SETTING A NEW PATH TO
PERFORMANCE
2019 ANNUAL REPORT | CERVUS EQUIPMENT CORPORATION
ABOUT
CERVUS EQUIPMENT
Cervus Equipment Corporation (“Cervus” “Company” “our” or “we”) provides equipment
solutions to customers in agriculture, transportation, and industrial markets across
Canada, Australia, and New Zealand. Throughout its territories and across its diverse
markets, Cervus dealerships are united in delivering sales and support of the market-
leading equipment our customers depend on to earn a living. The Company operates 63
Cervus dealerships and is the authorized representative of leading Original Equipment
Manufacturers
John Deere agricultural equipment; Peterbilt
transportation equipment; and Clark, Sellick, Doosan, JLG and Baumann material
handling equipment. Cervus operates an extensive product-support network including
a fleet of mobile service vehicles and over 500 service bays. Cervus employs more
than 1,500 people, a third of whom are technicians with specialized skills to perform
equipment diagnostics, optimization, maintenance and repairs.
including:
(“OEMs”)
The Company was founded in 2000. Its common shares are listed on the Toronto Stock
Exchange and trade under the symbol “CERV”. Please visit cervusequipment.com for
more information.
This Annual Report contains forward-looking statements and refers to non-GAAP financial measures, including
key performance indicators. Please read the sections “Cautionary Note Regarding Forward-Looking Statements”,
“Non-GAAP Financial Measures” and “Key Performance Indicators” contained in Cervus’ Management Discussion
& Analysis for the year ended December 31, 2019, available on sedar.com.
1 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
OUR LOCATIONS
A Diversified Platform For Growth
AGRICULTURE
INDUSTRIAL
36
DEALERSHIPS
8
DEALERSHIPS
TRANSPORTATION
TOTAL
19
DEALERSHIPS
63
DEALERSHIPS
2 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
SETTING A NEW PATH TO
PERFORMANCE
In late 2019, we announced our strategy to address shortcomings, capture value from our
scale and past growth, and drive the innovation our future will require. Amid the headwinds
of a challenging market, we set the stage for improvement with the introduction of a mission,
vision, and ambitious five-year strategy to become the leading full-service equipment solutions
provider in our industries and geographies.
We are confident that through a structured and disciplined approach, we can transform Cervus,
harness innovation and technology, develop new capabilities, and deliver value for customers,
shareholders, employees and OEMs.
3 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
A MESSAGE FROM
PETER LACEY
CHAIR OF THE BOARD
I am honoured to serve as Chair of the Board of
Cervus and pleased to own the largest equity
stake in a business that is actively and strategically
working to become better, stronger and more
capable of creating value than ever before.
Fellow Shareholders,
As you will read in this annual report, Cervus is changing with
the full support of your Board. Since being appointed, our new
CEO, Angela Lekatsas, has developed and implemented a five-
year growth and improvement strategy designed to increase
profitability and deliver tangible benefits to all stakeholders.
The plan is calibrated to transform our performance through
disciplined adherence to financial and operating processes and
a concerted effort to increase product support revenue as a
percentage of total sales. These changes are needed as we set
out to deliver better return on invested capital, provide stability
for our business across market cycles, and elevate the role of
product support within our Company.
Peter Lacey | Chair of the Board
2019 Results
I say these changes are needed because as you will read in
this annual report, 2019 was a challenging year. Despite the
benefits of market diversification, our results were whipsawed
by depressed demand for – and delayed customer spending on
– new agricultural equipment in Western Canada, excess used
equipment inventory across the industry, and excess freight
capacity and decreasing freight rates in the transportation
industry. On a 22% decrease in equipment revenue, partially
offset by a 6% increase in product support revenue, Cervus
lost $0.56 per basic share.
In response to these challenges, our management team took
decisive actions to protect the balance sheet by reducing
excess used
implementing more
discipline in our sales processes. As a result, we retained
operational flexibility as we enter 2020.
inventory while also
Building on Our Strengths
Your Board was actively involved in the development of our
new plan. In fact, we saw a compelling need for change and
began framing a new strategy before Angela’s appointment.
We wholeheartedly endorse the changes that are taking
place under Angela’s leadership. We are united in support
of retaining the Company’s traditional strengths including
an empowered employee-ownership culture, best-in-market
customer service, and our longstanding partnerships with
world-leading Original Equipment Manufacturers (“OEMs”).
Our strategy does not negate these strengths; it builds upon
them for a defined purpose: value creation.
Board Activities
As part of our commitment to ongoing education and
engagement, the Board allocates time for field work.
In 2019, we held our year-end committee and Board
meetings in Australia and toured our branch facilities to
gain a better appreciation for our market position. I also
attended Cervus’ inaugural Institutional Investor Day in
Toronto along with two other Directors, which afforded us
the opportunity to discuss our business and strategy with
those in attendance.
During 2019, your Board made two appointments. We
selected Angela as our CEO in May following an extensive
search and rigorous screening process. Angela is uniquely
qualified to lead Cervus. She has deep and relevant finance
and operational expertise in agriculture earned during a 15-
year career at Agrium, the public company predecessor to
Nutrien. Angela knows Cervus: she has served on our Board
since 2013 and as Audit Committee Chair from 2015 to the
spring of 2019.
I am pleased with how quickly
our management team
responded to market conditions
by reinforcing disciplined sales
process and reducing excess
used inventory.
Second, in September, we appointed Wendy Henkelman
to our Board. Wendy is an experienced public company
director. At ATB Financial, she chairs the Human Resource
Committee and is a member of the Audit Committee. She also
serves as a Director of and chairs the Audit Committee for
Postmedia Network Canada Corp. During her distinguished
career, Wendy held executive positions in major public oil
and gas companies.
Both of
Professional Accountants (CPA, CA).
these accomplished women are Chartered
Future Forward
I have been in the equipment industry for 38 years. From
that experience, I recognize that success – more than ever –
requires scale and strong partnerships. Cervus has both today.
Success also requires discipline to realize the true benefits
of scale, and focused accountability for creating value for all
partners. Having worked directly with our leaders and given
the evolution of our culture transition, I have no doubt the
organization will be aligned and successful in value creation.
I want to thank all of our partners: shareholders, customers,
employees and our OEMs, for your continued commitment
to Cervus. My thanks also to Graham Drake for 19 years of
inspired leadership as our co-founder. Graham retired in May
2019, but his contributions live on.
I encourage all shareholders to attend our annual meeting
on Thursday April 23, 2020 at 4:00 p.m. (MST) at Cervus’
corporate headquarters located at 5201, 333- 96 Avenue N.E.
Calgary, Alberta. I look forward to seeing you there.
Yours sincerely,
Peter Lacey
Chair of the Board
6 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
A MESSAGE FROM
ANGELA LEKATSAS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In late 2019, we introduced an ambitious five-year
strategy to transform Cervus into the leading
full-service equipment solutions provider in our
territories. Having taken the costly but necessary
actions to align our inventory with the current
market, we enter 2020 with a strong balance
sheet, a healthier level of used inventory, specific
targets for value creation and a skilled workforce
that is enthusiastically embracing structured
change. Even more fundamentally, a sense of
accountability is building up and down the line
towards performance and progression for our
shareholders and all partners.
Angela Lekatsas | President and CEO
Fellow Shareholders,
I was appointed President and CEO with a clear mandate
from our Board of Directors to create value. I am excited by
our prospects and delighted to be working closely with the
talented and dedicated people of Cervus to transform what
we do, how we do it and how we measure success.
Before describing our planned transformation, I believe it’s
important to discuss 2019, which was a staging year for our
Company. In my first 100 days as CEO, my priority was listening
to employees while travelling to the majority of our dealership
locations. I also spent time with customers, OEM partners and
shareholders. Together with my management team, I assessed
our assets, strategy and opportunities at an enterprise level. I’ll
start by telling you what I saw, beginning with an assessment of
our business strengths of which there are many:
• From branch staff to management and on to our Board,
Cervus has an extraordinary team of people in Canada,
Australia and New Zealand.
• We have a proud history of serving our customers, many
of whom are lifelong partners who trust Cervus to support
their needs across more than one of our divisions.
• We represent the world’s best OEMs and gain tremendous
competitive advantage
industry-leading
from
investments in equipment and technology innovation.
In turn, we are the single largest John Deere Agriculture,
Peterbilt Truck and Clark Forklift dealer in our territories
based on volume.
their
• As the largest diversified agriculture and transportation
dealer in our territories, we have the scale necessary
to compete and invest in meeting evolving customer
expectations.
• We have empowered decision-making capabilities right at
the customer level.
• We have built a reputation as a trustworthy acquisition
partner among other dealers who count on us to maintain
and build on their life’s work, when they wish to sell.
• We have developed a market-leading training business
that in 2019 alone, certified more than 11,500 students
for equipment operator safety training.
• We have a well-defined business model based on selling
specialized capital equipment and serving customers as
they use it.
• We have an extensive network of service bays and a
team of factory-trained parts and service technicians to
support our customers and deliver the equipment uptime
they need to achieve business success.
As the largest diversified
agriculture and transportation
dealer in our territories, we have
the scale necessary to compete
and invest in meeting evolving
customer expectations.
These facts are impressive, but my first 100 days was also the
time to understand why our financial results over the past five
years have been disappointing. What became obvious to me
was that Cervus had encountered growing pains related to
integration of past acquisitions that contributed to inefficient
systems and lack of standardized processes. As a result, our
growth in capabilities, scale and revenue was not accompanied
by a commensurate increase in profitability. Our share price
lagged industry peers as our five-year trailing Return on Invested
Capital (“ROIC”) was 8.4%; and is, in my view, much too low for a
company with our potential.
Furthermore, despite a strong presence in our Transportation
and Industrial sectors and Southern Hemisphere businesses,
historically about 70% of our revenue (50%
in 2019)
remains exposed to Western Canadian agriculture. Three
strong years of selling new agricultural equipment, without
an equal focus on disciplined used sales processes and
inventory management practices resulted in a buildup of
used equipment inventory taken on trade that continued to
depreciate and incur interest charges as it aged. The benefits
of diversification and stable product support revenues were
not sufficient to counterbalance the overweight impact of
Agriculture’s used equipment inventories.
As a result of these observations, the management team and
I began building a new path to performance.
2019’s Challenges
Shortly after my appointment in May of 2019, industry
strengths and weaknesses were brought into sharp focus by
a confluence of events impacting both our Agriculture and
Transportation segments. In Agriculture, lower farm incomes
in Western Canada, reduced commodity prices, higher input
costs, poor weather conditions and international trade disputes
all acted to dampen new and used equipment spending across
the board and the industry experienced excess inventory levels
as a result.
In our Transportation segment, early-year factory delays,
intense competition, particularly in the fleet market, and excess
freight capacity created multiple challenges.
Across both segments, customers were well positioned to
defer their equipment purchases in 2019 following record
purchase activity in 2017 and 2018. This coupled with intense
competition and increased Canadian dollar-cost of primarily
U.S.-manufactured equipment added to these challenges across
our segments.
8 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
In response to this confluence of
headwinds, my first request of our
organization was to protect our
balance sheet by reducing used
agriculture equipment inventory.
Cervus rallied to this task and cut
used Agriculture inventory by $67
million or 37% in the second half
of 2019 compared to June 30.
Despite best efforts, total equipment revenue dropped 22% in
2019. Meantime, product support revenue was up 6% as a result
of an increase in demand for parts and service from customers
operating their older equipment longer. While our product support
business was not large enough to offset the impact of this perfect
storm, our ability to grow product support sales in 2019 despite
market headwinds confirmed that our new strategy to increase
the proportion of revenues from product support is an appropriate
defensive play against cyclical volatility.
Rising to The Challenge
In response to this confluence of headwinds, my first request
of our organization was to protect our balance sheet by
reducing used agriculture equipment
inventory. Cervus
rallied to this task and cut used Agriculture inventory by
$67 million or 37% in the second half of 2019 compared to
June 30. While this resulted in a non-cash write down of $24
million and margin pressure on used equipment, we enter
2020 with agriculture equipment inventory better aligned to
the current market, which reduces prospective obsolescence
and interest costs. Used equipment turns of 1.78 times at
December 31, 2019 compared to 1.62 times at June 30, 2019
signaled that our inventory position had moved markedly
closer to being rightsized for sustainable market demand.
This response served to protect our balance sheet, keep
our credit metrics well within our banking covenants and
maintain organizational resiliency in the face of uncertain
market conditions.
Setting the Foundation:
Cultural Alignment
My experiences have taught me that recognizing what your
culture is and what you need it to be, are the most critical
steps in successfully leading an organization to improved
profitability. In 2019, we identified where our culture needed
structure and focus and developed the top five key cultural
attitudes and behaviours each employee needs to embrace
to find success and deliver on our future objectives. These
attitudes, shown below and expressed in the first person,
were conveyed to all employees during training led by
certified instructors and expectation setting facilitated by the
leadership team.
In 2019, we identified where our
culture needed structure and
focus and developed the top
five key cultural attitudes and
behaviours each employee needs
to embrace to find success and
deliver on our future objectives.
• Serving Customers – I own the customer experience and
will provide the best solution that will consistently deliver
or exceed customers’ expectations.
• Focus & Finish – I align and commit my actions to deliver
on our established priorities.
• Inspire Performance –
I support others through
frequent, meaningful feedback that fosters ownership
and accountability to drive results.
• Drive Business Excellence – I support and execute
standardized, effective and repeatable processes to
enhance the customer experience and optimize our
business results.
• Ownership – I respect how decisions are made and own
them as if they were mine.
I saw first-hand these cultural attitudes and behaviours begin
to take hold across our business. On my 100 day listening tours,
the number one comment I heard from employees was: “Our
cultural training was the best training I have seen at Cervus.”
While culture does not change overnight, employee feedback
9 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
As stated in our new vision, our
transformation will elevate Cervus
into “the leading full-service
equipment solutions provider” while
our new mission dedicates us “to
advance our customers’ success by
providing practical and intelligent
equipment solutions and support.”
Our Five-Year Strategy
After my appointment in May, I spent considerable time
on driving intensive business analysis which culminated
in the five-year strategy underpinning our new path to
performance. We presented the strategy to our Board of
Directors in September and introduced it to our employees,
OEMs, customers and shareholders in November.
This strategy consists of three components: Partnership,
Performance and Progression. In each of these “three Ps”,
we developed principles, priorities and objectives to guide
our transformation. Required actions are now underway.
suggests to me that up and down the line, there is a willingness
to embrace cultural change and a recognition of the merits of
doing so.
New Vision and Mission
During the
intense effort to address 2019 market
challenges, align our culture, and establish a new path to
performance, we also introduced a new corporate vision
and mission to guide us in our change management
efforts. As stated in our new vision, our transformation
will elevate Cervus into “the leading full-service equipment
solutions provider” while our new mission dedicates us “to
advance our customers’ success by providing practical and
intelligent equipment solutions and support.”
These statements serve as our north star: they inspire our
strategies and inform our actions for the future.
A New Path to Performance
Our new path requires transformation with a clear vision,
aligned goals and objectives throughout our Company and
it demands the full engagement of our workforce.
To start us on this new path, I brought focus to our
leadership and structure with special emphasis on
addressing areas where we have fundamental challenges.
At the divisional level, I reaffirmed our approach to strong,
decentralized management with the appointments of Scott
Johnston to the position of Vice President, Canadian Agriculture
effective October 1, 2019 and Tim Ormrod as Managing Director,
Australia & New Zealand on July 25, 2019. Scott joined Cervus
four years ago with prior leadership success as Vice President
and Chief Operating Officer of Siemens Transportation and
Chief Operating Officer of Yanke Group and most recently as
our General Manager of Agriculture Saskatchewan. Tim started
his career at Cervus in 2012 after serving as Senior Supervisor at
KPMG New Zealand. Prior to his most recent appointment, he
excelled in various roles including Integration Manager for New
Zealand and Australia and General Manager of Marketing and
Sales for Cervus Australia.
Along with Fred Hnatiw, Vice President, Operations,
Transportation and Industrial, our divisional leaders are
highly capable business executives with intimate knowledge
of their markets and a passion for collaborating and
leveraging each other’s skills to enhance value creation. Each
played formative roles in the development of our strategy
and each is aligned to our plan.
In September, I appointed a dedicated corporate leader to
take responsibility for all business development, innovation
and marketing efforts across our three segments. Having
one leader responsible for these important tasks ensures
collaboration across all divisions and geographies as we
identify and assess opportunities for growth and innovation
and implement best practices company-wide. Taking a
“One Cervus” approach will break down silos, ensure cross-
pollination and support the development of the solutions
culture we intend to build.
Our five-year goal is to build a
business capable of achieving
20% ROIC on a sustained basis.
to used inventory turns as inventory is the largest asset
on our balance sheet. Higher turns (calculated by dividing
cost of goods sold by average inventory) will improve
the efficiency of asset utilization and ROIC. Furthermore,
providing exceptional refurbishment of trade-ins – a
differentiating product support capability – and expanding
our knowledge of customer profiles and preferences will
allow us to match reliable used equipment with customer
needs. Our operational leaders have direct influence
on inventory held and now operate with inventory-turn
objectives that are specific and relevant to their businesses.
At the corporate level, we will do our part through prudent
choices in how and when we deploy capital using a
“compete for capital” approach. Competition will ensure
the best investments will receive funding.
ROIC 2024 Target – 20%
PARTNERSHIPS
Partnerships
include our relationships with customers,
employees, OEMs and shareholders. For customers: Cervus
level of service excellence through
seeks a consistent
communications, innovation and process improvements.
For employees: we must deliver targeted training and
development
to support engagement, attraction and
retention, and build capabilities related to the velocity of
innovation and technology evolution in our industries. For our
OEM partners: our mutual success is intrinsically linked with
delivery of market share, customer experience and dealer
profitability. For shareholders: we must generate superior
returns on a sustained basis.
PERFORMANCE
Performance means delivering
for all our
partners with laser focus and alignment on our industry’s
including gross margin growth,
key value drivers
uncompromising customer experience, market share
growth, and operational efficiency.
value
Within the Performance component of our strategy, we have
set specific financial targets, chosen to balance the goal of
higher profitability with the need for balance sheet strength.
A strong balance sheet provides the financial backbone to
support us through the bottom of the cycle and provides
incremental benefits at the top. In each case, we will measure
progress using Key Performance Indicators (“KPIs”) that we
have now entrenched in our management process.
Key Performance Indicators:
• Return on Invested Capital: ROIC measures our ability
to allocate capital effectively and is calculated by dividing
Earnings Before Interest and Taxes (minus floorplan
interest) by average net debt (excluding floorplan debt)
plus the book value of equity. Our five-year goal is to build
a business capable of achieving 20% ROIC on a sustained
basis. As noted above, our 5-year average ROIC was 8.4%.
To drive this KPI upward, we will bring much greater focus
11 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
• Product Support Gross Profit Dollar Growth: By the end
of our five-year strategy horizon, our objective is to have
established a platform capable of generating consistent
cash flows across business cycles. We will measure success
by compound annual growth in product support gross
profit dollars. Institutionalizing this metric ensures we focus
not just on revenue growth but pulling more dollars to the
bottom line. Overall product support gross profit improved
4.8% in 2019 and 5.5% in 2018. In five years, we aspire to
be running a business capable of achieving 8-10% CAGR
in this KPI. To deliver, we will need a combination of new
business lines, new systems, new product offerings, stronger
customer engagement and more efficient cost structures.
Product Support Gross Profit Growth
• Absorption: Calculated by dividing product support
gross profit dollars by operating costs (excluding
interest),
whole-goods commissions and floorplan
absorption is an indicator of our ability to generate
profitability across market cycles. At 100% absorption,
our operations achieve breakeven profitability
before selling any equipment. To move the needle on
absorption, we must grow product support margin and/
or reduce operating costs. Efficient expense structure is
essential, as is innovative service delivery. In 2019, our
absorption ranged from 87% to 99%, with a five-year
goal to achieve absorption of 100% to 115% depending
on the industry we serve. It will take a concerted
effort to achieve this KPI and our entire organization is
aligned to this goal.
Absorption
We will measure progress using
Key Performance Indicators that
we have now entrenched in our
managment process.
PROGRESSION
Progression speaks to our commitment to continuously move
our Company forward through a combination of organic
and inorganic growth. We aspire to achieve sustainable
equilibrium between revenues from new equipment sales
and product support in five years’ time. A move toward
a 50/50 split between these activities is a move toward
more predictable and sustainable cash flow and defensive
earnings stream in cyclical industries. The rationale is
straightforward. On the one hand, continued emphasis
on equipment sales and market share growth is critical to
building and maintaining a large machine population in
our territories (which fuels product support opportunities)
and sustaining our valued OEM relationships. On the
other, increased emphasis on product support is essential
to delivering a great customer experience, improving the
predictability of our revenues, and achieving profit margins
that will drive shareholder value.
Within our plan, organic growth will come from adding
service solutions beyond bricks and mortar, introducing
new product support offerings, expanding our industry
footprint and rental business as well as training and
racking solutions businesses.
Inorganic growth will
be achieved through selective acquisitions that fit our
business model and can be integrated in a straightforward
manner. We will be disciplined and purposeful in our
prioritization of acquisitions based on geographic location
relative to existing operations and the existence of
complementary opportunities.
Our future opportunities will be dramatically influenced by
the velocity of change driven by innovation and technology
with data being among the most valuable assets within
the customer-dealer-OEM partnership. Further, I believe
the dealer of tomorrow will be differentiated to a large
degree by employees who are technologically savvy and
who possess the capabilities (and technology tools) to help
customers optimize their equipment and maximize the
value of their operations.
In 2019, our absorption ranged
from 87% to 99%, with a five-year
goal to achieve absorption of
100% to 115% depending on the
industry we serve.
12 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
We aspire to achieve sustainable
equilibrium between revenues
from new equipment sales and
product support in five years’ time.
Adopting a creative and customer-solutions mindset is now
imperative for two reasons:
•
•
First, customers expect more from their dealer than
equipment. They want a high-touch, ongoing relationship
punctuated by rapid, expert and consistent advice and
service customized to their business needs.
Second, equipment is becoming ever more capable
and complex. With complexity, comes greater need for
technology-savvy employees to offer and deliver end-to-
end solutions.
Telematics-enabled machine tracking produces opportunities
for 24/7 remote monitoring and diagnostics and expands
possibilities for the delivery of preventative maintenance.
Sophisticated onboard capabilities create an ongoing need for
training as a service. Against this backdrop, many customers
are increasingly reluctant to take on the role of servicing their
own machines because it is difficult and costly to recruit,
train and equip mechanics. Cervus has built the foundation
to deliver solutions. Now we need to expand it for the future.
Our strategy dedicates us to creating value for shareholders
realized in two ways: dividends and appreciation in our stock
price. As Cervus performs, we see increased profitability
and cash generation to be correlated with a stable, growing
shareholder distribution and a rising share price.
Looking Ahead
As we enter 2020, we have charted our new path to performance.
We have introduced detailed strategies to become the leading
full-service equipment solutions provider in our industries and
implemented targeted, carefully-selected and aggressive KPIs to
measure and account for our progress. We have an organizational
structure that supports growth, empowerment and innovation. We
have a talented management group with the depth of experience
and expertise we need to operate a large, diversified international
business and to capture value from growth: past, present and
future. We have added new capabilities to drive enterprise-wide
innovation and best practices. Most importantly, we have an
ambitious, responsive team of 1,500 that cares deeply about our
customers, shareholders and OEMs and believes in our Vision,
Mission and disciplined approach.
It should be noted that transformation at the scale and scope we
seek will happen incrementally, which is why we have set five-year
targets. Our customer markets will also influence the cadence of
improvement. Does this mean we need to wait five years to see
progress? Absolutely not. The disciplines we are embedding in
our culture will begin to positively influence our activities starting
in 2020.
I look forward to a future of performance and progression that
rewards all partners. I encourage you to be part of that future and
I thank you for placing your trust in Cervus.
Yours sincerely,
Angela Lekatsas
President and Chief Executive Officer
SUSTAINABILITY
Our objective is to create industry-leading value for our
partners – customers, shareholders, employees and Original
Equipment Manufacturers – in a sustainable way, conserving
resources and earning the trust of the communities we serve.
We are proud of our efforts and quick to acknowledge the
need to continuously improve in all priority areas: safety,
employee development and recruiting, diversity and inclusion
and community impact. Our sustainability report provides a
synopsis of our activities in 2019.
14 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Safety
Sustainability at Cervus starts with protecting our employees.
We are accountable for their safety, and for modelling the
right behaviours, and we accept these responsibilities as our
most important priority.
To demonstrate our commitment, Cervus is COR™ certified.
Certificate of Recognition (COR™) is a provincially recognized
health and safety accreditation program open to employers
that go beyond the legal requirements of the Workers
Compensation Act and Occupational Health and Safety to take
a best-practice approach to implementing health and safety
programs. To maintain its standing, Cervus is recertified every
three years and must conduct internal maintenance audits
and comply with all the terms set out by COR™. This program
helps us to constantly improve.
Nothing, however is more important than making annual
investments in training, coaching, recognition and employee
engagement. This spending is targeted to nurture our health
and safety culture, build accountability for safety at all levels
– not just management – and ensure all employees start and
finish the jobs they are assigned in a safe manner. We hold
weekly Toolbox meetings to underscore the importance of
safety in all daily activities and in 2019, employees completed
over 50,000 hours of safety training.
In 2019, we implemented our “Good Catch” program to
improve our level of near-miss reporting at every level of our
organization. A near miss is an event that did not result in
injury or damage – but had the potential to do so. We believe
– and experience shows – that encouraging employees
to report these close calls provides important teaching
opportunities that prevent incidents in the future.
Our continued focus on safety in our operations has
resulted in a 72% reduction in lost-time days due to
workplace injuries over the past three years. Our Board
closely monitors our health and safety outcomes and
expects employees at all levels to continue to drive
towards an injury-free workplace and achieve a sustainable
safety culture.
We are also pleased to help our customers achieve their
safety objectives. Through formal online, in-class and on-
site training, we equip customers with the knowledge they
need to avoid injury while operating a variety of material
handling equipment. Courses are held throughout the
year and focus on theory followed by intensive hands-on
education and final evaluation. In 2019, 11,511 graduates
of our courses received Operator Equipment Safety
Certification. Customers tell us they appreciate training as it
gives them the insight they need to get the most out of their
equipment, safely.
Workforce Development
and Recruitment
Ensuring that we have a talented workforce with employees
who are engaged, inspired, invested and properly skilled
empowers our business strategy and the achievement of the
goals that we set for the Company. We invest in our people
and take steps to advance employee knowledge, skills and
engagement and create opportunities for them to maximize
their overall contribution.
In 2019, Cervus focused on structured training to engage
cultural transformation and leadership development skills.
This training and development provided a strong base for
sustained motivation and engagement.
We also provided numerous OEM workshops and other
sessions to learn best practices and to foster skills and
insights in key financial concepts, sales and operational
excellence strategies.
15 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Product support is a major focus of our coming five-year
transformation. We are keenly and strategically committed to
growing and retaining our workforce, including our technical
service
team. Our Service Technician Apprenticeship
Program provides 80% apprenticeship tuition top up and
education reimbursement for skills development. We
also operate a Technician Exchange program across our
operations in Canada, Australia and New Zealand. This
international exchange program is an attractive feature
for technicians and a competitive advantage for Cervus in
meeting workforce needs.
In 2019, we brought greater focus to standardizing our
recruiting and on-boarding process across Cervus to enhance
the candidate experience. These improvements streamlined
our ability to source top talent and to integrate new employees
to our culture.
Skills development is just one of the ways we invest in our
workforce. Another is the Cervus Employee Share Purchase
Program (ESPP). As shareowners of Cervus, participating
employees have another direct stake in their own success
and alignment of interest with public shareholders. We are
proud that more than 45% of our employees participate in
the ESPP program.
Succession planning helps us to identify and develop
our future leaders and is critically important to our
sustainability efforts and to our Board of Directors. In
2019, we introduced the Cervus framework for succession
planning, which will be further enhanced in 2020 to include
Talent Reviews and development through targeted work
experiences and mentorships.
Total Rewards Reallocated
for Greater Value
In 2019, we redesigned our health benefit program and changed
the benefit administrator, which will result in enhanced benefits
with no projected health-care premium increases for three
years. This change will also improve efficiency for our HR and
Payroll teams.
Our compensation program was also redesigned to drive
our business strategy and align Short-Term and Long-Term
incentives with financial metrics tied to our Key Performance
Indicators. We began the redesign by completing a
competitive review with the goal of implementing a job
band structure to ensure alignment within the markets in
which we compete for talent. We introduced a consistent
job-band compensation structure and piloted a skill-based
Service Technician Productivity Incentive program in Ontario
(alignment of skill to work). This incentive program will
expand to other divisions in 2020.
Diversity and Inclusion
We recognize the advantage of a diverse and inclusive team.
We ensure all individuals enjoy respect and dignity in a safe
work environment, free from discrimination, harassment and
workplace violence and intentionally seek to encourage diverse
candidates to participate in our industry and join our Company.
The first face of Cervus that many candidates see is our
recruiting materials. In 2019, we made a conscious effort
to reflect the diversity we seek by updating our marketing
campaigns and Careers section of our website.
During 2019, we initiated a recruitment campaign in Africa
to source and hire seasoned John Deere Service Technicians.
in partnership, our Operations and Human
Working
16 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Resources teams recruited eight Service Technicians from
Johannesburg, South Africa. Seven of our newest team
members are now working in various Cervus locations in
Saskatchewan, with the 8th to start in mid-2020. Our culture
of caring was key in supporting our new recruits as they
took up residence in Canada. Our local management teams
engaged with our prospective employees months in advance
of their relocation, set up a dedicated Facebook page for their
families to communicate and provided assistance to secure
housing and arrange temporary vehicles.
Gender equality is important at Cervus. We continued our
efforts to increase the proportion of women in our workforce
and in our leadership. We made inroads in various roles,
including the Board of Directors (two of seven now women)
and in our senior leadership ranks (33% female). In 2019,
the Board appointed our first-ever female CEO, proving that
no position at Cervus is out of reach for women or any other
underrepresented group in our industry.
In 2019, we conducted a gender pay gap review across
the Company and were pleased the results indicated our
organization was very balanced in its compensation practices.
Where we did identify a few gender-pay gaps, management
took action to correct them.
As mandated by our Board of Directors, Cervus operates with
an Employment Equity Policy and all employment decisions –
including hiring, promotions, job assignments, compensation,
access to benefits and training and performance management
– are based on individual merit.
Community Investment
For Cervus and our employees, thinking and acting locally
is about helping our customers as well as helping the
communities, in and around our locations, to grow and thrive.
Youth development and education is important to us. We are
a long-time partner of 4-H Alberta and 4-H Saskatchewan. In
collaboration with 4-H, we award scholarships to students with
strong community involvement and excellent academic standing.
These scholarships support students in attending Olds College
in Alberta, a school specializing in agriculture, horticulture, land
and environmental stewardship. We also make contributions
and donations to a number of worthy schools and educational
programs in the communities in which we operate.
Beginning in 2019, Cervus partnered with the College
of Agriculture and Bioresources at the University of
Saskatchewan to send students to the AgBio Discovery
Camp. It offers an entertaining, hands-on introduction to
modern agriculture for campers from both urban and rural
backgrounds. We also support local Agricultural Societies
that have been an active part of our communities for
generations as well as numerous local community rodeos
including the Calgary Stampede.
Our employees and stores are generous and thoughtful
members of the community. Every year – including in
2019 – they raise funds to support minor sports leagues,
community arenas, local food banks and booster clubs.
We are a proud sponsor of Ronald McDonald House Charities
in support of families seeking vital medical treatment for
their seriously ill or injured children.
In late 2019, when vast areas of Australia were consumed by
wildfires that threatened residents and their homes as well
as indigenous wildlife, Cervus donated $5,000 to the Victoria
Bushfire Appeal. Our employee volunteers organized events
and promotions to raise money for relief in February 2020 and
have raised more than $40,000 for both the New South Wales
and Victoria Rural fire services and the World Wildlife Fund.
Giving back to the communities where we live and work
matters to us and we’re passionate about helping to build
healthy, sustainable communities.
Our Role in Sustainable
Agriculture Practices
We recognize that agricultural producers are stewards of the land
that needs to be protected for future generations, and we have a
vital role to play in supporting sustainable agriculture practices.
Cervus is engaged in advancing the adoption of science-based
sustainable practices and incorporating technology and innovation
into farming operations.
The fight against climate change is one we and our business
partners take seriously. To reduce greenhouse gas emissions,
our OEM partners have developed engine technologies
that reduce exhaust particulate matter and improve energy
efficiency. We are doing our part with a zero-tolerance policy
on selling or servicing engines with tampered emissions control
devices or with modifications affecting power levels.
As farm equipment has become much more technologically
advanced, it has also increased the complexity of how to
run equipment to its fullest potential. Cervus Equipment
has developed a sophisticated Precision Ag team with
the skills needed to help farmers properly optimize their
farm technology.
Our Precision Ag services help our customers get the most out
of their machines by:
• Optimizing combine settings ensuring more crop ends
up in the bin instead of out the back of the machine
• Optimizing machine guidance to get across the field
with the fewest passes reducing fuel usage and wear
• Training, on-site, to be sure operators understand the
capabilities and impacts of equipment technology with
practical, hands-on courses
• Performing machine calibrations so the best field
application results are realized
The future focus for Cervus is advancing from equipment
optimization to data optimization. With proper data, a
producer will be able to make intelligent and informed
decisions on how better to manage their operations
In addition to helping
economically and sustainably.
customers make the most of their machine data, we assist
customers with yield and profit mapping services.
Our expertise in data interpretation combined with our
customers’ deep knowledge of farming ensures the right
ingredients are matched to the right types of soils at the right
time of the year and in the right amounts needed to optimize
yield, lower costs and minimize environmental impacts.
18 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Code of Conduct
We expect our Board of Directors, officers,
employees,
to
comply with our corporate values. The three most
important are:
contractors and
consultants
• Honest,
fair and
trustworthy business
behaviour
• Compliance with laws & regulations
• Safety and respect for our personnel and our
customers
We provide online Code of Conduct training and
certify compliance with the Code annually for
Directors and those in management positions
as well as all new hires. All employees retrain
and rededicate themselves to the Code every
second year. The Code explicitly covers workplace
harassment
anti-discrimination,
behaviors,
prevention, safe work environment, bribery and
anti-corruption.
a
global Whistleblower
Cervus maintains
policy, available at cervusequipment.com and
encourages all of its partners to raise questions or
concerns and report misconduct. We protect any
employee who reports misconduct in good faith.
Cervus Equipment
Corporation
Management’s Discussion +
Analysis
FOR THE PERIOD FROM JANUARY 1, 2019 TO DECEMBER 31, 2019
20 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Management’s Discussion & Analysis
Management’s Discussion & Analysis (“MD&A”) is provided to enable readers to assess the financial position and
the results of the consolidated operations of Cervus Equipment Corporation (“Cervus” or the “Company”) for the
three and twelve-month periods ended December 31, 2019. It was prepared on March 11, 2020. This MD&A should
be read in conjunction with the accompanying Audited Consolidated Financial Statements for the year ended
December 31, 2019, and notes contained therein. The accompanying Audited Consolidated Financial Statements
have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and Cervus’
functional and reporting currency is the Canadian dollar. Additional information relating to Cervus, including
Cervus’ Annual Information Form, Notice of Annual Meeting of Shareholders and Proxy Circular, is available on the
Company’s website at www.cervusequipment.com and on SEDAR at www.sedar.com.
Forward-Looking Statements
This MD&A contains statements that are forward-looking and may constitute “forward-looking information”
within the meaning of applicable securities legislation. Actual results or events may differ materially from those
forecast and from statements of the Company’s plans or strategy that are made in this MD&A because of the risks
and uncertainties associated with the Company’s businesses and the general economic environment. The
Company cannot provide any assurance that any forecast financial or operational performance, plans, or financial
targets will be achieved or, if achieved, will result in an increase in the Company’s share price. Refer to the section
“Cautionary Note Regarding Forward-Looking Statements” in this MD&A for a more detailed discussion of the
Company’s use of forward-looking statements.
Key Performance Indicators and Non-GAAP Financial Measures
We have identified several non-GAAP financial measures which we believe are useful in assessing the past
performance of the Company and several key performance indicators we will use to judge the effectiveness of our
strategies and disciplines for progress and transformation over the next five years. However, readers are cautioned
that some of these measures may not have standardized meanings under IFRS and, therefore, may not be
comparable to similar terms used by other companies. Refer to the sections “Key Performance Indicators” and
“Non-GAAP Financial Measures” for a more detailed discussion of these measures.
Company Overview
Corporate Profile
Cervus provides equipment solutions to customers in agriculture, transportation, and industrial markets across
Canada, Australia, and New Zealand. Throughout its territories and across its diverse markets, Cervus dealerships
are united in delivering sales and support of the market-leading equipment our customers depend on to earn a
living. The Company operates 63 Cervus dealerships and is the authorized representative of leading Original
Equipment Manufacturers (“OEMs”) including: John Deere agricultural equipment; Peterbilt transportation
equipment; and Clark, Sellick, Doosan, JLG and Baumann material handling equipment. Cervus operates an
extensive product-support network including a fleet of mobile service vehicles and over 500 service bays. Cervus
employs more than 1,500 people, a third of whom are technicians with specialized skills to perform equipment
diagnostics, optimization, maintenance and repairs. The Company traces its beginnings to 1982. Its common
shares are listed on the Toronto Stock Exchange and trade under the symbol "CERV".
Reporting Segments
Cervus operates through three market-focused business segments along with a corporate segment, as described
below:
Agriculture: 36 John Deere dealership locations with 15 operating in Alberta, 5 in Saskatchewan, 1 in British
Columbia, 9 in New Zealand and 6 in Australia.
Cervus Annual Report 2019
21 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
3 3
Transportation: 19 dealership locations with 4 Peterbilt truck dealerships and 1 Collision Centre operating in
Saskatchewan, 12 Peterbilt truck dealerships and 2 parts locations operating in Ontario.
Industrial: 8 material handling and forklift equipment dealership locations with 5 operating in Alberta, 2 in
Saskatchewan and 1 in Manitoba, representing the following brands: Clark, Sellick, Doosan, JLG and Baumann.
Corporate: We have centralized our corporate services including strategic business development, finance,
information technology, human resources, accounting, payroll and other support functions at our head office,
located in Calgary, Alberta.
In 2019, the Company segregated corporate expenses not directly attributable to an operating segment into a
Corporate segment. Corporate expenses consist of certain overheads and shared services provided to the
divisions, along with public company costs, salaries, share-based compensation, office and administrative costs
relating to corporate employees and officers, and interest cost on general corporate borrowings. Prior period
financial information for 2018 has been restated to reflect the separate reporting of corporate division expenses.
Business Model
Throughout our territories and across our diverse markets, Cervus dealerships are united by our business model
of marketing and selling equipment solutions (also known as “wholegoods”) and delivering uptime to our
customers as they use that equipment (“product support”). Product support involves the provision of preventative
maintenance, repairs, parts, rentals, training, storage, telematics and other ancillary services customers need to
operate their equipment, achieve efficient cost of ownership and maximize utilization. Our delivery of product
support, combined with best in class equipment, is valued by our customers as it improves productivity,
operational uptime, re-sale value and ultimately their profitability.
CEO Appointment
Effective May 15, 2019, the Board of Directors appointed Angela Lekatsas President and Chief Executive Officer of
Cervus. Ms. Lekatsas has extensive executive leadership experience with demonstrated financial, operational, risk
management and merger and acquisition credentials earned in agriculture, manufacturing and mining. Ms.
Lekatsas is a Chartered Professional Accountant (CPA, CA) and holds the Institute of Corporate Directors ICD.D
designation. She has served as a Director of Cervus Equipment Corporation since 2013.
Following her appointment, Ms. Lekatsas led a comprehensive review of the Company’s operations, risks and
strategic positioning. This review led to the implementation of a new mission, vision and strategic framework in
the fourth quarter of 2019 designed to drive performance improvements.
Strategic Framework
Strategic Goal
Our primary objective is to create value for shareholders, customers, OEM partners and employees through
profitable growth, supported by a disciplined approach to capital allocation and balance sheet management.
Through our sales activities (past and present), we have achieved a significant installed base of wholegoods
equipment in our markets. This installed base has created a sizeable opportunity for follow-on product support.
Product support revenue adds stability and predictability to reduce volatility experienced in our cyclical industries.
Over the past five years, the ratio of overall equipment sales to product support revenue has averaged 75:25. We
believe the Company can deliver enhanced performance across business cycles by advancing the sales to product
support revenue ratio to 50:50. Accordingly, we have set a goal for the next five years of achieving this balanced
position.
From experience, we have found that product support offers a variety of benefits, including the opportunity to
provide valued ongoing services to customers, in addition to their equipment purchases. While typical product
support offerings include parts, service, rentals, training and storage solutions, we see emerging opportunities to
Cervus Annual Report 2019
22 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
4 4
expand these offerings through application and interpretation of innovation and technology that complements
and/or leverages the technology in the equipment we sell. We believe the recurring nature of product support
makes it a stable business that can improve overhead absorption in our dealerships, while delivering customer
affinity for Cervus and our OEM partners.
We intend to drive product support revenue through targeted internal investments and complementary
acquisitions. Furthermore, we strive to operate with common and consistent customer service objectives across
our dealerships. The accurate quoting of service work, attraction and retention of skilled tradespeople, efficient
use of time and shop capacity, and proper investment and management of parts inventories are all key factors in
delivering product support that addresses our customers’ needs and are aligned with our financial performance
objectives.
Cervus Annual Report 2019
23 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
5 5
Overview of 2019 Results
As discussed in our Annual Report, 2019 was a challenging year as our Western Canadian Agriculture operations
endured compounding and considerable headwinds, which were a primary factor in the loss for the year of $9
million, compared to income of $25 million in 2018. Despite the very tough agriculture market, our operations
generated strong adjusted free cash flow1 of $21 million in 2019.
Amid these headwinds in our Agriculture segment, we set our focus on right-sizing our used equipment inventory
levels by December 31, 2019, and achieved this objective. We reduced our used Agriculture equipment inventory
by $67 million, or 37% compared to the second quarter of 2019, and improved our used Agriculture equipment
inventory turns to 1.78 times1 for the year.
We believe disciplined used equipment inventory management is a critical success factor, across all our segments,
as we navigate cyclical markets. Through the actions taken to rebalance our inventory this year, we maintained
our strong balance sheet, while limiting prolonged exposure to inventory carrying costs and valuation risk. Used
agriculture equipment levels across Western Canadian dealers remain in excess of market demand. Dealers who
have yet to take action are incurring the inventory carrying costs of interest and obsolescence, and are constrained
in their ability to accept equipment trades. As a result of these industry factors, we incurred inventory impairments
of $10 million in the fourth quarter and $24 million for 2019. This compares to $2.9 million and $12 million,
respectively, for the same period in 2018.
The excess supply of used equipment in the industry, combined with geo-political and macro-economic factors,
also reduced new Agriculture equipment revenue and profitability in 2019. In our second quarter report, we
outlined our expectation that reduced new equipment revenue, margins, and incentives would impact new
equipment gross profit by $15 to $20 million, across the third and fourth quarters of 2019. In line with this
expectation, in the third and fourth quarters we realized a reduction of Agriculture new equipment gross profit of
$11 million and $5 million, respectively, resulting in a $16 million reduction in the second half of 2019.
In our Transportation segment, truck sales were negatively impacted by factory delays in the first half of the year,
combined with softening customer demand and increased competition in the second half of the year, as dealers
were under increasing pressure to sell trucks ordered from OEMs in early 2019. Industry truck sales are anticipated
to return to more mid-cycle levels in 2020 following two successive years of above average demand. Our Industrial
segment continues to experience pressure from ongoing uncertainty in the oil and gas sector, which impacts the
geographies we serve.
Despite these short-term realities, we achieved increased parts and service revenues across the Company. As we
navigate industry cycles and pursue our strategy, the consistent performance and growth of our product support
business is critically important. Furthermore, we ended the year with a strong balance sheet, which provides us
with additional flexibility moving forward into 2020.
1 Described in the section titled “Non-GAAP Measures”.
Cervus Annual Report 2019
24 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
6 6
Consolidated Results
The Company’s results for the year ended December 31, 2018, included the financial performance of four
construction dealerships sold during the first quarter of 2018, up to the transaction closing date of
March 16, 2018.
($ thousands, except per share
amounts)
Equipment revenue
Three month periods
ended December 31
% Change
Compared
to 2018
(20%)
2019
2018
224,072
179,051
Years ended December 31
% Change
Compared
to 2018
(22%)
2018
1,041,835
2019
813,393
Product support revenue
80,498
6% 76,175
325,641
6% 308,201
Total revenue
259,549
(14%)
300,247
1,139,034
(16%)
1,350,036
Cost of sales before inventory impairment
(212,152)
(14%)
(245,352)
(945,677)
(16%) (1,129,445)
Inventory impairment
Gross profit
Total other income
Equipment commissions
SG&A expenses, excluding equipment
commissions
(Loss) income from operating
activities
Net finance costs
Share of profit of equity accounted
investees, net of income tax
(Loss) income before income tax
expense
Income tax recovery (expense)
(Loss) income
EBITDA(1)
Ratios
Gross profit margin as a % of revenue
Total SG&A as a % of gross profit
(Loss) income per share
Basic
Diluted
Basic - Adjusted(1)
Adjusted (loss) income before income
tax expense(1)
(10,496)
36,901
583
(2,962)
262%
(29%)
39%
4%
(2,896)
51,999
418
(24,006)
169,351
3,844
109%
(11,513)
(19%)
209,078
12%
3,443
(2,849)
(11,974)
(12%)
(13,541)
(40,299)
(1%)
(40,685)
(159,304)
(0%)
(159,504)
(5,777)
(3,036)
(165%)
8,883
1,917
145%
(1,241)
(12,369)
6
100%
-
6
(95%)
125%
(95%)
39,476
(5,498)
124
(8,807)
(215%) 7,642
(10,446)
(131%)
34,102
1,759
(7,048)
838
14.2%
117.2%
(0.46)
(0.46)
(0.50)
167%
(240%)
(94%)
(2,611)
5,031
13,367
1,828
(8,618)
27,942
120%
(135%)
(51%)
17.3%
83.7%
14.9%
101.1%
0.32
0.31
0.35
(0.56)
(0.56)
(0.65)
(9,325)
24,777
56,728
15.5%
82.8%
1.58
1.51
1.58
(9,638)
(219%) 8,133
(12,293)
(136%)
34,056
(1) Described in the section titled “Non-GAAP Measures”.
Cervus Annual Report 2019
25 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
7 7
2019 Annual Financial Results
Revenue
Revenue decreased 16% in the year, driven by a 22% decrease in equipment revenue, partly offset by a 6% increase
in product support revenue.
Agriculture equipment revenue declined 24% for the year, as the Canadian agriculture industry faced a number
of headwinds, including reduced 2018 farm income, increased input costs, reduced commodity prices and trade
disputes, all compounded by poor growing and harvesting conditions in parts of our geography. In this
environment, producers chose to postpone new equipment purchases as many own late model equipment
acquired in recent years. As a result, Canada agriculture 4-wheel-drive farm tractors and combine sales in the
market decreased 37% and 19%, respectively, in 2019 when compared to 20182.
Transportation equipment revenue declined 15% for the year, the result of factory delays experienced in the first
half of the year, combined with softening customer demand and increased competition in the second half of the
year.
Despite the headwinds shared across our Canadian equipment dealerships, product support revenue remained
resilient, improving 6% for the year. The largest increase in product support revenue was in our Agriculture
segment, as demand for parts and service continued through the challenging harvest window. A difficult 2018
harvest also bolstered early season product support revenue in 2019.
Gross Profit
Gross profit declined 19% or $40 million for the year due to a decrease in both new and used equipment gross
profit in the Agriculture segment associated with lower revenues and margins. This $40 million decline includes
an increase in equipment inventory impairments of $13 million for the year and the $16 million reduction in gross
profit from Agriculture new equipment sales in the second half of 2019.
Growth in product support revenue contributed an additional $7 million of gross profit for the year compared to
2018.
Gross profit as a percent of revenue decreased in the year due to equipment inventory impairments, compressed
new and used equipment margins and reduced incentives.
Selling, General and Administrative (“SG&A”) Expenses and Net Finance Costs
SG&A expenses excluding equipment commissions were flat for the year, primarily due to the elimination of
annual performance incentives and a reduction in marketing expenditures, partly offset by restructuring charges
and the inclusion of the Red Deer Agriculture dealership acquired in the fourth quarter of 2018.
The increase in net finance costs of $7 million for the year was primarily due to the adoption of IFRS 16.
Income
Income before income tax decreased $45 million for the year, primarily due to the $40 million reduction in gross
profit, as discussed above. The adoption of IFRS 16 also decreased income before income tax by $4.2 million
compared to 2018. Adjusted income before income tax decreased $46 million for the year.
Balance Sheet
Inventory
Total inventory was $320 million at December 31, 2019, a decrease of $70 million from June 30, 2019, due to a $90
million decrease in the Agriculture segment, partly offset by a $21 million increase in the Transportation segment.
2 Association of Equipment Manufacturers, AEM Ag Tractor Combine Report Shows Positive Growth in 2019, January 2020, www.aem.org
Cervus Annual Report 2019
26 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
8 8
Following peak used Agriculture equipment inventory of $181 million at June 30, 2019, inventory decreased $67
million or 37% by December 31, 2019. Agriculture used equipment inventory turnover for the trailing twelve-
month period ended December 31, 2019 was 1.78 times, compared to 1.62 times at June 30, 20193.
Shareholder Distributions
A quarterly dividend of $0.11 per share was declared to shareholders of record as at December 31, 2019, a 10%
increase from December 31, 2018. The Company repurchased 0.3 million common shares at a cost $3.9 million for
the year ended December 31, 2019.
Fourth Quarter 2019 Results --- Q4 2019 v Q4 2018
Revenue
Overall revenue decreased 14%, driven by a 20% decline in equipment revenue, partly offset by a 6% increase in
product support revenue. This trend was consistent with our annual results and impacted by the same factors
discussed above.
Gross Profit
Gross profit declined 29% or $15 million, primarily comprised of an increase in equipment inventory impairments
of $8 million and a $5 million reduction in gross profit from Agriculture new equipment sales due to lower revenue,
margins and incentives in the fourth quarter.
Growth in product support revenue contributed an additional $1.5 million or 5% increase to gross profit in the
quarter compared to 2018.
Gross profit as a percent of revenue decreased due to compressed equipment margins and incentives, combined
with increased equipment inventory impairments.
Selling, General and Administrative (“SG&A”) Expenses and Net Finance Costs
SG&A expenses excluding equipment commissions, decreased 1%, primarily due to a decrease in annual
performance incentives and marketing expenditures, partly offset by the inclusion of the Red Deer Agriculture
dealership acquired late in the fourth quarter of 2018.
The increase in net finance costs of $1.8 million was primarily due to the adoption of IFRS 16.
Income
Income before income tax decreased $16 million, primarily due to the $15 million reduction in gross profit, as
discussed above. The adoption of IFRS 16 also decreased income before income tax by $0.9 million. Adjusted
income before income tax decreased $18 million compared to the fourth quarter of 2018, a result of the significant
factors discussed above.
3 Described in the section titled “Non-GAAP Measures
Cervus Annual Report 2019
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9 9
Key Performance Indicators
The Company strives to create shareholder value through accelerated profitability, underpinned by a disciplined
approach to capital allocation and balance sheet management. In late 2019, we established targets for the key
performance indicators that are critical to measuring success and execution against the Company’s strategy. The
table below sets out the key performance indicators that we will use beginning in 2020 and includes our five-year
targets for 2024. The historical results for these measures have been provided for comparative purposes. We
believe the achievement of these targets would contribute to an increase in total shareholder return over the next
five years.
A discussion of the underlying material assumptions and risks that might impact the achievement of these targets
is provided in the section “Cautionary Note Regarding Forward-Looking Statements”. In addition, achievement of
the targets may be impacted by the risks identified in the section “Business Risks and Uncertainties”.
These key performance indicators do not have a standard meaning under IFRS and, therefore, may not be
comparable to similar terms used by other companies. These measures are identified and further described under
the section “Non-GAAP Financial Measures.”
Key Performance Indicators
Years Ended December 31
Return On Invested Capital ("ROIC")
Consolidated
Average Annual Product Support Gross Profit Growth
Consolidated
Agriculture
Transportation
Industrial
Absorption
Agriculture
Transportation
Industrial
Equipment Inventory Turnover(1)
Agriculture
Transportation
Industrial
2018
13.7%
5.5%
3.3%
7.5%
9.7%
84%
106%
99%
1.78
3.37
2.73
2019
-1.3%
4.8%
9.5%
-2.1%
6.0%
Objective by
2024
> 20%
8% - 10%
8% - 10%
8% - 10%
8% - 10%
87%
95% - 100%
99% 110% - 115%
95% 110% - 115%
1.78
2.69
2.79
> 2.5
> 3.5
> 3.5
(1) - Agriculture equipment inventory turnover is calculated based on used equipment only as most new equipment inventory
is on consignment. Transportation and Industrial equipment inventory turnover is calculated based on new and used
equipment.
Return on Invested Capital
Return on invested capital (“ROIC’”) is a measure we use to evaluate the effectiveness of capital deployed. We use
this measure to compare potential acquisitions and other capital investments against our internally computed
cost of capital to determine whether the investment will create shareholder value. We will also use this measure
to assess past acquisitions, capital investments and the Company as a whole to determine if shareholder value is
being achieved by these uses of capital. The calculation of ROIC is further identified and described under the
section “Non-GAAP Financial Measures.”
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Product Support Gross Profit Growth
Our customers value the ability of our dealerships to provide best in class equipment along with operational
uptime through efficient product support, that enhances the profitability of their businesses. Customer
relationships are built and maintained through the equipment’s useful life, and our product support capabilities
are a key factor in a customer’s purchasing decision. Growth in this stable and profitable area of our business will
serve to reduce cyclicality of income, while also enhancing customer affinity for Cervus and our OEM partners.
In assessing Product Support Gross Profit Growth, the Company includes the activities performed for the benefit
of our other departments. This internal activity is excluded from reported product support revenues under GAAP,
however, management assesses the overall product support activity when evaluating the use of the Company’s
resources. The calculation of Product Support Gross Profit Growth is further identified and described under the
section “Non-GAAP Financial Measures.”
Absorption Percentage
Absorption is an operating measure commonly used in the dealership industry as an indicator of sustainable
performance and profitability relative to cost structure. Absorption measures the extent product support gross
profit of a dealership covers (or absorbs) the operating costs of the dealership, excluding equipment sales
commissions, carrying costs of equipment inventory and corporate expenses. When 100% absorption is achieved,
all the gross profit from the sale of equipment, after sales commissions and inventory carrying costs, directly
impacts operating profit.
Absorption is not a measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP.
Therefore, absorption may not be comparable to similar measures presented by other issuers that operate in the
dealership industry. The calculation of absorption is further identified and described under the section “Non-GAAP
Financial Measures.”
Equipment Inventory Turnover
In our wholegoods’ departments, managing inventory levels to meet market demand must be balanced by
maintaining the sale of inventory we carry, which we measure using equipment inventory turnover. As our largest
asset, equipment inventory levels have a direct impact on overall asset levels, and therefore our capital
requirements and ROIC performance.
Equipment inventory turnover is a key metric for the Company, specifically, for used equipment held primarily in
our Agriculture segment. Used equipment carries additional risks relative to new inventory, including potential
obsolescence compared to features available in new models, exposure to changes in the comparative cost of new
equipment, and the ability to correctly estimate reconditioning costs. Therefore, focusing on used inventory
turnover reflects the market demand for the used inventory we carry, along with the average period of time used
equipment is exposed to fluctuating market factors prior to sale.
We calculate the ratio as trailing twelve-month equipment cost of sales divided by the quarterly average inventory
for the most recent four quarters. The calculation of inventory turnover is further identified and described under
the section “Non-GAAP Financial Measures.”
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Outlook (see “Cautionary Note Regarding Forward-Looking Statements”)
The following provides an overview of our market outlook as it relates to the Company’s operations, by segment,
at time of writing. 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.
Agriculture
Agriculture, particularly in Western Canada, remains the driving variable in the Company’s results. Canadian
producers manage complex, capital intensive businesses, and are heavily influenced by seasonal weather
conditions, commodity prices, and input costs. Following several years of record or near record net farm income,
Western Canadian producers have encountered higher input costs, lower commodity prices, uncertainty
associated with international trade, and increased Canadian dollar cost of equipment due to foreign exchange.
Heading into 2020, we are monitoring the possible impacts of railway disruptions in Canada and COVID-19.
Further, geopolitical and macroeconomic factors experienced in 2019 were compounded by a delayed 2019
harvest season in most of our Western Canadian regions due to cool weather, significant rainfall and snow. The
high levels of moisture negatively impacted the quality of crops not harvested before snowfall, and the delay
resulted in harvest not being completed and crops remaining in the field in parts of our Alberta region.
The difficult harvest has weighed on farmer sentiment entering 2020, particularly following the challenging
harvest conditions also experienced in 2018, reinforcing producer’s caution towards capital commitments. The
actions we took to rebalance our inventory in 2019, have improved our ability to match our inventory to market
demand, while limiting prolonged exposure to inventory carrying costs and valuation risk. Deferral of equipment
purchases by producers may provide additional opportunities for parts, service and other solutions as we support
the equipment population in our market.
In our Australia and New Zealand regions, the agriculture outlook remains stable as the wildfires have had limited
impact on our territories in Australia. Commodity prices for dairy have remained elevated due to a decline in global
production, while demand for exports, particularly from China, have provided an area of growth for producers.
Transportation
The US and Canadian truck market ended 2019 with total class 8 truck sales of 309,000 units, compared to 285,000
units in 2018.4 The industry continues to show signs of excess freight capacity and a decrease in freight rates,
which may negatively influence customer purchasing decisions into 2020. PACCAR, the owner of Peterbilt trucks,
is anticipating a tapering of class 8 truck sales for 2020 in the range of 230,000 to 260,000 units4, which is consistent
with mid-cycle US and Canadian truck sales experienced in 2016 and 2017.
With equipment demand anticipated to return to this more mid-cycle level in 2020, our focus is to expand and
strengthen our product support offerings. Our Saskatchewan region continues its stable performance despite
persistent weakness in the oil and gas sector, which is a significant driver of activity in this geography. In Ontario
our efforts remain on increasing our truck population and improving operational efficiencies.
Industrial
Our Industrial segment is largely dependent on the general economic conditions and activity in Alberta and
Saskatchewan, particularity in the oil and gas sector. Ongoing uncertainty around pipeline capacity challenges in
the oil and gas sector continues to weigh on equipment and product support demand in this segment.
We continue to focus on increasing our product support offerings and building on our training and rental lines
with the addition of storage solutions, including warehouse racking.
4 PACCAR, PACCAR Achieves Record Annual Revenues and Net Income, January 2020, www.paccar.com
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Business Segment Results
The Company has four reportable segments, as outlined in the ‘Company Overview’, and presented in Notes 3 and
25 of the Annual Financial Statements.
In 2019, the Company segregated corporate expenses not directly attributable to an operating segment into a
Corporate segment. Corporate expenses consist of certain overheads and shared services provided to the
divisions, along with public company costs, salaries, share-based compensation, office and administrative costs
relating to corporate employees and officers, and interest cost on general corporate borrowings. Prior period
financial information for 2018 has been restated to reflect the separate reporting of corporate division expenses.
Summary of Annual Business Segment Results
Below is a summary of Cervus’ segment results for the years ended December 31, 2019 and 2018.
Year ended December 31, 2019
($ thousands)
Equipment revenue
Product support revenue
Gross profit
Total other income
Selling, general and administrative expense
Net finance costs
(Loss) income before income tax expense
Adjusted (loss) income before income tax
expense(1)
Year ended December 31, 2018
($ thousands)
Equipment revenue
Product support revenue
Gross profit
Total other income
Selling, general and administrative expense
Net finance costs
Income (loss) before income tax expense
Adjusted income (loss) before income tax
expense(1)
(1) Described in the section titled “Non-GAAP Measures”.
813,393
325,641
169,351
3,844
596,155
159,287
94,740
524
Total Agriculture Transportation
193,957
136,296
57,405
2,516
Corporate
-
-
-
100
(171,278) (95,675) (51,315) (16,351) (7,937)
(12,369) (7,183) (3,455) (232) (1,499)
1,327 (9,336)
5,151
(10,446) (7,588)
Industrial
23,281
30,058
17,206
704
(12,293) (7,588)
3,330
1,301 (9,336)
783,788
143,097
131,754
1,463
1,041,835
308,201
209,078
3,443
Total Agriculture Transportation
228,569
133,587
59,310
292
Corporate
-
-
-
685
(173,045) (97,097) (50,036) (16,766) (9,146)
2 (1,011)
(5,498) (2,045) (2,444)
2,253 (9,472)
7,122
34,102
Industrial
29,478
31,517
18,014
1,003
34,199
34,056
33,434
8,192
1,902 (9,472)
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Summary of Fourth Quarter Business Segment Results
Below is a summary of Cervus’ segment results for the three months ended December 31, 2019 and 2018.
Three months ended December 31, 2019
($ thousands)
Equipment revenue
Product support revenue
Gross profit
Total other income (loss)
Selling, general and administrative expense
Net finance costs
(Loss) income before income tax expense (8,807) (5,798)
Adjusted (loss) income before income tax
expense(1)
179,051
80,498
36,901
Total Agriculture Transportation
44,766
33,157
13,307
1,030
129,865
40,474
19,874
583 (513)
106 (40)
(43,261) (23,511) (13,134) (4,419) (2,197)
(3,036) (1,654) (1,081) (35) (266)
122 (628) (2,503)
Industrial
4,420
6,867
3,720
Corporate
-
-
-
(9,638) (5,798) (704) (633) (2,503)
Three months ended December 31, 2018
($ thousands)
Equipment revenue
Product support revenue
Gross profit
Total other income (loss)
Selling, general and administrative expense
Net finance costs
Income (loss) before income tax expense
Adjusted income (loss) before income tax
expense(1)
(1) Described in the section titled “Non-GAAP Measures”.
169,548
35,670
34,094
224,072
76,175
51,999
418
Total Agriculture Transportation
48,086
33,452
13,830
630 (229)
(43,534) (24,154) (12,431)
(1,241) (360) (497)
7,642
10,210
(4,001) (2,948)
(5) (379)
673 86 (3,327)
Industrial
6,438
7,053
4,075
17
Corporate
-
-
-
-
8,133
9,445
1,613
402 (3,327)
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Agriculture Segment Results
($ thousands)
Equipment
New equipment
Used equipment
Total equipment revenue
Product support revenue
Total revenue
Three month periods
ended December 31
% Change
Compared
to 2018
2019
Years ended December 31
2018
2019
% Change
Compared
to 2018
2018
64,660
65,205
129,865
40,474
170,339
(33%)
95,835
330,932
(33%)
490,524
(12%)
73,713
265,223
(10%)
293,264
(23%)
169,548
596,155
(24%)
783,788
13% 35,670
159,287
11% 143,097
(17%)
205,218
755,442
(18%)
926,885
Cost of sales before inventory impairment
(140,305)
(17%)
(168,151)
(637,138)
(19%)
(784,182)
Inventory impairment
Gross profit
Total other (loss) income
Equipment commissions
SG&A expenses, excluding equipment
commissions
(Loss) income from operating
activities
Net finance costs
Share of profit of equity accounted
investees, net of tax
(Loss) income before income tax
expense
EBITDA(1)
Ratios
(10,160)
242%
(2,973)
(23,564)
115%
(10,949)
19,874
(42%)
34,094
94,740
(28%)
131,754
(513)
(2,301)
(181%)
630
4%
(2,214)
524
(9,217)
(64%)
(14%)
1,463
(10,750)
(21,210)
(3%)
(21,940)
(86,458)
0%
(86,347)
(4,150)
(1,654)
6
(139%)
10,570
359%
100%
(360)
-
(411)
(7,183)
(101%)
251%
36,120
(2,045)
6
(95%)
124
(5,798)
(157%)
10,210
(7,588)
(122%)
34,199
(511)
(104%)
12,899
13,943
(68%)
44,212
Gross profit margin as a % of revenue
Total SG&A as a % of gross profit
11.7%
118.3%
16.6%
70.8%
12.5%
101.0%
14.2%
73.7%
Reconciliation of adjusted (loss)
income before income tax expense:
(Loss) income before income tax expense
Adjustments:
Insurance proceeds received in excess
of building cost
Adjusted (loss) income before income
tax expense(1)
(5,798)
(157%)
10,210
(7,588)
(122%)
34,199
-
(100%)
(765)
-
(100%)
(765)
(5,798)
(161%)
9,445
(7,588)
(123%)
33,434
(1) Described in the section titled “Non-GAAP Measures”.
Revenue and Gross Profit
The headwinds facing producers reduced overall demand for equipment, resulting in a 23% decrease in
equipment revenue in the quarter and 24% for the year. In response, we prioritized reducing used equipment
inventory levels in line with market demand, which provided some support for used equipment demand, while
the market impact on new equipment revenue was more significant.
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Product support revenue increased 13% in the quarter and 11% for the year as demand for parts and service
continued through the challenging harvest window. Product support revenue was also positively impacted in the
first and second quarters of 2019 following a difficult 2018 harvest.
The 42% decrease in gross profit in the quarter and 28% for the year, was due to a decrease in equipment revenue,
margin compression, used equipment inventory impairments and reduced OEM incentives on new equipment
sales, as we prioritized reducing existing used equipment inventory levels. These factors also resulted in a decrease
in gross profit as a percentage of revenue in the quarter and for the year. The decrease in equipment gross profit
and gross profit as a percentage of revenue was partly offset by increased product support revenue.
SG&A and Net Finance Costs
SG&A expenses excluding equipment commissions decreased 3% in the quarter and were flat for the year. This
trend is consistent with our overall results and was primarily due to a decrease in annual performance incentives
and marketing expenditures, partly offset by the inclusion of the Red Deer dealership acquired in the fourth
quarter of 2018 and restructuring charges of $1.0 million incurred in the third quarter of 2019.
The increase in net finance costs of $1.3 million in the quarter and $5 million for the year was primarily due to the
adoption of IFRS 16, which increased net finance costs by $1.2 million in the quarter and $5 million for the year.
Managing floorplan to utilize certain interest-free periods provided by manufacturers reduced interest otherwise
payable on John Deere floor plans from $0.9 million to $0.2 million in the quarter, and from $4.0 million to $0.6
million for the year.
Income
Income before income tax decreased $16 million in the quarter and $42 million for the year, primarily the result of
the decrease in gross profit of $14 million in the quarter and $37 million for the year, as discussed above. The
adoption of IFRS 16 also decreased income before income tax by $0.6 million in the quarter and $2.3
million for the year.
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Transportation Segment Results
($ thousands)
Equipment
New equipment
Used equipment
Total equipment revenue
Product support revenue
Total revenue
Gross profit
Total other income (loss)
Equipment commissions
SG&A expenses, excluding equipment
commissions
Income from operating activities
Net finance costs
Income before income tax expense
EBITDA(1)
Ratios
Gross profit margin as a % of revenue
Total SG&A as a % of gross profit
Reconciliation of adjusted (loss)
income before income tax expense:
Income before income tax expense
Adjustments:
Unrealized foreign exchange (gain)
loss included in other income
Adjusted (loss) income before income
tax expense(1)
Three month periods
ended December 31
% Change
Compared
to 2018
2019
Years ended December 31
2018
2019
% Change
Compared
to 2018
2018
41,988
2,778
44,766
33,157
77,923
13,307
(6%)
44,564
184,239
(15%)
215,674
(21%)
3,522
9,718
(25%)
12,895
(7%)
48,086
193,957
(15%)
228,569
(1%)
33,452
136,296
2% 133,587
(4%)
81,538
330,253
(9%)
362,156
(4%)
13,830
57,405
(3%)
59,310
1,030
(494)
550%
13%
(229)
(436)
2,516
(1,945)
762%
(6%)
292
(2,065)
(12,640)
5% (11,995)
(49,370)
3%
(47,971)
1,203
(1,081)
122
3,038
17.1%
98.7%
3%
118%
(82%)
10%
1,170
(497)
673
2,762
8,606
(3,455)
5,151
15,801
(10%)
41%
(28%)
(3%)
17.0%
89.9%
17.4%
89.4%
9,566
(2,444)
7,122
16,338
16.4%
84.4%
122
(82%)
673
5,151
(28%)
7,122
(826)
188%
940
(1,821)
270%
1,070
(704)
(144%)
1,613
3,330
(59%)
8,192
(1) Described in the section titled “Non-GAAP Measures”.
Revenue and Gross Profit
Transportation segment equipment revenue decreased 7% in the quarter and 15% for the year. This reflected
factory delays experienced in the first half the year, combined with softening customer demand and increased
competition in the second half of the year, as dealers were under increasing pressure to sell trucks ordered from
OEMs in early 2019.
Product support revenue improved in the year, with a deliberate increase in our parts sales team facilitating a 5%
increase in parts revenue, combined with a 2% increase in service revenue. Parts and service revenue also
increased in the quarter, but this was more than offset by an ongoing intentional reduction of our rental fleet,
resulting in an overall 1% decrease in product support revenue.
Gross profit decreased $0.5 million in the quarter and $1.9 million for the year, primarily due to lower equipment
revenues and the rental fleet reduction discussed above. The increase in gross profit margin as a percent of
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17 17
revenue, for the quarter and the year, reflected the shift in sales mix towards higher margin product support
revenues.
SG&A and Net Finance Costs
SG&A expenses excluding equipment commissions, increased 5% in the quarter and 3% for the year, primarily due
to the investment in growing our parts sales team and increased personnel costs in the Ontario market, partly
offset by a decrease in annual performance incentives compared to 2018.
The increase in net finance costs of $0.6 million in the quarter and $1.0 million for the year was due to the adoption
of IFRS 16 which increased net finance costs by $0.3 million in the quarter and $1.2 million for the year.
At December 31, 2019, approximately 1% (December 31, 2018 – 3%) of the Transportation segment’s outstanding
floor plan balances were non-interest bearing due to various incentives and interest-free periods in place.
Income
Adjusted income before income tax decreased $2.3 million in the quarter and $4.9 million for the year. This
includes the adoption of IFRS 16, which decreased income before income tax by $0.2 million in the quarter and
$1.2 million for the year.
The increase in unrealized foreign exchange gains for the year was due to the appreciation of the Canadian dollar,
relative to the US dollar. Most of our floorplan in the Transportation segment is payable in US dollars and
exchanges rate fluctuations result in unrealized foreign exchange gains or losses period to period.
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Industrial Segment Results
($ thousands)
Equipment
New equipment
Used equipment
Total equipment revenue
Product support revenue
Total revenue
Gross profit
Total other income
Equipment commissions
SG&A expenses, excluding equipment
commissions
(Loss) income from operating
activities
Net finance costs
(Loss) income before income tax
expense
EBITDA(1)
Ratios
Three month periods
ended December 31
% Change
Compared
to 2018
2019
Years ended December 31
2018
2019
% Change
Compared
to 2018
2018
3,738
682
4,420
6,867
11,287
3,720
(32%)
5,493
19,254
(24%)
25,485
(28%)
945
4,027
1% 3,993
(31%)
6,438
23,281
(21%)
29,478
(3%)
7,053
30,058
(5%)
31,517
(16%)
13,491
53,339
(13%)
60,995
(9%)
4,075
17,206
(4%)
18,014
106
(167)
524%
(17%)
17
(200)
704
(813)
(30%)
12%
1,003
(726)
(4,252)
12%
(3,801)
(15,538)
(3%)
(16,040)
(593)
(35)
(628)
322
(752%)
600%
(830%)
(40%)
91
(5)
86
533
1,559
(232)
1,327
5,103
(31%)
2,251
(41%)
22%
2
2,253
4,172
29.5%
93.1%
Gross profit margin as a % of revenue
Total SG&A as a % of gross profit
33.0%
118.8%
30.2%
98.2%
32.3%
95.0%
Reconciliation of adjusted (loss)
income before income tax expense:
(Loss) income before income tax expense
Adjustments:
Unrealized foreign exchange (gain)
loss included in other income
Gain on sale of Commercial operations
Adjusted (loss) income before income
tax expense(1)
(628)
(830%)
86
1,327
(41%)
2,253
(5)
-
102%
100%
316
-
(26)
120%
-
(100%)
129
(480)
(633)
(257%)
402
1,301
(32%)
1,902
(1) Described in the section titled “Non-GAAP Measures”.
Overview
Due to the disposition of the four Construction dealerships in the first quarter of 2018, segment results for 2019
are not directly comparable to 2018. To aid in comparability of the ongoing Industrial segment, a same store
analysis is presented on the following page.
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Industrial Segment Same Store Highlights
Three month periods
ended December 31
Year ended December 31
% Change
Compared
to 2018
2019
2018(2)
2019
% Change
Compared
to 2018
2018
Same
Store
3,738
682
4,420
6,867
11,287
3,720
106
(32%)
5,493
19,254
(3%)
19,934
(28%)
945
4,027
42% 2,841
(31%)
6,438
23,281
(3%)
7,053
30,058
(16%)
13,491
53,339
4,075
(9%)
524% 17
17,206
704
2% 22,775
8% 27,908
5% 50,683
7% 16,126
79%
12%
393
(726)
(167)
(17%)
(200)
(813)
(4,252)
12%
(3,801)
(15,538)
11% (13,936)
(593)
(752%)
91
1,559
(16%)
1,857
(35)
600%
(5)
(232)
1067%
24
(628)
(830%)
86
1,327
(29%)
1,881
322
(40%)
533
5,103
50%
3,395
($ thousands)
Revenue
New equipment
Used equipment
Total equipment revenue
Product support revenue
Total revenue
Gross profit
Total other income
Equipment commissions
SG&A expenses, excluding equipment
commissions
(Loss) income from operating
activities
Net finance costs
(Loss) income before income tax
expense
EBITDA(1)
Ratios
Gross profit margin as a % of revenue
Total SG&A as a % of gross profit
33.0%
118.8%
30.2%
98.2%
32.3%
95.0%
31.8%
90.9%
Reconciliation of adjusted (loss)
income before income tax expense:
(Loss) income before income tax expense
Adjustments:
Unrealized foreign exchange (gain)
loss included in other income
(628)
(830%)
86
1,327
(29%)
1,881
(5)
102% 316
(26)
127% 97
Adjusted (loss) income before income
tax expense(1)
(1) Described in the section titled “Non-GAAP Measures”.
(2) For the three months ended December 31, 2018, the same store results are the same as the Industrial segment results.
(633)
1,301
(257%)
402
(34%)
1,978
Revenue and Gross Profit
Equipment revenue decreased 31% in the quarter and increased 2% for the year as uncertainty in the oil and gas
sector continued to limit equipment demand. The decrease in equipment revenue in the fourth quarter was
primarily due to the unusual timing of sales experienced in the fourth quarter of 2018, which represented a 43%
increase over the fourth quarter of 2017.
Product support revenue decreased 3% in the quarter, resulting from lower parts and rental activity, but increased
8% for the year, primarily driven by the increase in rental and other revenue of 25%, which includes our storage
and racking solutions business line.
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20 20
Gross profit decreased 9% in the quarter and increased 7% for the year, as a result of the factors discussed above.
The increase in gross profit margin as a percent of revenue, for the quarter and the year, reflects the shift in sales
mix towards higher margin product support revenues.
SG&A and Net Finance Costs
SG&A expenses excluding equipment commissions, increased 12% in the quarter and 11% for the year. These
increases were primarily driven by administrative expenses incurred to establish the storage and racking solutions
business line and the retention of key senior personnel previously shared between the Construction and Industrial
dealerships in 2018, partially offset by a decrease in annual performance incentives compared to 2018.
The increase in net finance costs of $0.1 million in the quarter and $0.3 million for the year was primarily due to
the adoption of IFRS 16 which increased net finance costs by $0.1 million in the quarter and $0.3 million for the
year.
At December 31, 2019, approximately 44% (December 31, 2018 – 27%) of the Industrial segment’s outstanding
floor plan balances were non-interest bearing due to various incentives and interest-free periods in place.
Income
Adjusted income before income tax decreased $1.0 million in the quarter and $0.7 million for the year, including
the impact of IFRS 16.
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Cash Flow
Cervus’ primary sources and uses of cash flow for the years ended December 31, 2019 and 2018 are as follows:
Year ended December 31
($ thousands)
Net (loss) income
Effect of non-cash items in net earnings & changes in working capital
Cash provided from operating activities
Cash (used in) investing activities
Cash (used in) financing activities
Net increase (decrease) in cash
Effect of foreign exchange on cash
Cash, beginning of year
Cash, end of year
Increase
(Decrease)
in Cash
(33,395)
47,777
14,382
(7,558)
3,876
10,700
(464)
(8,396)
1,840
2018
24,777
(12,088)
12,689
(4,117)
(17,753)
(9,181)
785
14,502
6,106
2019
(8,618)
35,689
27,071
(11,675)
(13,877)
1,519
321
6,106
7,946
Operating Activities
The principal factors in the $14 million increase in operating cash flow year over year were:
A $33 million decrease in cash from income associated with decreased profitability compared to the prior
year.
A $23 million increase in cash from accounts receivable, as the prior year included an increase to accounts
receivable of $19 million which was subsequently collected.
A $23 million increase in cash from changes in inventory and floorplan payables. Refer to the section
“Adjusted Free Cash Flow” for additional discussion of the impact of floorplan facilities on non-cash
working capital. For the year ended December 31, 2019, a $20 million increase in cash used for inventory
was offset by a $27 million increase in floor plan facilities, compared to a $40 million increase in cash used
for inventory partly offset by a $24 million increase in floor plan facilities in 2018. This provided net cash
of $7 million in 2019, compared to a net use of cash of $16 million in 2018, resulting in a $23 million
increase in cash from changes in inventory and floor plan financing.
Investing Activities
The $8 million decrease in cash from investing activities year over year was primarily attributable to the non-
recurrence of $14 million of proceeds received in the first quarter of 2018 on the sale of the Company’s Commercial
operations and a $2.8 million increase in cash used to purchase property and equipment, partially offset by $2.0
million of insurance proceeds received in 2018 related to the Agriculture Rosthern property.
Financing Activities
The $3.9 million decrease in cash used in financing activities year over year was primarily attributable to a $9
million decrease in cash used for repayments of term debt, partly offset by a $4.0 million increase in cash used for
payment of lease obligations related to IFRS 16, and a $1.3 million increase in cash used to purchase common
shares.
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Adjusted Free Cash Flow
The Company has defined adjusted free cash flow as cash flow from operating activities before changes in non-
cash working capital, less sustaining capital expenditures, excluding acquisition or disposals of dealerships and
real estate (refer to “Non-GAAP Measures”).
Reconciliation of Adjusted Free Cash Flow
Years ended December 31
($ thousands)
Cash flow provided by (used in) operating activities
(-) Changes in non-cash working capital
(-) Purchase of property and equipment
(+) Purchase of dealerships & real estate
(+) Proceeds on disposal of property and equipment
(-) Proceeds on disposal of dealerships & real estate
Adjusted Free Cash Flow(1)
(1) - Described in the section titled “Non-GAAP Measures”.
2019
27,071
1,815
2018
12,689
36,432
(15,671)
5,475
(12,854)
874
2,616
-
21,306
4,911
(3,857)
38,195
Increase
(Decrease)
in Cash
14,382
(34,617)
(2,817)
4,601
(2,295)
3,857
(16,889)
Adjusted free cash flow is a measure used by management in forecasting and determining available resources for
future capital expenditure, repayment of debt, funding future growth and dividends to shareholders.
We exclude changes in non-cash working capital in the calculation of adjusted free cash flow, as this amount can
vary significantly based on seasonal sales trends, strategic decisions regarding inventory levels and inventory
financing decisions. As well, the Company seeks to optimize the financing of inventory between OEM floor plans
facilities and the Syndicated credit facility. However, floor plan facilities are included in non-cash working capital,
while the Syndicated credit facility is included in financing activities due to the committed term of the facility. In
periods where a portion of inventory is financed through OEM floor plan facilities, operating cash flow increases,
while cash provided from financing activities decreases.
Accordingly, we review adjusted free cash flow to remove the significant impact that these factors can have on
reported cash flow from operating activities.
Sustaining property and equipment expenditures are necessary to maintain the Company’s operations, and we
believe that these capital expenditures should be funded by cash flow provided by operating activities. Capital
spending for the expansion of sales and service capacity is expected to improve future free cash and is not
deducted from cash flow provided by operating activities before changes in non-cash working capital in arriving
at adjusted free cash flow.
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Product Support Revenue By Segment
The below table shows product support revenue by segment for the three and twelve months ended December
31, 2019 and 2018:
Summary of Annual Product Support Revenue
Year ended December 31, 2019
($ thousands)
Parts
Service
Rental and other
Total product support revenue
Year ended December 31, 2018
($ thousands)
Parts
Service
Rental and other
Total product support revenue
Total
218,888
87,878
18,875
325,641
Agriculture Transportation
100,594
31,849
3,853
106,829
46,286
6,172
159,287
136,296
Industrial
11,465
9,743
8,850
30,058
Total
206,128
82,860
19,213
308,201
Agriculture Transportation
96,118
31,078
6,391
95,925
41,442
5,730
143,097
133,587
Industrial
14,085
10,340
7,092
31,517
Summary of Fourth Quarter Product Support Revenue
Three months ended December 31, 2019
($ thousands)
Parts
Service
Rental and other
Total product support revenue
Three months ended December 31, 2018
($ thousands)
Parts
Service
Rental and other
Total product support revenue
Total
53,151
22,235
5,112
80,498
Agriculture Transportation
24,543
7,818
796
26,038
11,961
2,475
40,474
33,157
Industrial
2,570
2,456
1,841
6,867
Total
49,837
20,995
5,343
76,175
Agriculture Transportation
24,303
7,677
1,472
22,694
10,979
1,997
35,670
33,452
Industrial
2,840
2,339
1,874
7,053
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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) - Described in the section titled “Non-GAAP Measures”.
December 31,
2019
402,507
615,723
264,156
117,454
227,138
138,351
December 31,
2018
406,261
538,228
253,062
32,624
243,699
153,199
1.52 1.61
Working Capital
Cervus’ working capital decreased by $15 million to $138 million at December 31, 2019, when compared to $153
million at December 31, 2018. As at the date of this report, the Company is in compliance with all of its covenants.
Based on inventory levels at December 31, 2019, the Company had the ability to floor plan an additional $17
million of inventory and held $449 million of undrawn floor plan capacity.
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 expects that continued cash flows from operations in 2020, together with currently available cash
on hand and credit facilities, will be sufficient to fund its requirements for investments in working capital, capital
assets and dividend payments through the next 12 months. The Company's contractual obligations and
availability of borrowing facilities at December 31, 2019 are described further in the sections below.
The Company has guaranteed the net residual value of certain leases between customers and John Deere
Financial (“JDF”) as set out in Note 24 to the Audited Consolidated Financial Statements for the year ended
December 31, 2019. The Company regularly assesses the residual value of the JDF lease portfolio relative to
wholesale values for comparable equipment. On the maturity of customers’ 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, 2019, leases
with a residual value of $42 million are scheduled to mature in 2020.
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Contractual Obligations
The Company has certain contractual obligations including payments under long-term debt agreements and
finance lease obligations. A summary of the Company’s principal contractual obligations are as follows:
($ thousands)
Term debt payable
Finance lease obligation
Total
Total
Carrying
Value
Contractual
principle
repayments
12 months
or less
1 - 2 years
2 - 5 years
5+ Years
43,165
92,883
136,048
43,446
148,134
191,580
9,795
15,471
25,266
3,397
13,945
17,342
30,254
-
36,345 82,373
66,599
82,373
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 Agriculture equipment sales come with a trade-in and a limited portion of our
Transportation sales come with a trade-in. 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 in the other
two segments, we purchase the new equipment from manufacturers. 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.
At December 31, 2019, the Company believes that the recoverable value of new and used equipment inventories
exceeds its respective carrying value. For the three-month period and year ended December 31, 2019, the
Company recognized inventory valuation adjustments through cost of goods sold expense of $10 million and $24
million (December 31, 2018 - $2.9 million and $12 million expense).
Inventory by segment for the year ended December 31, 2019, compared to December 31, 2018, is as follows:
($ thousands)
Agriculture
New
Used
Other
Total inventory
Transportation
New
Used
Other
Total inventory
Industrial
New
Used
Other
Total inventory
Total inventory
December 31,
2019
December 31,
2018
Increase/
(Decrease)
72,991
113,691
30,614
217,296
69,941
155,597
29,719
255,257
70,785
3,964
20,135
94,884
37,725
4,730
21,004
63,459
5,249
1,100
1,090
7,439
319,619
7,000
1,375
1,095
9,470
328,186
3,050
(41,906)
895
(37,961)
33,060
(766)
(869)
31,425
(1,751)
(275)
(5)
(2,031)
(8,567)
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Accounts Receivable
For the year ended December 31, 2019 the average time to collect the Company’s outstanding accounts
receivable was approximately 15 days (2018 - 13 days). At December 31, 2019 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 ongoing 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 $1.2 million at December 31, 2019 (2018 - $1.1 million),
which represents 3.8% (2018 – 2.9%) of outstanding trade accounts receivable and 0.1% (2018 - 0.1%) of gross
revenue on an annual basis. Bad debt expense for the year ended December 31, 2019 amounted to a $0.4 million
recovery (2018 - $0.2 million recovery)
Capital Resources
We use our capital to finance current operations and growth strategies. Our capital consists of both debt and
equity and we believe the best way to maximize shareholder value is to use a combination of equity and debt
financing to leverage our operations. A summary of the Company’s available credit facilities as at December 31,
2019 are as follows:
($ thousands)
Operating and other bank credit
facilities
Capital facilities
Floor plan facilities and rental
equipment term loan financing
Total borrowing
December 31, 2019
December 31, 2018
Total Limits Borrowings
Letters of
Credit
Amount
Available Total Limits Borrowings
Letters of
Credit
Amount
Available
122,735 25,788 9,600 87,347 122,867
21,071
2,400
99,396
(a)
9,367
(b) 190,670
225,825
9,942
166,219
197,232
(a) For capital facilities, the amount available under the facilities is limited to the pre-approved credit limit of
$9.4 million (December 31, 2018 - $10 million). The Company has unencumbered assets available for
financing which are estimated at $7 million as at December 31, 2019 (December 31, 2018 - $2.4 million).
(b) For floorplan facilities, the amount available under the facilities is limited to the lesser of the pre-approved
credit limit of $449 million (December 31, 2018 - $418 million) or the available unencumbered assets which
are estimated at $17 million as at December 31, 2019 (December 31, 2018 - $34 million).
Operating and Other Bank Credit Facilities
At December 31, 2019, 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 million accordion which the Company may request as an
increase to the total available facility, subject to lender approval. As at December 31, 2019, there was $25 million
drawn on the facility and $10 million had been utilized for outstanding letters of credit to John Deere.
We believe that the credit facilities available to the Company are sufficient to meet our revenue targets and
working capital requirements for 2020.
During the third quarter of 2019, the definition of Cervus’ fixed charge coverage ratio under the Syndicated credit
facility was amended to exclude certain restructuring costs in the determination of adjusted EBITDA and to
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27 27
exclude share purchases under the Normal Course Issuer Bid (“NCIB”) from shareholder distributions for the period
in which purchases under the NCIB are suspended.
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, 2019
2.64
December 31, 2018
2.39
1.57
6.24
2.38
11.82
(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.
(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, 2019, floor plan payables
related to inventories were $182 million.
Floor plan payables at December 31, 2019 represented approximately 57% of our inventories (December 31, 2018
– 48%). 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 by its key suppliers.
Interest on floor plans at the contractual rate were largely offset by dealer rebates and interest-free periods. Total
Agriculture segment interest otherwise payable on John Deere floor plans approximates $4.0 million for year
ended December 31, 2019 (December 31, 2018 – $3.1 million). This amount was offset by rebates applied during
the year ended December 31, 2019, of $3.4 million (December 31, 2018 - $2.6 million). At December 31, 2019,
approximately 44% (December 31, 2018 – 27%) of the Industrial segment’s and 1% (December 31, 2018 – 3%) of
the Transportation segment’s outstanding floor plan balances were non-interest bearing due to various incentives
and interest-free periods in place.
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Outstanding Share Data
As of the date of this MD&A, there are 16 million common shares and 0.6 million deferred share units outstanding.
As at December 31, 2019 and 2018, the Company had the following weighted average shares outstanding:
(thousands)
Basic weighted average number of shares outstanding
Dilutive impact of deferred share plan
Diluted weighted average number of shares outstanding
December 31
2019
December 31,
2018
15,413
15,656
- 801
16,457
15,413
Normal Course Issuer Bid (“NCIB”)
For the year ended December 31, 2019, the Company repurchased and cancelled 0.3 million common shares at a
weighted average price of $12.71 per share under the September 2018 NCIB, and no shares had been repurchased
under the September 2019 NCIB.
Dividends Paid and Declared to Shareholders
The Company, at the discretion of the Board of Directors, is entitled to make cash dividends to its shareholders.
The following table summarizes our dividends paid for the year ended December 31, 2019:
($ thousands, except
per share amounts)
Record Date
March 29, 2019
June 28, 2019
September 30, 2019
December 31, 2019
Total
Dividend per Share
0.1100
Dividend Payable
1,709
Dividends
Reinvested
0.1100
0.1100
0.1100
0.4400
1,685
1,686
1,689
6,769
Net Dividend Paid
1,479
1,476
1,577
1,453
5,985
230
209
109
236
784
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, 2019, 0.1 million (December 31, 2018 – 0.1 million) common shares were
issued through the Company’s dividend reinvestment plan.
Taxation
Cervus’ 2019 dividends declared and paid through December 31, 2019, are considered to be eligible dividends for
tax purposes on the date paid.
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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.
Summary of Annual Results
($ thousands, except per share amounts)
Total revenues
(Loss) income for the year
Net (loss) income per share - basic
Net (loss) income per share - diluted
Cash provided by operating activities
EBITDA (1)
Total assets
Total long-term liabilities
Total liabilities
Shareholders' equity
Dividends declared to shareholders
Dividends declared per share
Weighted average shares outstanding
Basic
Diluted
Actual shares outstanding
(1) - Described in the section titled “Non-GAAP Measures”.
2019
1,139,034
2018
1,350,036
2017
1,221,285
(8,618)
(0.56)
(0.56)
49,105
27,942
615,723
124,429
388,585
227,138
6,769
0.440
15,413
15,413
15,349
24,777
19,912
1.58
1.51
31,655
56,728
1.27
1.20
33,593
53,840
538,228
514,055
41,467
294,529
243,699
6,261
0.400
15,656
16,457
15,559
52,540
288,802
225,253
4,399
0.280
15,744
17,759
15,675
The comparative figures for 2018 included an adjustment relating to the first quarter of 2018. The adjustment
resulted in an increase to cost of sales of $2.4 million, due to a reduction in income tax expense of $0.6 million. The
change in the comparative balance sheet was a decrease in inventory of $2.4 million, a decrease in income tax
payable of $0.6 million and a decrease in retained earnings of $1.8 million.
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Summary of Quarterly Results
Sales activity for the Agriculture segment is normally highest between April and September during growing
seasons
for New Zealand and Australia have not materially
impacted results. Activity in the Transportation sector generally increases in winter months, while the
Industrial sector generally slows in the winter months. As a result, income or losses may not accrue uniformly from
quarter to quarter.
in Canada. The growing seasons
($ thousands, except per share
amounts)
Revenues
(Loss) income
Gross profit
Gross profit margin
EBITDA(1)
(Loss) income per share:
Basic
Diluted
Adjusted (loss) income per share(1)
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
($ thousands, except per share
amounts)
Revenues
Income (loss)
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
Basic
Diluted
December 31,
2019
259,549
(7,048)
36,901
14.2%
September 30,
2019
317,082
(1,675)
42,847
13.5%
838 8,228
June 30,
2019
327,605
2,817
46,879
14.3%
March 31,
2019
234,798
(2,712)
42,724
18.2%
11,981 6,895
(0.46)
(0.46)
(0.50)
(0.50)
15,344
15,344
(0.11)
(0.11)
(0.10)
(0.10)
15,326
15,326
0.18
0.17
0.15
0.14
15,445
16,394
(0.17)
(0.17)
(0.20)
(0.20)
15,546
15,546
December 31,
2018
300,247
5,031
51,999
17.3%
13,367
September 30,
2018
392,499
12,180
59,882
15.3%
21,284
June 30,
2018
408,584
9,515
57,848
14.2%
March 31,
2018
248,706
(1,949)
39,349
15.8%
19,383 2,694
0.32
0.31
0.35
0.33
0.78
0.74
0.74
0.71
0.61
0.58
0.61
0.58
15,593
16,393
15,679
16,498
15,672
16,483
(0.12)
(0.12)
(0.12)
(0.12)
15,686
15,686
(1) - Described in the section titled “Non-GAAP Measures”.
The comparative figures for 2018 included an adjustment relating to the first quarter of 2018. The adjustment
resulted in an increase to cost of sales of $2.4 million, due to a reduction in income tax expense of $0.6 million. The
change in the comparative balance sheet was a decrease in inventory of $2.4 million, a decrease in income tax
payable of $0.6 million and a decrease in retained earnings of $1.8 million.
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Off-Balance Sheet Arrangements
In the normal course of business, we enter agreements that include indemnities in favour 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, 2019, payments in
arrears by such customers aggregated $1.4 million (December 31, 2018 - $0.8 million). 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,
2019, the net residual value of such leases aggregated $316 million (December 31, 2018 - $321 million).
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 $2.3 million at December 31, 2019 (December 31, 2018
- $2.9 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 $10 million (2018 - $2.4 million). The Letters of Credit were issued in accordance with the
dealership arrangements with the suppliers that would allow the supplier to draw upon the letter of credit if the
Company was in default of any of its obligations.
Transactions with Related Parties
Key Management Personnel Compensation
In addition to their salaries, the Company also provides non-cash benefits to its directors and executive officers.
The Company contributes to the deferred share plan on behalf of directors and executive officers, and to the
employee share purchase plan on behalf of executive officers, if enrolled, in accordance with the terms of the
plans. The Company has no retirement or post-employment benefits available to its directors and executive
officers, aside from permitting unvested deferred share units earned during employment to continue vesting
upon retirement.
Total remuneration of key management personnel and directors during the years ended December 31, 2019 and
2018 was:
Year ended December 31
($ thousands)
Short-term benefits
Share-based payments
Total
2019
2018
2,515 3,050
550 1,184
3,065 4,234
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Other Related Party Transactions
During 2019, certain officers and dealer managers of the Company provided guarantees to John Deere as required
by John Deere aggregating $7 million (December 31, 2018 - $7 million). During the year ended December 31, 2019,
the Company paid those individuals $0.2 million (December 31, 2018 - $0.2 million), for providing these
guarantees, which represents a similar amount to guarantee fees otherwise paid to financial institutions. In
December 2019, these guarantees were replaced with a $7 million letter of credit dated December 4, 2019. These
transactions were recorded at the amount agreed to between the Company and the guarantors and are included
in selling, general and administrative expenses.
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
overseeing the Company’s risk management policies. 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 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 commodity prices, foreign exchange rates and
interest rates 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 influencers on our customers’ businesses, as rapid changes
in international trade relations, food input pricing, cattle pricing, or petroleum product pricing including carbon
taxes, as examples, can have a material adverse effect. 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 by eroding margins on the products it sells and reducing the valuation of the
inventory it holds.
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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 Agriculture 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 and
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.
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 $0.3 million (2018 - $0.1
million), based on the U.S. dollar floor plan balances at December 31, 2019. 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 customers from the manufacturer in U.S. dollars, having quoted customers 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, 2019 would have increased (decreased) comprehensive income by $0.5 million (2018 - $0.4 million).
A strengthening or weakening of the Canadian dollar by 5% against the Australian dollar at December 31, 2019
would have increased (decreased) comprehensive income by $0.5 million (2018 -$0.4 million).
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, 2019, a change in 100 basis
points in interest rates would impact the Company’s annual interest expense by approximately $2.3 million (2018
- $2.0 million).
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Reliance on our Key Manufacturers and Dealership Arrangements
Cervus’ primary source of income is from the sale of agriculture, 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 customers’ leases with John Deere. This equipment is then sold by Cervus as used
equipment. In a market of declining equipment demand, 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, 2019, customer
equipment leases with John Deere represented residual values of $316 million, 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
supply partners. 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. 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 an impairment of our inventory balance.
Industry Competitive Factors
Authorized John Deere agriculture dealerships sell John Deere agriculture, turf, and sport products and
equipment. The majority of the Company’s sales are derived from the Agriculture sector. The retail agriculture
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 mitigates a portion of the risks inherent in any one of these customer segments.
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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 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
The Canadian, New Zealand and Australian retailing of agricultural, transportation, and industrial equipment is
influenced by seasonality. Sales activity for the Agricultural equipment segment is normally highest between April
and September during growing seasons in Canada and July through December in New Zealand and Australia.
Activity in the Transportation sector generally increases in winter months, while the Industrial sector generally
slows in the winter months. As a result, income or losses may not accrue uniformly from quarter to quarter.
Human Resources
The ability to provide high-quality services to our customers depends on our ability to attract and retain well-
trained, experienced employees. The Company relies on the skills and availability of trained and experienced
technicians in order to provide efficient and appropriate services to customers. Hiring and retaining such
individuals is critical to the success of our business. Demographic trends are reducing the number of individuals
entering the trades, making access to skilled individuals more difficult. The Company has numerous rural locations
which make attracting and retaining skilled individuals more difficult. 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 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.
Trade relations with China, primarily China’s ongoing ban on canola exports has impacted the Company and its
customers, with the ban on pork and beef exports being lifted in the fourth quarter of 2019. 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.
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Environmental Risks
Our dealerships routinely handle hazardous and non-hazardous waste as part of their day-to-day operations.
Although the Company believes it is in full compliance with applicable laws, 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.
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 consistent with industry practices, such reviews are inherently incomplete. Conducting 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,
transportation and industrial equipment industries, resulting in a concentration of credit risk from customers in
these industries. Our Agriculture segment is influenced by the prices of crop inputs, commodity prices, as well as
local and global weather patterns in a growing season. 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. Our Industrial equipment segment is
influenced by general economic and warehouse activity, and due to location, oil prices for Western Canadian
crude oil.
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
due on invoice or net 30 days. The average time to collect the Company’s outstanding accounts receivable was
approximately 15 days for the year ended December 31, 2019 and 13 days for 2018. 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.
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The Company sets the amount of capital in proportion to risk. The Company manages the capital structure and
makes adjustments to it in 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 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);
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 is 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’s 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
favorable 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,
subject to board approval, 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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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,
maintenance and upgrade of information technology systems and network infrastructure, which we rely upon to
process, transmit and store electronic data. 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; the
Company cannot provide assurance that all cyber security problems can be prevented. 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.
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. In making estimates and judgments, management relies on
external information and observable conditions where possible, supplemented by internal analysis as required.
Management reviews its estimates and judgments on an ongoing basis.
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.
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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.
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 judgments 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 judgment to
determine whether substantially all of the significant risks and rewards of ownership are transferred to the
customer or remain with the Company. These judgments 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.
Judgment 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
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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.
Changes in Significant Accounting Policies
IFRS 16 Leases
The Company adopted IFRS 16 Leases effective January 1, 2019. IFRS 16 replaces existing lease guidance, including
IAS 17 Lease, IFRIC 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.
The Company has adopted IFRS 16 using the modified retrospective approach, with the cumulative effect of
initially applying this standard recognized in retained earnings on the date of initial application (i.e., January 1,
2019). Accordingly, the comparative 2018 information has not been restated, and continues to be reported under
IAS 17 and IFRIC 4. Refer to Note 4 and Note 13 of the Audited Financial Statements for the year ended December
31, 2019 for a detailed discussion of the new lease standard.
The adoption of IFRS 16 resulted in an increase in depreciation and interest expense, and a reduction in rent
expense. The adoption of IFRS 16 does not alter the cash payments made under rents compared to immediately
prior to transition. To aid in comparability to prior periods, the current period impact of adopting IFRS 16 on
components of the Statement of Comprehensive (Loss) Income is disclosed below and throughout this
Management’s Discussion and Analysis as follows:
Consolidated
$ thousands
Increase (decrease) in:
Gross profit
Rent expense
Depreciation expense
Three month period ended
December 31, 2019
Year ended December 31,
2019
(118) (408)
(3,221)
(12,860)
2,334
9,448
Selling, general and administrative expense
Net finance costs
Loss before income tax expense
Income tax expense
Loss for the period
(887)
1,620
851
-
851
(3,412)
6,587
3,583
664
4,247
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Agriculture
($ thousands)
Increase (decrease) in:
Gross profit
Rent expense
Depreciation expense
Three month period ended
December 31, 2019
Year ended December 31,
2019
-
(70)
(2,037) (8,207)
1,325
5,443
Selling, general and administrative expense
Net finance costs
Loss before income tax expense
(712)
1,235
593
(2,764)
5,026
2,262
Transportation
($ thousands)
Increase (decrease) in:
Gross profit
Rent expense
Depreciation expense
Three month period ended
December 31, 2019
Year ended December 31,
2019
(48) (408)
(653) (2,559)
524
2,072
Selling, general and administrative expense
Net finance costs
Loss before income tax expense
(129)
307
226
(487)
1,247
1,168
Industrial
($ thousands)
Increase (decrease) in:
Rent expense
Depreciation expense
Three month period ended
December 31, 2019
Year ended December 31,
2019
(410) (1,611)
372
1,481
Selling, general and administrative expense
Net finance costs
Loss before income tax expense
(38)
68
30
(130)
265
135
Corporate
($ thousands)
Increase (decrease) in:
Rent expense
Depreciation expense
Three month period ended
December 31, 2019
Year ended December 31,
2019
(121) (483)
113 452
Selling, general and administrative expense
Net finance costs
Loss before income tax expense
(8)
10
2
(31)
49
18
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42 42
Responsibility of Management and Board
Disclosure Controls
Management, under the supervision of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), is
responsible for establishing and maintaining adequate disclosure controls and procedures (“DC&P”), as defined by
National Instrument 52-109. Disclosure controls and other procedures are designed to provide reasonable
assurance that information required to be disclosed in documents filed or submitted under securities legislation is:
(i) recorded, processed, summarized and reported within the time periods specified in securities legislation; and (ii)
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, together with other members of management, have designed the Company’s disclosure
controls and procedures in order to provide reasonable assurance that material information relating to the
Company and its consolidated subsidiaries would have been known to them, and by others, within those entities.
The CEO and the CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the
Company’s disclosure controls and procedures. Based on that evaluation, the CEO and the CFO concluded that the
Company’s disclosure controls and procedures were effective as at December 31, 2019.
Internal Controls over Financial Reporting
Management, under the supervision of the CEO and CFO, is responsible for establishing and maintaining adequate
internal control over financial reporting (“ICFR”), as defined by National Instrument 52-109. 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 have evaluated, or caused to be evaluated under their supervision, the effectiveness of the
Company’s internal control over financial reporting as at December 31, 2019, 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 that evaluation, the CEO and the CFO concluded that the Company’s
internal control over financial reporting was effective as at December 31, 2019.
There have been no changes in the design of the Company’s internal control over financial reporting during 2019
that would materially affect, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
It should be noted that 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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43 43
Cautionary Note Regarding Forward-Looking Statements
Statements made by the Company in this report, in other filings with Canadian securities regulators and in other
communications include forward-looking statements within the meaning of applicable securities laws (“forward-
looking statements”). These statements include, but are not limited to, statements about the Company’s
objectives, strategies and initiatives, financial performance expectations and other statements made herein,
whether with respect to the Company's businesses or the economies of the countries where the Company
operates. Generally, forward-looking statements can be identified by the use of forward-looking terminology such
as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “planned”, “estimates”, “forecasts”,
“intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases which state
that certain actions, events or results “may”, “could”, “would”, “should”, “might” or “will be taken”, “occur”, “be
achieved”, or other similar expressions of future or conditional verbs.
Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may
cause the actual results, level of activity, closing of transactions, performance or achievements of the Company to
be materially different from those expressed or implied by such forward-looking statements, including but not
limited to risks related to general economic conditions, the industries and customers served by the Company, its
principal equipment partners, currency exchange rates, funding requirements, fluctuating interest rates,
legislative and regulatory developments, changes in accounting standards, and competition as well as those
factors discussed under the heading “Business Risks and Uncertainties” herein and in the Company's documents
filed on SEDAR at www.sedar.com.
All material assumptions used in making forward-looking statements are based on management's knowledge of
current business conditions and expectations of future business, economic and market conditions and trends.
Although the Company believes the assumptions used to make such statements are reasonable at this time and
has attempted to identify in its continuous disclosure documents important factors that could cause actual results
to differ materially from those contained in forward-looking statements, there may be other factors that cause
results not to be as anticipated, estimated or intended. Certain material assumptions are applied by the Company
in making forward-looking statements. There can be no assurance that such statements will prove to be accurate,
as actual results and future events could differ materially from those anticipated in such statements. Accordingly,
readers should not place undue reliance on forward-looking statements. The Company does not undertake to
update any forward-looking statements that are contained herein, except in accordance with applicable securities
laws.
The most recent quarterly dividend payment of $0.11 per share was made to the shareholders of record as of
December 31, 2019, on January 15, 2020. See “Capital Resources - Cautionary Note Regarding Dividends” for a
cautionary note regarding future dividends.
Cervus Annual Report 2019
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44 44
Material Assumptions and Risks for 2024 Targets
The following material assumptions and risks were made in establishing the Company’s key performance indicator
targets for the fiscal year 2024.
Return on Invested Capital
Material assumptions:
-
-
-
Material risks:
-
Realization of the product support gross profit, absorption and inventory turnover targets discussed below.
Prudent management of working capital.
Effective management of the Company’s capital allocation priorities.
Lower than anticipated earnings growth; refer to the product support gross profit and absorption risks
discussed below.
Short-term effects from the Company’s capital-allocation initiatives, including the potential impact of organic
and inorganic growth initiatives designed to create long-term growth.
-
Product Support Gross Profit Growth
Material assumptions:
- All business segments will contribute positively to the consolidated product support gross profit growth.
-
Product support revenue growth will be driven by an expansion of current product support offerings and the
introduction of new revenue lines.
Successful implementation of initiatives to improve the gross profit margin percentage of our product
support departments.
-
Material risks:
- Adverse economic, foreign exchange, trade or regulatory conditions which negatively impact demand for our
-
-
products and services.
Pricing pressure from existing competitors, new entrants to the market and accelerated disruption from
online competitors.
Lower or lesser contributions than expected from initiatives to improve gross profit margin percentage of our
product support departments.
- Our ability to attract and retain qualified employees to provide our product support offering.
Absorption Percentage
Material assumptions:
-
Realization of the product support gross profit objective discussed above, while limiting the increase in our
fixed expense base.
Fixed expenses have been assumed to increase at an inflationary rate, while variable expenses are assumed
to increase in line with revenues.
Material risks:
-
Lower than anticipated product support gross profit growth; refer to the product support gross profit risks
discussed above.
Short-term effects of new product support initiatives designed to create long-term improvements in product
support gross profit and absorption.
- Adverse regulatory or economic conditions that result in an unforeseen increase in operating costs.
-
-
-
Equipment Inventory Turnover
Material assumptions:
-
There will not be a significant change in market demand for equipment across our business segments over
the five-year period.
Successful implementation of new processes and a new commissions structure will improve the management
of used inventory that is taken on trade in our Canadian agriculture operations.
Material risks:
- Adverse economic, foreign exchange, trade or regulatory conditions which negatively impact demand for our
-
equipment inventory.
Equipment inventory ordering from OEMs can require significant lead time. In the period between ordering
inventory from OEMs, and the delivery of that equipment, market demand can shift resulting in inventory
levels that are not in line with market demand.
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Additional GAAP Financial Measures
This MD&A contains certain financial measures considered additional GAAP measures, where the Company
considers such information to be useful to the understanding of the Company’s results. 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-GAAP 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:
Working Capital
Working capital is calculated as current assets less current liabilities. Working capital ratio is calculated as current
assets divided by current liabilities.
Adjusted Free Cash Flow
Adjusted free cash flow is a measure used by management to evaluate its performance. Adjusted free cash flow is
considered relevant because it provides an indication of how much cash generated by operations before changes
in non-cash working capital is available after deducting sustaining capital expenditures. Although we consider
this measure to be adjusted free cash flow, financial and non-financial covenants in our credit facilities and dealer
agreements may restrict cash from being available for distributions, reinvestment in the Company, potential
acquisitions, or other purposes. Investors should be cautioned that adjusted free cash flow may not actually be
available for growth or distribution of the Company. References to “Adjusted free cash flow” are to cash provided
by (used in) operating activities (before changes in non-cash working capital balances) less sustaining capital
expenditures. The reconciliation of adjusted free cash flow for the years ended December 31, 2019 and 2018 is
presented in the Adjusted Free Cash Flow section of this MD&A.
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Adjusted (Loss) Income
Adjusted (loss) 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 (loss) income as follows:
Adjusted (Loss) Income
($ thousands, except per share amounts)
(Loss) income
Adjustments:
Unrealized foreign exchange (gain) loss (1)
Gain on sale of Commercial operations
Insurance proceeds received in excess of building cost
Tax impact of adjustments
Adjusted (loss) income
Adjusted (loss) income per share:
Basic
Diluted
Adjusted (Loss) Income Before Income Tax Expense
Three Months Ended December 31, 2019
Reconciliation of Adjusted (Loss) Before
Income Tax Expense ($ thousands)
Three month periods
ended December 31
Year ended December 31
2019
(7,048)
2018
5,031
2019
(8,618)
(831)
1,256
(1,847)
-
-
222
(7,657)
-
(765)
(132)
5,390
-
-
493
(9,972)
2018
24,777
1,199
(480)
(765)
12
24,743
(0.50)
(0.50)
0.35
0.33
(0.65)
(0.65)
1.58
1.50
Three months ended December 31, 2019
Total Agriculture Transportation
Industrial
Corporate
(Loss) income before income tax expense
(8,807)
(5,798)
122
(628)
(2,503)
Adjustments:
Unrealized foreign exchange (gain)(1)
(831)
-
Adjusted (loss) before income tax expense
(9,638)
(5,798)
(826)
(704)
(5)
-
(633)
(2,503)
Year Ended December 31, 2019
Reconciliation of Adjusted (Loss) Income
Before Income Tax Expense ($ thousands)
Year ended December 31, 2019
Total Agriculture Transportation
Industrial
Corporate
(Loss) income before income tax expense
(10,446)
(7,588)
5,151
1,327
(9,336)
Adjustments:
Unrealized foreign exchange (gain)(1)
Adjusted (loss) income before income tax
expense
(1,847)
-
(1,821)
(26)
-
(12,293)
(7,588)
3,330
1,301
(9,336)
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Three Months Ended December 31, 2018
Reconciliation of Adjusted Income (Loss)
Before Income Tax Expense ($ thousands)
Three months ended December 31, 2018
Total Agriculture Transportation
Industrial
Corporate
Income (loss) before income tax expense
7,642
10,210
1,256 -
673
940
86
(3,327)
316
-
(765)
(765)
- - -
8,133
9,445
1,613
402
(3,327)
Adjustments:
Unrealized foreign exchange loss(1)
Insurance proceeds received in excess of
building cost
Adjusted income (loss) before income tax
expense
Year Ended December 31, 2018
Reconciliation of Adjusted Income (Loss)
Before Income Tax Expense ($ thousands)
Year ended December 31, 2018
Total Agriculture Transportation
Industrial
Corporate
Income (loss) before income tax expense
34,102
34,199
7,122
2,253
(9,472)
Adjustments:
Unrealized foreign exchange loss(1)
Gain on sale of Commercial operations
Gain on sale of land and building
Adjusted income (loss) before income tax
expense
1,199 - 1,070
-
(480) -
(765)
(765)
129
-
(480)
-
- - -
34,056
33,434
8,192
1,902
(9,472)
(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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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, 2019
EBITDA ($ thousands)
Three months ended December 31, 2019
Net (loss) income
Add:
Interest
Income taxes
Depreciation and Amortization
EBITDA(1)
EBITDA margin(2)
Reconciliation of adjusted EBITDA(1):
EBITDA(1)
Adjustments:
Unrealized foreign exchange (gain)
Adjusted EBITDA(1)
Year Ended December 31, 2019
EBITDA ($ thousands)
Year ended December 31, 2019
Net (loss) income
Add:
Interest
Income taxes
Depreciation and Amortization
EBITDA(1)
EBITDA margin(2)
Reconciliation of adjusted EBITDA(1):
EBITDA(1)
Adjustments:
Unrealized foreign exchange (gain)
Adjusted EBITDA(1)
Total Agriculture Transportation
122
(5,798)
(7,048)
Industrial
(628)
Corporate
(744)
3,434
(1,759)
6,211
838
0.3%
1,767
1,226
62
- -
-
3,520
(511)
-0.3%
1,690
3,038
3.9%
888
322
379
(1,759)
113
(2,011)
838
(511)
3,038
322
(2,011)
(831)
7
-
(511)
(826)
2,212
(5)
317
-
(2,011)
Total Agriculture Transportation
5,151
(7,588)
(8,618)
Industrial
1,327
Corporate
(7,508)
14,019
(1,828)
24,369
27,942
2.5%
7,695
4,009
336
- -
-
13,836
13,943
1.8%
6,641
15,801
4.8%
3,440
5,103
9.6%
1,979
(1,828)
452
(6,905)
27,942
13,943
15,801
5,103
(6,905)
(1,847)
26,095
-
13,943
(1,821)
13,980
(26)
5,077
-
(6,905)
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49 49
Three Months Ended December 31, 2018
EBITDA ($ thousands)
Three months ended December 31, 2018
Net income (loss)
Add:
Interest
Income taxes
Depreciation and Amortization
EBITDA(1)
EBITDA margin(2)
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 (loss)
Add:
Interest
Income taxes
Depreciation and Amortization
EBITDA(1)
EBITDA margin(2)
Reconciliation of adjusted EBITDA(1):
EBITDA(1)
Adjustments:
Unrealized foreign exchange loss
Insurance proceeds received in excess of
building cost
(Gain) on sale of Commercial operations
Adjusted EBITDA(1)
Total Agriculture Transportation
673
5,031
10,210
Industrial
86
Corporate
(5,938)
671
757
1,955
2,612 - -
3,769
13,367
4.5%
1,932
12,899
6.3%
1,418
2,762
3.4%
28
-
499
2,612
-
(2,827)
419
533
4.0%
13,367
12,899
2,762
533
(2,827)
1,256 -
940
316
-
(765)
(765)
13,858
12,134
3,702
849
(2,827)
Total Agriculture Transportation
7,122
34,199
24,777
7,515
9,325 - -
2,718
3,247
Industrial
2,253
Corporate
(18,797)
72
-
1,478
9,325
15,111
56,728
4.2%
7,295
44,212
4.8%
5,969
16,338
4.5%
1,847
4,172
6.8%
-
(7,994)
56,728
44,212
16,338
4,172
(7,994)
1,199 -
1,070
129
-
(765) (765)
-
-
(480)
56,682
- - (480)
3,821
43,447
17,408
-
(7,994)
(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, sale of real estate, dealerships and insurance proceeds received in excess of
building cost.
(2) - EBITDA Margin is calculated as EBITDA divided by gross revenue.
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50 50
Return On Invested Capital
Return on invested capital (“ROIC’”) is a measure we use to evaluate the effectiveness of capital deployed. We use this measure to compare potential acquisitions
and other capital investments against our internally computed cost of capital to determine whether the investment will create shareholder value. We will also use
this measure to assess past acquisitions, capital investments and the Company as a whole to determine if shareholder value is being achieved by these uses of
capital.
ROIC is calculated as trailing twelve months earnings before income tax excluding unrealized (gains) losses from foreign currency, plus finance costs less floorplan
interest expense, divided by 4 quarter average total invested capital. Total invested capital is calculated as average net debt plus book value of equity.
The reconciliation of ROIC for 2019 and 2018 is presented in the table below.
Reconciliation of Return On Invested Capital
($ thousands, except as noted)
Net (loss) income before tax
(+) Unrealized foreign exchange (gain) loss
(+) Finance costs
(-) Floorplan interest expense
Adjusted (Loss) Earnings Before Interest and Tax
31-Dec
(8,807)
(831)
3,188
(1,210)
(7,660)
2019
30-Sep
(2,308)
207
3,598
(1,139)
358
30-Jun
2,811
(625)
3,233
(1,050)
4,369
31-Mar
(2,145)
(598)
3,037
(1,009)
(715)
Shareholders' equity
(+) Long-term debt
(+) Current portion of long-term debt
(-) Cash
Total Invested Capital
227,138
33,370
9,795
(7,946)
262,357
232,742
31,621
11,204
(7,146)
268,421
237,885
75,691
12,048
(10,256)
315,368
240,747
45,995
13,488
(2,562)
297,668
2018
30-Sep
15,820
(730)
1,696
(1,234)
15,552
240,018
39,263
7,976
(8,810)
278,447
30-Jun
13,582
38
1,629
(1,268)
13,981
230,502
30,346
8,958
(1,930)
267,876
31-Dec
7,642
1,256
1,684
(1,129)
9,453
243,700
25,123
13,964
(6,106)
276,681
31-Mar
(2,941)
635
1,343
(1,035)
(1,998)
223,806
27,354
10,485
(3,236)
258,409
Adjusted (Loss) Earnings Before Interest and Tax -
trailing 12 months
Total Invested Capital - 4 quarter average
Return On Invested Capital
(3,648)
13,465
28,659
38,272
36,988
33,640
31,967
29,775
285,954
-1.3%
289,535
4.7%
292,041
9.8%
280,168
13.7%
270,353
13.7%
264,694
12.7%
263,322
12.1%
262,544
11.3%
Cervus Annual Report 2019
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Product Support Gross Profit Growth and Absorption
Product Support Gross Profit Growth
Our customers value the ability of our dealerships to provide best in class equipment along with operational uptime through efficient product support, that
enhances the profitability of their businesses. Customer relationships are built and maintained through the equipment’s useful life, and our product support
capabilities are a key factor in a customer’s purchasing decision. Growth in this stable and profitable area of our business will serve to reduce cyclicality of income,
while also enhancing customer affinity for Cervus and our OEM partners.
In assessing Product Support Gross Profit Growth, the Company includes the activities performed for the benefit of its other departments. This internal activity is
excluded from reported product support revenues under GAAP, however, management assesses the overall product support activity when evaluating the use of
the Company’s resources.
Product Support Gross Profit Growth is calculated as the change from prior period product support revenue divided by product support cost of sales, adjusted to
include internal product support activity benefiting wholegoods that is eliminated on consolidation, as internal work is performed on trade-in equipment to make
it available for re-sale.
Absorption Percentage
Absorption is an operating measure commonly used in the dealership industry as an indicator of sustainable performance and profitability relative to cost structure.
Absorption measures the extent product support gross profit of a dealership covers (or absorbs) the operating costs of the dealership, excluding equipment sales
commissions, carrying costs of equipment inventory and corporate expenses. When 100% absorption is achieved, all the gross profit from the sale of equipment,
after sales commissions and inventory carrying costs, directly impacts operating profit.
Absorption is not a measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, absorption may not be comparable
to similar measures presented by other issuers that operate in the dealership industry.
Absorption is calculated as product support gross profit, divided by total operating costs. Total operating costs is calculated as total SG&A expenses plus net finance
costs, less equipment commissions expense, amortization of intangibles, and floorplan interest expense.
Reconciliation of Product Support Gross Profit Growth and Absorption
The reconciliation of consolidated and segmented Product Support Gross Profit Growth and Absorption for 2019 and 2018 are presented in the tables below.
Cervus Annual Report 2019
52
70 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Consolidated
Reconciliation of Product Support Gross Profit
Dollars Growth % and Absorption -
Consolidated
($ thousands, except as noted)
Product support revenues - reported
(+) Product support revenues - internal activity
Product support revenues - total
Product support cost of sales - reported
(+) Product support cost of sales - internal activity
Product support cost of sales - total
YTD
325,641
33,898
359,539
202,935
16,151
219,086
Q4
80,498
7,094
87,592
50,692
3,457
54,149
2019
Q3
88,445
8,725
97,170
55,068
4,223
59,291
Q2
83,141
9,966
93,107
51,963
4,562
56,525
Q1
73,557
8,113
81,670
45,212
3,909
49,121
YTD
304,593
37,806
342,399
190,412
17,974
208,386
Q4
76,175
7,828
84,003
47,892
3,999
51,891
2018
Q3
82,249
9,940
92,189
51,154
4,521
55,675
Q2
79,759
11,149
90,908
49,830
4,764
54,594
Q1
66,410
8,889
75,299
41,536
4,690
46,226
Product Support Gross Profit
Product support gross profit dollars growth ($)
Product Support Gross Profit Growth (%)
140,453
6,440
4.8%
33,443
1,331
4.1%
37,879
1,365
3.7%
36,582
268
0.7%
32,549
3,476
12.0%
134,013
6,966
5.5%
32,112
2,670
9.1%
36,514
1,687
4.8%
36,314
1,887
5.5%
29,073
722
2.5%
Total SG&A expenses
(-) Equipment commissions expense
(-) Amortization of intangibles
(+) Net finance costs
(-) Floorplan interest expense
Total Operating Costs
171,278
(11,974)
(4,655)
12,369
(4,408)
162,609
43,261
(2,962)
(984)
3,036
(1,210)
41,141
42,499
(3,366)
(1,169)
3,423
(1,139)
40,248
42,397
(3,376)
(1,251)
3,059
(1,050)
39,779
43,121
(2,271)
(1,251)
2,851
(1,009)
41,442
171,324
(13,541)
(4,255)
5,477
(4,638)
154,367
43,534
(2,849)
(1,086)
1,241
(1,129)
39,711
44,169
(4,375)
(747)
1,565
(1,234)
39,378
43,408
(3,978)
(1,211)
1,479
(1,263)
38,435
40,213
(2,339)
(1,211)
1,192
(1,012)
36,843
Absorption
86%
81%
94%
92%
79%
87%
81%
93%
94%
79%
Cervus Annual Report 2019
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71 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Agriculture
Reconciliation of Product Support Gross Profit
Dollars Growth and Absorption - Agriculture
($ thousands, except as noted)
Product support revenues - reported
(+) Product support revenues - internal activity
Product support revenues - total
Product support cost of sales - reported
(+) Product support cost of sales - internal activity
Product support cost of sales - total
YTD
159,287
25,043
184,330
95,842
11,576
107,418
Q4
40,474
4,782
45,256
24,178
2,280
26,458
2019
Q3
47,551
6,639
54,190
28,258
3,119
31,377
Q2
39,216
7,370
46,586
24,557
3,248
27,805
Q1
32,046
6,252
38,298
18,849
2,929
21,778
YTD
143,097
28,316
171,413
88,088
13,065
101,153
Q4
35,670
5,857
41,527
21,808
2,855
24,663
2018
Q3
42,162
7,528
49,690
25,363
3,324
28,687
Q2
38,114
8,091
46,205
24,065
3,255
27,320
Q1
27,151
6,840
33,991
16,852
3,631
20,483
Product Support Gross Profit
Product support gross profit dollars growth ($)
Product Support Gross Profit Growth (%)
76,912
6,652
9.5%
18,798
1,934
11.5%
22,813
1,810
8.6%
18,781
(104)
-0.6%
16,520
3,012
22.3%
70,260
2,267
3.3%
16,864
1,839
12.2%
21,003
781
3.9%
18,885
587
3.2%
13,508
(940)
-6.5%
Total SG&A expenses
(-) Equipment commissions expense
(-) Amortization of intangibles
(+) Net finance costs
(-) Floorplan interest
Total Operating Costs
95,675
(9,217)
(3,098)
7,183
(2,272)
88,271
23,511
(2,301)
(640)
1,654
(479)
21,745
24,847
(2,710)
(818)
2,102
(701)
22,720
23,614
(2,479)
(820)
1,666
(505)
21,477
23,703
(1,727)
(820)
1,761
(588)
22,330
97,097
(10,750)
(2,680)
2,045
(2,351)
83,361
24,154
(2,214)
(781)
360
(664)
20,855
25,967
(3,629)
(632)
605
(632)
21,679
24,545
(3,076)
(633)
567
(549)
20,854
22,431
(1,831)
(634)
513
(506)
19,973
Absorption
87%
86%
100%
87%
74%
84%
81%
97%
91%
68%
Cervus Annual Report 2019
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72 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Transportation
Reconciliation of Product Support Gross Profit
Dollars Growth and Absorption - Transportation
($ thousands, except as noted)
Product support revenues - reported
(+) Product support revenues - internal activity
Product support revenues - total
Product support cost of sales - reported
(+) Product support cost of sales - internal activity
Product support cost of sales - total
YTD
136,296
6,881
143,177
90,553
3,649
94,202
Q4
33,157
1,910
35,067
22,691
984
23,675
2019
Q3
33,462
1,608
35,070
22,669
866
23,535
Q2
35,365
2,053
37,418
22,700
1,079
23,779
Q1
34,312
1,310
35,622
22,493
720
23,213
YTD
133,587
7,459
141,046
87,085
3,958
91,043
Q4
33,452
1,431
34,883
22,237
864
23,101
2018
Q3
33,028
1,947
34,975
21,833
990
22,823
Q2
34,385
2,491
36,876
21,836
1,260
23,096
Q1
32,722
1,590
34,312
21,179
844
22,023
Product Support Gross Profit
Product support gross profit dollars growth ($)
Product Support Gross Profit Growth (%)
48,975
(1,028)
-2.1%
11,392
(390)
-3.3%
11,535
(617)
-5.1%
13,639
(141)
-1.0%
12,409
120
1.0%
50,003
3,484
7.5%
11,782
526
4.7%
12,152
739
6.5%
13,780
1,078
8.5%
12,289
1,141
10.2%
Total SG&A expenses
(-) Equipment commissions expense
(-) Amortization of intangibles
(+) Net finance costs
(-) Floorplan interest
Total Operating Costs
51,315
(1,945)
(1,116)
3,455
(2,063)
49,646
13,134
(494)
(225)
1,081
(720)
12,776
12,279
(449)
(243)
779
(423)
11,943
12,905
(686)
(324)
828
(521)
12,202
12,997
(316)
(324)
767
(399)
12,726
50,036
(2,065)
(1,171)
2,444
(2,244)
47,000
12,431
(436)
(261)
497
(445)
11,786
12,122
(552)
5
629
(592)
11,613
13,063
(688)
(458)
772
(707)
11,982
12,420
(390)
(457)
546
(500)
11,619
Absorption
99%
89%
97%
112%
98%
106%
100%
105%
115%
106%
Cervus Annual Report 2019
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73 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Industrial
Reconciliation of Product Support Gross Profit
Dollars Growth and Absorption - Industrial
($ thousands, except as noted)
Product support revenues - reported
(+) Product support revenues - internal activity
Product support revenues - total
Product support cost of sales - reported
(+) Product support cost of sales - internal activity
Product support cost of sales - total
Product Support Gross Profit
Product support gross profit dollars growth ($)
Product Support Gross Profit Growth (%)
Total SG&A expenses
(-) Equipment commissions expense
(-) Amortization of intangibles
(+) Net finance costs
(-) Floorplan interest
Total Operating Costs
YTD
30,058
1,974
32,032
16,540
926
17,466
14,566
818
6.0%
16,351
(813)
(441)
232
(73)
15,256
Q4
6,867
402
7,269
3,823
193
4,016
3,253
(213)
-6.1%
4,419
(167)
(119)
35
(11)
4,157
2019
Q3
7,432
478
7,910
4,141
238
4,379
3,531
172
5.1%
3,750
(207)
(108)
60
(15)
3,480
Q2
8,560
543
9,103
4,706
235
4,941
4,162
513
14.1%
3,934
(211)
(107)
70
(25)
3,661
Q1
7,199
551
7,750
3,870
260
4,130
3,620
346
10.6%
4,248
(228)
(107)
67
(23)
3,957
YTD
27,907
2,031
29,938
15,239
951
16,190
13,748
1,215
9.7%
15,045
(726)
(404)
(23)
(43)
13,849
Q4
7,053
540
7,593
3,847
280
4,127
3,466
305
9.7%
4,001
(200)
(44)
5
(20)
3,742
2018
Q3
7,059
465
7,524
3,958
207
4,165
3,359
167
5.2%
3,795
(195)
(120)
7
(10)
3,477
Q2
7,260
567
7,827
3,929
249
4,178
3,649
222
6.5%
3,858
(214)
(120)
(21)
(7)
3,496
Q1
6,535
459
6,994
3,505
215
3,720
3,274
521
18.9%
3,391
(118)
(120)
(14)
(6)
3,133
Absorption
95%
78%
101%
114%
91%
99%
93%
97%
104%
104%
Cervus Annual Report 2019
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74 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Equipment Inventory Turnover
In our wholegoods’ departments, managing inventory levels to meet market demand must be balanced by maintaining the sale of inventory we carry, which we
measure using equipment inventory turnover. As our largest asset, equipment inventory levels have a direct impact on overall asset levels and therefore our capital
requirements and ROIC performance. Equipment inventory turnover is a key metric for the Company; specifically, for used equipment held primarily in our
Agriculture segment, as discussed in the section ‘Key Performance Indicators’.
We calculate the ratio as trailing twelve-month equipment cost of sales divided by the quarterly average inventory for the most recent four quarters. The
reconciliation of equipment inventory turnover for 2019 and 2018 is presented in the table below.
Reconciliation of Equipment Inventory Turnover
($ thousands, except as noted)
Agriculture
Q4
2019
Q3
Q2
Q1
Q4
2018
Q3
Q2
Q1
Used equipment cost of sales
Used equipment cost of sales - trailing 12 months
70,668
268,665
97,052
265,767
55,909
265,530
45,036
282,314
67,770
276,640
96,815
257,899
72,693
232,120
39,362
223,561
Used equipment inventory
Average used equipment inventory - last four quarters
Used Equipment Inventory Turnover
113,691
151,042
1.78
148,258
161,519
1.65
180,802
164,101
1.62
161,418
159,385
1.77
155,597
155,219
1.78
158,587
147,714
1.75
161,937
138,769
1.67
144,754
125,688
1.78
Transportation
Total equipment cost of sales
Total equipment cost of sales - trailing 12 months
41,925
182,295
44,275
185,841
66,539
198,287
29,556
208,982
45,471
215,761
56,721
200,331
77,234
182,164
36,335
162,352
Total equipment inventory
Average total equipment inventory - last four quarters
Total Equipment Inventory Turnover
74,749
67,823
2.69
74,009
59,749
3.11
51,482
54,854
3.61
71,050
60,647
3.45
42,455
64,102
3.37
54,430
62,939
3.18
74,652
59,416
3.07
84,871
51,168
3.17
Industrial
Total equipment cost of sales
Total equipment cost of sales - trailing 12 months
3,744
19,593
5,227
21,120
5,219
19,756
5,403
20,248
5,271
17,422
3,863
15,971
5,711
15,188
2,577
13,817
Total equipment inventory
Average total equipment inventory - last four quarters
Total Equipment Inventory Turnover
6,349
7,035
2.79
6,449
7,454
2.83
7,437
7,596
2.60
7,905
7,056
2.87
8,026
6,387
2.73
7,015
5,480
2.91
5,277
5,068
3.00
5,231
5,307
2.60
Cervus Annual Report 2019
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75 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Consolidated Financial
Consolidated Financial
Statements of
Statements of
CERVUS EQUIPMENT
CERVUS EQUIPMENT
CORPORATION
CORPORATION
For the years ended December 31, 2019 and 2018
For the years ended December 31, 2019 and 2018
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
76 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
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 and Board of Directors 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, 2019 and 2018
the consolidated statements of comprehensive income (loss) 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, 2019 and 2018, 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.
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.
77 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Emphasis of Matter – Prospective Change in Accounting Policy
We draw attention to Note 4 to the consolidated financial statements which indicates that
the Entity has changed its accounting policy for leases and has applied that change on a
modified retrospective basis.
Our opinion is not modified in respect of this matter.
Other Information
Management is responsible for the other information. Other information comprises:
−
−
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 “2019 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.
The information, other than the financial statements and the auditors’ report thereon,
included in a document likely to be entitled “2019 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
78 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
2
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.
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’
79 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
3
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.
− 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 11, 2020
80 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
4
CERVUS EQUIPMENT CORPORATION
Consolidated Statements of Financial Position
As at December 31, 2019 and 2018
CERVUS EQUIPMENT CORPORATION
($ thousands)
Consolidated Statements of Financial Position
Assets
As at December 31, 2019 and 2018
Current assets
Cash and cash equivalents
($ thousands)
Accounts receivable and other assets
Assets
Inventories
Current assets
Total current assets
Non-current assets
Cash and cash equivalents
Accounts receivable and other assets
Other long-term assets
Inventories
Property and equipment
Total current assets
Intangible assets
Non-current assets
Goodwill
Other long-term assets
Total non-current assets
Property and equipment
Total assets
Intangible assets
Liabilities
Goodwill
Current liabilities
Total non-current assets
Trade and other liabilities
Total assets
Floor plan payables
Liabilities
Current portion of term debt
Current liabilities
Current portion of lease obligation
Trade and other liabilities
Total current liabilities
Floor plan payables
Non-current liabilities
Current portion of term debt
Term debt
Current portion of lease obligation
Lease obligation
Total current liabilities
Deferred income tax liability
Non-current liabilities
Total non-current liabilities
Term debt
Total liabilities
Lease obligation
Equity
Deferred income tax liability
Shareholders’ capital
Deferred share plan
Other reserves
Accumulated other comprehensive (loss) income
Shareholders’ capital
Retained earnings
Deferred share plan
Other reserves
Accumulated other comprehensive (loss) income
Retained earnings
Total non-current liabilities
Total liabilities
Equity
Total equity
Total liabilities and equity
“Wendy Henkelman” Director
Approved by the Board:
“Peter Lacey” Director
Total equity
Total liabilities and equity
December 31,
2019
December 31,
2018
Note
Note
6
7
6
8
7
9
10
10
8
9
10
10
11
12
12
13
11
12
12
12
13
13
14
12
13
14
16
20
16
20
74,942
13,599
319,619
138,705
402,507
38,015
22,897
13,599
213,216
138,705
38,015
22,897
213,216
December 31,
December 31,
$ 7,946 $ 6,106
2019
2018
74,942
71,969
319,619
328,186
402,507
406,261
$ 7,946 $ 6,106
71,969
9,375
328,186
58,328
406,261
42,640
21,624
9,375
131,967
58,328
$ 615,723 $ 538,228
42,640
21,624
131,967
$ 63,183 $ 77,713
$ 615,723 $ 538,228
157,615
13,964
3,770
$ 63,183 $ 77,713
253,062
157,615
13,964
25,123
3,770
7,501
253,062
8,843
41,467
25,123
294,529
7,501
8,843
86,540
41,467
8,693
294,529
5,195
506
86,540
142,765
8,693
243,699
5,195
$ 615,723 $ 538,228
506
142,765
243,699
$ 615,723 $ 538,228
182,379
9,795
8,799
264,156
182,379
9,795
33,370
8,799
84,084
264,156
6,975
124,429
33,370
388,585
84,084
6,975
83,740
124,429
10,271
388,585
5,195
(136)
83,740
128,068
10,271
227,138
5,195
(136)
128,068
227,138
Approved by the Board:
“Peter Lacey” Director
“Wendy Henkelman” Director
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
81 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
Note
2019
2018
CERVUS EQUIPMENT CORPORATION
Consolidated Statements of Comprehensive (Loss) Income
For the years ended December 31, 2019 and 2018
CERVUS EQUIPMENT CORPORATION
($ thousands)
Consolidated Statements of Comprehensive (Loss) Income
Revenue
For the years ended December 31, 2019 and 2018
Note
Equipment sales
Parts
($ thousands)
Service
Revenue
Rentals and other
Equipment sales
Total revenue
Parts
Cost of sales
Service
Gross profit
Rentals and other
Other income
Total revenue
Selling, general and administrative expense
Cost of sales
Income from operating activities
Gross profit
Finance income
Other income
Finance costs
Selling, general and administrative expense
Net finance costs
Income from operating activities
Share of profit of equity accounted investees, net of income tax
Finance income
(Loss) income before income tax expense
Finance costs
Income tax recovery (expense)
Net finance costs
(Loss) income for the year
Share of profit of equity accounted investees, net of income tax
(Loss) income before income tax expense
Other comprehensive (loss) income
Income tax recovery (expense)
Foreign currency translation differences for foreign operations, net of tax
(Loss) income for the year
Total comprehensive (loss) income for the year
18
19
21
18
19
14
21
14
Other comprehensive (loss) income
Net (loss) income per share:
Foreign currency translation differences for foreign operations, net of tax
Basic
Total comprehensive (loss) income for the year
Diluted
22
22
Net (loss) income per share:
Basic
Diluted
22
22
$
$
$
$
$
$
813,393 $ 1,041,835
218,888
206,128
2019
2018
87,878
82,860
18,875
19,213
813,393 $ 1,041,835
1,139,034
1,350,036
218,888
206,128
(969,683)
(1,140,958)
87,878
82,860
169,351
209,078
18,875
19,213
3,844
3,443
1,139,034
1,350,036
(171,278)
(173,045)
(969,683)
(1,140,958)
1,917
39,476
169,351
209,078
687
854
3,844
3,443
(13,056)
(6,352)
(171,278)
(173,045)
(12,369)
(5,498)
1,917
39,476
6
124
687
854
(10,446)
34,102
(13,056)
(6,352)
1,828
(9,325)
(12,369)
(5,498)
(8,618)
24,777
6
124
(10,446)
34,102
1,828
(9,325)
(642)
315
(8,618)
24,777
(9,260)
25,092
(642)
(0.56) $
(9,260)
(0.56) $
315
1.58
25,092
1.51
(0.56) $
(0.56) $
1.58
1.51
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
82 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
CERVUS EQUIPMENT CORPORATION
Consolidated Statements of Changes in Equity
For the years ended December 31, 2019 and 2018
Attributable to Equity Holders of the Company
( $ t ho us a nds )
Balance December 31, 2017
Comprehensive income for the year
Profit
Other comprehensive income
Foreign currency translation adjustments, net of tax
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
Dividends to equity holders
Shares issued through DRIP
Shares issued through deferred share plan
Share-based payment transactions
Common shares repurchased
Transactions with owners
Balance December 31, 2018
Balance at January 1, 2019, as previously reported
Impact of change in accounting policy
Adjusted balances at January 1, 2019
Comprehensive loss for the year
Loss
Other comprehensive loss
Foreign currency translation adjustments, net of tax
Total comprehensive loss for the year
Transactions with owners, recorded directly in equity
Dividends to equity holders
Shares issued through DRIP
Shares issued through deferred share plan
Share-based payment transactions
Common shares repurchased
Transactions with owners
Balance December 31, 2019
Share
capital
Deferred
share
plan
Other
reserves
Cumulative
translation
account
Retained
earnings
Note
Total
$
88,163 $
7,455 $
5,195 $
191 $
124,249 $ $
225,253
-
-
-
-
710
276
-
(2,609)
(1,623)
-
-
-
-
-
(276)
1,514
-
1,238
-
-
-
-
-
-
-
-
-
-
24,777
24,777
315
315
-
24,777
315
25,092
-
-
-
-
-
-
(6,261)
(6,261)
-
-
-
-
(6,261)
710
-
1,514
(2,609)
(6,646)
$
86,540 $
8,693 $
5,195 $
506 $
142,765 $ $
243,699
86,540
8,693
5,195
4
-
-
-
506
-
142,765
243,699
690
690
$
86,540 $
8,693 $
5,195 $
506 $
143,455 $ $
244,389
-
-
-
-
770
370
-
(3,940)
(2,800)
-
-
-
-
-
(370)
1,948
-
1,578
16
16
16
16
-
-
-
-
-
-
-
-
-
-
(8,618)
(8,618)
(642)
(642)
-
(8,618)
(642)
(9,260)
(6,769)
(6,769)
-
-
-
-
-
-
-
-
-
-
(6,769)
770
-
1,948
(3,940)
(7,991)
227,138
$
83,740 $
10,271 $
5,195 $
(136) $
128,068 $ $
83 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
CERVUS EQUIPMENT CORPORATION
Consolidated Statement of Cash Flows
For the years ended December 31, 2019 and 2018
($ thousands)
(Loss) income for the year
Adjustments for:
Income tax (recovery) expense
Depreciation
Amortization of intangibles
Equity-settled share-based payment transactions
Net finance costs
Unrealized foreign exchange (gain) loss
Non-cash impairment of inventories
(Gain) on sale of property and equipment
Share of (profit) of equity accounted investees, net of tax
Change in non-cash working capital
Cash provided 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
Proceeds from (payments for) intangible assets and goodwill
Insurance proceeds for property and equipment
Proceeds from disposal of property and equipment
Proceeds from sale of Commercial operations
Net cash (used in) investing activities
Cash flows from financing activities
Net proceeds (repayments) from term debt
Dividends paid
(Payment) of lease obligation
Receipt (payment) of deposits with manufacturers
Purchase of common shares
Net cash (used in) financing activities
Increase (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
$
2019
(8,618) $
14
9
10
21
18
7
18
23
9
10
9
16
16
(1,828)
19,714
4,655
1,948
13,332
(1,847)
24,006
(436)
(6)
(1,815)
49,105
(8,016)
(14,018)
27,071
687
-
(15,671)
693
-
2,616
-
(11,675)
4,588
(5,867)
(9,256)
599
(3,941)
(13,877)
1,519
321
6,106
$
7,946 $
2018
24,777
9,325
10,856
4,255
1,514
6,661
1,199
11,513
(1,889)
(124)
(36,432)
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
84 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
1. Reporting Entity
Cervus Equipment Corporation (“Cervus” or the “Company”) is incorporated 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, 2019, comprise the Company and its subsidiaries (“the Group”).
Cervus Equipment Corporation (“Cervus” or “Company”) provides equipment solutions to customers in agriculture,
transportation, and industrial markets across Canada, Australia, and New Zealand. Throughout its territories and
across its diverse markets, Cervus dealerships are united in delivering sales and support of the market-leading
equipment our customers depend on to earn a living. The Company operates 63 Cervus dealerships and is the
authorized representative of leading Original Equipment Manufacturers (“OEMs”) including: 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 11, 2020.
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.
Cervus Annual Report 2019
85 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
10
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
2. Basis of Preparation (continued)
Details of the Company’s subsidiaries at December 31, 2019 and December 31, 2018 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.
2019
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
2018
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Use of Judgments and Estimates
In preparing these consolidated financial statements, management has made judgments, 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.
Judgments
Information about judgments 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 where the Company is the lessor, as an operating or finance lease;
judgment 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. (Note 13)
Impairment tests on long-lived assets; judgment is used in identifying impairment triggers and determining
cash generating units or groups of cash generating units at which goodwill, intangible assets, and property
and equipment are tested for impairment, as well as determining the appropriate discount rate for these
calculations. (Note 10)
Assumptions and Estimation Uncertainties
Information about assumptions and estimation uncertainties which could have a significant effect on the carrying
amounts of assets and liabilities are included in the following notes:
Recoverability of inventories and key assumptions regarding the net realizable value of inventory. (Note 7)
Impairment tests on long-lived assets; estimates on key assumptions related to the future operating results
and the appropriate discount rate. (Note 10)
Depreciation and amortization expense; assumptions on the useful lives of property and equipment and
intangible assets. (Note 9 and 10)
Cervus Annual Report 2019
86 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
11
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
2. Basis of Preparation (continued)
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.
Comparative Figures
The comparative figures for 2018 include an adjustment relating to the first quarter of 2018. The adjustment results
in an increase to cost of sales of $2.4 million, resulting in a reduction to income tax expense of $0.6 million. The change
in the comparative balance sheet was a decrease in inventory of $2.4 million, a decrease in income tax payable of $0.6
million and a decrease in retained earnings of $1.8 million.
Cervus Annual Report 2019
87 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
12
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
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
An operating segment is a component of the Corporation that engages in business activities from which it may earn
revenues and incur expenses. All operating segments’ results are reviewed regularly by the Corporation’s Chief
Executive Officer in order to make decisions regarding the allocation of resources to the segment. Segment results
include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
The Corporation has three reportable operating segments: Agriculture, Transportation and Industrial, based on the
industry which they serve. The Agriculture segment consists of John Deere dealership locations in Alberta,
Saskatchewan, British Columbia, New Zealand, and Australia. The Transportation segment consists of Peterbilt
dealership locations in Saskatchewan and Ontario. The Industrial segment consists of Clark, Sellick, Doosan, and JLG
dealership locations in Alberta, Saskatchewan, and Manitoba.
The Corporation also reports activities not directly attributable to an operating segment under a fourth Corporate
segment. The corporate head office incurs certain costs which are not considered directly attributable to an operating
segment. Corporate expenses consist of certain overheads and shared services provided to the divisions, along with
public company costs, salaries, share-based compensation, office and administrative costs relating to corporate
employees and officers, and interest cost on general corporate borrowings. These corporate costs are not allocated
to the business segments and are reported within the Corporate segment.
These audited annual financial statements for the year ended December 31, 2019, are the first set of the Company’s
financial statements whereby the Corporate segment is reported as its own segment. This change to the composition
of the segments is described in further detail in Note 25. Prior period financial information for 2018 has also been
restated to reflect the change in segment composition.
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.
Cervus Annual Report 2019
88 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
13
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
3. Significant Accounting Policies (continued)
Foreign Currency Translation (continued)
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.
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 impairment of inventory are reversed when economic changes support an increased
value. Where a previous impairment is reversed, the reversal is limited to the amount of the original impairment, 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.
Right-of-use assets related to leased properties are also presented as property, plant and equipment in the statement
of financial position. Right-of-use assets are measured at recognition at the initial amount of the lease liability adjusted
for any lease payments made at or before the commencement date, plus any direct costs incurred, less any lease
incentives received.
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.
Leased assets 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.
Cervus Annual Report 2019
89 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
14
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
3. Significant Accounting Policies (continued)
Property and Equipment (continued)
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%
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.
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.
Cervus Annual Report 2019
90 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
15
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
3. Significant Accounting Policies (continued)
Leases
Policy applicable from January 1, 2019
At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains,
a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for
consideration.
i. As a lessee
The Company recognizes a right-of-use asset and a lease liability at the lease commencement date. The right-of-use
asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease
payments made at or before the commencement date, plus any direct costs incurred, less any lease incentives
received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement
date to the end of the lease term.
The lease liability is initially measured at the present value of the lease payments that are not paid at the
commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily be
determined, the Company’s incremental borrowing rate. Generally, the Company uses the incremental borrowing
rate as the discount rate.
The Company determines its incremental borrowing rate by obtaining interest rates from various external financing
sources and makes certain adjustments to reflect the terms of the lease and the type of asset leased.
Lease payments included in the measurement of the lease liability comprise the following:
-
-
-
-
fixed payments, including in-substance fixed payments;
variable lease payments that depend on an index or a rate, initially measured using the index rates as at the
commencement date;
amounts expected to be payable under a residual value guarantee, and
lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension
option, and penalties for early termination of a lease unless the Company is reasonably certain not to
terminate early.
Cervus Annual Report 2019
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16
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
3. Significant Accounting Policies (continued)
The lease liability is initially measured at amortized cost using the effective interest rate method. It is remeasured
when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the
Company’s estimate of the amount expected to be payable under a residual value guarantee, if the Company changes
its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-
substance fixed lease payment.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the
right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to
zero.
The Company presents right-of-use assets in ‘Property and equipment’ on the statement of financial position. Lease
liabilities are presented based on when the underlying payments become due. Short-term lease liabilities (due within
12 months of statement of financial position date) are presented in ‘Current portion of lease obligation’. Long-term
lease liabilities (due later than 12 months) are presented in ‘Lease obligation’.
ii. As a lessor
When the Company acts as a lessor, it determines at lease inception whether each lease is a finance lease or an
operating lease.
To classify each lease, the Company makes an assessment of whether the lease transfers substantially all of the risks
and rewards incidental to the ownership of the underlying asset. If this is the case, then the lease is a finance lease; if
not, then it is an operating lease. As part of this assessment, the Company considers certain indicators such as whether
the lease if for the major part of the economic life of asset.
When the Company is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease
separately. It assesses the lease classification of the sub-lease with reference to the right-of-use asset arising from the
head lease, not with reference to the underlying asset. If the sub-lease is a short-term lease to which the Company
applies the exemption described above, then it classifies the sub-lease as an operating lease.
The Company applies the derecognition and impairment requirements in IFRS 9 to the net investment in the lease.
The Company regularly reviews estimated unguaranteed residual values used in calculating the gross investment in
the lease.
The Company recognizes lease payments received under operating leases as income on a straight-line basis over the
lease term as part of ‘Rentals and other’ revenue.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
3. Significant Accounting Policies (continued)
ii. Policy applicable before January 1, 2019
For contracts entered before January 1, 2019, the Company determined whether the arrangement was or contained
a lease based on the assessment of whether:
-
-
fulfillment of the arrangement was dependent on the use of a specific asset or assets; and
the arrangement had conveyed a right to use the asset.
i. As a lessee
In the comparative period, as a lessee, the Company classified leases that transferred substantially all of the risks and
rewards of ownership as finance leases. When this was the case, the leased assets were measured initially at an
amount equal to the lower of their fair value and the present value of the minimum lease payments. Minimum lease
payments were the payments over the lease term that the lessee was required to make, excluding any contingent
rent. Subsequent to initial recognition, the assets were accounted for in accordance with the accounting policy
applicable to that asset.
Assets held under other leases were classified as operating leases and were not recognized in the Company’s
statement of financial position. Payments made under operating leases were expensed in profit or loss on a straight-
line basis over the term of the lease.
ii. As a lessor
When the Company acted as lessor, it determined at lease inception whether each lease was a finance lease or an
operating lease.
To classify each lease, the Company made an overall assessment of whether the lease transferred substantially all of
the risks and rewards of ownership of the underlying asset. If this was the case, then the lease was a finance lease; if
not, the it was an operating lease. As part of this assessment, the Company considered certain indicators such as
whether the lease was for the major part of the economic life of the asset.
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.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
3. Significant Accounting Policies (continued)
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’s financial assets and liabilities consist primarily of cash and cash equivalents, trade and other accounts
receivable, trade and other accrued liabilities, dividends payable, floor plan payables, foreign currency hedging
instruments, leases, and term debt.
Classification and Measurement of Financial Assets and Financial Liabilities
A financial asset is classified and is measured at:
Amortised cost; or
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.
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.
The Company’s financial liabilities are classified as Other liabilities initially recognized at fair value and are
subsequently measured at amortized cost using the effective interest rate method. The Company’s other financial
liabilities include trade and other accrued liabilities, floor plan payables, term debt, and lease obligations.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
3. Significant Accounting Policies (continued)
Classification and Measurement of Financial Assets and Financial Liabilities (continued)
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.
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.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
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.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
3. Significant Accounting Policies (continued)
Revenue Recognition
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 to have
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.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
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.
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.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
4. Changes in Significant Accounting Policies
IFRS 16 Leases
The Company adopted IFRS 16 Leases effective January 1, 2019. IFRS 16 replaces existing lease guidance, including
IAS 17 Lease, 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.
The Company has adopted IFRS 16 using the modified retrospective approach, with the cumulative effect of initially
applying this standard recognized in retained earnings on the date of initial application (i.e., January 1, 2019).
Accordingly, the comparative information has not been restated, and continues to be reported under IAS 17 and IFRIC
4. The details of the changes in accounting policies are described below.
On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of
which transactions are leases. It applied IFRS 16 only to contracts that were previously identified as leases. Contracts
that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed for whether there is a lease. Therefore,
the definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after January 1,
2019.
Leases in which the Company is Lessee
As a lessee, the Company previously classified leases as operating or finance leases based on its assessment of
whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset
to the Company. Under IFRS 16, the Company recognizes right-of-use assets and lease liabilities for most leases – i.e.,
these leases are on-balance sheet.
The Company decided to apply recognition exemptions to short-term leases of buildings, and leases of low-value
office equipment. For leases of all other assets, which were classified as operating under IAS 17, the Company
recognized right-of-use assets and lease liabilities.
At transition, lease liabilities were measured at the present value of the remaining lease payments, discounted at the
Company’s incremental borrowing rate as at January 1, 2019. Right-of-use assets are measured at the amount equal
to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.
i. Leases classified as Operating Leases under IAS 17
The Company used the following practical expedients when applying IFRS 16 to leases previously classified as
operating leases under IAS 17.
- Applied a single discount rate to a portfolio of leases with similar characteristics.
- Applied the exemption not to recognize right-of-use assets and liabilities for leases with less than 12 months of
lease term.
Excluded initial direct costs from measuring the right-of-use asset at the date of initial application.
-
- Used hindsight when determining the lease term if the contract contains options to extend or terminate the
lease.
ii. Leases previously classified as Finance Leases under IAS 17
For leases that were classified as finance leases under IAS 17, the carrying amount of the right-of-use asset and
the lease liability at January 1, 2019 are determined at the carrying amount of the lease asset and lease liability
under IAS 17 immediately before that date.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
4. Changes in Significant Accounting Policies (continued)
Leases in which the Company is Lessor
The Company is not required to make any adjustments on transition to IFRS 16 for leases in which it acts as a lessor,
except for certain sub-leases. The Company accounted for its leases in accordance with IFRS 16 from the date of initial
application.
Under IFRS 16, the Company is required to assess the classification of a sub-lease with reference to the right-of-use
asset, not the underlying asset. On transition, the Company reassessed the classification of its sub-lease contracts
previously classified as operating leases under IAS 17. The Company concluded that certain sub-leases are finance
leases under IFRS 16.
Impacts on Financial Statements
On transition to IFRS 16, the Company recognized $84 million of right-of-use assets and $84 million of lease liabilities.
When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate
applicable to the assets at January 1, 2019. The weighted average rate applied is 8%.
$ thousands
Operating lease commitment at December 31, 2018 as disclosed in the Company's consolidated
financial statements
Discounted using the incremental borrowing rate at January 1, 2019
Lease obligation recognized as at January 1, 2019
Recognition exemption for:
Leases of low-value assets
Extension options reasonably certain to be exercised
Lease obligation recognized as at January 1, 2019
January 1, 2019
$
$
$
130,584
(57,446)
73,138
(25)
11,116
84,229
The associated right-of-use assets for property leases were measured at the amount equal to the lease liability,
adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the statement
of financial position as at December 31, 2019. There were no onerous contracts that would have required an
adjustment to the right-of-use assets at the date of initial application.
The recognized right-of-use assets relate to the following types of assets:
$ thousands
Buildings
Motor vehicles
Office equipment
Total right-of-use assets
$
December 31,
2019
79,310
2,008
87
81,405
$
January 1,
2019
82,748
1,341
140
84,229
$
$
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
5. Seasonality
The Canadian, New Zealand and Australian retailing of agriculture, transportation, and industrial equipment is
influenced by seasonality. Sales activity for the Agriculture segment is normally highest between April and September
during growing seasons in Canada and July through December in New Zealand and Australia. Sales in the
Transportation and Industrial segments are not as heavily impacted by seasonality but do see slower sales activity in
the winter months. As a result, profit or losses may not accrue uniformly from quarter to quarter.
6. Accounts Receivable and Other Assets
($ thousands)
Trade receivables
Allowance for doubtful debts(a)
Trade receivables, net
Prepaid expenses
Income tax receivable
Other receivables
Total accounts receivable and other assets
2019
40,565
(1,155)
39,410
26,151
6,586
2,795
74,942
$
$
2018
54,939
(1,078)
53,861
17,576
-
532
71,969
$
$
(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 19.
7.
Inventories
($ thousands)
New equipment
Used equipment
Parts and accessories
Work-in-progress
Total inventories
2019
149,025
118,754
50,607
1,233
319,619
$
$
2018
114,667
161,703
50,285
1,531
328,186
$
$
During the year ended December 31, 2019, inventories included in costs of sales were $892 million (2018 - $1,078
million). The total inventory impairment recorded during the year ended December 31, 2019, and included in cost of
goods sold was $24 million (2018 - $12 million). The Company’s inventory has been pledged as security for floor plan
payables under terms of the floorplan agreements and for long-term debt under general security agreements.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
8. Other Long-Term Assets
($ thousands)
Long-term receivables
Deposits with manufacturers
Other investments (a)
Other long-term assets
2019
4,355
2,260
6,984
13,599
$
$
$
$
2018
748
2,913
5,714
9,375
(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 during the term of the lease. 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 $2.3 million (December
31, 2018 - $2.9 million). Deere Credit reviews the deposit account balances quarterly and if the balances exceed the
minimum requirements, Deere Credit refunds the difference to the Company.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
9. Property and Equipment
($ thousands)
Cost
Balance at January 1, 2018
Additions
Additions for finance lease
Disposals(a)
Transfers
Currency translation effects
Balance at December 31, 2018
Balance at January 1, 2019
Adjustments on transition to
IFRS 16(b)
Recognition of right-of-use assets
on initial application of IFRS 16
(Note 13)
Adjusted balance at January 1, 2019
Additions
Right of use additions
Disposals
Transfers and adjustments
Remeasurements
Currency translation effects
Balance at December 31, 2019
Land and
Buildings
Rental
Equipment
Automotive
and Trucks Equipment
26,102
1,414
-
(2,259)
-
9
25,266
40,453
4,855
742
(5,326)
(3,805)
254
37,173
20,632
4,015
-
(1,937)
27
25
22,762
18,691
2,570
-
(612)
195
50
20,894
25,266
37,173
22,762
20,894
Right-of-
use assets
(Note 13)
-
-
-
-
-
-
-
-
Total
105,878
12,854
742
(10,134)
(3,583)
338
106,095
106,095
-
-
25,266
7,433
-
(28)
21
-
(36)
32,656
(19,234)
-
17,939
3,492
-
(3,305)
3,294
-
(393)
21,027
-
-
22,762
2,565
-
(1,449)
1,160
-
(331)
24,707
-
-
10,961
(8,273)
84,229
84,229
20,894
2,181
-
(3,990)
1,277
-
(204)
20,158
95,190
-
1,777
-
(6,300)
5,896
(456)
182,051
15,671
1,777
(8,772)
(548)
5,896
(1,420)
96,108 $ 194,656
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
9. Property and Equipment (continued)
($ thousands)
Accumulated Depreciation and
Impairment
Balance at January 1, 2018
Depreciation expense
Disposals(a)
Transfers
Currency translation effects
Balance at December 31, 2018
Balance at January 1, 2019
Adjustments on transition to
IFRS 16(b)
Adjusted balance at January 1, 2019
Depreciation expense
Disposals
Transfers and adjustments
Currency translation effects
Balance at December 31, 2019
Land and
Buildings
Rental
Equipment
Automotive
and Trucks Equipment
4,717
937
(230)
-
2
5,426
13,858
5,179
(2,414)
(2,271)
37
14,389
12,815
2,530
(1,500)
11
13
13,869
12,313
2,210
(483)
-
43
14,083
5,426
14,389
13,869
14,083
Right-of-
use assets
(Note 13)
-
-
-
-
-
-
-
Total
43,703
10,856
(4,627)
(2,260)
95
47,767
47,767
-
5,426
1,134
(12)
25
(4)
6,569
(7,611)
6,778
2,628
(1,592)
(171)
(59)
7,584
-
13,869
2,682
(1,257)
1,202
(76)
16,420
-
14,083
2,182
(3,731)
1,241
(142)
13,633
4,871
(2,740)
4,871
11,088
-
(4,207)
(8)
45,027
19,714
(6,592)
(1,910)
(289)
11,744 $ 55,950
($ thousands)
Carrying Value
Balance at December 31, 2018
Balance at December 31, 2019
Land and
Buildings
Rental
Equipment
Automotive
and Trucks Equipment
Right-of-
use assets
(Note 13)
Total
19,840
26,087
22,784
13,443
8,893
6,811
-
$ 58,328
8,287 6,525
84,363
$ 138,705
(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.
(b) On transition to IFRS 16, leased rental equipment was transferred from property and equipment to right-of-use assets
or was derecognized as the associated sub-leases were reclassified as finance leases.
Depreciation expense related to rental and lease fleets have been recorded in cost of sales in the amount of $4.3 million
(2018 - $5 million) and selling, general and administrative expenses of $15 million (2018 - $6 million). The Company’s
property and equipment has been pledged as security for its long-term debt.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
10. Intangible Assets and Goodwill
Intangible Assets
Intangible assets are comprised of the following:
($ thousands)
Cost
Balance at January 1, 2018
Additions
Effect of movements in exchange rates
Additions through business acquisition
Balance at December 31, 2018
Additions
Effect of movements in exchange rates
Balance at December 31, 2019
($ thousands)
Accumulated Depreciation
Balance at January 1, 2018
Amortization expense
Balance at December 31, 2018
Amortization expense
Balance at December 31, 2019
($ thousands)
Carrying Value
Balance at December 31, 2018
Balance at December 31, 2019
Dealership
Distribution
Agreements
46,901
-
4,470
(108)
51,263
-
(217)
51,046
Dealership
Distribution
Agreements
11,620
2,381
14,001
2,589
Customer
Lists
14,857
-
1,840
16
16,713
-
-
16,713
Customer
Lists
13,143
971
14,114
1,110
Non-
Competition
Agreements
2,608
-
310
3
2,921
-
-
2,921
Non-
Competition
Agreements
2,122
284
2,406
265
Software
Costs
3,766
622
-
-
4,388
247
-
4,635 $
Software
Costs
1,505
619
2,124
691
16,590
15,224
2,671
2,815 $
Dealership
Distribution
Agreements
37,262
Customer
Lists
2,599
Non-
Competition
Agreements
515
Software
Costs
2,264 $
Total
68,132
622
6,620
(89)
75,285
247
(217)
75,315
Total
28,390
4,255
32,645
4,655
37,300
Total
42,640
34,456
1,489
250
1,820 $ 38,015
Amortization expense of $4.7 million (2018 - $4.3 million) has been recorded in selling, general and administrative
expense.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
10. Intangible Assets and Goodwill (continued)
Goodwill
The movements in the net carrying amount of goodwill is as follows:
($ thousands)
Balance at January 1, 2018
Additions through business acquisition
Impact of translation of goodwill held in foreign currencies
Balance at December 31, 2018
Valuation adjustment on business combination (a)
Impact of translation of goodwill held in foreign currencies
Balance at December 31, 2019
$
$
$
18,880
2,722
22
21,624
1,417
(144)
22,897
(a) During the year ended December 31, 2019, the Company had an adjustment to goodwill of $1.4 million on the
final holdback payments for the acquisition of Deermart Equipment Sales Ltd.
The aggregate carrying amounts of goodwill allocated to each CGU are as follows:
($ thousands)
Agriculture Segment
Agriculture - Alberta
Agriculture - Saskatchewan
Agriculture - New Zealand
Agriculture - Australia
Industrial Segment
Industrial
Transportation Segment
Transportation - Ontario
Carrying value of goodwill
2019
2018
$ 16,127
327
2,064
1,166
$
14,710
327
2,144
1,230
666
666
2,547
22,897
$
2,547
21,624
$
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
10. Intangible Assets and Goodwill (continued)
Annual Impairment Test
The Company performed the annual impairment test of goodwill and intangible assets as at December 31, 2019. The
test for impairment is to compare the recoverable amount of the CGUs to their carrying value. Goodwill and intangible
assets are assessed for impairment at the CGU level to which they are allocated.
The recoverable amount of all CGUs are determined based on a value-in-use calculation. The value-in-use calculation
uses future cash flow projections, based on the following:
A review of 2019 revenue which was then adjusted through the projection period for the outlook of the CGU at the
date of impairment testing. Revenues used in the projection period did not exceed prior historical revenue levels
of the CGU, other than the impact of assumed inflation.
Gross profit margin, expenses and cash requirements for working capital were benchmarked by CGU based on
historical amounts as a percent of annual historical revenue.
The projections were assessed for reasonability against the demonstrated historical performance of the CGUs and
the financial budget approved by senior management for a one-year period.
For the annual impairment testing purposes, the cash flows subsequent to the five-year projection period were
extrapolated using a 2.0% growth rate which represents the expected growth in the markets in which the Company
operates.
The discount rate applied to each CGU to determine value-in-use, is a post-tax rate that reflects an optimal debt-to-
equity ratio and considers the risk-free rate, market equity risk premium, size premium and the risks specific to each
CGU’s cash flow projections. The post-tax discount rates ranged from 10.3% to 11.5% (pre-tax discount rate of 14.1% to
15.8%). As a result of the analysis, management determined there was no impairment of goodwill or indefinite lived
intangible assets.
Sensitivity testing is conducted as part of the annual impairment tests, including stress testing the post-tax discount
rate and projected cash flows with all other assumptions being held constant. Had the estimated 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
6%, the recoverable amounts of each CGU would continue to exceed their carrying amounts. A decrease in the cash
flow assumption of between 6% and 12% would result in $1.8 million of impairment. Any additional negative changes
in the cash flow assumption would cause goodwill to be impaired, with such impairment loss recognized in net
earnings.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
11. Trade and Other Liabilities
($ thousands)
Trade and other payables
Non-trade payables and accrued expenses
Contract liabilities
Dividends payable (Note 16)
Income taxes payable
Foreign exchange contracts
Total trade and other liabilities
12. Loans and Borrowings
2019
40,189
17,680
2,829
1,688
-
797
63,183
$
$
2018
39,548
28,629
6,512
1,556
1,392
76
77,713
$
$
Bank Indebtedness
At December 31, 2019, 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, 2019, there was $25 million drawn on the
facility and $10 million had been utilized for outstanding letters of credit to John Deere. The Company’s credit facility
bears interest at the lender’s prime rate plus the Applicable Margin (currently 0%). Applicable Margin can range from
0% to 1.75% (2018 – 0% to 1.75%) and is based on a liabilities to income ratio.
Term Debt Borrowings
The Syndicated Facility is secured by a general security agreement, a priority agreement; trade accounts receivable,
unencumbered inventories, assignment of fire insurance and guarantees from the Company’s subsidiaries. As terms
under the Syndicated Facility, the Company must maintain certain leverage, income coverage, and asset coverage
ratios, which the Company has complied with throughout 2019, see Note 24 for further discussion on covenants. Costs
directly attributable to the completion of the Syndicated Facility have been deferred and will be amortized over the
four year term.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
12. Loans and Borrowings (continued)
Outstanding Borrowings
($ 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
2019
2018
2022
$
25,000 $ 20,494
National Australian Bank, Australia, revolving credit facility, interest at 6.48%
2022
-
577
ANZ National Bank, New Zealand, flexible credit facility, interest at 4.49%
2020
788
-
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, 2018 - 5.21%)
Farm Credit Corporation, mortgages payable in monthly instalments of $39
thousand including interest at 4.50%, a rate of lenders prime plus 1% per annum
(December 31, 2018 - 4.95%)
2019
-
109
2024
3,945
4,210
Affinity Credit Union, mortgages payable in monthly installments of $17 thousand,
including interest at 3.99% per annum (December 31, 2018 - 3.69%)
2020
5,422
5,623
Rental Equipment Term Loans
John Deere finance contracts, New Zealand, payable in monthly instalments
including interest at the rate of 4.50% to 6.45% per annum, secured by related
equipment
Various
7,163
7,332
Hire purchase contracts, Australia, finance contracts payable in monthly
installments ranging up to AUD $3 thousand including interest at a rate of 3.95% to
5.35%, secured by related equipment
Various
861
1,191
Finance contracts, various, repayable in monthly instalments ranging per month
including interest from 2.99% to 4.95%
Total
Less: current portion
Less: deferred debt issuance costs
Carrying value of term debt at December 31
Various
267
81
43,446
(9,795)
(281)
33,370 $
39,617
(13,964)
(530)
25,123
$
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
12. 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 3.95% to 8.85% at December 31, 2019. 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
Other Floor Plan Facilities
Total floor plan payable
Interest Rate
5.00% - 8.85%
5.91% - 6.04%
5.34% - 5.75%
3.95% - 4.22%
4.95% - 5.75%
2019
2018
$ 91,342 $ 95,907
2,223
19,297
36,531
3,657
157,615
103
21,571
67,089
2,274
$ 182,379 $
Pre-Approved Credit Limits and Available Credit Facilities
The Company has various facilities, the amount available under which are limited to the lesser of pre-approved credit
limits or the available unencumbered assets. A summary of the Company’s maximum pre-approved credit limits on
available credit facilities as at December 31, 2019, are as follows:
($ thousands)
December 31, 2019
December 31, 2018
Total Limits Borrowings
Letters of
Credit
Amount
Available Total Limits Borrowings
Letters of
Credit
Amount
Available
Operating and other bank credit facilities
122,735 25,788
9,600
87,347 122,867
21,071
2,400 99,396
Capital facilities
Floor plan facilities and rental
equipment term loan financing
Total borrowing
Total current portion long term debt
Total inventory floor plan facilities
Deferred debt issuance costs
Total long term debt
(a)
9,367
(b)
190,670
225,825
(9,795)
(182,379)
(281)
33,370
9,942
166,219
197,232
(13,964)
(157,615)
(530)
25,123
(a) For capital facilities, the additional amount available under the facilities is limited to the pre-approved credit limit
of $9.4 million (December 31, 2018 - $10 million). The Company has unencumbered assets available for financing
which are estimated at $7 million as at December 31, 2019 (December 31, 2018 - $2.4 million).
(b) For floorplan facilities, the additional amount available under the facilities is limited to the lesser of the pre-
approved credit limit of $449 million (December 31, 2018 - $418 million) or the available unencumbered assets
which are estimated at $17 million as at December 31, 2019 (December 31, 2018 - $34 million).
As at December 31, 2019, the Company is in compliance with all its covenants.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
12. Loans and Borrowings (continued)
Reconciliation of Movements of Liabilities to Cash Flows Arising from Financing Activities
($ thousands)
Balance at January 1, 2018
Changes from financing cash (outflows) inflows
Cash dividends paid
Payment of finance lease liabilities
Repayment of term debt
Total (outflows) inflows 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
Balance at January 1, 2019, as previously reported
Impact of change in accounting policy
Adjusted balances at January 1, 2019
Changes from financing cash (outflows) inflows
Cash dividends paid
Payment of lease obligation
Advance of term debt
Total (outflows) inflows from financing cash flows
Effect of changes in foreign exchange rates
Liability related changes
Dividends issued through DRIP
Dividends declared
New lease obligation
Interest expense
Interest paid
Total liability related other increase (decrease)
Balance at December 31, 2019
Dividend
payable
1,098
Financial Liabilities
Lease
obligation
15,777
Term debt
43,292
Total
60,167
(5,093)
(5,249)
(4,205)
(14,547)
-
(710)
6,261
743
-
-
6,294
51,914
-
-
(4,205)
(4,205)
-
-
-
-
-
-
-
39,087
39,087
39,087
51,914
84,229
136,143
-
-
4,588
4,588
(510)
-
-
-
-
-
-
43,165
(5,867)
(9,256)
4,588
(10,535)
(1,547)
(770)
6,769
7,676
-
-
13,675
137,736
(5,093)
-
-
(5,093)
-
(710)
6,261
-
-
-
5,551
1,556
1,556
1,556
(5,867)
-
-
(5,867)
-
(770)
6,769
-
-
-
5,999
1,688
-
(5,249)
-
(5,249)
-
-
-
743
-
-
743
11,271
11,271
84,229
95,500
-
(9,256)
-
(9,256)
(1,037)
-
-
7,676
-
-
7,676
92,883
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
13. Leases
(a) Leases as lessee
The Company leases buildings, vehicles, office equipment, and rental equipment.
The Company’s building leases range from 3 to 20 years in term duration, and typically include options to renew the
lease after the initial maturity date. Most of the Company’s building leases are for its equipment dealership locations
and were entered into as combined leases of land and building. The Company also leases a fleet of vehicles for certain
employees that typically run for a period of 5 years. Previously, these building and vehicle leases were classified as
operating leases under IAS 17.
Information about leases for which the Company is a lessee is presented below.
i. Lease obligation
The following table sets out a maturity analysis of lease obligations, showing the undiscounted lease payments to be
paid by the Company after the reporting date.
($ thousands)
Less than one year
One to two years
Two to five years
More than five years
Total undiscounted lease obligation
Accrued interest expense
Present value of lease obligation
ii. Right-of-use assets
2019
15,471
13,945
36,345
82,373
148,134
55,251
92,883
$
$
$
Right-of-use assets related to leased properties are presented as property, plant and equipment in the statement of
financial position.
($ thousands)
2019
Balance at January 1, 2019
Transfers
Depreciation charge for the year
Additions to right-of-use assets
Remeasurements
Currency translation effects
Balance at December 31, 2019
Buildings
Vehicles
Office equipment Rental equipment
Total
$
$
$
$
$
82,748
-
(8,994)
222
5,778
(444)
79,310
1,341
-
(406)
955
118
-
2,008
140
-
(49)
-
-
(4)
87
6,090
(2,093)
(1,639)
600
-
-
2,958
90,319
(2,093)
(11,088)
1,777
5,896
(448)
84,363
$
$
$
$
$
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
13. Leases (continued)
iii. Amounts recognized in profit or loss
($ thousands)
2019 - Leases under IFRS 16
Interest expense on lease liabilities
Income from sub-leasing right-of-use assets presented in 'Rental Income'
Occupancy expense relating to short-term leases and leases of low-value assets
2018 - Operating leases under IAS 17
Lease expense
Sub-lease income presented in 'Rental income'
iv. Amounts recognized in statement of cash flows
($ thousands)
Total cash outflow for leases
$
7,140
1,478
1,281
$
12,347
1,773
2019
13,609
$
v. Extension options
Some building leases contain extension options exercisable by the Company before the end of the non-cancellable
contract period. Where practicable, the Company seeks to include extension options in new leases to provide
operational flexibility. The extension options held are exercisable only by the Company and not by the lessors. The
Company assesses at lease commencement date whether it is reasonably certain to exercise the extension options. The
Company reassesses whether it is reasonably certain to exercise the options if there is a significant event or significant
changes in circumstances within its control.
As at December 31, 2019, the Company has estimated that the lease liability resulting from extension options
reasonably certain to be exercised is $11 million.
(b) Leases as lessor
The Company is the intermediate lessor in several sub-lease arrangements with its customers, whereby equipment is
first leased (the “head lease) by the Company (or “intermediate lessor”) from its original equipment manufacturer (or
“head lessor”), and subsequently sub-leased by the Company to its customers for dedicated use. The head-leases and
corresponding sub-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 arrangement
remains with the Company.
The Company classifies each sub-lease as a finance lease or as an operating lease with reference to the right-of-use asset
arising from the head lease.
i. Finance leases
In cases where the sub-lease term is for the major part of the remaining term of the right-of-use asset arising from the
head-lease, the sub-lease is classified and accounted for as a finance lease.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
13. Leases (continued)
(b) Leases as lessor (continued)
At the commencement date of the sub-lease, the Company derecognizes the right-of-use asset relating to the head-
lease that it transfers to the customer and recognizes a lease receivable (measured as the net investment in the sub-
lease). Any difference between the carrying amount of the right-of-use asset and the net investment in the sub-lease is
recognized in profit or loss.
The Company continues to recognize the lease liability relating to the head lease, which represents the lease payments
owed to the head lessor.
Over the term of the sub-lease, the Company recognizes both interest income on the sub-lease and interest expense
on the head lease. During 2019, the Company recognized interest income on lease receivables of $0.3 million (2018 -
$0.1 million).
The following table sets out a maturity analysis of lease receivables, showing the undiscounted lease payments to be
received after the reporting date.
($ thousands)
Less than one year
One to two years
Two to five years
More than five years
Total undiscounted lease receivable
Unearned finance income
Net investment in the lease
ii. Operating leases
2019
2,070
1,801
2,525
-
6,396
571
5,825
$
$
$
In cases where the sub-lease term is not a major part of the remaining term of the right-of-use asset arising from the
head-lease, or the sub-lease term meets the short-term lease exemption (less than 12 months), the sub-lease is classified
and accounted for as an operating lease. The right-of-use asset from the head lease remains with the Company and is
depreciated over the term of the head lease. Lease payments from customers are recognized by the Company as rental
income upon receipt.
Rental income recognized by the Company during 2019 was $3.3 million (2018 - $3.5 million).
The following table sets out a maturity analysis of lease payments, showing the undiscounted lease payments to be
received after the reporting date.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
13. Leases (continued)
(b) Leases as lessor (continued)
($ thousands)
2019 - Operating leases under IFRS 16
Less than one year
Between one and five years
More than five years
Total
2018 - Operating leases under IAS 17
Less than one year
Between one and five years
More than five years
Total
14. Income Taxes
Tax (Recovery) Expense
($ thousands)
Current income tax expense
Deferred income tax (recovery)
Income tax (recovery) expense
2019
920
604
-
1,524
3,101
5,326
-
8,427
2019
40 $
(1,868)
(1,828) $
2018
10,436
(1,111)
9,325
$
$
The corporate tax rate decrease in Alberta for current and future periods that was enacted in the second quarter of 2019
resulted in a decrease in the deferred income tax expense. The estimated impact of the corporate tax rate decrease on
deferred tax expense for the year ended December 31, 2019 was $0.5 million.
Using federal and provincial statutory rates of 26.7% (2018 – 26.9%), the income tax expense for the year can be
reconciled to the statement of comprehensive income as follows:
($ thousands)
(Loss) income before income tax expense
Expected income tax (recovery) expense
Non-deductible costs and other
Income tax (recovery) expense
2019
2018
$
$
(10,446) $
(2,785)
957
(1,828) $
34,102
9,167
158
9,325
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
14. Income Taxes (continued)
Deferred Tax Assets and Liabilities
Continuity of the Company’s tax balances in during the year are as follows:
($ thousands)
Tangible assets
Intangible assets
Lease obligation
Unrealized foreign exchange and other
Net deferred tax liability
2018
$ 6,672
4,144
(3,029)
1,056
$ 8,843
$
Recognized in
Comprehensive
Income
15,755
(974)
(18,247)
1,598
$ (1,868)
2019
$ 22,427
3,170
(21,276)
2,654
$ 6,975
The Company has not recognized the benefits associated with net capital losses of $35 million (2018 - $35 million) and
non-capital losses of $0.8 million (2018 - $0.9 million), as the timing and ultimate application of these tax loss
carryforwards are uncertain.
15. Financial Instruments
Fair values are approximate amounts at which financial instruments could be exchanged between willing parties based
on current markets for instruments with similar characteristics, such as risk, principal, and remaining maturities.
Financial instruments recorded or disclosed at fair value are classified using a fair value hierarchy that reflects the
significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
Level 1: Reflects valuation based on quoted prices observed in active markets for identical assets or liabilities;
Level 2: Reflects valuation techniques based on inputs other than quoted prices included in level 1 that are
observable either directly or indirectly;
Level 3: Reflects valuation techniques with significant unobservable market inputs, there were no level 3 instruments in
current or prior year.
Carrying Value and Fair Value of Financial Assets and Liabilities
The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their
levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not
measured at fair value if the carrying amount is a reasonable approximation of fair value.
Cervus Annual Report 2019
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Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
15. Financial Instruments (continued)
Category
($ thousands)
Financial Assets
Cash and cash equivalents (a)
Accounts receivable and other
assets (a)
Derivative financial instruments Fair value through profit
Amortised cost
Amortised cost
Other investments
Other long-term assets
Finance lease receivables(a)
Financial Liabilities
Trade and other liabilities (a)
Floor plan payables (a)
Term debt (b)
Derivative financial liability
Lease obligation
and loss
Fair value through profit
and loss
Amortised cost
Amortised cost
Other liabilities
Other liabilities
Other liabilities
Held-for-trading
Other liabilities
2019
Fair Value
Level 1 Level 2
2018
Fair Value
Level 1 Level 2
Carrying
$
6,106
71,700
776
77
6,548
5,238
3,504
349
82,046
157,615
39,087
76
11,271
43,165
797
77
5,238
396
39,087
76
11,986
Carrying
$
7,946
72,384
776
6,548
2,576
5,821
62,386
182,379
43,165
797
92,883
(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 approximate fair value because the
applicable interest rates on these liabilities are at rates similar to prevailing market rates.
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.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
16. 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, 2018
Issued under the DRIP plan
Issued under the deferred share plan
Repurchased under the NCIB
Balance at December 31, 2018
Issued under the DRIP plan
Issued under the deferred share plan
Repurchased under the NCIB
Balance at December 31, 2019
Common Shares
Shareholders are entitled to:
Number of
common shares
15,675 $
52
30
(198)
15,559 $
68
31
(310)
15,349 $
Total carrying
amount
88,163
710
276
(2,609)
86,540
770
370
(3,940)
83,740
(i)
(ii)
(iii)
dividends if, as and when declared by the Board of Directors of the Company;
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 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 1.0 million common shares (the “Shares”) for
cancellation before September 12, 2019. Cervus appointed Raymond James Ltd. as its broker, to conduct the Bid on
behalf of the Company. All purchases were made in accordance with the September 2018 Bid at the prevailing market
price of the Shares at the time of purchase. This normal course issuer bid expired on September 12, 2019. Prior to expiry
Cervus repurchased and cancelled 0.5 million common shares through the bid at a weighted average price of $12.78
per share.
On September 10, 2019, the Company announced a Normal Course Issuer Bid (the “Bid”), which commenced on
September 16, 2019, to purchase up to a maximum of 1.1 million common shares (the “Shares”) for cancellation before
September 15, 2020. Cervus appointed Raymond James Ltd. as its broker, to conduct the Bid on behalf of the Company.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
16. Capital and Other Components of Equity (continued)
Normal Course Issuer Bid (continued)
All purchases are to be made in accordance with the September 2019 Bid at the prevailing market price of the Shares
at the time of purchase.
For the year ended December 31, 2019, the Company had repurchased and cancelled 0.3 million common shares at a
weighted average price of $12.71 per share under the September 2018 Bid, and no shares had been repurchased under
the September 2019 Bid.
Dividends Declared
($ thousands)
2019
2018
$0.44 per qualifying common share (2018 - $0.40)
$
6,769
$
6,261
Total dividends paid in cash during the year were $6 million (2018 - $5 million). Dividends payable as at December 31,
2019, was $1.7 million (2018 - $1.6 million).
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 Pty Ltd. and Cervus
Equipment Australia Pty Ltd.
17. Revenue
The Company’s contract liabilities primarily relate to advance consideration received from customers for wholegoods
equipment, parts and services. The amount of $7 million recognized in contract liabilities at the beginning of the year
has been recognized as revenue for the year ended December 31, 2019. In the current year, the Company has received
$2.8 million from customers, but has not fulfilled the performance obligations as at December 31, 2019.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
18. Other Income
Other income for the years ended December 31, 2019 and 2018 is comprised of the following:
($ thousands)
Net gain on sale of property and equipment (a)
Gain on sale of Commercial operations
Unrealized foreign exchange gain (loss)(b)
Extended warranty commission
Financial compensation and consignment commissions
Other income
Total other income
2019
436
-
1,847
(34)
772
823
3,844
2018
1,409
480
(1,199)
(217)
877
2,093
3,443
$
$
$
$
(a) 2018 net gain on sale of property and equipment includes a $0.8 million gain on insurance recoveries, related to
the derecognition of capital assets for damage caused by fire, as discussed in Note 9.
(b) Unrealized foreign exchange gain (loss) is due to changes in fair value of our foreign exchange derivatives and from
period close translation of accounts payable and floorplan payables denominated in U.S. dollars.
19. Selling, General and Administrative Expenses By Nature
($ thousands)
Wages and benefits
Depreciation and amortization
Occupancy costs including maintenance
Operating and administrative expenses
Total selling, general and administrative expenses
2019
2018
101,203
20,031
10,008
40,036
$ 171,278
102,204
9,884
21,607
39,350
$ 173,045
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
20. 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
2019
2018
$
38,091
$
35,439
99,255
1,948
101,203
$ 139,294
100,690
1,514
102,204
$ 137,643
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 $1.1 million (2018 - $0.9 million) 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, 2019, MTIP expense recognized during the year amounted to $nil (2018 – $0.5 million).
Deferred Share Plan
During 2019, the Company had a deferred share plan (the “Deferred Share Plan”) available to officers, directors and
executives whereby, if elected, certain payments to these individuals could be deferred, ranging in amounts up to $50
thousand per individual, where the Company also matched the deferred portion. The deferred shares were 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 had a deferred share plan (the “Management Deferred Share Plan”) available to management
whereby, if elected, certain payments to these individuals could be deferred, ranging in amounts up to $10 thousand
per individual, where the Company also matches the deferred portion. The deferred shares were 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.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
20. Wages and Benefits (continued)
Deferred Share Plan (continued)
The Deferred Share Plan and the Management Deferred Share Plan were discontinued for employees in 2020 and no
future elections can be made. Existing deferred share plan units as at December 31, 2019 will remain in place and any
unvested units will continue to vest according to the vesting schedules mentioned above. Effective January 1, 2020, the
Deferred Share Plan will be replaced with a PSU plan, based on the single measure of total shareholder return.
Participants in the Deferred Share Plan were offered in 2019 to redeem all or a portion of their vested and unvested
units into common shares. The immediate vesting of the 0.3 million deferred share units resulted in $0.7 million of
share-based payment expense recognized for the year ended December 31, 2019.
As at December 31, 2019, the Company has 1.2 million shares reserved for issuance under these plans. As at December
31, 2019, 0.9 million (2018 – 0.8 million) deferred shares have been issued under these plans and remain outstanding.
Of the outstanding deferred shares, 0.7 million (2018 – 0.6 million) can be converted to common shares. Total deferred
shares payable as of December 31, 2019 was $10 million (2018 - $9 million).
Balance, January 1
Units granted
Units redeemed
Units forfeited
Balance, end of year
21. Finance Income and Finance Costs
($ thousands)
Finance income
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
2019
2018
Number of units Number of Units
696
180
(36)
(39)
801
801
211
(35)
(65)
912
2019
$
687
(2,338)
(11,681)
$ (14,019)
(12,369)
(963)
$ (13,332)
2018
854
(1,900)
(5,615)
(7,515)
(5,498)
(1,163)
(6,661)
$
$
$
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
22. 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,
2019 and 2018.
Weighted Average Number of Common Shares
The weighted average number of shares for the purposes of diluted (loss) earnings per share is 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
Weighted Average Number of Diluted Shares
2019
15,559
42
18
(206)
15,413
2018
15,675
31
12
(62)
15,656
The calculation of diluted (loss) income per share at December 31, 2019 and 2018 was based on the (loss) income
attributable to common shareholders and the weighted average number of common shares outstanding. 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
Weighted average number of shares (diluted)
2019
15,413
-
15,413
2018
15,656
801
16,457
All deferred shares of 0.9 million for the year ended December 31, 2019 have been excluded, as they are considered
anti-dilutive.
23. 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
2019
2018
(20,443)
27,204
4,127
(12,703)
(1,815)
(40,045)
23,703
(18,757)
(1,333)
(36,432)
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
24. Financial Risk Management
Overview
The Company has exposure to the following risks from its use of financial instruments: credit, liquidity, market, currency
and interest. 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, transportation and industrial 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.
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. 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.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
24. 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
Other receivables
Total
The maximum exposure to credit risk at the reporting date by geographic region was:
($ thousands)
Domestic
New Zealand
Australia
Total
The aging of trade and other receivables at the reporting date was:
($ thousands)
Current - 60 days
Past due – 61-90 days
Past due – 91 to 120 days
Past due more than 120 days
Total
2019
40,565
7,391
47,956
2019
33,125
3,481
3,959
40,565
2019
36,882
2,090
568
1,025
40,565
$
$
$
$
$
$
The Company recorded the following activity in its allowance for impairment of loans and receivables:
($ thousands)
Balance at January 1
Additional allowance recorded
Amounts written-off as uncollectible
Balance at December 31
2019
1,078
362
(285)
1,155
$
$
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
2018
1,579
(213)
(288)
1,078
$
$
$
$
$
$
$
$
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
24. Financial Risk Management (continued)
Guarantees
The Company has irrevocable standby letters of credit to John Deere in the amount of $10 million (2018 - $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. The increase in letters of credit from 2018 is due to the replacement of personal
guarantees, as described in Note 27.
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, 2019, total residual values
maturing over the next 12 months was $42 million (2018 – $32 million) and the total residual values maturing in the
next five years is $316 million (2018 - $321 million).
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 12, the Company has available for its current use under its Syndicated Facility, $120 million less $25 million drawn
on the facility and $10 million for irrevocable letters of credit issued to John Deere.
The Company expects that continued cash flows from operations in 2020, together with currently available cash on
hand and credit facilities, will be sufficient to fund its requirements for investments in working capital, capital assets
and dividend payments through the next 12 months. The following are the contractual maturities of financial liabilities
existing as at December 31, 2019.
($ thousands)
Trade and other accrued liabilities
Floor plans payable
Dividends payable
Term debt payable
Derivative financial liability
Lease obligation
Total contractual maturities of financial
liabilities
$
Carrying
amount
62,386
182,379
1,688
43,165
797
92,883
Contractual
principal
maturities
62,386
182,379
1,688
43,446
797
148,134
12 months
or less
1 – 2
Years
2 – 5
Years
62,386
182,379
1,688
9,795
797
15,471
-
-
-
3,397
-
-
-
30,254
5+ Years
-
-
-
-
13,945
36,345
82,373
$ 383,298
438,830
272,516
17,342
66,599
82,373
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
24. Financial Risk Management (continued)
Market Risk
Market risk is the risk that changes in the marketplace such as commodity prices, foreign exchange rates and interest rates
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, and provider of equipment rental and support.
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, 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 Agriculture 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 and 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.
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 $0.3 million (2018 - $0.1 million), based on the U.S.
dollar floor plan balances at December 31, 2019.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
24. Financial Risk Management (continued)
From time to time the Company also enters into foreign exchange forward contracts to provide the Company Canadian
dollar cost certainty for equipment ordered for the Customer from the manufacturer in U.S. dollars, having quoted the
customer a fixed Canadian dollar price at the time the order was placed. In addition, the Company is exposed to foreign
currency fluctuation related to translation adjustments upon consolidation of its Australian and New Zealand
operations. These foreign subsidiaries report operating results in Australia and New Zealand dollars, respectively.
Movements in these currencies relative to the Canadian dollar will impact the results of these operations upon
consolidation.
Interest Rate Risk
The Company’s cash flow is exposed to changes in interest rates on its floor plan arrangements and certain term debt
which bear interest at variable rates. The cash flows required to service these financial liabilities will also fluctuate as a
result of changes in market interest rates. The Company mitigates its exposure to interest rate risk by utilizing excess
cash resources to buy-down or pay-off interest bearing contracts, and by managing its floor plan payables and
inventory levels to maximize the benefit of interest-free periods, where available.
Interest Bearing Financial Instruments
At the reporting dates, the Company’s interest bearing financial instruments were:
($ thousands)
Fixed Rate
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
2019
2018
92,883
11,271
180,650
1,729
43,446
$ 318,708
155,705
1,910
39,617
$ 208,503
(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, 2019 by approximately $2.3 million (2018 -$2.0 million).
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.
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CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
24. 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 Syndicated Facility, and the Company was in
compliance as at December 31, 2019. 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, 2019 with the covenants contained in the Syndicated
Credit Agreement is set out below:
As at December 31, 2019
As at December 31, 2018
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.
2.64 Less than 4.0:1.0
1.57 Greater than 1.1:1.0
6.24 Greater than 3.0:1.0
Less than 4.0:1.0
Greater than 1.1:1.0
Greater than 3.0:1.0
2.39
2.38
11.82
Cervus Annual Report 2019
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54
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
25. Segment Information
For management purposes, the Corporation is organized into divisions based on the nature of the services and products
provided. Management monitors the operating results of each division separately for the purpose of making decisions
about resource allocation and performance assessment. The Corporation has four reportable segments, as described in
Note 3.
In 2019, the Company changed the composition of its reportable segments to include the Corporate segment, which
reports activities not directly attributable to an operating segment. Corporate expenses consist of certain overheads
and shared services provided to the divisions, along with public company costs, salaries, share-based compensation,
office and administrative costs relating to corporate employees and officers, and interest cost on general corporate
borrowings. Prior period financial information for 2018 has also been restated to reflect the change in segment
composition.
Financial information for each reportable segment is presented in the table below, which includes the disaggregation
of revenues by type of service or good.
($ thousands)
Segmented income figures
Year ended December 31, 2019
Revenue
Equipment sales
Parts
Service
Rentals and other
Total revenue
Total other income
Depreciation and amortization
Finance income
Finance expense including amounts in
costs of sales
(Loss) income for the year before income
tax
Capital additions
Segmented assets and liabilities as at
December 31, 2019
Reportable segment assets
Intangible assets
Goodwill
Reportable segment liabilities
Agriculture Transportation
Industrial
Corporate
Total
$ 596,155 $
106,829
46,286
6,172
$ 755,442 $
524
13,836
201
193,957 $
100,594
31,849
3,853
330,253 $
2,516
6,641
-
(7,695)
(4,009)
(7,588)
7,867
5,151
814
$ 379,702 $
24,241
19,684
219,230
174,340 $
10,039
2,546
107,997
23,281 $
11,465
9,743
8,850
53,339 $
704
3,440
6
(336)
1,327
493
27,651 $
3,735
667
13,159
- $
813,393
-
218,888
-
87,878
-
18,875
- $ 1,139,034
3,844
24,369
687
100
452
480
(1,979)
(14,019)
(9,336)
(10,446)
6,497
15,671
34,030 $
-
-
48,199
615,723
38,015
22,897
388,585
Cervus Annual Report 2019
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55
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
25. Segment Information (continued)
($ thousands)
Segmented income figures
Year ended December 31, 2018
Revenue
Equipment sales
Parts
Service
Rentals and other
Total revenue
Total other income
Depreciation and amortization
Finance income
Finance expense including amounts in
costs of sales
Income (loss) for the year before income
tax
Capital additions
Segmented assets and liabilities as at
December 31, 2018
Agriculture
Transportation
Industrial
Corporate
Total
$ 783,788 $
95,925
41,442
5,730
228,569 $
96,118
31,078
6,391
29,478 $
14,085
10,340
7,092
$ 926,885 $ 362,156 $ 60,995 $
1,463
7,295
399
292
5,969
-
1,003
1,847
(12)
- $ 1,041,835
206,128
-
82,860
-
19,213
-
- $ 1,350,036
3,443
685
15,111
-
854
467
(2,718)
(3,247)
(72)
(1,478)
(7,515)
34,199
9,216
7,122
887
2,253
619
(9,472)
2,132
34,102
12,854
Reportable segment assets
Intangible assets
Goodwill
Reportable segment liabilities
$ 362,843 $
27,614
18,411
182,496
122,022 $
10,975
2,546
73,737
31,079 $
4,051
666
12,348
22,284 $
-
-
25,948
538,228
42,640
21,624
294,529
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 agriculture equipment dealerships. Gross revenues for
the year ended December 31, 2019, for the New Zealand and Australian territories were $184 million (2018 – $191
million). Non-current assets for New Zealand and Australia as at December 31, 2019, were $30 million (2018 – $22
million). The Australia and New Zealand operations are included in the Agriculture Segment.
26. Commitments and Contingencies
The Company is a defendant and plaintiff in various 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, 2019, payments in arrears by such customers aggregated $1.4 million (2018 - $0.8 million).
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, 2019, the net residual value of such leases aggregated $316 million (2018 -
$321 million). Management believes that the potential liability in relation to the amounts outstanding is negligible and
consequently, no accrual has been made in these financial statements in relation to any potential loss on assumed lease
obligations.
Cervus Annual Report 2019
131 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
56
CERVUS EQUIPMENT CORPORATION
Notes to Consolidated Financial Statements
For the years ended December 31, 2019 and 2018
27. Related Party Transactions
Key Management Personnel Compensation
In addition to their salaries, the Company also provides non-cash benefits to directors and executive officers, and
contributes to the deferred share plan and the employee share purchase plan, if enrolled, in accordance with the terms
of the plans. The Company has no retirement or post-employment benefits available to its directors and executive
officers.
The remuneration of key management personnel and directors during the year ended December 31 was:
($ thousands)
Short-term benefits
Share-based payments
Total
Other Related Party Transactions
2019
2,515 $
550
3,065 $
$
$
2018
3,050
1,184
4,234
During 2019, certain officers and dealer managers of the Company provided guarantees to John Deere aggregating $7
million (2018 – $7 million). During the year ended December 31, 2019 and 2018, the Company paid those individuals
$0.2 million (2018 - $0.2 million) for providing these guarantees. In December 2019, these guarantees were replaced
with letters of credit, as mentioned in Note 24. This compensation for guarantees was recorded at the amount agreed
to between the Company and the guarantors, are included in selling, general and administrative expense and has been
fully paid during the year.
Cervus Annual Report 2019
132 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
57
SHAREHOLDER & CORPORATE
INFORMATION
Corporate Head Office
5201, 333 – 96th Avenue NE
Calgary, Alberta, Canada
T3K 0S3
T: 1-877-567-0339
Investor Relations
Angela Lekatsas
President and Chief Executive Officer
T. 403-567-0339
Adam Lowther
Chief Financial Officer
T. 403-567-0339
Website
cervusequipment.com
Stock Listing
TSX: CERV
Transfer Agent and Registrar
Computershare Trust Company of Canada
600, 530 – 8th Avenue SW
Calgary, Alberta, Canada
T2P 3S8
T. 403-267-6800
computershare.com
Annual Meeting of Shareholders
Thursday April 23, 2020, 4:00 p.m. (Mountain Daylight Time)
Cervus Equipment Corporation
5201, 333 – 96th Avenue NE,
Calgary, Alberta, Canada
Auditors
KPMG LLP
Board of Directors
Don Bell
Corporate Director
Larry Benke
Corporate Director
Steven Collicutt
Corporate Director
Peter Lacey
Chair of the Board and Corporate Director
Angela Lekatsas
President and Chief Executive Officer Cervus Equipment
Corporation
Dan Sobic
Corporate Director
Wendy Henkelman
Corporate Director
Officers
Angela Lekatsas
President and Chief Executive Officer
Adam Lowther
Chief Financial Officer
Devin P. Mylrea
Corporate Counsel and Corporate Secretary
Stella Cosby
Vice President, People
Fred Hnatiw
Vice President, Operations, Transportation and Industrial
Scott Johnston
Vice President, Agriculture Canada
133 | CERVUS EQUIPMENT CORPORATION | 2019 ANNUAL REPORT
CERVUSEQUIPMENT.COM