated financial statements, as described
below. The actual impacts of adopting the standard on January 1, 2019, may change because:
The new accounting policies are subject to change until the Company presents its first financial statements that
include the date of initial application.
New leases may be entered into or lease terms modified after the date in which the assessment was completed
for year-end disclosure, and before the date of the first interim financial statements that report under the new
standard.
Actual foreign currency translation on Australia and New Zealand leases will vary from what was calculated using
year-end spot rates at the time of assessment.
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognizes a right-of-use
asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease
payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting
remains similar to the current standard – i.e., lessors continue to classify leases as finance or operating leases.
IFRS 16 replaces existing lease guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement
contains a Lease, SIC-15 Operating Leases – Incentives and SIC 27 Evaluating the Substance of Transactions Involving
the Legal Form of a Lease.
i. Leases in which the Company is Lessee
Currently treated as Operating Leases
The Company will recognize new assets and liabilities for its operating leases of buildings, vehicles, and office
equipment. The nature of expenses related to those leases will now change because the Company will recognize
a depreciation charge for right-of-use assets and interest expense on lease liabilities.
Previously, the Company recognized operating lease expense on a straight-line basis over the term of the lease,
and recognized assets and liabilities only to the extent that there was a timing difference between actual lease
payments and the expense recognized.
Based on the information available, the Company estimates that it will recognize additional lease liabilities and
additional lease assets of approximately $82 million, on initial adoption of IFRS 16 as at January 1, 2019.
Currently treated as Finance leases
No significant impact is expected for the Company’s existing finance leases.
75
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
4. Standards Issued But Not Yet Effective (continued)
II. Leases in which the Company is Lessor
The Company will reassess the classification of sub-leases in which the Company is lessor. Based on the
information currently available, the Company expects that it will reclassify certain sub-leases as finance leases,
resulting in the recognition of a finance lease receivable of approximately $6 million, the derecognition of
approximately $5 million in lease assets, with the difference recorded as an adjustment to opening retained
earnings.
No significant impact is expected for other leases in which the Company is lessor.
III. Transition
The Company plans to apply IFRS 16 initially on January 1, 2019, using the modified retrospective approach.
Therefore, the cumulative effect of adopting IFRS 16 will be recognized as an adjustment to the opening balance
of retained earnings on January 1, 2019, with no restatement of comparative information.
The Company plans to apply the practical expedient to grandfather the definition of a lease on transition. This
means that it will apply IFRS 16 to all contracts entered into before January 1, 2019, and previously identified as
leases in accordance with IAS 17 and IFRIC 4.
76
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
5. Business Combinations
Deermart Equipment Sales Ltd.
Effective December 3, 2018, the Company acquired certain business assets and assumed certain business liabilities of
Deermart Equipment Sales Ltd. (“Deermart”) for consideration of $12,595 thousand. The consideration on closing was
$12,595 thousand, paid in cash drawn from the Company’s existing credit facilities.
Deermart owns and operates one John Deere dealership located in Red Deer, Alberta which sells new and used John
Deere agricultural equipment and offers equipment parts and servicing. The addition of the Deermart location
represents a strategic opportunity to expand in geography adjacent to existing Cervus locations in Western Canada.
The following table summarizes the preliminary purchase price paid for the net assets of Deermart.
($ thousands)
Recognized amounts of acquired assets and liabilities:
Inventory
Property and equipment
Accounts receivable
Identifiable intangible assets
Goodwill
Deposits with manufacturers
Accounts payable and accrued liabilities
Term debt
Purchase Price
Considerations:
Cash
Total consideration
$
10,175
289
6
6,620
2,722
282
(7,350)
(149)
12,595
12,595
12,595
$
$
$
The Company incurred acquisition-related costs of $87 thousand in the year-ended December 31, 2018, which have
been recorded to selling, general and administrative expense.
The Company’s preliminary estimates of the fair value of acquired intangible assets is based on significant
management judgments and as in a business combination, it generally takes time to obtain the information necessary
to measure the fair values of assets acquired and liabilities assumed and the resulting goodwill, if any. Changes to the
provisional measurements of assets and liabilities acquired and resulting goodwill may be retrospectively adjusted
when new information is obtained until the final measurements are determined.
77
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
6. Trade and Other Accounts Receivable
($ thousands)
Trade receivables
Allowance for doubtful debts(a)
Trade receivables, net
Prepaid expenses
Other receivables
Total trade and other accounts receivable
2018
54,939
(1,078)
53,861
17,576
532
71,969
$
$
2017
41,454
(1,579)
39,875
12,959
695
53,529
$
$
(a) Changes in allowance for doubtful debts during the year has been recorded in selling, general and administrative
expense, the details of which are disclosed in Note 26.
7.
Inventories
($ thousands)
New equipment
Used equipment
Parts and accessories
Work-in-progress
Total inventories
2018
114,667
164,144
50,285
1,531
330,627
$
$
2017
116,016
128,188
45,188
1,132
290,524
$
$
During the year ended December 31, 2018, inventories included in costs of sales were $1,078 million (2017 - $955
million). The total inventory write-downs recorded during the year ended December 31, 2018, and included in cost of
goods sold was $11,513 thousand (2017 - $5,624 thousand). The Company’s inventory has been pledged as security for
floor plan payables under terms of the floorplan agreements and for long-term debt under general security agreements.
8. Disposal of Assets Held for Sale
At December 31, 2017, the Company had entered into a definitive agreement to sell its four construction dealerships
within the Commercial and Industrial segment, along with the land and building of one dealership location. The
Commercial disposal group was classified as held for sale and stated at carrying value at December 31, 2017.
The sale of the Commercial group closed on March 16, 2018, with gross proceeds of $14,218 thousand resulting in a
gain on sale of $480 thousand.
The Company reclassified $2,883 thousand of inventory, originally included in assets held for sale at December 31, 2017,
to inventory at March 31, 2018, as a result of an amending agreement where certain inventories were retained by the
Company.
78
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
9. Other Long-Term Assets
($ thousands)
Long-term receivables
Deposits with manufacturers
Other investments (a)
Other long-term assets
2018
748
2,913
5,714
9,375
$
$
$
$
2017
746
2,201
5,476
8,423
(a) In 2016, the Company purchased units in Skyline Commercial REIT as a deposit on long-term leases. The units
have been classified as other investments measured at fair value through profit and loss.
Deposits with Manufacturers
John Deere Credit Inc. (“Deere Credit”) provides and administers customer financing for retail purchases and customer
leases of new and used equipment. Under the financing and lease plans, Deere Credit retains the security interest in the
financed equipment. The Company is liable for a portion of the deficiency in the event that the customer defaults on
their lease obligation. Deere Credit retains 1% of the face amount of the finance or lease contract for amounts that the
Company may have to pay Deere Credit under this arrangement. The deposits are capped at 3% of the total dollar
amount of the lease finance contracts outstanding.
The maximum liability that may arise related to these arrangements is limited to the deposits of $2,913 thousand
(December 31, 2017 - $2,201 thousand). Deere Credit reviews the deposit account balances quarterly and if the balances
exceed the minimum requirements, Deere Credit refunds the difference to the Company.
79
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
10. Property and Equipment
($ thousands)
Cost
Balance at January 1, 2017
Additions
Additions for finance lease
Disposals
Assets held for sale (Note 8)
Transfers
Effect of movements in
exchange rates
Balance at December 31, 2017
Additions
Additions for finance lease
Disposals (a)
Transfers
Effect of movements in
exchange rates
Balance at December 31, 2018
($ thousands)
Accumulated Depreciation
and Impairment
Balance at January 1, 2017
Depreciation expense
Disposals
Assets held for sale (Note 8)
Transfers
Effects of movements in
exchange rates
Balance at December 31, 2017
Depreciation expense
Disposals (a)
Transfers
Effects of movements in
exchange rates
Balance at December 31, 2018
Land and
Buildings
Short-term
Rental
Equipment
Automotive
and Trucks
Furniture
and
Fixtures
Parts and
Shop
Equipment
Computers
and Software
Leasehold
Improvements
28,994
696
-
(4,014)
(3,187)
-
193
22,682
878
-
(2,254)
-
43,575
2,623
4,925
(7,471)
(910)
(1,821)
(468)
40,453
4,855
742
(5,326)
(3,805)
20,976
2,440
-
(1,516)
(1,239)
-
(29)
20,632
4,015
-
(1,937)
27
7,228
282
-
(381)
(280)
-
(18)
6,831
447
-
(157)
1
-
254
25
-
8,367
499
-
(599)
(539)
112
(45)
7,795
776
-
(313)
194
18
3,071
1,166
-
(21)
(108)
-
(43)
4,065
1,347
-
(142)
-
32
21,306
37,173
22,762
7,122
8,470
5,302
3,960 $ 106,095
Land and
Buildings
Short-term
Rental
Equipment
Automotive
and Trucks
Furniture
and
Fixtures
Parts and
Shop
Equipment
Computers
and Software
Leasehold
Improvements
3,309
648
(189)
(517)
-
3
3,254
516
(227)
-
-
3,543
10,848
6,890
(3,028)
(336)
(329)
(187)
13,858
5,179
(2,414)
(2,271)
12,640
2,326
(1,077)
(1,003)
-
(71)
12,815
2,530
(1,500)
11
37
14,389
13
13,869
4,525
690
(333)
(250)
-
(10)
4,622
644
(118)
-
1
5,149
5,414
805
(502)
(451)
-
(39)
5,227
825
(269)
-
17
5,800
2,072
521
(17)
(75)
(1)
(36)
2,464
741
(96)
-
25
3,134
Total
116,129
8,181
4,925
(14,213)
(7,014)
(1,709)
(421)
105,878
12,854
742
(10,134)
(3,583)
3,918
475
-
(211)
(751)
-
(11)
3,420
536
-
(5)
-
9
338
Total
40,631
12,355
(5,289)
(3,321)
(330)
(343)
43,703
10,856
(4,627)
(2,260)
1,823
475
(143)
(689)
-
(3)
1,463
421
(3)
-
2
95
1,883 $ 47,767
80
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
10. Property and Equipment (continued)
($ thousands)
Carrying Value
Balance at December 31, 2017
Balance at December 31, 2018
Land and
Buildings
19,428
Short-term
Rental
Equipment
26,595
Automotive
and Trucks
7,817
Furniture
and
Fixtures
2,209
Parts and
Shop
Equipment
2,568
Computers
and Software
1,601
17,763
22,784
8,893
1,973
2,670
2,168
Leasehold
Improvements
1,957 $
2,077 $
Total
62,175
58,328
(a) Included in total disposals for the year ended December 31, 2018 were capital assets damaged by the fire in the
Company’s agriculture dealership in Rosthern, for a total net book value of $1.2 million.
Depreciation expense related to rental and lease fleets have been recorded in cost of sales in the amount of $5,227
thousand (2017 - $4,388 thousand) and selling, general and administrative expenses of $5,629 thousand (2017 - $5,435
thousand). Prior year depreciation expense includes amounts related to certain assets in the Transportation segment in
the amount of $2,532 thousand, which have been recorded in 2017 other expenses (Note 19). Included in total additions
were amounts for short-term rental equipment relating to additions for lease arrangements classified as finance lease of
$742 thousand (2017 – $4,925 thousand). The Company’s property and equipment has been pledged as security for its
long-term debt.
81
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
11. Intangible Assets and Goodwill
Intangible Assets
Intangible assets are comprised of the following:
Cost
Balance at January 1, 2017
Additions
Effect of movements in exchange rates
Assets held for sale (Note 8)
Balance at December 31, 2017
Additions
Additions through business acquisition (Note 5)
Effect of movements in exchange rates
Balance at December 31, 2018
Accumulated Depreciation
Balance at January 1, 2017
Amortization expense
Assets held for sale (Note 8)
Balance at December 31, 2017
Amortization expense
Balance at December 31, 2018
Carrying Value
Balance at December 31, 2017
Balance at December 31, 2018
Dealership
Distribution
Agreements
52,062
-
39
(5,200)
46,901
-
4,470
(108)
51,263
Dealership
Distribution
Agreements
12,716
2,055
(3,151)
11,620
2,381
Customer
Lists
15,940
-
17
(1,100)
14,857
-
1,840
16
16,713
Customer
Lists
12,238
2,005
(1,100)
13,143
971
Non-
Competition
Agreements
3,505
-
3
(900)
2,608
-
310
3
2,921
Non-
Competition
Agreements
2,677
345
(900)
2,122
284
Software
Costs
3,315
451
-
-
3,766
622
-
-
4,388 $
Software
Costs
677
828
-
1,505
619
14,001
14,114
2,406
2,124 $
Total
74,822
451
59
(7,200)
68,132
622
6,620
(89)
75,285
Total
28,308
5,233
(5,151)
28,390
4,255
32,645
Dealership
Distribution
Agreements
35,281
Customer
Lists
1,714
Non-
Competition
Agreements
486
Software
Costs
2,261 $
Total
39,742
37,262
2,599
515
2,264 $ 42,640
Amortization expense of $4,255 thousand (2017 - $5,233 thousand) has been recorded in selling, general and
administrative expense.
82
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
11. Intangible Assets and Goodwill (continued)
Goodwill
The continuity of the Company’s goodwill is as follows:
($ thousands)
Balance at January 1, 2017
Impact of translation of goodwill held in foreign currencies
Disposal of goodwill
Assets held for sale (Note 8)
Balance at December 31, 2017
Additions through business acquisition (Note 5)
Impact of translation of goodwill held in foreign currencies
Balance at December 31, 2018
The aggregate carrying amounts of goodwill allocated to each CGU are as follows:
($ thousands)
Agricultural Segment
Agricultural - Alberta
Agricultural - Saskatchewan
Agricultural - New Zealand
Agricultural - Australia
Industrial Segment
Industrial
Transportation Segment
Transportation - Ontario
Carrying value of goodwill
Annual Impairment Test
$
$
$
$
20,544
(68)
(69)
(1,527)
18,880
2,722
22
21,624
2017
11,988
327
2,098
1,254
2018
$ 14,710
327
2,144
1,230
666
666
2,547
21,624
$
2,547
18,880
$
The Company conducted the annual impairment test of goodwill at December 31, 2018 and 2017. The recoverable
amount of the cash-generating units (CGUs) was determined using value in use calculations. Value in use was
determined by discounting the future cash flow forecasts for a five-year period and applying after-tax discount rates
ranging from 11.9% to 12.8% (2017 – 11.1% to 12.0%) based on the Company’s post-tax weighted average cost of
capital and risks specific to particular CGUs (pre-tax discount rate of 16.3% to 18.3% in 2018 (2017 – 15.2% to 17.1%)).
Future cash flow estimates began with 2018 revenue, gross profit margin, and expenses, which were then adjusted
through the forecast period for the outlook of the CGU at the date of impairment testing. In situations where 2018
performance diverged from demonstrated historical mid cycle performance, revenue in the five-year forecast period
was based on mean convergence with historical mid cycle actual results for the CGU.
83
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
11. Intangible Assets and Goodwill (continued)
CGU revenue expectations within the forecast period were also assessed for reasonability against third party market
expectations at the time of impairment testing. Further, forecasts were assessed for reasonability against the
demonstrated historical performance of the CGUs. Revenues used in the forecast period did not exceed prior historical
revenue levels of the CGU, other than the impact of assumed inflation. A growth rate was not applied in extrapolating
the resulting cash flows beyond the fifth year of the forecast period.
CGU historical gross profit margin has generally increased in periods of increased revenue and decreased in periods of
lower revenue. Therefore, gross profit margin in the forecast period was based on the CGU’s historical gross profit at
historical revenue levels corresponding with the annual revenues used in the forecast period. The expense forecasts for
each CGU were set based on historical expenses as a percent of revenue. Cash requirements for working capital were
benchmarked by CGU based on historical actual working capital requirements as a percent of annual historical revenue.
Sensitivity testing was conducted as part of the impairment test. Had the estimated cost of capital used in determining
the post-tax discount rate been 1% higher than management’s estimates the recoverable amount of the CGUs would
continue to exceed their carrying amount. Alternatively, holding the post-tax discount rate unchanged from that
utilized in the annual impairment tests, had the annual estimated cash flows of each CGU in the forecast and terminal
period decreased by 19%, the recoverable amounts of each CGU would continue to exceed their carrying amounts. Any
additional negative changes in the cash flow assumption would cause goodwill to be impaired, with such impairment
loss recognized in net earnings.
The impairment calculations require the use of estimates related to the future operating results and cash generating
ability of the assets. Judgment is also used in identifying the CGUs or group of CGUs at which goodwill, intangible assets
and property and equipment are monitored for internal management purposes and identifying an appropriate
discount rate for these calculations.
12. Trade and Other Liabilities
($ thousands)
Trade and other payables
Non-trade payables and accrued expenses
Customer deposits
Dividends payable (Note 17)
Income taxes payable
Foreign exchange contracts
Current portion of finance lease obligation (Note 14)
Total trade and other liabilities
2018
39,548
28,982
6,159
1,556
2,031
76
3,770
82,122
$
$
2017
49,290
25,672
3,086
1,098
2,408
402
5,361
87,317
$
$
84
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
13. Loans and Borrowings
Bank Indebtedness
At December 31, 2018, the Company has a revolving credit facility (the “Syndicated Facility”), with a syndicate of lenders.
The principal amount available under this facility is $120 million. The facility was amended and extended on December
18, 2018. The facility is committed for a four year term, but may be extended on or before the anniversary date with the
consent of the lenders. The facility contains an $80 million accordion which the Company may request as an increase
to the total available facility, subject to lender approval. As at December 31, 2018, there was $20.5 million drawn on the
facility and $2.4 million had been utilized for outstanding letters of credit to John Deere. The Company’s credit facility
bears interest at the lender’s prime rate plus the Applicable Margin (currently 0%). Applicable Margin can range from
0% to 1.75% (2017 – 0% to 2.00%) and is based on a liabilities to income ratio.
Term Debt Borrowings
The Syndicated Facility is secured by a general security agreement, a priority agreement; trade accounts receivable,
unencumbered inventories, assignment of fire insurance and guarantees from the Company’s subsidiaries. As terms
under the Syndicated Facility, the Company must maintain certain leverage, income coverage, and asset coverage
ratios, which the Company has complied with throughout 2018, see Note 26 for further discussion on covenants. Costs
directly attributable to the completion of the Syndicated Facility have been deferred and will be amortized over the
four year term.
85
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
13. Loans and Borrowings (continued)
Outstanding Borrowings
($ thousands)
Operating and Other Bank Credit Facilities
Revolving credit facility, lenders prime rate plus the Applicable Margin (currently
0.0%). Applicable Margin can range from 0% to 1.75% and is based on a liabilities
to income ratio
Year of
Maturity
2018
2017
2022
$ 20,494 $ 25,000
National Australian Bank, Australia, revolving credit facility, interest at 6.48%
2019
577
589
Capital Facilities
Farm Credit Corporation, mortgages payable in monthly instalments of $22
thousand including interest at 5.21%, a rate of lenders prime plus 1% per annum
(December 31, 2017 - 4.46%)
Farm Credit Corporation, mortgages payable in monthly instalments of $38
thousand including interest at 4.95%, a rate of lenders prime plus 1% per annum
(December 31, 2017 - 4.20%)
2019
109
1,792
2019
4,210
4,468
Affinity Credit Union, mortgages payable in monthly installments of $16 thousand,
including interest at 3.69% per annum (December 31, 2017 - 3.24%)
2019
5,623
5,822
Rental Equipment Term Loans
John Deere finance contracts, New Zealand, payable in monthly instalments
including interest at the rate of 4.88% to 6.45% per annum, secured by related
equipment
Hire purchase contracts, Australia, finance contracts payable in monthly
installments ranging up to AUD $4 thousand including interest at a rate of 4.56% to
5.68%, secured by related equipment
Various
7,332
5,586
Various
1,191
1,312
Finance contracts, various, repayable in monthly instalments ranging per month
including interest from 4.18% to 4.98%
Various
81
648
Less current portion
Less liabilities held for sale (Note 8)
Less deferred debt issuance costs
Carrying value of term debt at December 31
39,617
(13,964)
-
(530)
25,123 $
45,217
(11,122)
(1,530)
(395)
32,170
$
86
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
13. Loans and Borrowings (continued)
Floor Plan Payables
The Company utilizes floor plan financing arrangements with various suppliers for inventory purchases. The terms of
these arrangements may include an interest-free period followed by a term during which interest is charged at rates
ranging from 3.90% to 8.95% at December 31, 2018. Settlement of the floor plan liability occurs at the earlier of sale of
the inventory, in accordance with terms of the financing arrangement, or based on management’s discretion. Floor plan
payables are secured by specific new and used equipment inventories.
($ thousands)
John Deere Financial, Canada
Wells Fargo Vendor Finance
John Deere Financial, New Zealand and Australia
PACCAR Financial
CIBC Floor Plan Facility
Other Floor Plan Facilities
Total floor plan payable
Interest Rate
5.20% - 8.95%
6.73%
6.25% - 6.50%
4.91% - 5.10%
4.59%
3.90% - 5.75%
2018
2017
$ 95,907 $ 72,165
3,412
13,640
33,806
908
1,642
125,573
2,223
19,297
36,531
-
3,657
$ 157,615 $
87
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
13. Loans and Borrowings (continued)
Pre-Approved Credit Limits and Available Credit Facilities
A summary of the Company’s maximum pre-approved credit limits on available credit facilities as at December 31, 2018,
are as follows:
($ thousands)
December 31, 2018
December 31, 2017
Total Limits Borrowings
Letters of
Credit
Amount
Available Total Limits Borrowings
Letters of
Credit
Amount
Available
Operating and other bank credit facilities
122,867 21,071
2,400
99,396 101,925
25,589
2,400 73,936
Capital facilities (a)
Floor plan facilities and rental
equipment term loan financing (b)
Total borrowing
Total current portion long term debt
Total inventory floor plan facilities
Term debt held for sale
Deferred debt issuance costs
Total long term debt
9,942
166,219
197,232
(13,964)
(157,615)
-
(530)
25,123
12,082
133,119
170,790
(11,122)
(125,573)
(1,530)
(395)
32,170
(a) For capital facilities, the additional amount available under the facilities is limited to the lesser of the pre-approved
credit limit of $9.9 million (2017-$55.8 million) or the available unencumbered assets which is estimated at $2.4
million as at December 31, 2018 (2017- $1.5 million).
(b) For floorplan facilities, the additional amount available under the facilities is limited to the lesser of the pre-
approved credit limit of $418.4 million (2017-$453.0 million) or the available unencumbered assets which is
estimated at $33.5 million as at December 31, 2018 (2017- $28.9 million).
88
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
13. Loans and Borrowings (continued)
Reconciliation of Movements of Liabilities to Cash Flows Arising from Financing Activities
($ thousands)
Balance at January 1, 2017
Changes from financing cash (outflows) inflows
Cash dividends paid
Repayment of debenture payable
Payment of finance lease liabilities
Advance of term debt
Total (outflows) inflows from financing cash flows
Effect of changes in foreign exchange rates
Liabilities held for sale
Liability related changes
Dividends issued through DRIP
Dividends declared
New finance leases
Interest expense
Interest paid
Total liability related other increase (decrease)
Balance at December 31, 2017
Changes from financing cash (outflows) inflows
Cash dividends paid
Payment of finance lease liabilities
Repayment of term debt
Total (outflows) from financing cash flows
Effect of changes in foreign exchange rates
Liability related changes
Dividends issued through DRIP
Dividends declared
New finance leases
Interest expense
Interest paid
Total liability related other increase (decrease)
Balance at December 31, 2018
Dividend
payable
1,103
(3,626)
-
-
-
(3,626)
-
-
(778)
4,399
-
-
-
3,621
1,098
(5,093)
-
-
(5,093)
-
(710)
6,261
-
-
-
5,551
1,556
Financial Liabilities
Finance
lease
obligation
15,223
Debenture
payable
33,899
Term debt
37,380
-
(34,500)
-
-
(34,500)
-
-
-
-
-
1,808
(1,207)
601
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(4,373)
-
(4,373)
-
-
-
-
4,927
-
-
4,927
15,777
-
(5,249)
-
(5,249)
-
-
-
743
-
-
743
11,271
-
-
-
7,692
7,692
(250)
(1,530)
-
-
-
-
-
-
43,292
-
-
(4,205)
(4,205)
-
-
-
-
-
-
-
39,087
Total
87,605
(3,626)
(34,500)
(4,373)
7,692
(34,807)
(250)
(1,530)
(778)
4,399
4,927
1,808
(1,207)
9,149
60,167
(5,093)
(5,249)
(4,205)
(14,547)
-
(710)
6,261
743
-
-
6,294
51,914
89
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
14. Finance Leases
As Lessee - Finance Lease Liabilities
Finance lease liabilities reflect the Company’s total future payments on leases for heavy trucks and equipment,
including final payments or buyouts. The finance lease assets are subsequently leased to customers, primarily under
operating lease agreements. Based on the effective interest rate implicit in each lease these future payments are
discounted to determine the net scheduled lease payments on each lease. The leases have terms typically between 1
and 7 years. On the maturity of the lease, the Company will sell the equipment. The difference between the Company’s
proceeds and the residual value per the lease agreement remains with the Company.
Finance lease liabilities as at December 31, 2018 and 2017 are payable as follows:
Future minimum lease
payments
($ thousands)
Less than one year
Between one and five years
More than five years
Total
$
$
2018
4,324 $
8,197
-
12,521 $
2017
5,535 $
11,260
965
17,760 $
Interest
2018
(554) $
(696)
-
(1,250) $
Present value of minimum
lease payments
2017
(174) $
(1,474)
(335)
(1,983) $
2018
3,770 $
7,501
-
11,271 $
2017
5,361
9,786
630
15,777
90
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
15. Income Taxes
Tax Expense
($ thousands)
Current income tax expense
Deferred income tax (recovery) expense
Income tax expense
2018
11,076 $
(1,111)
9,965 $
$
$
2017
9,700
(654)
9,046
Using federal and provincial statutory rates of 26.9% (2017 – 26.8%), the income tax expense for the year can be
reconciled to the statement of comprehensive income as follows:
($ thousands)
Income before income tax expense
Expected income tax expense
Non-deductible costs and other
Income tax (recovery) expense
2018
2017
$
$
36,544 $
9,823
142
9,965 $
28,958
7,761
1,285
9,046
Deferred Tax Assets and Liabilities
Continuity of the Company’s tax balances in during the year are as follows:
($ thousands)
Tangible assets
Intangible assets
Finance lease obligation
Unrealized foreign exchange and other
Net deferred tax liability
2017
$ 7,654
6,013
(4,242)
529
$ 9,954
$
Recognized in
Comprehensive
Income
(982)
(1,869)
1,213
527
$ (1,111)
2018
$ 6,672
4,144
(3,029)
1,056
$ 8,843
The Company has not recognized the benefits associated with net capital losses of $35,183 thousand (2017 - $36,302
thousand) and non-capital losses of $933 thousand (2017 - $936 thousand), as the timing and ultimate application of
these tax loss carryforwards are uncertain.
91
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
16. Financial Instruments
Fair values are approximate amounts at which financial instruments could be exchanged between willing parties based
on current markets for instruments with similar characteristics, such as risk, principal, and remaining maturities.
Financial instruments recorded or disclosed at fair value are classified using a fair value hierarchy that reflects the
significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
Level 1: Reflects valuation based on quoted prices observed in active markets for identical assets or liabilities;
Level 2: Reflects valuation techniques based on inputs other than quoted prices included in level 1 that are
observable either directly or indirectly;
Level 3: Reflects valuation techniques with significant unobservable market inputs, there were no level 3
instruments in current or prior year.
Carrying Value and Fair Value of Financial Assets and Liabilities
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their
levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not
measured at fair value if the carrying amount is a reasonable approximation of fair value.
Category
($ thousands)
Financial Assets
Cash and cash equivalents (a)
Trade and other accounts
receivable (a)
Derivative financial instruments Fair value through profit
Amortised cost
Amortised cost
Other investments
Other long-term assets
and loss
Fair value through profit
and loss
Amortised cost
Finance lease receivables
Amortised cost
Financial Liabilities
Trade and other liabilities (a)
Floor plan payables (a)
Term debt (b)
Derivative financial liability
Other liabilities
Other liabilities
Other liabilities
Held-for-trading
Finance lease obligation
Other liabilities
2018
Fair Value
Level 1 Level 2
2017
Fair Value
Level 1 Level 2
Carrying
value
$
14,502
52,834
77
397
5,238
5,119
2,605
640
396
86,915
125,573
39,087
43,292
76
402
11,986
15,777
397
5,119
636
43,292
402
15,716
Carrying
value
$
6,106
71,700
77
5,238
3,504
349
82,046
157,615
39,087
76
11,271
(a) The carrying value approximates fair value due to the immediate or short-term maturity.
(b) The carrying values of the current and long-term portions of term debt and notes payable approximate fair value
because the applicable interest rates on these liabilities are at rates similar to prevailing market rates.
92
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
16. Financial Instruments (continued)
For other financial liabilities where the carrying value does not approximate the fair value, a discounted cash flows
approach was used to determine the fair value. For derivative financial instruments or forward exchange contracts, fair
value is based on market comparison technique based on quoted prices.
17. Capital and Other Components of Equity
The Company has unlimited authorized share capital without par value for all common shares. All issued common
shares have been fully paid.
Share Capital
(thousands)
Balance at January 1, 2017
Issued under the DRIP plan
Issued under the deferred share plan
Repurchased under the NCIB
Balance at December 31, 2017
Issued under the DRIP plan
Issued under the deferred share plan
Repurchased under the NCIB
Balance at December 31, 2018
Common Shares
Shareholders are entitled to:
Number of
common shares
15,750 $
62
103
(240)
15,675
52
30
(198)
15,559 $
Total carrying
amount
89,863
778
757
(3,235)
88,163
710
276
(2,609)
86,540
(i)
(ii)
(iii)
dividends if, as and when declared by the Board of Directors of the Company;
to one vote per share at meetings of the holders of Common Shares; and
upon liquidation, dissolution or winding up of Cervus to receive pro rata the remaining property and assets of
the Company, subject to the rights of shares having priority over the Common Shares.
Normal Course Issuer Bid
On August 21, 2017, the Company announced a Normal Course Issuer Bid (the “August 2017 Bid”), which commenced
on August 23, 2017, to purchase up to a maximum of 806 thousand common shares (the “Shares”) for cancellation
before August 22, 2018. Cervus appointed Raymond James Ltd. as its broker, who conducted the Bid on behalf of the
Company. All purchases were made in accordance with the August 2017 Bid at the prevailing market price of the Shares
at the time of purchase. This normal course issuer bid expired on August 22, 2018. Prior to expiry, Cervus repurchased
and cancelled 292 thousand common shares through the bid at a weighted average price of $13.44 per share.
On September 10, 2018, the Company announced a Normal Course Issuer Bid (the “September 2018 Bid”), which
commenced on September 13, 2018 to purchase up to a maximum of 1,031 thousand common shares (the “Shares”)
for cancellation before September 12, 2019. Cervus appointed Raymond James Ltd. as its broker, who will conduct the
Bid on behalf of the Company. All purchases are to be made in accordance with the September 2018 Bid at the
prevailing market price of the Shares at the time of purchase.
93
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
17. Capital and Other Components of Equity (continued)
For the year ended December 31, 2018, the Company had repurchased and cancelled 52 thousand common shares at
a weighted average price of $13.48 per share under the August 2017 Bid, and 146 thousand common shares at a
weighted average price of $13.03 per share under the September 2018 Bid.
Dividends Declared
($ thousands)
2018
2017
$0.40 per qualifying common share (2017 - $0.28)
$
6,261
$
4,399
Total dividends paid in cash during the year were $5,093 thousand (2017 - $3,626 thousand). Dividends payable as at
December 31, 2018, was $1,556 thousand (2017 - $1,098 thousand).
Dividend Reinvestment Plan
The Company has a Dividend Reinvestment Plan ("DRIP") entitling shareholders to reinvest cash dividends in additional
common shares. The DRIP allows shareholders to reinvest dividends into new shares at 95 percent of the average share
price of the previous 10 trading days prior to distribution.
Accumulated and Other Comprehensive Income
Accumulated and Other Comprehensive Income is comprised of a cumulative translation account that comprises all
foreign currency differences that arise on the translation of the financial statements of the Company’s investment in its
foreign operations, Cervus New Zealand Equipment Ltd., Cervus Equipment Holdings Australia Pyt Ltd. and Cervus
Equipment Australia Pty Ltd.
18. Revenue
The Company’s contract liabilities primarily relate to advance consideration received from customers for wholegoods
equipment, parts and services. The amount of $107 thousand recognized in contract liabilities at the beginning of the
period has been recognized as revenue for the year ended December 31, 2018.
The amount of revenue recognized for the year ended December 31, 2018 from performance obligations satisfied (or
partially satisfied) in previous periods was $88 thousand.
94
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
19. Other Income
Other income for the years ended December 31, 2018 and 2017 are comprised of the following:
($ thousands)
Net gain on sale of property and equipment (a)
Gain on sale of Commercial operations
Reorganization costs (b)
Unrealized foreign exchange (loss) gain (c)
Extended warranty commission
Financial compensation and consignment commissions
Other income
Total other income
2018
1,409
480
-
(1,199)
(217)
877
2,093
3,443
$
$
2017
1,680
-
(2,532)
890
(214)
315
973
1,112
$
$
(a) Net gain on sale of property and equipment includes a $0.8 million gain on insurance recoveries, related to the
derecognition of capital assets for damage caused the by fire.
(b) Relates to a valuation adjustment to the Ontario lease fleet, incurred in connection with reorganizing the
Company’s Ontario operations during the year.
(c) Unrealized foreign exchange gain (loss) is due to changes in fair value of our foreign exchange derivative and from
period close translation of accounts payable and floorplan payables denominated in U.S. dollars.
20. Selling, General and Administrative Expenses By Nature
($ thousands)
Wages and benefits
Depreciation and amortization
Occupancy costs including maintenance
Operating and administrative expenses
Total selling, general and administrative expenses
2018
2017
102,204
9,884
21,607
39,350
$ 173,045
101,530
10,668
21,609
42,392
$ 176,199
95
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
21. Wages and Benefits
($ thousands)
Included in cost of sales:
Wages and benefits
Included in selling, general and administrative expenses:
Wages and benefits
Share-based payments
Total wages and benefits included in selling, general and administrative expenses
Total wages and benefits
2018
2017
$
35,439
$
36,285
100,690
1,514
102,204
$ 137,643
100,838
692
101,530
$ 137,815
Employee Share Purchase Plan
The Company has an employee share purchase plan available to all employees on a voluntary basis. Under the plan,
employees are able to contribute 2% to 4% of their annual salaries, based on years of service. The Company contributes
between 15% and 150%, depending on the Company’s annual financial performance, on a matching basis to a
maximum of $5,000 per year, per employee. The shares are purchased on the open market through a trustee; therefore,
there is no dilutive effect to existing shareholders. Included in selling, general and administrative wages and benefits
expense are $894 thousand (2017 - $837 thousand) of expenses incurred by the Company to match the employee
contributions.
Mid-Term Management Incentive Plan
The Company offers a mid-term incentive plan (the “MTIP”) to certain senior key employees. Under the MTIP,
participants receive annual grants of performance share units (“PSUs”) which are settled in cash based on the
achievement of performance targets at the end of a three year performance period. A liability for MTIP obligation is
recognized at its fair value of cash payable, and is re-measured each reporting period until the liability is settled on the
third anniversary of initial grant. Any changes in the liability are recognized in the statement of comprehensive income.
For the year ended December 31, 2018, MTIP expense recognized during the year amounted to $471 thousand (2017 –
$137 thousand).
96
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
21. Wages and Benefits (continued)
Deferred Share Plan
The Company has a deferred share plan (the “Deferred Share Plan”) available to officers, directors and executives
whereby, if elected, certain payments to these individuals can be deferred, ranging in amounts up to $50 thousand per
individual, where the Company also matches the deferred portion. The deferred shares are granted as approved by the
board of directors based on 95% of the 10-day average share price prior to the date of grant. The matched component
of the plan vests over a period of 5 years (50% after 3 years, 25% after 4 years and 25% after 5 years) and is recorded as
selling, general and administrative expense as it vests.
The Company also has a deferred share plan (the “Management Deferred Share Plan”) available to management
whereby, if elected, certain payments to these individuals can be deferred, ranging in amounts up to $10 thousand per
individual, where the Company also matches the deferred portion. The deferred shares are granted as approved by the
board of directors based on 95% of the 10-day average share price prior to the date of grant. The matched component
of the plan vests and is redeemable on December 1st of the 3rd year following the year for which the deferred shares
were issued, and is recorded as selling, general and administrative expense upon vesting.
As at December 31, 2018, the Company has 870 thousand shares reserved for issuance under these plans. As at
December 31, 2018, 801 thousand (2017 – 696 thousand) deferred shares have been issued under these plans and
remain outstanding. Of the outstanding deferred shares, 640 thousand (2017 – 570 thousand) can be converted to
common shares. Total deferred shares payable as of December 31, 2018 was $8.7 million (2017 - $7.5 million).
Balance, January 1
Units granted
Units redeemed
Units forfeited
Balance, end of year
22. Finance Income and Finance Costs
($ thousands)
Finance income
Interest expense on convertible debenture
Interest expense on mortgage and term debt obligations
Interest expense on financial liabilities
Finance costs
Net finance costs recognized separately
Net finance costs recognized in cost of sales
Total net finance costs
2018
2017
Number of units Number of Units
745
129
(162)
(16)
696
696
180
(36)
(39)
801
2018
854
-
(1,900)
(5,615)
(7,515)
(5,498)
(1,163)
(6,661)
$
$
$
2017
484
(1,808)
(1,373)
(4,108)
(7,289)
(5,379)
(1,426)
(6,805)
$
$
$
97
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
23. Earnings per Share
Per Share Amounts
Both basic and diluted earnings per share have been calculated using the net earnings attributable to the shareholders
of the Company as the numerator. No adjustments to net earnings were necessary for the years ended December 31,
2018 and 2017.
Weighted Average Number of Common Shares
The weighted average number of shares for the purposes of diluted earnings per share can be reconciled to the
weighted average number of basic shares as follows:
($ thousands)
Issued common shares opening
Effect of shares issued under the DRIP plan
Effect of shares issued under the deferred share plan
Effect of shares repurchased from NCIB
Weighted average number of common shares
Diluted Earnings per Share
2018
15,675
31
12
(62)
15,656
2017
15,750
36
27
(69)
15,744
The calculation of diluted earnings per share at December 31, 2018 was based on the profit attributable to common
shareholders. The calculation of diluted earnings per share at December 31, 2017 was based on profit attributable to
common shareholders, including interest expense on convertible debentures, net of tax, given its dilutive impact on
the Company’s earnings per share.
($ thousands)
Profit attributable to common shareholders (basic)
Interest expense on convertible debentures, net of tax
Profit attributable to common shareholders (diluted)
2018
26,579 $
-
26,579 $
$
$
2017
19,917
1,331
21,248
Weighted Average Number of Shares (Diluted)
The weighted average number of common shares outstanding after adjustment for the effects of dilutive potential
common shares which consist of the following:
($ thousands)
Weighted average number of common shares (basic)
Effect of dilutive securities:
Deferred share plan
Convertible debenture
Weighted average number of shares (diluted)
The above table includes all dilutive instruments held by the Company.
2018
15,656
801
-
16,457
2017
15,744
696
1,319
17,759
98
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
24. Operating Leases
a) As Lessee
The Company leases a number of lands and building facilities, office equipment and vehicles. The leases typically run
for a period of between 1 to 20 years (2017 - 1 and 20 years) with options to renew the leases on the lands and buildings
after that date. The land and building leases do not include any provisions for transfer of title. It was determined that
substantially all the risks and rewards of ownership of the land and buildings remains with the landlord. As such, the
Company has determined that the leases are operating leases.
The Company is committed to the following minimum payments under operating leases for land and buildings,
equipment and vehicles:
($ thousands)
Less than 1 year
Between 1 and 5 years
More than 5 years
b) As Lessor
2018
$
12,087
36,305
82,192
$ 130,584
2017
11,775
34,168
83,407
129,350
The Company has entered into fixed term contractual arrangements to allow customers to have dedicated use of
certain heavy trucks and equipment owned by the Company. The minimum payments for the non-cancellable
operating leases for rental fleet is as follows:
($ thousands)
Less than 1 year
Between 1 and 5 years
More than 5 years
25. Supplemental Cash Flow Information
($ thousands)
Changes in non-cash working capital:
Inventory
Floorplan
Trade and other receivables
Trade and other liabilities
Total change in non-cash working capital
2018
3,101
5,326
-
8,427
$
$
2017
3,780
7,102
547
11,429
2018
2017
(42,486)
23,703
(18,758)
(1,333)
(38,874)
(58,343)
49,221
(1,686)
4,544
(6,264)
The change in non-cash working capital takes into consideration the assets and liabilities held for sale (Note 8) and
acquired through business combinations (Note 5).
99
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
26. Financial Risk Management
Overview
The Company has exposure to the following risks from its use of financial instruments: credit risk; liquidity risk; and
market risk. This note presents information about the Company’s exposure to each of the above risks, the Company’s
objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. Further
quantitative disclosures are included throughout these consolidated financial statements.
Risk Management Framework
The Board of Directors (“Board”) has overall responsibility for the establishment and oversight of the Company’s risk
management framework. The Board, together with the Audit Committee are responsible for monitoring and oversight
of the Company’s risk management policies. The Company’s risk management policies are established to identify and
analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence
to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the
Company’s activities. The Company, through its training and management standards and procedures, aims to develop
a disciplined and constructive control environment in which all employees understand their roles and obligations.
The Company’s Audit Committee oversees how management monitors compliance with the Company’s risk
management policies and procedures, and reviews the adequacy of the risk management framework in relation to the
risks faced by the Company.
Credit Risk
Trade and Other Receivables
By granting credit sales to customers, it is possible these entities, to which the Company provides services, may
experience financial difficulty and be unable to fulfill their obligations. A substantial amount of the Company’s revenue
is generated from customers in the farming, industrial, and transportation equipment industries. This results in a
concentration of credit risk from customers in these industries. A significant decline in economic conditions within these
industries would increase the risk customers will experience financial difficulty and be unable to fulfill their obligations
to the Company. The Company’s exposure to credit risk arises from granting credit sales and is limited to the carrying
value of accounts receivable, finance lease receivables, long-term receivables and deposits with manufacturers (see
Note 6).
Goods are sold subject to retention of title clauses so that in the event of non-payment, the Company may have a
secured claim. The Company will also register liens in respect to trade and other long-term receivables as deemed
necessary and dependent on the value of the receivable.
100
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
26. Financial Risk Management (continued)
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk
at the reporting dates was:
($ thousands)
Trade receivables (a)
Other receivables
The maximum exposure to credit risk at the reporting date by geographic region was:
($ thousands)
Domestic (a)
New Zealand
Australia
The aging of trade and other receivables at the reporting date was:
($ thousands)
Current - 60 days (a)
Past due – 61-90 days
Past due – 91 to 120 days
Past due more than 120 days
2018
54,939
3,930
58,869
2018
46,267
4,198
4,474
54,939
2018
50,976
2,191
962
810
54,939
$
$
$
$
$
$
2017
43,285
3,642
46,927
2017
36,140
4,395
2,750
43,285
2017
38,047
2,900
1,242
1,096
43,285
$
$
$
$
$
$
(a) Included in the balances for 2017 are receivables held for sale, as the Company was exposed to the credit risk as at
December 31, 2017 (Note 8).
The Company recorded the following activity in its allowance for impairment of loans and receivables:
($ thousands)
2018
2017
Balance at January 1
Additional allowance recorded
Amounts written-off as uncollectible
Balance at December 31
1,710
903
(1,034)
1,579
In our industries, customers typically pay invoices within 30 to 60 days. No single outstanding customer balance
represented more than 10% of total accounts receivable.
1,579
(213)
(288)
1,078
$
$
$
$
101
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
26. Financial Risk Management (continued)
The Company mitigates its credit risk by assessing the credit worthiness of its customers on an ongoing basis. The
Company closely monitors the amount and age of balances outstanding and establishes a provision for bad debts
based on specific customers’ credit risk, historical trends, and other economic information.
Guarantees
The Company has irrevocable standby letters of credit to John Deere in the amount of $2.4 million (2017 - $2.4 million).
The letter of credit agreements allow for John Deere to draw upon it in whole or in part in the event of any default by
the Company of any or all obligations.
In addition to these guarantees, the Company has also guaranteed the residual value of certain equipment leases which
have been entered into between our Customers and John Deere. For these leases, Cervus is responsible to purchase
the equipment from John Deere upon the maturity of the lease between the customer and John Deere. The Company’s
purchase price for the equipment is the residual value agreed to at the inception of the lease between John Deere, the
Customer, and Cervus. On lease maturity, the equipment is purchased by the Company and is included in the
Company’s used inventory. Cervus regularly assesses residual values of customer equipment under lease with John
Deere, to assess its carrying value and if any allowance is necessary. At December 31, 2018, total residual values
maturing over the next 12 months was $32,052 thousand (2017 – $29,031 thousand) and the total residual values
maturing in the next five years is $320,617 thousand (2017 - $269,146 thousand). The Company has not recorded a
provision in the twelve months ended December 31, 2018 and 2017 as residual values as set under the leases are
anticipated to result in profit above cost when ultimately sold by the Company as used equipment.
Liquidity Risk
The Company’s exposure to liquidity risk is dependent on the collection of accounts receivable and the ability to raise
funds to meet purchase commitments and financial obligations and to sustain operations. The Company controls its
liquidity risk by managing its working capital, cash flows, and the availability of borrowing facilities. As described in
Note 13, the Company has available for its current use, $120 million less $20.5 million drawn on the facility and $2.4
million for irrevocable letters of credit issued to John Deere.
The Company believes that it has sufficient operating funds available to meet expected operational expenses, including
the service of financial obligations. The following are the contractual maturities of financial liabilities existing as at
December 31, 2018.
($ thousands)
Trade and other accrued liabilities
Floor plans payable
Dividends payable
Term debt payable
Derivative financial liability
Finance lease obligation
Total contractual maturities of financial
liabilities
Carrying
amount
Contractual
principal
maturities
12 months
or less
1 – 2
Years
2 – 5
Years
5+ Years
$
76,720
157,615
1,556
39,087
76
11,271
76,720
157,615
1,556
39,617
76
11,271
76,720
157,615
1,556
13,964
76
3,770
-
-
-
2,532
-
-
-
23,121
2,253
5,248
$ 286,325
286,855
253,701
4,785
28,369
-
-
-
-
-
-
102
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
26. Financial Risk Management (continued)
Market Risk
Market risk is the risk that changes in the marketplace such as foreign exchange rates, interest rates and commodity prices
that will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk
management is to manage and control market risk exposures within acceptable parameters while optimizing return. The
Company’s primary approach to market risk is managing the quantity, type, and applicability of its inventory, to facilitate
regular inventory turnover in line with market demand.
Currency Risk
Many of our products, including equipment and parts, are based on a U.S. dollar price as they are supplied primarily by U.S.
manufacturers but are settled in Canadian dollars as they are received. This may cause fluctuations in the sales values
assigned to equipment and parts inventories, as inventory is recorded based on Canadian dollar cost at the time of receipt,
but is sold to the customer based on market pricing prevailing at the time of sale. Both sales revenues and gross profit
margins may fluctuate based on differences in foreign exchange rates between the purchase of inventory and sale of
inventory. Certain of the Company’s manufacturers also have programs in place to facilitate and/or reduce the effect of
foreign currency fluctuations, primarily on the Company’s new equipment inventory purchases.
Further, a portion of the Company’s owned inventory is floor planned in U.S. dollars. As such, U.S. dollar denominated floor
plan payables are exposed to fluctuations in the U.S. dollar exchange rate until the unit is sold and the floorplan is repaid.
The fluctuation in the U.S. dollar floorplan payable is recorded in unrealized gain/loss on foreign exchange within other
income. When the equipment is sold, equipment is priced based on the prevailing spot USD/CAD exchange rate at the time
of sale, plus applicable margin. In so doing, the Company’s proceeds on sale directly offset the prevailing U.S. Dollar
floorplanned cost of the equipment. If the Company was unable to recapture fluctuations in the US/CAD dollar in the sales
price for equipment floor planned in U.S. dollars, a $0.01 change in the U.S. exchange rate would have increased (decreased)
comprehensive income by $141 thousand (2017 - $108 thousand), based on the U.S. dollar floor plan balances at December
31, 2018. From time to time the Company also enters into foreign exchange forward contracts to manage exposure on
timing difference between the payout of floorplan and receipt of funds from a customer.
In addition, the Company is exposed to foreign currency fluctuation related to translation adjustments upon consolidation
of its Australian and New Zealand operations. These foreign subsidiaries report operating results in Australia and New
Zealand dollars, respectively. Movements in these currencies relative to the Canadian dollar will impact the results of these
operations upon consolidation.
103
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
26. Financial Risk Management (continued)
Interest Rate Risk
The Company’s cash flow is exposed to changes in interest rates on its floor plan arrangements and certain term debt
which bear interest at variable rates. The cash flows required to service these financial liabilities will also fluctuate as a
result of changes in market interest rates. The Company mitigates its exposure to interest rate risk by utilizing excess
cash resources to buy-down or pay-off interest bearing contracts and by managing its floor plan payables by
maximizing interest-free periods as may be provided by Original Equipment Manufacturers (“OEM”).
Interest Bearing Financial Instruments
At the reporting dates, the Company’s interest bearing financial instruments were:
($ thousands)
Fixed Rate
Finance lease obligation
Variable Rate
Floor plan payables
Floor plan payables - interest bearing
Floor plan payables - interest free period (a)
Term debt
Total interest bearing financial instruments
2018
2017
11,271
15,777
155,705
1,910
39,617
$ 208,503
119,426
6,147
45,217
$ 186,567
(a) Various floor plan facilities include an interest free period, further certain incentives and rebates may be available to reduce
interest expense otherwise due on interest bearing portions of floor plans.
The Company does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. A change
in 100 basis points in interest rates would have increased or decreased interest costs for the year ended December 31, 2018
by approximately $1,972 thousand (2017 -$1,708 thousand).
Capital Risk Management
The Company’s objective when managing its capital is to safeguard its ability to continue as a going concern, in order
to generate returns for shareholders, expand business relationships with stakeholders, and identify risk and allocate its
capital accordingly. In the management of capital, the Company considers its capital to comprise term debt, the current
portion of term debt, and all components of equity.
The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and makes
adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In
order to maintain or adjust the capital structure, the Company may issue or repurchase shares, raise or retire term debt,
and/or adjust the amount of distributions paid to the shareholders.
104
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
26. Financial Risk Management (continued)
The Company uses the following ratios in determining its appropriate capital levels:
Debt to Total Capital ratio (term debt plus current portion of term debt divided by: term debt plus current
portion of term debt plus book value of equity);
Return on Invested Capital ratio (net income before tax plus interest on long term debt divided by total long-
term capital);
A debt to tangible assets ratio (calculated as total debt divided by: total assets less goodwill and intangibles);
and;
A fixed charge coverage ratio (calculated as adjusted net income divided by contractual principle, interest,
shareholder distributions, and lease payments).
There were no changes in the Company’s approach to capital management in the year. Neither the Company, nor any
of its other subsidiaries are subject to externally imposed capital requirements.
Covenant Compliance
The Company must meet certain financial covenants as part of its current Canadian syndicated credit facility, all of which
the Company was in compliance as at December 31, 2018. The covenants under the Syndicated Credit Facility are
consistent in principle with the internal ratios used by the Company in determining appropriate capital levels, however
calculations are not directly comparable, as the Company’s internal ratios are broader to consider all stakeholders, while
the Syndicate Covenants are specifically tailored by the Syndicate for their specific security position. The three core
covenants under the Syndicated Credit Facility, as contained in the Syndicated Credit agreement requires:
Maintaining a “total liabilities to tangible net worth ratio” not exceeding 4.0:1.0 calculated from adjusted total
liabilities over adjusted equity.
Maintaining a “fixed charge coverage ratio” greater to or equal to 1.10:1
Maintaining an “asset coverage ratio” greater than 3.0:1.0.
The specific calculations of the covenants under the Syndicated lending agreement include numerous lender, and
agreement specific, non-IFRS measures. The specific calculations and defined terms thereof are available for retrieval at
www.SEDAR.ca. The Company’s compliance as at December 31, 2018 with the covenants contained in the Syndicated
Credit Agreement is set out below:
As at December 31, 2018
As at December 31, 2017
Covenant
Result Covenant
Result
Total Liabilities to Tangible Net Worth*
Fixed Charge Coverage Ratio*
Asset Coverage Ratio*
* These are non-IFRS measures, stating the title of the covenant as defined in the Syndicated Credit Agreement, for
reference purposes.
2.39 Less than 4.0:1.0
2.39 Greater than 1.1:1.0
11.82 Greater than 3.0:1.0
Less than 4.0:1.0
Greater than 1.1:1.0
Greater than 3.0:1.0
2.55
1.69
10.01
105
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
27. Segment Information
The Company operates under three segments: Agriculture, Transportation, and Industrial based on the industries which
they serve. These segments are managed separately, and strategic decisions are made on the basis of their respective
operating results. These three business segments are described in Note 3 and are considered to be the Company’s three
strategic business units. The three business segments offer different products and services and are managed separately
as they operate in different markets and require separate strategies. For each of the strategic business units, the
Company’s key decision makers review internal management reports on a monthly basis.
Each of these business segment operations are supported by a single shared corporate head office. Certain corporate
head office expenses are allocated to the business segments under either specific identification approach or a usage
based metric. The corporate head office also incurs certain costs which are considered as public company costs, which
are allocated to the segments based on the gross margin of the Canadian operations. Total corporate related
expenditures, excluding income taxes, that have been allocated for the year ended December 31, 2018 are $3,241
thousand (2017 - $4,476 thousand).
The following is a summary of financial information for each of the reportable segments.
($ thousands)
Segmented income figures
Year ended December 31, 2018
Revenue
Equipment sales
Parts
Service
Rentals
Total revenue
Depreciation and amortization
Finance income
Finance expense including amounts in costs of sales
Income for the period before income tax
Capital additions, including finance leases
Segmented assets and liabilities as at December 31,
2018
Agricultural
Equipment
Transportation
Equipment
Industrial
Equipment
Total
$ 783,788 $
95,925
42,724
4,449
$ 926,886 $
7,295
662
(3,557)
31,188
10,439
228,569 $
96,118
31,078
6,391
362,156 $
5,969
154
(3,735)
4,064
2,341
29,478
14,085
12,700
4,732
60,995
1,847
38
(223)
1,292
815
1,041,835
206,128
86,502
15,572
1,350,037
15,111
854
(7,515)
36,544
13,595
Reportable segment assets
Intangible assets
Goodwill
Reportable segment liabilities
$ 378,080 $
27,614
18,411
197,763
129,466 $
10,975
2,546
82,618
33,123 $
4,051
667
14,787
540,669
42,640
21,624
295,168
106
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
27. Segment Information (continued)
($ thousands)
Segmented income figures
Year ended December 31, 2017
Revenue
Equipment sales
Parts
Service
Rentals
Total revenue
Depreciation and amortization
Finance income
Finance expense including amounts in costs of sales
Income for the period before income tax
Capital additions, including finance leases
Segmented assets and liabilities as at December 31,
2017
Agricultural
Equipment
Transportation
Equipment
Industrial
Equipment
Total
53,244
22,677
14,258
4,060
164,485 $
92,559
29,367
6,958
$ 694,052 $
93,627
40,839
5,159
911,781
208,863
84,464
16,177
$ 833,677 $ 293,369 $ 94,239 $ 1,221,285
17,588
484
(7,289)
28,958
13,106
7,029
319
(3,593)
29,479
6,838
7,852
115
(3,152)
(3,562)
5,825
2,707
50
(544)
3,041
443
Reportable segment assets
Intangible assets
Goodwill
Reportable segment liabilities
$ 337,442 $
23,673
15,667
185,443
122,687 $
11,867
2,547
77,956
53,926 $
4,202
666
25,403
514,055
39,742
18,880
288,802
The Company primarily operates in Canada but includes subsidiaries in Australia (Cervus Australia Pty Ltd.) and in New
Zealand (Cervus NZ Equipment Ltd.), which together operate 15 agricultural equipment dealerships. Gross revenue and
non-current assets for the geographic territories of New Zealand and Australia were $190,719 thousand (2017 -
$168,398 thousand) and $21,748 thousand (2017 - $20,431 thousand) respectively. The Australia and New Zealand
operations are included in the Agricultural Segment.
28. Commitments and Contingencies
The Company is a defendant and plaintiff in various other legal actions that arise in the normal course of business. The
Company believes that any liabilities that might arise pertaining to such matters would not have a material effect on its
consolidated financial position.
Financing Arrangements
John Deere Credit Inc. (“Deere Credit”) and other financing companies provide financing to certain of the Company’s
customers. A portion of this financing is with recourse to the Company if the amounts are uncollectible. At December
31, 2018 payments in arrears by such customers aggregated $829 thousand (2017 - $226 thousand).
In addition, the Company is responsible for assuming all lease obligations held by its customers with Deere Credit and
other financing companies through recourse arrangements for the net residual value of the lease outstanding at the
maturity of the contract. At December 31, 2018, the net residual value of such leases aggregated $320,617 thousand
(2017 - $269,146 thousand). Management believes that the potential liability in relation to the amounts outstanding is
negligible and consequently, no accrual has been made in these financial statements in relation to any potential loss
on assumed lease obligations.
107
Cervus Annual Report 2018
CERVUS EQUIPMENT CORPORATION
Notes to the Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
29. Related Party Transactions
Key Management Personnel Compensation
In addition to their salaries, the Company also provides non-cash benefits to directors and executive officers, and
contributes to the deferred share plan and the employee share purchase plan, if enrolled, in accordance with the terms
of the plans. The Company has no retirement or post-employment benefits available to its directors and executive
officers.
The remuneration of key management personnel and directors during the year ended December 31 was:
($ thousands)
Short-term benefits
Share-based payments
Total
Other Related Party Transactions
2018
3,050 $
1,184
4,234 $
$
$
2017
2,895
694
3,589
Certain officers and dealer managers of the Company have provided guarantees to John Deere aggregating $6,800
thousand (2017 – $5,400 thousand). During the year ended December 31, 2018 and 2017, the Company paid those
individuals $190 thousand (2017 - $170 thousand) for providing these guarantees. These transactions were recorded at
the amount agreed to between the Company and the guarantors, are included in selling, general and administrative
expense and have been fully paid during the year.
Cervus Annual Report 2018
108
cervusequipment.com