Growth International
Annual Report 2011

Plain-text annual report

2011 Annual Report This year’s annual report is dedicated in memory of our founding CEO and friend, Rob Stenson. Ag Growth International Investor Relations: Steve Sommerfeld Ag Growth IPO: May 18, 2004 (Founded 1996) 1301 Kenaston Blvd. Telephone: 204.489.1855 Winnipeg, MB R3P 2P2 Email: steve@aggrowth.com Batco Manufacturing, Acquired: 1997 (Founded 1992) Wheatheart Manufacturing, Acquired: 1998 (Founded 1973) Telephone: 204.489.1855 Auditors: Ernst & Young LLP (Winnipeg) Fax: 204.488.6929 www.aggrowth.com Transfer Agent: Computershare Investor Services Inc. Shares Listed: Toronto Stock Exchange Stock Symbol: AFN Westfield Industries, Acquired: 2000 (Founded 1950) Edwards Group, Acquired: 2005 (Founded 1964) Hi Roller Conveyors, Acquired: 2006 (Founded 1982) Twister Pipe Ltd., Acquired: 2007 (Founded 1976) Union Iron, Inc., Acquired: 2007 (Founded 1852) Applegate Steel Inc., Acquired: 2008 (Founded 1955) Mepu Oy, Acquired: 2010 (Founded 1952) Franklin Enterprises, Acquired: 2010 (Founded 1979) Tramco Inc., Acquired: 2010 (Founded 1967) Airlanco Inc., Acquired: 2011 (Founded 2000) From left to right: Bill Lambert, Board of Directors Chairman and Director; Bill Maslechko, Governance Committee Chairman and Director; Gary Anderson, President, Chief Executive Officer and Director; Steve Sommerfeld, CA, Executive Vice President and Chief Financial Officer; John R. Brodie, FCA, Audit Committee Chairman and Director; David White, CA, Director nOvEmbER 1996 In November 1996, Ag Growth International was incorporated as a Junior Capital Pool on the Alberta Stock Exchange. nOvEmbER 1997 In November 1997, Batco Manufacturing was acquired through a reverse takeover by AGI. Batco was established in 1992. may 1998 In May 1998, AGI acquired Wheatheart Manufacturing. Wheatheart was established in 1973. may 2000 Established in 1950, Westfield Industries was acquired by AGI in May 2000. This was our transformational event. may 2004 AGI launched an Initial Public Offering in May 2004 on the Toronto Stock Exchange as an Income Trust. CEO MESSAGE On behalf of our board of Directors and all of us at aGI, I am pleased to provide you with ag Growth International’s 2011 annual Report. This year’s report is special in a couple of ways. We want to recognize our 15th anniversary since incorporation in november 1996, and we want to pay tribute to our founding CEO and friend Rob Stenson who passed away October 15th, 2010 at 44 years of age. In doing so, we will draw upon a few stories and photos to accentuate the positives that have been woven into the fabric of our culture. Hopefully it will provide some additional perspective on 2011, a year of challenge that ended on a better foot than it had started. 7 Sales in Q-4, 2011 were $67 million compared to $49.4 in Q-4, 2010, while Adjusted EBITDA of $8.4 million in Q-4, 2011 exceeded Q-4, 2010 Adjusted EBITDA of $6.7 million by 25%. Fiscal 2011 sales were $301 million up from $262 million in fiscal 2010. Adjusted EBITDA however did not track favourably at $53.3 million, down from $59.7 million in fiscal 2010. The reasons have been well documented throughout the year. Start-up challenges at our Twister greenfield plant and an off year at our Mepu division in Finland combined to negatively impact Adjusted International sales activity in general remains very strong. We continue to invest in sales, engineering and support resources to build our global competencies. EBITDA by $7.7 million compared to 2010 results. FX resources toward production engineering and support, We have also moved past Mepu’s challenges from 2011. accounted for an additional negative impact of $5.8 million while continuing the development and refinement of the Sales in 2011 were sufficient to flush through carryover on Adjusted EBITDA in 2011 compared to 2010. Our MD&A new product designs. Order has been restored to both the inventory in the marketplace, creating the expectation for provides considerable clarity and detail for these and other production floor and shipping. Exceptional commitment a more positive 2012. This season we have been more performance related events throughout the year. to discipline and diligence has been incorporated into proactive with our steel procurement which will help Our single biggest initiative in 2011 was working through the start-up challenges at the Twister greenfield plant. A year ago at the time of this writing, we were enthusiastically awaiting the final commissioning of our new production lines. New bin sales were being closed and everyone anticipated that success was close at hand. Unfortunately it wasn’t and we found it necessary to temporarily stand down our international sales team and regroup. Since then, we have directed substantial the quoting process as a plethora of individual sizes and protect margins in 2012. Recent progress in establishing specifications are being quoted for the first time. We are regional sales and distribution capabilities for the broader extremely pleased and grateful for the extra effort and AGI catalogue are gaining traction, as evidenced in both teamwork demonstrated by everyone involved. One would quoting activity and order backlogs. International sales be hard pressed to find a better example of cooperation activity in general remains very strong. We continue to anywhere between sales, engineering, production and invest in sales, engineering and support resources to finance teams. As a result, we expect to take a much build our global competencies. We started this initiative in needed step forward in 2012. late 2007 and since then our offshore sales have grown from approximately 4% of total sales to 18%. Given early apRIl 2005 In April 2005, AGI acquired Edwards Group from Lethbridge, Alberta. Edwards Group was founded in 1964. quoting and sales activity in 2012, we should expect We received a number of compliments from the industry in 2011 and for that we are all disappointed. But we also further growth this year. regarding the acquisition of Airlanco, a niche brand with made substantial progress on a number of fronts. All said, Over the past few weeks, I have attended two major North American trade shows. I came away from both shows feeling a sense of pride in our teams and in the strength of our brands. The first show was the National Farm Machinery Show in Louisville, Kentucky, which houses over one million square feet of exhibitors serving farmers throughout the USA. This is an event that all stakeholders in agriculture should consider attending. The entire farm industry is represented including our Westfield, Batco, Wheatheart, Grain Guard, Applegate and HSI brands. Farmers expressed continued optimism for the year ahead, with preliminary intentions to plant plenty of corn acres. The second show was part of the annual GEAPS conference (Grain Elevator and Processing Society). It offers an exceptional glimpse into the commercial side of the grain business. This year it was hosted by the Minneapolis chapter. Our Hi Roller, Union Iron Works, Tramco and Airlanco divisions all displayed at this show. a wonderful reputation. Last year while at the conference I believe we have now made it through another one of in Portland, we were inundated with positive comments those tough periods in our development. about our acquisition of Tramco as a powerful international brand. It serves as a reminder that there are lots of positives to take away from 2011. Yes, we took a step back We couldn’t have done it without the unwavering support of our board, the resolve of our team and the understanding of our shareholders. We are extremely grateful to all. We look forward to delivering results in the future that will make it all worthwhile. 9 StrOnG rOOtS Whenever presented with the opportunity to tell someone activities were often centered around making payroll, Batco was a one-product wonder in a regional market, about our company, I inevitably look for a chance to with Art and Rob doing whatever it took to look after their too small to be significant to most dealers and one bad proclaim that “our roots are in Batco Manufacturing of employees. When I joined in 1996, as General Manager, weather event away from disaster. We needed to grow Swift Current, Saskatchewan”. It was there that the seeds there were about a dozen employees. I’m pleased to say quickly, but that would require capital. One night in the fall of Ag Growth took hold. Art Stenson started Batco in June that Judy, Gerry, Brent, Joe, Garry and Clayton remain part of 1996, Rob and I were scheming on how best to realize 1992, a modest venture to build two-wheel hand carts. of the AGI family today. Soon afterwards, Art turned his attention to grain handling. His first belt conveyor prototype was designed in 1993. The following summer, Art’s brother Rob offered to lend a hand while home from university. Rob became so captivated by the business that he returned the following year upon completing his MBA. The brothers became 50/50 partners. These were the days when sales, production and delivery Our roots are in batco manufacturing of Swift Current, Saskatchewan. September 1997 issue of Profit Magazine – Named one of Canada’s top ten hottest start-ups May 1997, announcing going public on ASE the potential we believed lay before us. I told him about first came to appreciate Rob’s absolute refusal to give up entities played was pivotal in our early development. my brother- in-law’s recent involvement in Junior Capital on a scent. By the end of the week, he had found a JCP EDC remains a strategic partner with AGI to this day. Pools on the Alberta Stock Exchange. The light came on in shell, controlled by Jack Lee, an oilman formerly from Swift an instant – we would take the company public. Drafting Current. On November 7, 1996 we were incorporated as of the business plan didn’t take long. I still have the flip Ultra Capital Inc. Early the following year, we completed charts that flushed out our two-prong strategy of catalogue a private placement subscribed by local investors to help expansion and geographic diversification. The market fund the construction of a much needed production facility. was ready for a consolidator. Rob and I headed to Calgary In early June, 1997, shortly after Steve Sommerfeld joined in our one-ton delivery truck, barely able to contain our us as CFO, we began trading on the ASE. Our early financial enthusiasm. Two days of door knocking later, there were partners included South West Credit Union, Business no bites. I headed home to attend to work, but Rob stayed Development Bank, SOCO (Saskatchewan Opportunities on. He said he would catch a bus later. It was then that I Corp), and Export Development Canada. The role these Our first acquisition in May of 1998, was Wheatheart Hydrostatic and Machine of Saskatoon. It was a friendly deal, as the vendors were well known to the Stensons. Again, after a lot of door knocking, we were able to raise the required $8 million, including an equity investment from Agri Food Equity Fund and $5.5 million term debt from TD Bank. It was a fantastic acquisition, but the untimely onset of the Asian economic flu made it impossible for us to make our first loan payment six weeks later. StrOnG rOOtS The Stenson brothers with wives, Linda and Sue Fortunately we benefited from the experience of veteran Goliath feat that took 15 months to complete. I swear Rob team, led by Ron Braun, and they weren’t afraid of hard lender and TD Bank Manager, Ian McNaughton. He told us spent more time convincing the owners of Westfield to work. Our cultures melded almost immediately and we to simply service the interest monthly until the following take him seriously than he did raising the capital. Not to were on our way. Today Westfield remains the world January. That we did and two years later TD Bank backed say that raising money was easy. It was in the height of the leader in grain augers and has almost tripled in sales and us with $40 million term debt for the acquisition of Dot Com craze and Ag wasn’t very sexy. In fact, few people profitability since our acquisition 12 years ago. Our four Westfield Industries, the world’s largest manufacturer in those days, outside of Rob, championed the long-term years with private equity gave us time to fully digest our of grain augers. It was a deal of a lifetime and part of a fundamentals of agriculture. $113 milliuon transaction that saw us buy ourselves off the public markets. We brought in Tricor Pacific Capital of Vancouver as our private equity sponsor. Roynat and McKenna Gale provided the mezzanine capital and a vendor note sealed the deal. It may sound easy into today’s world, but back then our sales were only $10 million and our EBITDA approximated $2 million. It was a David and The Westfield acquisition was truly a transformational event. It gave us access to an extensive distribution network and economies of scale that were generations in transformational acquisition. We had learned the business well and were confident in taking it to a new level. It was time to get on with our original business plan and in 2004 we launched our IPO on the Toronto Stock Exchange. the making. We were highly levered so we put our heads Gaining access to public markets proved valuable to down and worked hard, growing organically and paying our strategy as a consolidator. In the nearly eight years off the debt. Thankfully we had acquired an experienced since we went public on the TSE, we have acquired three At E&Y Entrepreneur of the Year Awards, 2007 Mepu, AGI’s first offshore acquisition companies in Canada, five in the USA and one offshore. As we look back at our 15 years of development, we do so we wouldn’t have made it without them or our financial With the exception of the Edwards acquisition in April with both pride and humility. We are proud of the business partners. It has been a lot of work but also a lot of fun. 2005, our major initiatives have taken place in clusters, we have grown from start-up, but even more proud of the Together we have established strong roots capable of followed by periods of digestion. In a period of roughly team we have assembled along the way. We recognize great endeavours. Thanks everyone. twelve months ending January 2008, we acquired Hi Roller, Twister, Union Iron Works and Applegate. We spent the next two plus years integrating operations, introducing lean manufacturing and developing offshore market opportunities. In the next 17 months ending October 2011, we acquired Mepu, Franklin, Tramco and Airlanco. During this period, we also expanded our Westfield and Edwards facilities, consolidated Lethbridge/Nobleford and Wheatheart/Franklin and launched the Twister greenfield storage bin facility in Alberta. as we look back at our 15 years of development, we do so with both pride and humility. thE WAkE At triplE B’S It was our local watering hole. Within walking distance of our first AGI office. A family owned business consisting of a pub, eatery and pool hall. The large horseshoe-shaped bar near the entrance had been handcrafted by the owner. Fifteen pool tables were spread out across a vast open room adorned with murals of classic musicians. Tonight it was closed to the public. A table had been placed near the entrance for donations to the Victoria General Hospital. The owners of Triple B’s had been more than happy to accommodate Rob’s request to use their facility for his wake. Why wouldn’t they? Rob was a friend. Hundreds of fellow friends and family had been at the Faith Lutheran Church service earlier in the afternoon. It had been a tough day for all of us and now it was time to kick back and reminisce. People streamed in way beyond expectations, but there was plenty of food and drinks for all. Family values Fighting instincts Beautiful family Cheers The service had gone off without a hitch, except for some that became a lifelong passion. A picture of Rob decaling wanted to share their stories of an exceptional man whom temporary technical problems with the slide show. And even a truck for his first business venture at age 19, a paving they had grown to know and love. There were people from that seemed appropriate. It was perhaps Rob’s parting bit company with friend and partner Eddie Slusar. Lots of all walks of life and from all across our country. Late into of humour. He had always been jinxed with technology. He pictures of winter vacations. In the paving business, there the night when the last of us left, we did a tally of the funds claimed that his mere presence near a photocopier would were no summer holidays, good training for his future career raised. Over $80,000 had been donated for the purpose cause it to jam. This was a man whose sunroof randomly in agriculture. There were pictures of his university days of purchasing special air cushioned beds for the hospital. opened on his vehicle, usually when it was raining. In the when he first set out on his new path. Photos of the family Rob had benefitted from such a bed, and it was his request end, the slide show worked…and it was worth the wait. We business that developed into a successful public company. that we help buy some more so that others could rest in brought it with us to the wake that evening, wanting to keep as much of Rob with us as we could. We played it over and over again. He had packed a lot of living into his 44 years and two months. The photos were evidence of that. The music accompanying the slides was set to Eric Clapton’s Tears In Heaven, Norah Jones’ Don’t Know Why, comfort. The exceptional generosity was a fitting end to a special evening, Rob’s Wake at Triple B’s. and Ray Charles’s Georgia On My Mind. Music had been Sincerely, such a huge part of Rob’s life. Throughout the evening, the The slides spanned the length of three songs. They sound system carried many of Rob’s favourite tunes above were mostly of family. Rob’s, Sue’s, theirs…leaving no the steadily increasing roar of the crowd…Robert Johnson, doubt about Rob’s priorities. As successful and driven an Lightning Hopkins, JJ Cale, The Travelling Wilburies and entrepreneur as Rob was, his finest hours were family his all-time favourite, Stevie Ray Vaughn. The evening had times. There were photos of a young boy reading, a pursuit a special buzz to it. No one wanted to leave. Everyone Gary Anderson President and CEO MAnAGEMEnt’S DiSCUSSiOn AnD AnAlYSiS March 14, 2012 This Management’s Discussion and Analysis (“MD&A”) This MD&A contains forward-looking statements. Please These three items negatively impacted adjusted EBITDA by should be read in conjunction with the audited consolidated refer to the cautionary language under the heading “Risks approximately $13.5 million compared to the prior year. financial statements and accompanying notes of Ag and Uncertainties” and “Forward-Looking Statements” Growth International Inc. (“Ag Growth”, the “Company”, in this MD&A and in our most recently filed Annual “we”, “our” or “us”) for the year ended December 31, Information Form. 2011. Results are reported in Canadian dollars unless otherwise stated. SUMMArY OF rESUltS Ag Growth achieved record sales for the year ended Net profit and diluted profit per share for the year ended December 31, 2011 decreased compared to the prior year due to the factors discussed above and a decrease of $4.3 million in the Company’s gain on foreign exchange. The decrease in the foreign exchange gain was in part The financial information contained in this MD&A has December 31, 2011, due largely to revenues from divisions the result of $0.3 million non-cash loss (2010 – gain of been prepared in accordance with International Financial acquired in 2010 and 2011. The Company ended the year $1.3 million) related to the translation of its U.S. dollar Reporting Standards (“IFRS”). All dollar amounts are with a strong fourth quarter due to robust preseason sales denominated debt into Canadian dollars at the year-end expressed in Canadian currency, unless otherwise noted. of portable equipment and continued domestic strength in exchange rate. Throughout this MD&A references are made to “trade sales”, “EBITDA”, “adjusted EBITDA”, “gross margin”, “funds from operations” and “payout ratio”. A description of these measures and their limitations are discussed below under “Non-IFRS Measures”. commercial grain handling. Adjusted EBITDA for the fiscal year decreased compared to 2010 due to the impact of foreign exchange, start-up challenges at the Company’s Twister greenfield storage bin plant and regional market issues at the Company’s Finland-based Mepu division. DECEmbER 2006 Founded in 1982, Hi Roller was acquired in December of 2006. (thousands of dollars) Year ended December 31 Trade sales (1)(2) 301,014 262,260 2011 2010 Adjusted EBITDA (2) Net Profit Diluted profit per share Funds from operations (2) Dividends per share Payout ratio (2) 53,274 24,523 1.95 40,471 2.40 75% 59,730 30,761 2.40 53,067 2.07 50% On October 4, 2011, the Company acquired the operating assets of airlanco, a manufacturer of aeration products and filtration systems. flat compared to 2010, despite less than optimal harvest these strong margins due to high throughput levels and conditions that reduced in-season third quarter sales, due continued investment in manufacturing through capital (1) Sales excluding gains or losses on foreign exchange contracts. to strong preseason demand as dealers began building expenditures and lean manufacturing practices. (2) See “Non-IFRS Measures”. inventory levels in advance of the 2012 season. A brief summary of our operating results can be found below. A more detailed narrative is included later in this MD&A under “Explanation of Operating Results”. Acquisitions in 2010 and 2011 To enhance the comparison of results between 2011 and 2010, we often refer to results “excluding acquisitions” so the analysis is comparing only the divisions that were owned for the full twelve months in both periods. When comparing results “excluding acquisitions” for the twelve month periods, the comparison excludes Mepu, Franklin, Tramco and Airlanco. trade sales (see non-IFRS measures) Trade sales in 2011 increased compared to 2010 due to revenues from divisions acquired in 2010 and 2011, continued strength in commercial grain handling and an increase in storage bin sales. Portable grain handling sales as measured in base currencies ended 2011 roughly The Company’s consolidated gross margin percentage Trade sales for the year ended December 31, 2011 were decreased from 39% in 2010 to 34% in 2011 due to the significantly impacted by the rate of exchange between impact of foreign exchange, sales mix and challenges the Canadian and U.S. dollars. Ag Growth’s average rate at the Company’s Edwards/Twister and Mepu divisions. of foreign exchange in 2011 was $0.97 CAD per one The factors that impacted gross margins at these divisions U.S. dollar (2010 – $1.04 CAD per one U.S. dollar). Had are discussed in more detail later in this MD&A. the foreign exchange rates experienced in 2010 been in effect in 2011, trade sales in 2011, excluding acquisitions, would have increased by approximately an additional $12.6 million. Gross margin (see non-IFRS measures) The gross margin percentages at divisions owned for a full twelve months in both 2010 and 2011 were relatively consistent year over year, with the exception of the Edwards/Twister division, despite significant foreign exchange headwinds. Excluding acquisitions and Edwards/ Twister, the Company’s gross margin percentage was 41% in both 2010 and 2011. The Company was able to maintain Adjusted EBitDA (see non-IFRS measures) Adjusted EBITDA in 2011 benefited from high levels of domestic demand for commercial equipment, strong post-harvest demand for portable grain augers and lower expenses related to stock based compensation and performance related bonuses. The stronger Canadian dollar in 2011 negatively impacted adjusted EBITDA by approximately $5.7 million compared to 2010. Challenges experienced at the Edwards/Twister and Mepu divisions, which are discussed in more detail later in this MD&A, contributed to a decrease in adjusted EBITDA of $7.7 million compared to 2010. 17 The following table sets forth our geographic concentration comparisons between 2011 and 2010. These acquisitions of sales for the periods indicated. are summarized briefly below. Diluted profit per share The decrease in diluted profit per share compared to 2010 is primarily the result of the decrease in adjusted EBITDA discussed above. In addition, the Company’s gain trade sales by geographic region on foreign exchange decreased $4.3 million compared to (thousands of dollars) Year ended December 31 2010 due to a $0.3 million non-cash loss on the translation of the Company’s U.S. dollar denominated debt to Canadian dollars (2010 – gain of $1.3 million) and less favourable foreign exchange hedging rates. payout ratio (see non-IFRS measures) The Company’s payout ratio increased to 75% (2010 – 50%) due largely to the factors that impacted adjusted EBITDA as discussed above. The increase compared to 2010 is partially attributable to the increase in Ag Growth’s monthly dividend rate implemented in November 2010. Ag Growth’s payout ratio in 2010 would have been 58% based on the current dividend rate of $2.40 per annum. COrpOrAtE OVErViEW We are a manufacturer of agricultural equipment with a focus on grain handling, storage and conditioning products. Our products service most agricultural markets including the individual farmer, corporate farms and commercial operations. Our business is affected by regional and global trends in grain volumes, on-farm and commercial grain storage and handling practices, and crop prices. Our business is seasonal, with higher sales occurring in the second and third calendar quarters compared with the first and fourth quarters. We manufacture in Canada, the US and Europe and we sell products globally, with most of our sales in the US. Canada US Overseas Total 2011 63,746 182,727 54,541 2010 57,971 167,482 36,807 301,014 262,260 Our business is sensitive to fluctuations in the value of the Canadian and US dollars as a result of our exports from Canada to the US and as a result of earnings derived from our US based divisions. Fluctuations in currency impact our results even though we engage in currency hedging with the objective of partially mitigating our exposure to these fluctuations. Our business is also sensitive to fluctuations in input costs, especially steel, a principal raw material in our products. Steel represented approximately 30% of production costs in fiscal 2011 (2010 – 29%). Short-term fluctuations in the price of steel impact our financial results even though we strive to partially mitigate our exposure to such fluctuations through the use of long-term purchase contracts, bidding commercial projects based on current input costs and passing input costs on to customers through sales price increases. The inclusion of the assets, liabilities and operating results of a number of acquisitions significantly impact Acquisitions in fiscal 2011 Airlanco – On October 4, 2011, the Company acquired the operating assets of Airlanco, a manufacturer of aeration products and filtration systems that are sold primarily into the commercial grain handling and processing sectors. The purchase price of $11.5 million was financed primarily from Ag Growth’s acquisition line of credit while costs related to the acquisition of $0.2 million and a working capital adjustment of $0.4 million were financed by cash on hand. The purchase price represents a valuation of approximately five times Airlanco’s normalized fiscal 2010 EBITDA. Airlanco is located in Falls City, Nebraska and has traditionally served customers headquartered or located in North America. The Company had sales of approximately $11 million in 2010, operating out of an 80,000 square foot facility with 65 employees. Acquisitions in fiscal 2010 Mepu – Ag Growth acquired 100% of the outstanding shares of Mepu Oy (“Mepu”) on April 29, 2010, for cash consideration of $11.3 million, plus costs related to the acquisition of $0.6 million and the assumption of a $1.0 million operating line. The acquisition was funded from cash on hand. Mepu is a Finland based manufacturer of grain drying systems and other agricultural equipment. The acquisition of Mepu provided the Company with a complementary product line, distribution in a region where the Company previously had only limited representation and a corporate footprint near the growth markets of The USDa is currently forecasting that U.S. farmers in 2012 will plant 94 million acres of corn, the highest planting level since 1944. based on the USDa yield estimate, this may result in a corn crop in excess of 14 billion bushels (2011 – 12.4 billion bushels). Russia and Eastern Europe. Mepu had average sales and Tramco – Ag Growth acquired 100% of the outstanding EBITDA of approximately 14 million Euros (CAD $19 million) shares of Tramco, Inc. (“Tramco”), on December 20, 2010, and 1.5 million Euros (CAD $2 million), respectively, in the for cash consideration of $21.5 million, less a working three fiscal years prior to acquisition. The nature of Mepu’s capital adjustment of $1.3 million. Costs related to the business is very seasonal with a heavy weighting towards acquisition were $0.5 million. The acquisition was funded economics, the potential for a large number of corn acres in the U.S. and a return to normalized conditions in western Canada. The USDA is currently forecasting that U.S. farmers in 2012 will plant 94 million acres of corn (2011 – 92 million acres), the highest planting level since 1944. Based on the USDA yield estimate, this may result in a corn crop in excess of 14 billion bushels (2011 – 12.4 billion bushels). In western Canada, management anticipates that seeded acres will more closely approximate traditional levels as current conditions are not indicative of the excessive spring flooding that resulted in 4 million acres of farmland going unseeded in 2011. Sales of commercial equipment in North America were at record levels in 2011 due to positive agricultural economics and a commercial infrastructure which is expanding its capacity to accommodate the growing the second and third quarters. Franklin – Ag Growth acquired the assets of Winnipeg-based Franklin Enterprises Ltd (“Franklin”) effective October 1, 2010 for cash consideration of $7.1 million, plus costs related to the acquisition of $0.4 million and a working capital adjustment of $1.7 million. The acquisition was funded from cash on hand. Franklin enhances Ag Growth’s manufacturing capabilities and can increase production capacity in periods of high in-season demand. Franklin has played an integral role in the development of Ag Growth’s new from cash on hand. Tramco is a manufacturer of heavy duty number of total bushels of grain in the system. Based on chain conveyors and related handling products, primarily current conditions management anticipates continued high for the grain processing sector. Tramco is an industry leader with a premier brand name and strong market share and as such provides the Company with an excellent entry point into a new segment of the food supply chain. Tramco had average sales and EBITDA of approximately $30 million and $4 million, respectively, in the two fiscal levels of domestic demand in 2012, however domestic sales may fall below the record sales achieved in 2011. International commercial grain handling sales are expected to increase compared to 2011 as the Company remains very encouraged with respect to the outlook for developing markets and the potential of product bundling with storage years prior to acquisition. Tramco manufactures in Wichita, bins and other Ag Growth products. Kansas, and in Hull, England and has a sales office in the Netherlands. storage bin product line. Franklin’s custom manufacturing business generates monthly sales of approximately OUtlOOk Management expects demand for portable grain handling $1 million and roughly breaks even on an EBITDA basis. equipment in 2012 will benefit from positive on-farm Entering 2012, management believes the start-up challenges at our greenfield storage bin facility at Twister are largely resolved however targeted gross margins may not be immediately achieved. Interest in our storage bin product line remains strong both domestically and 19 overseas and management retains a very positive outlook for contributions from this plant in 2012 and beyond. The new bins have been well received by our domestic and international customers. Management expects earnings from Mepu in 2012 to improve significantly compared to 2011 due to improved market conditions, largely the result of a favourable 2011 harvest, and improved steel cost alignment. Mepu has historically been very seasonal, with negative EBITDA in the first and fourth quarters, and this trend is expected to continue in 2012. Ag Growth remains very optimistic with respect to its international potential. The Company has continued to invest in its international development with additions to its sales team and has recently opened sales offices in Columbia, Argentina and Latvia. Ag Growth’s international sales backlog for 2012 is significantly higher compared to the backlog at this time in 2011. The Company’s geographic scope of activity continues to expand beyond the original areas of focus of Russia, Eastern Europe and Latin America to include increased activity in Southeast Asia, the Middle East and Africa. ag Growth remains very optimistic with respect to its international potential. The Company has continued to invest in its international development with additions to its sales team and has recently opened sales offices in Columbia, argentina and latvia. Management expects gross margins in portable and Consistent with prior years, demand in 2012, particularly commercial handling equipment to remain strong in 2012 in the second half, will be influenced by crop and harvest and expects margin improvements at the Mepu and Twister conditions. Changes in global macro-economic factors, divisions. The Company’s gross margin expectations for including the availability of credit in new markets, also may storage products in 2012 are significantly higher than influence demand, primarily for commercial grain handling those achieved in 2011. However, storage sales are and storage products. Results may be also be impacted by expected to comprise a higher proportion of total sales in changes in steel costs and other material inputs. The rate 2012 and this change in sales mix is expected to reduce of exchange between the Canadian and US dollars may gross margin on a consolidated basis. As a result of these impact the comparison of results between 2012 and 2011. offsetting factors, Ag Growth’s consolidated gross margin The Company’s average rate of exchange in 2011 was percentage in 2012 is expected to remain relatively $1 USD = CAD $0.97. consistent with 2011. may 2007 Established in 1976, Twister was acquired in May of 2007 by AGI. DEtAilED OpErAtinG rESUltS EBitDA rECOnCiliAtiOn (thousands of dollars) Year ended December 31 (thousands of dollars) Year ended December 31 2010 262,260 Profit before income taxes Trade sales (1) Gain on foreign exchange (2) Sales Cost of inventories Depreciation & amortization Cost of sales General and administrative Transaction expenses Depreciation & amortization Other operating income Finance costs Finance loss (income) Profit before income taxes Current income taxes Deferred income taxes Profit for the period Net profit per share Basic Diluted (1) See “Non-IFRS Measures”. (2) Primarily related to gains on foreign exchange contracts. 2011 301,014 4,918 305,932 198,767 5,436 204,203 49,392 1,676 3,758 (100) 12,668 159 34,176 3,910 5,743 24,523 1.97 1.95 7,007 269,267 160,581 3,377 163,958 46,009 1,696 3,353 (605) 12,484 (2,065) 44,437 5,627 8,049 30,761 2.43 2.40 Finance costs Depreciation in cost of sales and G&A expenses Amortization in cost of sales and G&A expenses Accelerated vesting and death benefits EBitDA (1) Transaction costs Gain on foreign exchange in sales (2) Loss (gain) on foreign exchange in finance income Loss on sale of property, plant & equipment Other operating expense Adjusted EBitDA (1) (1) See “Non-IFRS Measures”. (2) Primarily related to gains on foreign exchange contracts. 2011 34,176 12,668 5,418 3,776 0 56,038 1,676 (4,918) 276 76 126 53,274 2010 44,437 12,484 3,312 3,418 2,549 66,200 1,696 (7,007) (1,300) 262 (121) 59,730 ASSEtS AnD liABilitiES (thousands of dollars) Total assets Total liabilities Year ended December 31 2011 394,566 192,407 2010 398,385 188,091 21 EXplAnAtiOn OF OpErAtinG rESUltS trade sales International trade sales in the year ended December 31, Company’s gross margin was 41% in both 2010 and 2011. 2011 were $54.5 million (2010 – $36.8 million). The The Company was able to maintain these strong margins increase of 42% from a year earlier was primarily due due to high throughput levels and continued investment to our 2010 acquisitions of Mepu and Tramco. Excluding in manufacturing through capital expenditures and lean acquisitions, international trade sales in 2011 were manufacturing practices. (thousands of dollars) Year ended December 31 2011 2010 301,014 262,260 238,478 247,727 Trade sales Trade sales excluding acquisitions (1) Trade sales excluding acquisitions, adjusted for FX (2) (1) Trade sales excluding acquisitions completed in 2010 and 2011. (2) Trade sales excluding acquisitions and adjusted to assume the 2011 FX rate was identical to the rate in 2010. Trade sales were negatively impacted by a stronger Canadian dollar compared to 2010. If the Canadian/US dollar exchange rates in 2011 had been the same as in 2010, trade sales excluding acquisitions for the year ended December 31, 2011 would have been $12.6 million higher and exceeded the levels achieved in 2010. Trade sales in 2011 benefited from continued strength in commercial grain handling, increased storage bin sales and revenues from acquisitions completed in 2010 and 2011. Portable grain handling sales as measured in base $23.2 million, compared to $27.4 million in 2010. The year over year decrease is largely due to the inclusion of a single $10 million sale to Russia in 2010. 251,141 247,727 Gross profit and gross margin (thousands of dollars) Year ended December 31 2011 2010 301,014 262,260 198,767 102,247 160,581 101,678 Trade sales Cost of inventories (1) Gross Margin Gross Margin (1) (as a % of trade sales) Gross Margin (2) (excluding 2010 acquisitions) 37% 39% (1) Excluding depreciation and amortization included in cost of sales. (2) Gross margin without taking into effect the divisions acquired The Company’s consolidated gross margin percentage decreased compared to 2010 due in part to the impact of foreign exchange and product sales mix. Also of significance were challenges experienced at the Company’s Edwards/Twister and Mepu divisions: • Edwards/twister – Ag Growth embarked on an ambitious greenfield storage bin manufacturing project in 2010 and anticipated the new equipment it had purchased would be commissioned early in 2011. The equipment was not commissioned until June 2011 and with limited time to prototype the new designs and to establish production processes and engineering support. As a result, the Company experienced production inefficiencies and incurred significant expenditures in order to properly service its customers. Entering 2012, management believes these start-up challenges are 34% 39% as a result the Company had to commence production in 2010 and 2011 so as to provide a comparison based only largely resolved. on the results of divisions that were operating in both periods. • Mepu – Results at Finland-based Mepu in 2011 were currencies ended 2011 roughly flat compared to 2010, The gross margin percentages at divisions owned for a significantly impacted by regional market challenges. despite less than optimal growing conditions that reduced full twelve months in both 2010 and 2011 were relatively A major drought in northern Europe in 2010 led to a very in-season third quarter sales, due to strong preseason consistent year over year, with the exception of Edwards/ poor harvest, resulting in surplus inventory throughout demand as dealers began building inventory levels in Twister, despite significant foreign exchange headwinds. the region as the Company entered 2011. In early 2011, advance of 2012. Excluding acquisitions and Edwards/Twister, the the region experienced a significant spike in steel costs which, due to the unusual competitive situation, Mepu was unable to pass through to customers. As a result, Mepu experienced significant margin compression and reported negative EBITDA in 2011. Gross margin and EBITDA at Mepu in 2012 are expected to increase compared to 2011 due to improved market conditions, largely the result of a favourable 2011 harvest, and improved steel cost alignment. General and administrative expenses Trade sales in 2011 benefited from continued strength in commercial grain handling, increased storage bin sales and revenues from acquisitions completed in 2010 and 2011. (thousands of dollars) Year ended December 31 EBitDA and adjusted EBitDA G&A (1) G&A (as a % of trade sales) G&A excluding acquisitions 2011 49,392 2010 43,460 16% 17% 38,723 41,222 (1) G&A excluding depreciation, amortization, transaction costs and accelerated vesting and death benefits. G&A expenses increased compared to 2010 largely due to new acquisitions. As a percentage of trade sales, G&A was 16% in 2011 (2010 – 17%). Compared to 2010, G&A expenses net of acquisitions decreased $2.5 million mainly due to lower stock-based compensation and short-term bonuses, which were partially offset by increased professional fees related the Company’s conversion to IFRS and a continued investment in international sales development. (thousands of dollars) Year ended December 31 EBITDA (1) Adjusted EBITDA (1) 2011 56,038 53,274 2010 66,200 59,730 (1) See the EBITDA reconciliation table above and “Non-IFRS Measures” later in this MD&A. comprised of US $25.0 million aggregate principal amount of non-amortizing secured notes that bear interest at 6.80% and mature October 29, 2016 and US $10.5 million of non-amortizing term debt, net of all deferred financing costs of $0.3 million. See “Capital Resources” for a description of the Company’s credit facilities. Obligations under capital lease of $0.2 million include a number of equipment leases with an average interest rate The decline in EBITDA and adjusted EBITDA in 2011 of 6.5%. The lease end dates are in 2012. compared with a year earlier is largely due to the stronger Canadian dollar in 2011, start-up challenges at the Company’s new storage bin facility and the factors affecting Mepu, as discussed under “Explanation of Operating results”. Finance costs The Company’s bank indebtedness as at December 31, 2011 was $nil (2010 – $nil) and its outstanding long-term debt and obligations under capital leases including the current portion was $36.0 million (2010 – $25.2 million). Long-term debt at December 31, 2011 is primarily Finance costs for the year ended December 31, 2011 were $12.7 million (2010 – $12.5 million). At December 31, 2011 the Company had outstanding $114.9 million aggregate principal amount of convertible unsecured subordinated debentures (2010 – $115.0 million). The Debentures bear interest at an annual rate of 7.0% and mature December 31, 2014. See “Capital Resources”. In addition to interest on the instruments noted above, finance costs include non-cash interest related to debenture accretion, the amortization of deferred finance costs, stand-by fees and other sundry cash interest. 23 profit and profit per share For the year ended December 31, 2011, the Company reported net profit of $24.5 million (2010 – $30.8 million), basic net profit per share of $1.97 (2010 – $2.43), and fully diluted net profit per share of $1.95 (2010 – $2.40). Profit per share for the year ended December 31, 2011 decreased compared to the prior year primarily due to lower adjusted EBITDA (see “Explanation of Operating Results”) and a lower gain on foreign exchange. Finance income Finance income is comprised of interest earned on the Company’s cash balances and gains or losses on translation of the Company’s U.S. dollar denominated long-term debt. Depreciation and amortization Under IFRS the depreciation of property, plant and equipment and the amortization of intangible assets are categorized on the income statement in accordance with the function to which the underlying asset is related. Depreciation Year ended December 31 Effective tax rate Year ended December 31 (thousands of dollars) Current tax expense Deferred tax expense Total tax 2011 3,910 5,743 9,653 2010 5,627 8,049 13,676 Profit before taxes 34,176 44,437 Total tax % 28.2% 30.8% Current income tax expense For the year ended December 31, 2011, the Company recorded current tax expense of $3.9 million (2010 – $5.6 million). Current tax expense relates primarily to (thousands of dollars) 2011 2010 certain subsidiary corporations of Ag Growth, including its Depreciation in cost of sales Depreciation in G&A Total depreciation 4,933 2,927 485 5,418 385 3,312 Amortization Year ended December 31 (thousands of dollars) 2011 2010 Amortization in cost of sales Amortization in G&A Total Amortization 503 3,273 3,776 450 2,968 3,418 U.S. and Finland based divisions. Deferred income tax expense For the year ended December 31, 2011, the Company recorded deferred tax expense of $5.7 million (2010 – $8.0 million). The deferred tax expense in 2011 relates to the utilization of deferred tax assets plus a decrease in deferred tax liabilities that related to the application of corporate tax rates to reversals of temporary differences between the accounting and tax treatment of depreciable assets, intangibles, reserves, deferred compensation plans and deferred financing fees. nOvEmbER 2007 Founded in 1852 and based in Decatur, Illinois, Union Iron was acquired in November 2007. Selected annual information (thousands of dollars, other than per share data) twelve months ended December 31 Trade sales EBITDA Adjusted EBITDA Net income Earnings per share – basic Earnings per share – fully diluted Funds from operations Payout ratio Dividends declared per share (2) Fund trust units Class B units Common shares Total assets Total long-term liabilities 2011 301,014 56,038 53,274 24,523 1.97 1.95 40,471 75% n/A n/A 2.40 394,566 151,986 2010 262,260 66,200 59,730 30,761 2.43 2.40 53,067 50% N/A N/A 2.07 398,385 139,831 2009 (1) 237,294 60,680 59,277 45,303 3.53 3.45 52,165 51% 0.85 0.85 1.19 387,850 174,024 (1) Results for 2010 have been restated in accordance with IFRS. The Company was not required to apply IFRS to periods prior to 2010 and accordingly 2009 comparative data is presented in accordance with CGAAP. (2) Effective June 3, 2009, the Company converted from an open-ended limited purpose trust to a publicly listed corporation (see “Conversion to a Corporation”). Accordingly, Fund trust units and Class B units received distributions for the first five months of 2009, and common shareholders of the publicly listed corporation received dividends thereafter. The following factors impact comparability between years conversion transaction all Trust Units and Class B units • The inclusion of the assets, liabilities and operating in the table above: of the Fund were exchanged for common shares of the results of the following acquisitions significantly impacts corporation (see “Conversion to a Corporation”). comparisons in the table above: • Sales, gain (loss) on foreign exchange, net earnings, and net earnings per share are significantly impacted by the • Total assets and long-term liabilities were impacted rate of exchange between the Canadian and U.S. dollars. by financing activities in 2009 as the Company issued • On June 3, 2009, the Company converted from an income trust to a corporation. In conjunction with the $115 million face value of convertible debentures, repaid its long-term debt, and issued new long-term debt. • April 29, 2010 – Mepu • October 1, 2010 – Franklin • December 20, 2010 – Tramco • October 4, 2011 – Airlanco 25 Quarterly financial information (thousands of dollars) Q1 Q2 Q3 Q4 Fiscal 2011 Q1 Q2 Q3 Q4 Fiscal 2010 Average USD/CAD exchange rate 0.99 0.96 0.97 0.96 0.97 Average USD/CAD exchange rate 1.05 1.03 1.05 1.02 1.04 2011 2010 profit 4,706 11,994 4,570 3,253 24,523 profit (loss) 4,351 11,626 15,164 (380) 30,761 Sales 67,065 88,111 83,341 67,415 305,932 Sales 52,430 76,727 88,703 51,407 269,267 Basic profit per share Diluted profit per share 0.38 0.97 0.37 0.26 1.97 0.38 0.91 0.36 0.26 1.95 Basic profit (loss) per share Diluted profit (loss) per share 0.33 0.90 1.23 (0.03) 2.43 0.33 0.85 1.12 (0.03) 2.40 Interim period sales and profit historically reflect seasonality. • Sales, net profit and profit per share are significantly The third quarter is typically the strongest primarily due to impacted by the acquisitions of Mepu (April 29, 2010), Acquisitions in 2010 and 2011 In the fourth quarter narrative below the comparisons to the timing of construction of commercial projects and high Franklin (October 1, 2010), Tramco (December 20, 2010) 2010 most often include a comparison of consolidated in-season demand at the farm level. Due to the seasonality and Airlanco (October 2011). of Ag Growth’s working capital movements, cash provided by operations will typically be highest in the fourth quarter. FOUrth QUArtEr Sales and EBITDA in the fourth quarter of 2011 exceeded The following factors impact the comparison between the record levels achieved in 2010, despite the negative periods in the table above: • Sales, gain (loss) on foreign exchange, profit, and profit per share in all periods are significantly impacted by the rate of exchange between the Canadian and U.S. dollars. impact of foreign exchange, due to strength in both portable and commercial grain handling sales. results and a comparison that includes only the divisions that were owned for the full three month period in both 2010 and 2011. The “excluding acquisitions” comparison below excludes Tramco (acquired December 2010) and Airlanco (acquired October 2011). trade sales Trade sales for the three months ended December 31, 2011 were $67.0 million (2010 – $49.4 million). Excluding acquisitions, trade sales in the fourth quarter of 2011 were $56.1 million, an increase of $6.9 million or 14% over 2010. The increase in trade sales is largely due to increased demand for portable grain handling equipment, as the Company’s dealer network replenished their inventory levels in advance of the 2012 season, higher domestic sales of commercial handling equipment and an increase in storage bin sales internationally. Sales and EbITDa in the fourth quarter of 2011 exceeded the record levels achieved in 2010, despite the negative impact of foreign exchange, due to strength in both portable and commercial grain handling sales. Gross margin Gross margin as a percentage of sales for the three months ended December 31, 2011 was 33%, and excluding acquisitions the gross margin in the fourth quarter of of sales (2010 – $10.4 million or 24%). The decrease EBITDA for the three months ended December 31, 2011 of $0.4 million from 2010 was primarily the result of was $9.7 million, compared to $8.4 million in 2010. a lower expense related to stock based compensation The increase in EBITDA is the result of the factors above and a reduction in short term bonuses, partially offset by partially offset by a decrease in the Company’s gain on 2011 was 36% (2010 – 35%). Gross margin percentages increased sales and marketing expenses as the Company foreign exchange from $2.9 million in 2010 to $1.2 million in the fourth quarter of 2011 benefited from sales mix, continued to expand its international sales infrastructure. in 2011. manufacturing efficiencies realized through the impact of G&A expenses as a percentage of sales are typically high in lean manufacturing and the advantages of high production the fourth quarter as the Company’s trade sales are lower volumes, partially offset by the negative impact of the due to seasonality. For the three months ended December 31, 2011, the Company reported net earnings of $3.3 million (2010 – loss of $0.4 million), basic net earnings per share of stronger Canadian dollar and quarter-over-quarter gross margin percentage decreases at the Edwards/Twister and Mepu divisions. Adjusted EBitDA, EBitDA and net earnings Adjusted EBITDA for the three months ended December 31, $0.26 (2010 – loss per share of $0.03), and fully diluted net earnings per share of $0.26 (2010 – loss per share 2011 was $8.4 million (2010 – $6.7 million). Excluding of $0.03). Expenses For the three months ended December 31, 2011, general acquisitions, adjusted EBITDA in the fourth quarter of 2011 was $8.2 million (2010 – $6.5 million). The increase and administrative expenses were $13.6 million or 20% resulted primarily from higher sales of portable and of sales. Excluding acquisitions, selling, general and administrative expenses were $10.0 million or 20% commercial grain handling as discussed above. 27 Cash flow and liquidity (thousands of dollars) Profit before income taxes for the period Add charges (deduct credits) to operations not requiring a current cash payment: Depreciation and amortization Translation loss (gain) on foreign exchange Non-cash interest expense Stock based compensation Loss on sale of assets Net change in non-cash working capital balances related to operations: Accounts receivable Inventory Prepaid expenses and other assets Accounts payable and accruals Customer deposits Provisions Settlement of SAIP obligation Income tax paid Cash provided by operations janUaRy 2008 Established in 1955, Applegate was acquired by AGI in January of 2008. Year ended December 31 2010 44,437 6,731 (1,022) 2,274 8,214 (263) 60,371 (9,664) (1,321) (5,248) 2,046 (2,868) 748 (16,307) 0 (5,063) 39,001 2011 34,176 9,194 1,793 2,422 2,038 (76) 49,547 (9,607) (9,850) 5,034 (1,755) 1,445 280 (14,453) (1,998) (5,217) 27,879 For the year ended December 31, 2011, cash provided by increase in the number of days accounts receivable remain • Grain storage bin capacity – in 2010 the Company operations was $27.9 million (2010 – $39.0 million). The outstanding. In addition, payment terms related to certain invested $15.9 million towards a grain storage bin decrease in cash generated from operations compared to preseason ordering programs have changed compared to manufacturing facility and automated storage bin 2010 is the result of a decrease in EBITDA and net earnings prior years which is expected to result in higher levels of production equipment. The investment is expected to which resulted primarily from the impact of foreign accounts receivable in the first two quarters of 2012. allow the Company to capitalize on international sales exchange and challenges at the company’s Edwards/ Twister and Mepu divisions (see “Explanation of Operating Results” above). Working Capital requirements Interim period working capital requirements typically reflect Capital Expenditures Ag Growth had maintenance capital expenditures of $3.9 million in the year ended December 31, 2011 (2010 – $3.3 million), representing 1.3% of trade sales (2010 – opportunities and to increase sales in North America. In the year ended December 31, 2011, the Company invested $3.4 million to complete the project. No additional significant expenditures are anticipated. 1.3%). Maintenance capital expenditures in 2011 relate • Manufacturing equipment – $1.3 million was invested the seasonality of the business. Ag Growth’s collections of primarily to purchases of manufacturing equipment, trucks, to upgrade certain equipment to allow for increased accounts receivable are weighted towards the third and trailers, and forklifts and were funded through cash on capacity and operating efficiency. fourth quarters. This collection pattern, combined with hand, cash from operations and bank indebtedness. Ag Growth defines maintenance capital expenditures as the paint line and shipping/receiving area to cash outlays required to maintain plant and equipment provide for increased capacity and improved at current operating capacity and efficiency levels. manufacturing efficiencies. • Union Iron – $0.6 million was invested to upgrade historically higher sales in the third quarter that result from seasonality, typically lead to accounts receivable levels increasing throughout the year and peaking in the third quarter. Inventory levels typically increase in the first and second quarters and then begin to decline in the third or fourth quarter as sales levels exceed production. As a result of these working capital movements, historically, Ag Growth begins to draw on its operating lines in the first or second quarter. The operating line balance typically peaks in the second or third quarter and normally begins to decline later in the third quarter as collections of accounts receivable increase. Ag Growth has typically fully repaid its operating line balance by early in the fourth quarter. Non-maintenance capital expenditures encompass other investments, including cash outlays required to increase operating capacity or improve operating efficiency. Ag Growth had non-maintenance capital expenditures in the year ended December 31, 2011 of $5.3 million (2010 – $21.7 million). As expected, non-maintenance capital expenditures in 2011 have decreased significantly from 2010 largely due to the significant investment in 2010 related to the Company’s greenfield storage bin facility. Non-maintenance capital expenditures in 2011 were Working capital requirements in 2012 are expected to financed through cash on hand, cash from operations and be generally consistent with historical patterns, however bank indebtedness. growth in the Company’s storage bin sales and increasing international sales with extended payment terms may result in higher than historical inventory levels and an The following capital expenditures were classified as non-maintenance in 2011: Capital expenditures in 2012 are expected to decrease modestly compared to 2011 and are expected to be financed through a combination of cash on hand, bank indebtedness and term debt. Cash Balance The Company’s cash balance in 2011 decreased $28 million (2010 – $74 million) as growth in working capital and payments related to acquisitions offset cash generated from operations net of dividend payments and capital expenditures. The decrease was more significant in 2010 due to higher capital expenditures, primarily due to the greenfield bin plant in Alberta, and outlays related to the Company’s normal course issuer bid. 29 Contractual obligations (thousands of dollars) Debentures Long-term debt Capital leases Operating leases Total obligations total 114,885 36,134 131 2,514 153,664 2012 0 0 131 657 788 2013 0 0 0 533 533 2014 114,885 10,709 0 513 126,107 2015 0 0 0 468 468 2016+ 0 25,425 0 343 25,768 Debentures relate to the aggregate principal amount “Convertible Debentures”). The remainder of the debenture was drawn under this facility (2010 – $nil). The facilities of debentures issued by the Company in October 2009 proceeds was deployed in fiscal 2011. bear interest at rates of prime plus 0.50 % to prime plus (see “Convertible Debentures” below). Long-term debt at December 31, 2011 is comprised of US $25.0 million aggregate principal amount of secured notes issued through a note purchase and private shelf agreement and US $10.5 million non-amortizing term debt, net of deferred financing costs. Capital lease obligations relate to a number of leases for equipment. The operating leases relate primarily to vehicle, equipment, warehousing, and facility leases and were entered into in the normal course of business. long-term debt On October 29, 2009, the Company authorized the issue 1.50% based on performance calculations and were to mature on October 29, 2012. and sale of US $25.0 million aggregate principal amount of Subsequent to December 31, 2011, the Company renewed secured notes through a note purchase and private shelf its credit facility on substantially the same terms with agreement. The notes are non-amortizing and bear interest its existing lenders. The renewed credit includes lender at 6.80% and mature October 29, 2016. The note purchase approval to expand the facility by an additional $25 million, agreement also provides for a possible future issuance bears interest at rates of prime plus 0.0% to prime plus and sale of notes of up to an additional US $75.0 million 1.0% based on performance calculations and matures aggregate principal amount, with maturity dates no longer on the earlier of March 8, 2016 or three months prior to than ten years from the date of issuance. Under the note maturity date of the Debentures, unless refinanced on As at March 14, 2012, the Company had outstanding purchased agreement, Ag Growth is subject to certain terms acceptable to the lenders. Ag Growth is subject commitments of $1.5 million in relation to capital financial covenants, including a maximum leverage ratio to certain financial covenants, including a maximum expenditures for property, plant and equipment. and a minimum debt service ratio. The Company is in leverage ratio and a minimum debt service ratio, and is in CApitAl rESOUrCES Cash The Company had a cash balance of $6.8 million as at compliance with all financial covenants. compliance with all financial covenants. On October 29, 2009, the Company also entered a credit facility with three Canadian chartered banks that includes Obligation under capital leases Upon the acquisition of Franklin the Company assumed a December 31, 2011 (2010 – $35.0 million). The Company’s CAD $10.0 million and US $2.0 million available for number of capital leases for manufacturing equipment. The cash balance at December 31, 2010 was higher than is working capital purposes, and provides for non-amortizing leases bear interest at rates averaging 6.5% and mature in typical because it included a portion of the net proceeds long-term debt of up to CAD $38.0 million and US 2012. The Company expects to exercise the buyout option received from an October 2009 debenture offering (see $20.5 million. As at December 31, 2011, US $10.5 million upon maturity of the equipment leases. Convertible debentures In October 2009 the Company issued $115 million 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of redemption COMMOn ShArES The following common shares were issued and outstanding aggregate principal amount of convertible unsecured is given is not less than 125% of the conversion price. during the periods indicated: subordinated debentures (the “Debentures”) at a price of On and after December 31, 2013, the Debentures may be $1,000 per Debenture. The Debentures bear interest at redeemed, in whole or in part, at the option of the Company an annual rate of 7.0% payable semi-annually on June at a price equal to their principal amount plus accrued and December 31, 2009 30 and December 31. Each Debenture is convertible into unpaid interest. common shares of the Company at the option of the holder at a conversion price of $44.98 per common share. The maturity date of the Debentures is December 31, 2014. On redemption or at maturity, the Company may, at its option, subject to regulatory approval and provided that no event of default has occurred, elect to satisfy its obligation Normal course issuer bid Share award incentive plan issuance December 31, 2010 Conversion of Debentures # Common Shares 13,078,040 (674,600) 140,000 12,543,440 2,556 Net proceeds of the offering of approximately to pay the principal amount of the Debentures, in whole or December 31, 2011 and March 14, 2012 12,545,996 $109.9 million were used by Ag Growth for general in part, by issuing and delivering for each $100 due that corporate purposes and to repay existing indebtedness number of freely tradeable common shares obtained by of approximately US $37.6 million and CAD $11.9 million dividing $100 by 95% of the volume weighted average under the Company’s credit facility. In 2010, the trading price of the common shares on the Toronto Stock Company used proceeds from the Debentures to Exchange (“TSX”) for the 20 consecutive trading days fund the acquisitions of Mepu, Franklin and Tramco ending on the fifth trading day preceding the date fixed (see “Acquisitions in Fiscal 2010”) and to finance the for redemption or the maturity date, as the case may be. expansion of the Company’s storage bin product line Any accrued and unpaid interest thereon will be paid in (see “Capital Expenditures”). The Debentures are not redeemable before December 31, 2012. On and after December 31, 2012 and prior to December 31, 2013, the Debentures may be redeemed, in whole or in part, at the option of the Company at a price cash. The Company may also elect, subject to any required regulatory approval and provided that no event of default has occurred, to satisfy all or part of its obligation to pay interest on the Debentures by delivering sufficient freely tradeable common shares to satisfy its interest obligation. equal to their principal amount plus accrued and unpaid The Debentures trade on the TSX under the symbol interest, provided that the volume weighted average AFN.DB. trading price of the common shares during the On November 17, 2011, Ag Growth commenced a normal course issuer bid for up to 994,508 common shares, representing 10% of the Company’s public float at that time. In the year ended December 31, 2011, no common shares were purchased under the normal course issuer bid. On December 10, 2009, Ag Growth commenced a normal course issuer bid for up to 1,272,423 common shares, representing 10% of the Company’s public float at that time. In the year ended December 31, 2010, the Company purchased 674,600 common shares for $23.4 million under the normal course issuer bid. The normal course issuer bid was terminated on December 9, 2010. In the year ended December 31, 2011, 2,556 common shares were issued on conversion of $115,000 principal amount of Debentures. Ag Growth has reserved 2,554,136 common shares for issuance upon conversion of the Debentures as at December 31, 2011. 31 Ag Growth has granted 220,000 share awards under its share award incentive plan. In fiscal 2010 a total of 140,000 share awards vested and the equivalent number of common shares was issued to the participants. In 2011 an additional 40,000 share awards vested however no common shares were issued as the participants were compensated in cash rather than common shares. As at December 31, 2011, a total of 40,000 share awards were outstanding. These vested on January 1, 2012, however no common shares were issued as the participants were compensated in cash rather than common shares. The administrator of the LTIP has acquired 317,304 common shares to satisfy its obligations with respect to awards under the LTIP for fiscal 2007, 2008, 2009 and 2010. These common shares are held by the administrator until such time as they vest to the LTIP participants. As at December 31, 2011, a total of 182,928 common shares related to the LTIP had vested to the participants. A total of 23,144 deferred grants of common shares are outstanding under the Company’s Director’s Deferred Compensation Plan. Ag Growth’s common shares trade on the TSX under the symbol AFN. DiViDEnDS In the year ended December 31, 2011, Ag Growth declared In the year ended December 31, 2011, ag Growth declared dividends of $2.40 per common share (2010 – $2.07). monthly dividends. The Company’s Board of Directors changes in working capital as they are necessary to drive reviews financial performance and other factors when organic growth and have historically been financed by the assessing dividend levels. An adjustment to dividend levels Company’s operating facility (See “Capital Resources”). may be made at such time as the Board determines an Funds from operations should not be construed as an adjustment to be in the best interest of the Company. alternative to cash flows from operating, investing, and Dividends in a fiscal year are typically funded entirely through cash from operations, although due to seasonality financing activities as a measure of the Company’s liquidity and cash flows. dividends may be funded on a short-term basis by the (thousands of dollars) Year ended December 31 Company’s operating lines. Dividends in year ended December 31, 2011 were funded through cash on hand, cash from operations and bank indebtedness. The Company expects dividends in 2012 will be funded through bank indebtedness and cash from operations. FUnDS FrOM OpErAtiOnS Funds from operations, defined under “Non-IFRS Measures” is cash flow from operating activities before the net change in non-cash working capital balances related to operations and stock-based compensation, less EBITDA Stock based compensation Non-cash interest expense Translation loss (gain) on foreign exchange Interest expense Income taxes paid Maintenance capital expenditures Funds from operations (1) 2011 56,038 2010 66,200 2,038 6,511 2,422 2,274 1,793 (12,668) (5,217) (3,935) 40,471 (1,022) (12,484) (5,063) (3,349) 53,067 dividends to shareholders of $30.1 million (2010 – maintenance capital expenditures and adjusted for the $26.9 million). Ag Growth increased its monthly dividend gain or loss on the sale of property, plant & equipment. rate from $0.17 per common share to $0.20 per common The objective of presenting this measure is to provide share in November 2010. Ag Growth’s policy is to pay a measure of free cash flow. The definition excludes Funds from operations can be reconciled to cash provided by operating activities as follows: (thousands of dollars) Year ended December 31 FinAnCiAl inStrUMEntS Foreign exchange contracts Risk from foreign exchange arises as a result of variations contracts with three Canadian chartered banks to partially hedge its foreign currency exposure on anticipated U.S. dollar sales transactions and as at December 31, 2011, in exchange rates between the Canadian and the U.S. had outstanding the following foreign exchange contracts: 2011 2010 dollar. Ag Growth has entered into foreign exchange Cash provided by operating activities Change in non-cash working capital Settlement of SAIP option Cash portion of death benefits (3) Maintenance capital expenditures Loss on sale of assets Funds from operations (1) (3,935) 76 40,471 (3,349) 263 53,067 Shares outstanding (2) 12,562,335 12,828,372 Funds from operations per share Dividends declared per share Payout ratio (1) (1) See “Non-IFRS Measures”. 3.22 2.40 75% 4.14 2.07 50% 27,879 39,001 14,453 1,998 16,307 0 Settlement Dates Face Amount USD (000s) Average rate CAD CAD Amount (000s) Jan – Dec 2012 $60,000 $0.9905 $59,430 Forward Foreign Exchange Contracts 0 845 The fair value of the outstanding forward foreign exchange results can vary from these assumptions. It is possible contracts in place as at December 31, 2011 was a that materially different results would be reported using loss of $1.8 million. Consistent with prior periods, the different assumptions. Company has elected to apply hedge accounting for these contracts and the unrealized loss has been recognized in other comprehensive income for the period ended December 31, 2011. CritiCAl ACCOUntinG EStiMAtES The preparation of financial statements in conformity Ag Growth believes the accounting policies that are critical to its business relate to the use of estimates regarding the recoverability of accounts receivable and the valuation of inventory, intangibles, goodwill, convertible debentures and deferred income taxes. Ag Growth’s accounting policies are described in the notes to its December 31, 2011 audited with IFRS requires management to make estimates and financial statements. assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and (2) Fully diluted weighted average, excluding the potential dilution liabilities at the date of the financial statements and of the Debentures as the calculation includes the interest the reported amount of revenues and expenses during expense related to the Debentures. (3) Accelerated vesting and death benefits expense of $2,549 has been excluded from EBITDA in 2010. The non-cash portion of this expense was $1,704. the period. By their nature, these estimates are subject to a degree of uncertainty and are based on historical experience and trends in the industry. Management reviews these estimates on an ongoing basis. While management has applied judgment based on assumptions believed to be reasonable in the circumstances, actual Allowance for doubtful accounts Due to the nature of Ag Growth’s business and the credit terms it provides to its customers, estimates and judgments are inherent in the on-going assessment of the recoverability of accounts receivable. Ag Growth maintains an allowance for doubtful accounts to reflect expected credit losses. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and these judgments must be 33 continuously evaluated and updated. Ag Growth is not annually. Assessing goodwill and intangible assets for likelihood of utilizing such losses and deductions. These able to predict changes in the financial conditions of its impairment requires considerable judgment and is based in estimates and assumptions are subject to significant customers, and the Company’s judgment related to the part on current expectations regarding future performance. uncertainty and if changed could materially affect our recoverability of accounts receivable may be materially Changes in circumstances including market conditions assessment of the ability to fully realize the benefit of the impacted if the financial condition of the Company’s may materially impact the assessment of the fair value of deferred income tax assets. Deferred tax asset balances customers deteriorates. goodwill and intangible assets. Valuation of inventory Assessments and judgments are inherent in the Deferred income taxes Deferred income taxes are calculated based on determination of the net realizable value of inventories. assumptions related to the future interpretation of tax The cost of inventories may not be fully recoverable if legislation, future income tax rates, and future operating they are slow moving, damaged, obsolete, or if the selling results, acquisitions and dispositions of assets and would be reduced and additional income tax expense recorded in the applicable accounting period in the event that circumstances change and we, based on revised estimates and assumptions, determined that it was no longer probable that those deferred tax assets would be fully realized. price of the inventory is less than its cost. Ag Growth liabilities. Ag Growth periodically reviews and adjusts its regularly reviews its inventory quantities and reduces the estimates and assumptions of income tax assets and riSkS AnD UnCErtAintiES The risks and uncertainties described below are not the cost attributed to inventory no longer deemed to be fully liabilities as circumstances warrant. A significant change in only risks and uncertainties we face. Additional risks recoverable. Judgment related to the determination of net any of the Company’s assumptions could materially affect and uncertainties not currently known to us or that we realizable value may be impacted by a number of factors Ag Growth’s estimate of deferred tax assets and liabilities. currently consider immaterial also may impair operations. including market conditions. Goodwill and intangible assets Assessments and judgments are inherent in the Future benefit of tax-loss carryforwards Ag Growth should only recognize the future benefit of tax-loss carryforwards where it is probable that sufficient determination of the fair value of goodwill and intangible future taxable income can be generated in order to fully If any of the following risks actually occur, our business, results of operations and financial condition, and the amount of cash available for dividends could be materially adversely affected. assets. Goodwill and indefinite life intangible assets are utilize such losses and deductions. We are required to recorded at cost and finite life intangibles are recorded make significant estimates and assumptions regarding at cost less accumulated amortization. Goodwill and future revenues and profit, and our ability to implement industry cyclicality and general economic conditions The performance of the agricultural industry is cyclical. intangible assets are tested for impairment at least certain tax planning strategies, in order to assess the To the extent that the agricultural sector declines or apRIl 2010 Acquired in April 2010, Mepu is based in Ylane, Finland and was established in 1952. experiences a downturn, this is likely to have a negative material and component price volatility by planning and businesses, or successfully integrate any acquired impact on the grain handling, storage and conditioning negotiating significant purchases on an annual basis, business, products, or technologies into the business, or industry, and the business of Ag Growth. Among other and endeavours to pass through to customers, most, if increase the scope or change the nature of operations at things, the agricultural sector has benefited from the not all, of the price volatility. There can be no assurance existing facilities without substantial expenses, delays or expansion of the ethanol industry, and to the extent the that industry dynamics will allow Ag Growth to continue other operational or financial difficulties. The Company’s ethanol industry declines or experiences a downturn, this to reduce its exposure to volatility of production costs by ability to increase the scope or change the nature of its is likely to have a negative impact on the grain handling, passing through price increases to its customers. operations or acquire or develop additional businesses storage and conditioning industry, and the business of Ag Growth. Foreign exchange risk Ag Growth generates the majority of its sales in U.S. Future developments in the domestic and global economies dollars, but a materially smaller proportion of its expenses may negatively impact the demand for our products. are denominated in U.S. dollars. In addition, Ag Growth Management cannot estimate the level of growth or may denominate its long-term borrowings in U.S. dollars. contraction of the economy as a whole or of the economy Accordingly, fluctuations in the rate of exchange between of any particular region or market that we serve. Adverse the Canadian dollar and the U.S. dollar may significantly changes in our financial condition and results of operations impact the Company’s financial results. Management may occur as a result of negative economic conditions, has implemented a foreign currency hedging strategy declines in stock markets, contraction of credit availability and the Company has entered into a series of hedging or other factors affecting economic conditions generally. arrangements to partially mitigate the potential effect of fluctuating exchange rates. To the extent that Ag Growth does not adequately hedge its foreign exchange risk, changes in the exchange rate between the Canadian dollar may be impacted by its cost of capital and access to credit. Acquisitions and expansions may involve a number of special risks including diversion of management’s attention, failure to retain key personnel, unanticipated events or circumstances, and legal liabilities, some or all of which could have a material adverse effect on Ag Growth’s performance. In addition, there can be no assurance that an increase in the scope or a change in the nature of operations at existing facilities or that acquired or newly developed businesses, products, or technologies will achieve anticipated revenues and income. The failure of the Company to manage its acquisition or expansion strategy successfully could have a material adverse effect on Ag Growth’s results of operations and financial condition. risk of decreased crop yields Decreased crop yields due to poor weather conditions and other factors are a significant risk affecting Ag Growth. Both reduced crop volumes and the accompanying decline in farm incomes can negatively affect demand for grain handling, storage and conditioning equipment. potential volatility of production costs Various materials and components are purchased in connection with Ag Growth’s manufacturing process, some or all of which may be subject to wide price variation. Consistent with past and current practices within the industry, Ag Growth seeks to manage its exposure to and the U.S. dollar may have a material adverse effect on Ag Growth’s results of operations, business, prospects and international sales and operations A portion of Ag Growth’s sales are generated in overseas financial condition. Acquisition and expansion risk Ag Growth may expand its operations by increasing the scope or changing the nature of operations at existing facilities or by acquiring or developing additional businesses, products or technologies. There can be no assurance that the Company will be able to identify, acquire, develop or profitably manage additional markets and Ag Growth anticipates increasing its offshore sales and operations in the future. Sales and operations outside of North America, particularly in emerging markets, are subject to various risks, including: currency exchange rate fluctuations; foreign economic conditions; trade barriers; competition with domestic and international manufacturers and suppliers; exchange controls; national and regional labour strikes; political risks and risks of 35 a portion of ag Growth’s sales are generated in overseas markets and ag Growth anticipates increasing its offshore sales and operations in the future. increases in duties; taxes and changes in tax laws; The world grain market is subject to numerous risks and expropriation of property, cancellation or modification uncertainties, including risks and uncertainties related to of contract rights, unfavourable legal climate for the international trade and global political conditions. calendar year and may impact the ability of the Company to make cash dividends to shareholders, or the quantum of such dividends, if any. No assurance can be given that Ag Growth’s credit facility will be sufficient to offset the seasonal variations in Ag Growth’s cash flow. Business interruption The operation of Ag Growth’s manufacturing facilities are subject to a number of business interruption risks, including delays in obtaining production materials, plant shutdowns, labour disruptions and weather conditions/ natural disasters. Ag Growth may suffer damages associated with such events that it cannot insure against or which it may elect not to insure against because of high premium costs or other reasons. For instance, Ag Growth’s Rosenort facility is located in an area that is often subject litigation In the ordinary course of its business, Ag Growth may be party to various legal actions, the outcome of which cannot be predicted with certainty. One category of potential legal actions is product liability claims. Farming is an inherently dangerous occupation. Grain handling, storage and conditioning equipment used on farms or in commercial applications may result in product liability claims that require insuring of risk and management of the legal process. Dependence on key personnel Ag Growth’s future business, financial condition, and collection of unpaid accounts; changes in laws and policies governing operations of foreign-based companies, as well as risks of loss due to civil strife and acts of war. There is no guarantee that one or more of these factors will not materially adversely affect Ag Growth’s offshore sales and operations in the future. Commodity prices, international trade and political uncertainty Prices of commodities are influenced by a variety of Competition Ag Growth experiences competition in the markets in which it operates. Certain of Ag Growth’s competitors have to widespread flooding, and insurance coverage for this greater financial and capital resources than Ag Growth. type of business interruption is limited. Ag Growth is not Ag Growth could face increased competition from newly able to predict the occurrence of business interruptions. formed or emerging entities, as well as from established entities that choose to focus (or increase their existing focus) on Ag Growth’s primary markets. As the grain handling, storage and conditioning equipment sector is unpredictable factors that are beyond the control of fragmented, there is also a risk that a larger, formidable Ag Growth, including weather, government (Canadian, competitor may be created through a combination of one United States and other) farm programs and policies, and or more smaller competitors. Ag Growth may also face changes in global demand or other economic factors. potential competition from the emergence of new products A decrease in commodity prices could negatively impact or technology. the agricultural sector, and the business of Ag Growth. New legislation or amendments to existing legislation, including the Energy Independence and Security Act in the U.S., may ultimately impact demand for the Company’s products. Seasonality of business The seasonality of the demand for Ag Growth’s products results in lower cash flow in the first three quarters of each operating results depend on the continued contributions Debentures and is renewable at the option of the lenders. coverage that, in the event of a substantial loss, would of certain of Ag Growth’s executive officers and other key There can be no guarantee the Company will be able to not be sufficient to pay the full current market value or management and personnel, certain of whom would be obtain alternate financing and no guarantee that future current replacement cost of its assets or cover the cost of difficult to replace. credit facilities will have the same terms and conditions a particular claim. labour costs and shortages and labour relations The success of Ag Growth’s business depends on a large number of both hourly and salaried employees. Changes in the general conditions of the employment market could affect the ability of Ag Growth to hire or retain staff at current wage levels. The occurrence of either of these events could have an adverse effect on the Company’s results of operations. There is no assurance that some or all of the employees of Ag Growth will not unionize in the future. If successful, such an occurrence could increase labour costs and thereby have an adverse affect on as the existing facility. This may have an adverse effect on the Company, its ability to pay dividends and the market value of its common shares. In addition, the business of the Company may be adversely impacted in the event that the Company’s customer base does not have access to sufficient financing. Sales related to the construction of commercial grain handling facilities, sales to developing markets, and sales to North American farmers may be negatively impacted. interest rates Ag Growth’s term and operating credit facilities bear Ag Growth’s results of operations. interest at rates that are in part dependent on performance Distribution, sales representative and supply contracts Ag Growth typically does not enter into written agreements with its dealers, distributors or suppliers. As a result, such parties may, without notice or penalty, terminate their relationship with Ag Growth at any time. In addition, even if such parties should decide to continue their relationship with Ag Growth, there can be no guarantee that the consideration or other terms of such contracts will continue on the same basis. Availability of credit Ag Growth’s credit facility matures on the earlier of March 8, 2016 or three months prior to the maturity of the based financial ratios. The Company’s cost of borrowing may be impacted to the extent that the ratio calculation results in an increase in the performance based component of the interest rate. To the extent that the Company has term and operating loans where the fluctuations in the cost of borrowing are not mitigated by interest rate swaps, the Company’s cost of borrowing may be impacted by fluctuations in market interest rates. Uninsured and underinsured losses Ag Growth uses its discretion in determining amounts, Cash dividends are not guaranteed Future dividend payments by Ag Growth and the level thereof is uncertain, as Ag Growth’s dividend policy and the funds available for the payment of dividends from time to time are dependent upon, among other things, operating cash flow generated by Ag Growth and its subsidiaries, financial requirements for Ag Growth’s operations and the execution of its growth strategy, fluctuations in working capital and the timing and amount of capital expenditures, debt service requirements and other factors beyond Ag Growth’s control. income tax matters Income tax provisions, including current and deferred income tax assets and liabilities, and income tax filing positions require estimates and interpretations of federal and provincial income tax rules and regulations, and judgments as to their interpretation and application to Ag Growth’s specific situation. The amount and timing of reversals of temporary differences will also depend on Ag Growth’s future operating results, acquisitions and dispositions of assets and liabilities. The business and operations of Ag Growth are complex and Ag Growth has coverage limits and deductibility provisions of insurance, executed a number of significant financings, acquisitions, with a view to maintaining appropriate insurance coverage reorganizations and business combinations over the course on its assets and operations at a commercially reasonable of its history including the Conversion. The computation cost and on suitable terms. This may result in insurance of income taxes payable as a result of these transactions 37 involves many complex factors as well as Ag Growth’s operations may need to be dedicated to payment of the to comply with these obligations could result in an event interpretation of and compliance with relevant tax principal of and interest on indebtedness, thereby reducing of default which, if not cured or waived, could permit legislation and regulations. While Ag Growth believes that funds available for future operations and to pay dividends; acceleration of the relevant indebtedness and trigger its existing and proposed tax filing positions are probable to (iii) certain of the borrowings under the Company’s credit financial penalties including a make-whole provision in be sustained, there are a number of existing and proposed facility may be at variable rates of interest, which exposes the note purchase agreement. If the indebtedness under tax filing positions including in respect of the Conversion Ag Growth to the risk of increased interest rates; and (iv) the credit facility and note purchase agreement were that are or may be the subject of review by taxation Ag Growth may be more vulnerable to economic downturns to be accelerated, there can be no assurance that the authorities. Therefore, it is possible that additional taxes and be limited in its ability to withstand competitive assets of Ag Growth would be sufficient to repay in full could be payable by Ag Growth and the ultimate value of pressures. Ag Growth’s ability to make scheduled that indebtedness. There can also be no assurance that Ag Growth’s income tax assets and liabilities could change payments of principal and interest on, or to refinance, the credit facility or any other credit facility will be able to in the future and that changes to these amounts could have its indebtedness will depend on its future operating be refinanced. a material effect on Ag Growth’s consolidated financial performance and cash flow, which are subject to prevailing statements and financial position. economic conditions, prevailing interest rate levels, and financial, competitive, business and other factors, many of which are beyond its control. rECEnt ACCOUntinG ChAnGES For all periods up to and including the year ended December 31, 2010, Ag Growth presented its consolidated financial statements in accordance with previous Canadian Ag Growth may issue additional common shares diluting existing shareholders’ interests The Company is authorized to issue an unlimited number The ability of Ag Growth to pay dividends or make other generally accepted accounting principles (“CGAAP”). The of common shares for such consideration and on such payments or advances will be subject to applicable laws Company’s financial statements for the quarterly reporting terms and conditions as shall be established by the and contractual restrictions contained in the instruments periods beginning March 31, 2011 and the year ending Directors without the approval of any shareholders, except governing its indebtedness, including the Company’s December 31, 2011, and this MD&A, have been prepared as required by the TSX. In addition, the Company may, credit facility and note purchase agreement. Ag Growth’s in accordance with IFRS. at its option, satisfy its obligations with respect to the credit facility and note purchase agreement contain interest payable on the Debentures and the repayment of restrictive covenants customary for agreements of this the face value of the Debentures through the issuance of nature, including covenants that limit the discretion of common shares. leverage, restrictive covenants The degree to which Ag Growth is leveraged could have important consequences to the shareholders, including: (i) the ability to obtain additional financing for working capital, capital expenditures or acquisitions in the future may be limited; (ii) a material portion of Ag Growth’s cash flow from management with respect to certain business matters. These covenants place restrictions on, among other things, the ability of Ag Growth to incur additional indebtedness, to pay dividends or make certain other payments and to sell or otherwise dispose of material assets. In addition, the credit facility and note purchase agreement contain a number of financial covenants that will require Ag Growth to meet certain financial ratios and financial tests. A failure transition to iFrS For the majority of accounting policy choices, the Company did not change the accounting policies it applied under CGAAP if it was not required to do so under IFRS. In preparing its consolidated financial statements in accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards (“IFRS 1”), the Company availed itself of certain of the optional exemptions from full retrospective application of IFRS. A comprehensive summary of the optional exemptions applied by the Company is included in Note 33 in the Company’s December 31, 2011 audited consolidated Sales financial statements. Trade sales per CGAAP The transition to IFRS did result in a number of changes Reclassify – gain on foreign exchange to the Company’s Statements of Financial Position as Adoption of IFRS – revenue recognition at January 1, 2010, its IFRS transition date, and to its Sales per IFRS Statements of Income, Comprehensive Income, Cash Flows and Equity for its 2010 reporting periods. A comprehensive Cost of sales summary of all of the significant changes including the various reconciliations of CGAAP financial statements to those prepared under IFRS is included in Note 33 in the Company’s December 31, 2011 audited financial statements. Although the adoption of IFRS resulted in adjustments to the Company’s financial statements, it did not materially impact the underlying cash flows or profitability trends of the Company. inCOME StAtEMEnt prESEntAtiOn The Company has elected to categorize its income and expenses by their function which is one of the two alternatives available under IFRS. Under this methodology revenues and expenses are categorized according to their underlying activity or asset. Accordingly, amortization and foreign-exchange gains (losses), which were Cost of sales per CGAAP Adoption of IFRS – inventory overhead Adoption of IFRS – revenue recognition Reclassify – depreciation and amortization Cost of sales per IFRS General and administrative per CGAAP Reclassify – stock based compensation Reclassify – research and development Reclassify – accelerated vesting and death benefits Adoption of IFRS – acquisition costs previously disclosed separately under CGAAP, have now Adoption of IFRS – other been allocated to sales, cost of sales or general and Reclassify – depreciation and amortization administrative expenses. Presentation differences under Total general and administrative IFRS, compared to the Company’s income statement presentation under CGAAP, include the following: General and administrative expenses Year ended December 31, 2010 Year ended December 31, 2010 $ 262,077 7,007 183 269,267 Year ended December 31, 2010 $ 160,504 (8) 85 3,377 163,958 $ $35,505 6,394 1,444 2,549 1,696 117 3,353 $51,058 39 nEW ACCOUntinG prOnOUnCEMEntS presentation of financial statements (amendments to iAS 1) On June 16, 2011, the International Accounting Standards Benefits. The revisions include the elimination of the option to defer the recognition of gains and losses, enhancing iFrS 10 Consolidated financial statements IFRS 10 replaces the portion of IAS 27, Consolidated the guidance around measurement of plan assets and and Separate Financial Statements that addresses the defined benefit obligations, streamlining the presentation accounting for consolidated financial statements. It also Board’s (“IASB”) issued amendments to IAS 1, Presentation of changes in assets and liabilities arising from defined includes the issues raised in SIC-12, Consolidation – of Financial Statements. The amendments enhance the benefit plans and introduction of enhanced disclosures Special Purpose Entities. What remains in IAS 27 is limited presentation of other comprehensive income (“OCI”) for defined benefit plans. The amendments are effective to accounting for subsidiaries, jointly controlled entities, in the financial statements, primarily by requiring the for annual periods beginning on or after January 1, 2013. and associates in separate financial statements. IFRS 10 components of OCI to be presented separately for items The Company is currently assessing the impact of the establishes a single control model that applies to all that may be reclassified to the statement of earnings from amendments on its consolidated financial statements. entities (including “special purpose entities” or “structured those that remain in equity. The amendments are effective for annual periods beginning on or after January 1, 2012. The Company is currently assessing the impact of the amendments on its consolidated financial statements. Offsetting financial assets and liabilities In December 2011, the IASB issued amendments to IAS 32 Financial Instruments: Presentation. The amendments are intended to clarify certain aspects of the existing guidance Financial instruments: classification and measurement (“iFrS 9”) IFRS 9 as issued reflects the first phase of the IASB’s work on offsetting financial assets and financial liabilities due to the diversity in application of the requirements on offsetting. The IASB also amended IFRS 7 to require on the replacement of the existing standard for financial information about all recognized financial instruments that instruments (“IAS 39”) and applies to classification are set off in accordance with IAS 32. The amendments and measurement of financial assets and liabilities as also require disclosure of information about recognized defined in IAS 39. The standard is effective for annual financial instruments subject to enforceable master netting periods beginning on or after January 1, 2015. In arrangements and similar agreements even if they are not subsequent phases, the IASB will address classification set off under IAS 32. and measurement of hedge accounting. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of Ag Growth’s financial assets. The Company will quantify the effect in conjunction with the other phases, when issued, to present a comprehensive picture. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2012. However, the new offsetting disclosure requirements are effective for annual periods beginning on or after January 1, 2013 and interim periods within those annual periods. The amendments need entity” as they are now referred to in the new standards, or “variable interest entities” as they are referred to in US GAAP). The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore are required to be consolidated by a parent, compared with the requirements of IAS 27. Under IFRS 10, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. This principle applies to all investees, including structured entities. IFRS 10 is effective for annual periods commencing on or after January 1, 2013. The Company is currently in the process of evaluating the implications of this new standard, if any. iFrS 11 Joint arrangements IFRS 11 replaces IAS 3l, Interests in Joint Ventures and Employee benefits (“iAS 19”) On June 16, 2011, the IASB revised IAS 19, Employee The Company is currently assessing the impact of adopting Contributions by Venturers. IFRS 11 uses some of the terms these amendments on the consolidated financial statements. that were used by IAS 31, but with different meanings. to be provided retrospectively to all comparative periods. SIC-13, Jointly-controlled Entities – Non-monetary Whereas IAS 31 identified three forms of joint ventures (i.e., jointly controlled operations, jointly controlled assets iFrS 12 Disclosure of interests in other entities IFRS 12 includes all of the disclosures that were previously and jointly controlled entities), IFRS 11 addresses only in IAS 27 related to consolidated financial statements, as Deferred tax: recovery of underlying assets (amendments to iAS 12) On December 20, 2010, the IASB issued Deferred Tax: two forms of joint arrangements (joint operations and joint well as all of the disclosures that were previously included Recovery of Underlying Assets (amendments to IAS 12) ventures) where there is joint control. IFRS 11 defines joint in IAS 31 and IAS 28, Investment in Associates. These concerning the determination of deferred tax on investment control as the contractually agreed sharing of control of an disclosures relate to an entity’s interests in subsidiaries, property measured at fair value. The amendments arrangement that exists only when the decisions about the joint arrangements, associates and structured entities. incorporate SIC-21, Income Taxes – Recovery of Revalued relevant activities require the unanimous consent of the A number of new disclosures are also required. One of the Non-Depreciable Assets into IAS 12, Income Taxes for parties sharing control. most significant changes introduced by IFRS 12 is that an non-depreciable assets measured using the revaluation Because IFRS 11 uses the principle of control in IFRS 10 to define joint control, the determination of whether joint entity is now required to disclose the judgments made to model in IAS 16 Property, Plant and Equipment. The aim determine whether it controls another entity. of the amendments is to provide a practical solution for control exists may change. In addition, IFRS 11 removes IFRS 12 is effective for annual periods commencing on the option to account for jointly controlled entities (“JCEs”) or after January 1, 2013. The Company is currently in the using proportionate consolidation. Instead, JCEs that process of evaluating the implications of this new standard, meet the definition of a joint venture must be accounted which will be limited to disclosure requirements for the for using the equity method. For joint operations (which financial statements. includes former jointly controlled operations, jointly controlled assets, and potentially some former JCEs), an entity recognizes its assets, liabilities, revenues and expenses, and/or its relative share of those items, if any. In addition, when specifying the appropriate accounting, IAS 31 focused on the legal form of the entity, whereas IFRS 11 focuses on the nature of the rights and obligations arising from the arrangement. iFrS 13 Fair value measurement IFRS 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to measure the fair value of financial and non-financial assets and liabilities when required or permitted by IFRS. While many • A requirement that deferred tax on non-depreciable of the concepts in IFRS 13 are consistent with current assets, measured using the revaluation model in IAS 16, practice, certain principles, such as the prohibition on should always be measured on a sale basis. IFRS 11 is effective for annual periods commencing on have a significant effect. The disclosure requirements are or after January 1, 2013. The Company is currently in the substantial and could present additional challenges. blockage discounts for all fair value measurements, could process of evaluating the implications of this new standard, if any. The amendments are mandatory for annual periods beginning on or after January 1, 2012, but earlier application is permitted. This amendment is not expected IFRS 13 is effective for annual periods commencing on or to have an impact on the Company. after January 1, 2013 and will be applied prospectively. The Company is currently in the process of evaluating the implications of this new standard. 41 jurisdictions where entities currently find it difficult and subjective to determine the expected manner of recovery for investment property that is measured using the fair value model in IAS 40, Investment Property. IAS 12 has been updated to include: • A rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale; and DiSClOSUrE COntrOlS AnD prOCEDUrES AnD intErnAl COntrOlS Disclosure controls and procedures are designed to provide accuracy and completeness of the acquired operations’ subject to adjustments that have the effect of excluding financial information. The following is the summary (including) amounts, that are included (excluded) in most financial information pertaining to the acquisition that was directly comparable measures calculated and presented in reasonable assurance that all relevant information is included in Ag Growth’s consolidated financial statements accordance with IFRS. Non-IFRS financial measures are not gathered and reported to senior management, including for the twelve months ended December 31, 2011: standardized; therefore, it may not be possible to compare Ag Growth’s Chief Executive Officer and Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure. Management of Ag Growth is responsible for designing internal controls over financial reporting for the Company as defined under National Instrument 52-109 issued by the Canadian Securities Administrators. Management has designed such internal controls over financial reporting, (thousands of dollars) Airlanco (1) Revenue Profit (loss) Current assets (2) Non-current assets (2) Current liabilities (2) Non-current liabilities (2) 2,701 (92) 3,125 9,353 1,039 0 or caused them to be designed under their supervision, (1) Results from October 4, 2011 to December 31, 2011 to provide reasonable assurance regarding the reliability (2) Balance sheets as at December 31, 2011 of financial reporting and the preparation of the financial statements for external purposes in accordance with IFRS. There have been no material changes in Ag Growth’s internal controls over financial reporting that occurred The Company acquired the assets of Airlanco in fiscal in the three month period ended December 31, 2011, these financial measures with other companies’ non-IFRS financial measures having the same or similar businesses. We strongly encourage investors to review our consolidated financial statements and publicly filed reports in their entirety and not to rely on any single financial measure. We use these non-IFRS financial measures in addition to, and in conjunction with, results presented in accordance with IFRS. These non-IFRS financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our IFRS results and the accompanying reconciliations to corresponding IFRS financial measures, may provide a more complete understanding of factors and trends affecting our business. 2011 (see “Acquisitions”). Management has not completed that have materially affected, or are reasonably likely to In the MD&A, we discuss the non-IFRS financial measures, its review of internal controls over financial reporting or materially affect, the Company’s internal controls over including the reasons that we believe that these measures disclosure controls and procedures for this newly acquired financial reporting. operation. Since the acquisition occurred within 365 days of the end of the reporting period, management has limited the scope of design, and subsequent evaluation, of disclosure controls and procedures and internal controls over financial reporting to exclude controls, policies and procedures of this acquisition, as permitted under Section 3.3 of National Instrument 52-109, Certification of Disclosure in Issuer’s Annual and Interim Filings. For the period covered by this MD&A, management has undertaken specific procedures to satisfy itself with respect to the nOn-iFrS MEASUrES In analyzing our results, we supplement our use of financial measures that are calculated and presented in accordance with IFRS, with a number of non-IFRS financial measures including “EBITDA”, “Adjusted EBITDA”, “gross margin”, “funds from operations”, “payout ratio” and “trade sales”. provide useful information regarding our financial condition, results of operations, cash flows and financial position, as applicable and, to the extent material, the additional purposes, if any, for which these measures are used. Reconciliations of non-IFRS financial measures to the most directly comparable IFRS financial measures are contained in the MD&A. A non-IFRS financial measure is a numerical measure of Management believes that the Company’s financial results a company’s historical performance, financial position may provide a more complete understanding of factors or cash flow that excludes (includes) amounts, or is and trends affecting our business and be more meaningful to management, investors, analysts and other interested References to “funds from operations” are to cash current economic conditions and macroeconomic trends parties when certain aspects of our financial results are flow from operating activities before the net change in on the demand for our products, expectations regarding adjusted for the gain (loss) on foreign exchange and other non-cash working capital balances related to operations, pricing for agricultural commodities, our working capital operating expenses and income. This measurement is a stock-based compensation and the non-cash portion of and capital expenditure requirements, capital resources non-IFRS measurement. Management uses the non-IFRS accelerated vesting and death benefits, less maintenance and the payment of dividends. Such forward-looking adjusted financial results and non-IFRS financial measures capital expenditures and adjusted for the gain or loss on statements reflect our current beliefs and are based on to measure and evaluate the performance of the business the sale of property, plant & equipment. Management information currently available to us, including certain key and when discussing results with the Board of Directors, believes that, in addition to cash provided by (used in) expectations and assumptions concerning anticipated analysts, investors, banks and other interested parties. operating activities, funds from operations provide a useful financial performance, business prospects, strategies, supplemental measure in evaluating its performance. product pricing, regulatory developments, tax laws, the References to “EBITDA” are to profit before income taxes, finance costs, accelerated vesting and death benefits, References to “payout ratio” are to dividends declared as a amortization and depreciation. References to “adjusted percentage of funds from operations. EBITDA” are to EBITDA before the gain (loss) on foreign exchange, gains or losses on the sale of property, plant and equipment, expenses related to corporate acquisition activity and other operating expenses. Management believes that, in addition to profit or loss, EBITDA and adjusted EBITDA are useful supplemental measures in evaluating the Company’s performance. Management cautions investors that EBITDA and adjusted EBITDA should not replace profit or loss as indicators of performance, or cash flows from operating, investing, and financing activities as a measure of the Company’s liquidity and cash flows. FOrWArD-lOOkinG StAtEMEntS This MD&A contains forward-looking statements that reflect our expectations regarding the future growth, results of operations, performance, business prospects, and opportunities of the Company. Forward-looking statements may contain such words as “anticipate”, “believe”, “continue”, “could”, “expects”, “intend”, “plans”, “will” or similar expressions suggesting future conditions or events. In particular, the forward looking statements in this MD&A include statements relating to the benefits of the acquisitions of Mepu, Franklin, Tramco and Airlanco (see “Acquisitions”), our business and strategy, including References to “trade sales” are to sales net of the gain or our outlook for our financial and operating performance, loss on foreign exchange. References to “gross margin” growth in sales to developing markets, the benefits of the are to trade sales less cost of sales net of the depreciation expansion of the Company’s grain storage product line and amortization included in cost of sales. Management including the anticipated resolution of start up issues at cautions investors that trade sales should not replace sales our Twister bin plant and the future contribution of that as an indicator of performance. plant to our operating and financial performance, the effect of crop conditions in our market areas, the effect of sufficiency of budgeted capital expenditures in carrying out planned activities, foreign exchange rates and the cost of materials, labour and services. Forward-looking statements involve significant risks and uncertainties. A number of factors could cause actual results to differ materially from results discussed in the forward-looking statements, including changes in international, national and local business conditions, crop yields, crop conditions, seasonality, industry cyclicality, volatility of production costs, commodity prices, the cost and availability of capital, foreign exchange rates, and competition. These risks and uncertainties are described under “Risks and Uncertainties” in this MD&A and in our most recently filed Annual Information Form. We cannot assure readers that actual results will be consistent with these forward-looking statements and we undertake no obligation to update such statements except as expressly required by law. ADDitiOnAl inFOrMAtiOn Additional information relating to Ag Growth, including Ag Growth’s most recent Annual Information Form, is available on SEDAR (www.sedar.com). 43 OCTObER 2010 Franklin was established in 1979 and acquired by AGI in October 2010. DECEmbER 2010 Tramco was founded in 1967, and is based in Wichita, Kansas. Tramco was acquired by AGI in December 2010. OCTObER 2011 In October 2011, AGI acquired Airlanco based in Falls City, NE. It was founded in 2000. 2011 The last 15 years have been dramatic for Ag Growth International, with acquisitions, integration and expansion of our manufacturing facilities. We believe that strong relationships and quality products are the cornerstones to success. FinAnCiAl StAtEMEntS inDEpEnDEnt AUDitOrS’ rEpOrt To the Shareholders of Ag Growth International Inc. AUDitOrS’ rESpOnSiBilitY Our responsibility is to express an opinion on these of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used consolidated financial statements based on our audits. and the reasonableness of accounting estimates made by We conducted our audits in accordance with Canadian management, as well as evaluating the overall presentation generally accepted auditing standards. Those standards of the consolidated financial statements. We have audited the accompanying consolidated financial statements of Ag Growth International Inc., which comprise the consolidated statements of financial position as at December 31, 2011 and 2010 and January 1, 2010, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years ended December 31, 2011 and 2010, and require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. a summary of significant accounting policies and other An audit involves performing procedures to obtain explanatory information. MAnAGEMEnt’S rESpOnSiBilitY FOr thE COnSOliDAtED FinAnCiAl StAtEMEntS Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. OpiniOn In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Ag Growth International Inc. as at December 31, 2011 and 2010 and January 1, 2010, and its financial performance and its cash flows for the years ended December 31, 2011 and 2010 in accordance with International Financial Reporting Standards. Winnipeg, Canada March 13, 2012 Chartered Accountants COnSOliDAtED StAtEMEntS OF FinAnCiAl pOSitiOn (in thousands of Canadian dollars) ASSEtS (note 22) Current assets Cash and cash equivalents (note 15) Cash held in trust (note 7) Restricted cash (notes 6, 7, 16 and 21) Accounts receivable (note 17) Inventory (note 18) Prepaid expenses and other assets (note 21(f)) Income taxes recoverable Derivative instruments (note 27) non-current assets Property, plant and equipment, net (note 9) Goodwill (note 11) Intangible assets, net (note 10) Available-for-sale investment (note 14) Derivative instruments (note 27) Deferred tax asset (note 25) Assets held for sale (notes 9 and 13) total assets As at December 31, 2011 As at December 31, 2010 As at January 1, 2010 6,839 — 2,439 49,691 64,558 2,720 1,506 — 127,753 83,434 65,876 75,510 2,800 — 38,092 265,712 1,101 394,566 34,981 822 1,860 38,535 52,574 7,628 — 4,200 140,600 79,022 62,355 72,345 2,000 — 42,063 257,785 — 398,385 109,094 — — 25,072 39,621 1,772 598 7,652 183,809 37,873 52,187 68,441 2,000 1,848 47,356 209,705 — 393,514 47 COnSOliDAtED StAtEMEntS OF FinAnCiAl pOSitiOn (continued) (in thousands of Canadian dollars) liABilitiES AnD ShArEhOlDErS’ EQUitY Current liabilities Accounts payable and accrued liabilities (note 24 and 29) Customer deposits Dividends payable Acquisition price, transaction and financing costs payable (notes 6 and 7) Income taxes payable Current portion of long-term debt (note 22) Current portion of obligations under finance leases (note 22) Current portion of derivative instruments (note 27) Current portion of share award incentive plan (note 21) Provisions (note 19) non-current liabilities Long-term debt (note 22) Obligations under finance leases (note 22) Convertible unsecured subordinated debentures (note 23) Deferred tax liability (note 25) Share award incentive plan (note 21) total liabilities As at December 31, 2011 As at December 31, 2010 As at January 1, 2010 22,264 8,018 2,509 1,938 — 16 131 1,828 1,495 2,222 40,421 35,824 — 107,202 8,960 — 151,986 192,407 22,623 6,573 2,509 11,994 56 128 432 — 2,003 1,942 48,260 24,518 138 105,140 8,464 1,571 139,831 188,091 12,736 8,340 2,224 1,028 — 16 — — — 1,194 25,538 25,403 — 103,107 2,214 5,857 136,581 162,119 COnSOliDAtED StAtEMEntS OF FinAnCiAl pOSitiOn (continued) (in thousands of Canadian dollars) Shareholders’ equity (note 20) Common shares Accumulated other comprehensive income (loss) Equity component of convertible debentures Contributed surplus Retained earnings total shareholders’ equity total liabilities and shareholders’ equity Commitments and contingencies (note 32) See accompanying notes On behalf of the Board of Directors: As at December 31, 2011 As at December 31, 2010 As at January 1, 2010 151,039 (1,875) 5,105 5,341 42,549 202,159 394,566 151,376 (443) 5,105 6,121 48,135 210,294 398,385 157,279 5,590 5,105 3,859 59,562 231,395 393,514 Bill Lambert Director John R. Brodie, FCA Director 49 COnSOliDAtED StAtEMEntS OF inCOME (in thousands of Canadian dollars, except per share amounts) Years ended December 31 Sales Cost of goods sold (note 8(d)) Gross profit Expenses Selling, general and administrative (note 8(e)) Other operating income (note 8(a)) Finance costs (note 8(c)) Finance expense (income) (note 8(b)) Profit before income taxes Income tax expense (note 25) Current Deferred profit for the year profit per share – basic (note 30) profit per share – diluted (note 30) See accompanying notes 2011 305,932 204,203 101,729 54,826 (100) 12,668 159 67,553 34,176 3,910 5,743 9,653 24,523 1.97 1.95 2010 269,267 163,958 105,309 51,058 (605) 12,484 (2,065) 60,872 44,437 5,627 8,049 13,676 30,761 2.43 2.40 COnSOliDAtED StAtEMEnt OF ChAnGES in ShArEhOlDErS’ EQUitY (in thousands of Canadian dollars) Year ended December 31, 2011 As at January 1, 2011 Profit for the year Other comprehensive income (loss) Conversion of subordinated debentures (note 20) Share-based payment transactions (note 21) Dividends to shareholders (note 20) Common shares 151,376 — — 115 (452) — As at December 31, 2011 151,039 5,105 See accompanying notes Equity component of convertible debentures Contributed surplus 5,105 6,121 — — — — — — — — (780) — 5,341 retained earnings 48,135 24,523 — — — (30,109) 42,549 Cash flow hedge reserve 2,966 — (4,306) — — — Foreign currency reserve (3,409) — 2,286 — — — (1,340) (1,123) Available-for- sale reserve — — 588 — — — 588 total equity 210,294 24,523 (1,432) 115 (1,232) (30,109) 202,159 (in thousands of Canadian dollars) Year ended December 31, 2010 As at January 1, 2010 Profit for the year Other comprehensive loss Share-based payment transactions Common shares purchased under normal course issuer bid Dividends to shareholders As at December 31, 2010 See accompanying notes Common shares 157,279 — — 2,154 (8,057) — 151,376 Equity component of convertible debentures Contributed surplus 5,105 3,859 — — — — — 5,105 — — 2,262 — — 6,121 retained earnings 59,562 30,761 — — (15,334) (26,854) 48,135 Cash flow hedge reserve 5,590 — (2,624) — Foreign currency reserve — — (3,409) — — — 2,966 (3,409) total equity 231,395 30,761 (6,033) 4,416 (23,391) (26,854) 210,294 51 COnSOliDAtED StAtEMEntS OF COMprEhEnSiVE inCOME (in thousands of Canadian dollars) Profit for the year Other comprehensive loss Change in fair value of derivatives designated as cash flow hedges Gains on derivatives designated as cash flow hedges recognized in net earnings in the current period Income tax effect on cash flow hedges Exchange differences on translation of foreign operations Gain on available-for-sale financial assets Income tax effect on available-for-sale financial assets Other comprehensive loss for the year total comprehensive income for the year See accompanying notes Years ended December 31 2011 24,523 (1,556) (4,452) 1,702 2,286 800 (212) (1,432) 23,091 2010 30,761 3,034 (6,692) 1,034 (3,409) — — (6,033) 24,728 COnSOliDAtED StAtEMEntS OF CASh FlOWS (in thousands of Canadian dollars, except per share amounts) OpErAtinG ACtiVitiES Profit before income taxes for the year Add (deduct) items not affecting cash Depreciation of property, plant and equipment Amortization of intangible assets Translation loss (gain) on foreign exchange Non-cash component of interest expense Accelerated vesting Stock-based compensation Loss on sale of property, plant and equipment Net change in non-cash working capital balances related to operations (note 15) Settlement of SAIP obligation Income tax paid Cash provided by operating activities inVEStinG ACtiVitiES Acquisition of property, plant and equipment Acquisition of shares of Tramco, Inc. (note 7), net of cash acquired Acquisition of shares of Mepu Oy, including bank indebtedness assumed (note 7) Acquisition of assets of Franklin Enterprises Ltd. (note 7) Acquisition of assets of Airlanco Inc. (note 6) Transfer to cash held in trust Proceeds from sale of property, plant and equipment Development of intangible assets Transaction and financing costs payable Cash used in investing activities Years ended December 31 2011 2010 34,176 44,437 5,418 3,776 1,793 2,422 — 2,038 (76) 49,547 (14,453) (1,998) (5,217) 27,879 (9,254) (9,930) — — (11,970) (243) 500 (1,471) (433) (32,801) 3,313 3,418 (1,022) 2,274 1,703 6,511 (263) 60,371 (16,307) — (5,063) 39,001 (25,021) (10,163) (12,309) (8,856) — (2,682) 648 — 1,484 (56,899) 53 COnSOliDAtED StAtEMEntS OF CASh FlOWS (continued) (in thousands of Canadian dollars, except per share amounts) Years ended December 31 FinAnCinG ACtiVitiES Repayment of long-term debt Repayment of obligations under finance leases Issuance of long-term debt Dividends paid Purchase of common shares under the normal course issuer bid Purchase of shares in the market under the long-term incentive plan Cash used in financing activities net decrease in cash and cash equivalents during the year Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year interest expense paid See accompanying notes 2011 (319) (439) 10,993 (30,109) — (3,346) (23,220) (28,142) 34,981 6,839 10,259 2010 (89) (135) — (26,568) (23,391) (6,032) (56,215) (74,113) 109,094 34,981 11,694 nOtES tO COnSOliDAtED FinAnCiAl StAtEMEntS December 31, 2011 (in thousands of Canadian dollars, except where otherwise noted and per share data) 1. OrGAniZAtiOn The consolidated financial statements of Ag Growth The first date at which IFRS was applied was owned subsidiaries, Ag Growth Industries Partnership, January 1, 2010 (the “Transition Date”). Note 33 contains AGX Holdings Inc., Ag Growth Holdings Corp., Westfield International Inc. (“Ag Growth Inc.”) for the years ended reconciliations and descriptions of the effect of the Distributing (North Dakota) Inc., Hansen Manufacturing December 31, 2011 and 2010 were authorized for Company’s transition from Canadian generally accepted Corp. (“Hi Roller”), Union Iron Inc. (“Union Iron”), issuance in accordance with a resolution of the directors accounting principles (“GAAP”) to IFRS. It also includes Applegate Trucking Inc., Applegate Livestock Equipment, on March 13, 2012. Ag Growth International Inc. is a listed reconciliations of: the consolidated statements of financial Inc. (“Applegate”), Airlanco Inc. (“Airlanco”), Tramco, company incorporated and domiciled in Canada, whose position as at January 1, 2010 and December 31, 2010; the Inc. (“Tramco”), Tramco Europe Ltd., Euro-Tramco B.V., shares are publicly traded at the Toronto Stock Exchange. change in equity as at January 1, 2010 and December 31, Ag Growth Suomi Oy and Mepu Oy (“Mepu”) as at The registered office is located at 1301 Kenaston Blvd., 2010; and the changes in net income and comprehensive December 31, 2011. Subsidiaries are fully consolidated Winnipeg, Manitoba, Canada. income for the year ended December 31, 2010. from the date of acquisition, it being the date on which 2. OpErAtiOnS Ag Growth conducts business in the grain handling, storage Basis of preparation The consolidated financial statements are presented in and conditioning market. Included in these consolidated financial statements are the accounts of Ag Growth Inc. and all of its subsidiary partnerships and incorporated companies; together, Ag Growth Inc. and its subsidiaries are referred to as “Ag Growth” or the “Company”. 3. SUMMArY OF SiGniFiCAnt ACCOUntinG pOliCiES Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Canadian dollars, which is also the functional currency of the parent company Ag Growth International Inc. All values are rounded to the nearest thousand. They are prepared on the historical cost basis, except for derivative financial instruments, which are measured at fair value. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing an opening IFRS consolidated statement of financial position at January 1, 2010, for the purposes of the transition, except for elected exemptions as described in note 33. principles of consolidation The consolidated financial statements include the accounts of Ag Growth International Inc. and its wholly Ag Growth obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. All intra-company balances, income and expenses and unrealized gains and losses resulting from intra-company transactions are eliminated in full. Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the fair value of the assets given, equity instruments and liabilities incurred or assumed at the date of exchange. Acquisition costs for business combinations are expensed and included in selling, general and administrative expenses. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair values at the date of acquisition. 55 Goodwill is initially measured at cost, being the excess allocated to a new CGU compared to the part remaining in prevailing at the reporting date and their statements of of the cost of the business combination over Ag Growth’s the old organizational structure. 2010 is carried at the amount reported in the consolidated Any goodwill arising on the acquisition of a foreign financial statements prepared under Canadian GAAP as of operation and any fair value adjustments to the carrying share in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Any negative difference is recognized directly in the statement of income. If the fair values of the assets, liabilities and contingent liabilities can only be calculated on a provisional basis, the business combination is recognized using provisional values. Any adjustments resulting from the completion of the measurement process are recognized within 12 months of the date of acquisition (“measurement period”). After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of Ag Growth’s cash-generating units (“CGU”) that are expected to benefit from the synergies of the combination, irrespective of whether other assets and liabilities of the On first-time adoption of IFRS, Ag Growth elected not to apply IFRS 3, Business Combinations retrospectively to acquisitions carried out before January 1, 2010. Accordingly, the goodwill associated with acquisitions carried out prior to the IFRS transition date of January 1, December 31, 2009. Foreign currency translation Each entity in Ag Growth determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded by Ag Growth entities at their respective functional currency rates prevailing at the date of the transaction. acquiree are assigned to those CGUs. Where goodwill forms Monetary items are translated at the functional currency part of a CGU and part of the operating unit is disposed spot rate as of the reporting date. Exchange differences of, the goodwill associated with the operation disposed of from monetary items are recognized in the statement is included in the carrying amount of the operation when of income. Non-monetary items that are not carried at determining the gain or loss on disposal of operation. If the fair value are translated using the exchange rates as at Company reorganizes its reporting structure in a way that the dates of the initial transaction. Non-monetary items changes the composition of one or more CGUs to which measured at fair value in a foreign currency are translated goodwill has been allocated, the goodwill is reallocated using the exchange rates at the date when the fair value to the units affected. Goodwill disposed of or reallocated is determined. income are translated at the monthly rates of exchange. The exchange differences arising on the translation are recognized in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognized in the consolidated statement of income. amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the reporting date. property, plant and equipment Property, plant and equipment is stated at cost, net of any accumulated depreciation and any impairment losses determined. Cost includes the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary and, where relevant, the present value of all dismantling and removal costs. Where major components of property, plant and equipment have different useful lives, the components are recognized and depreciated separately. Ag Growth recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when the cost is incurred and if it is probable that the future economic benefits embodied with the item can be reliably measured. All other repair and maintenance costs are in these cases is measured based on the relative values of the operation disposed of and the portion of the CGU retained, or the relative fair value of the part of a CGU The assets and liabilities of foreign operations are recognized in the consolidated statement of income as an translated into Canadian dollars at the rate of exchange expense when incurred. Depreciation is calculated on a straight-line basis over the leased item, are capitalized at the commencement of the amortization and any accumulated impairment losses. estimated useful lives of the assets as follows: lease at the fair value of the leased property or, if lower, at The useful lives of intangible assets are assessed as either the present value of the minimum lease payments. Lease finite or indefinite. Intangible assets with finite useful lives payments are apportioned between finance charges and are amortized over the useful economic life and assessed reduction of the lease liability so as to achieve a constant for impairment whenever there is an indication that the rate of interest on the remaining balance of the liability. intangible asset may be impaired. The amortization method Finance charges are recognized in finance costs in the and amortization period of an intangible asset with a finite consolidated statement of income. useful life is reviewed at least annually. Changes in the Buildings and building components 20 to 60 years Manufacturing equipment 10 to 20 years Computer hardware 5 years Leasehold improvements Over the lease period Equipment under finance leases 10 years Furniture and fixtures Vehicles 5 to 10 years 4 to 16 years An item of property, plant and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that Ag Growth will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. derecognition of the asset is included in the consolidated Operating lease payments are recognized as an expense statement of income when the asset is derecognized. in the consolidated statement of income on a straight-line The assets’ useful lives and methods of depreciation of assets are reviewed at each financial year-end, and adjusted prospectively, if appropriate. No depreciation is basis over the lease term. Borrowing costs Borrowing costs directly attributable to the acquisition, taken on construction in progress until the asset is placed construction or production of an asset that necessarily in use. Amounts representing direct costs incurred for takes a substantial period of time, which Ag Growth major overhauls are capitalized and depreciated over the considers to be 12 months or more, to get ready for its estimated useful life of the different components replaced. intended use or sale, are capitalized as part of the cost leases The determination of whether an arrangement is, or of the respective assets. All other borrowing costs are expensed in the period they occur. contains, a lease is based on whether fulfillment of the arrangement is dependent on the use of a specific asset or intangible assets Intangible assets acquired separately are measured on assets or the arrangement conveys a right to use the asset. initial recognition at cost. The cost of intangible assets Finance leases, which transfer to Ag Growth substantially all the risks and benefits incidental to ownership of the acquired in a business combination is its fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the consolidated statement of income in the expense category consistent with the function of the intangible assets. Intangible assets with indefinite useful lives, which include brand names, are not amortized, but are tested for impairment annually, either individually or at the CGU level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Internally generated intangible assets are capitalized when the product or process is technically and commercially feasible and Ag Growth has sufficient resources to complete development. The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Expenditures incurred to develop new 57 demos and prototypes are recorded at cost as internally least annually on December 31. The recoverable amount is For assets other than goodwill, an assessment is made at generated intangible assets. Amortization of the internally the higher of an asset’s or CGU’s fair value less costs to sell each reporting date as to whether there is any indication generated intangible assets begins when the development and its value in use. is complete and the asset is available for use and it is amortized over the period of expected future benefit. Amortization is recorded in cost of goods sold. During the period of development, the asset is tested for impairment at least annually. Value in use is determined by discounting estimated future cash flows using a pretax discount rate that reflects the current market assessment of the time value of money and the specific risks of the asset. In determining fair value less costs to sell, recent market transactions are Finite life intangible assets are amortized on a straight-line taken into account, if available. If no such transactions basis over the estimated useful lives of the related assets can be identified, an appropriate valuation model is used. as follows: Patents 8 years Distribution networks 8 to 25 years Demos and prototypes 3 to 10 years The recoverable amount of assets that do not generate independent cash flows is determined based on the CGU to which the asset belongs. Ag Growth bases its impairment calculation on detailed Inventory order backlog 3 to 6 months budgets and forecast calculations that are prepared Software 8 years separately for each of Ag Growth’s CGUs to which the Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. For periods after five years, a terminal value approach is used. and are recognized in the statement of income when the An impairment loss is recognized in the consolidated asset is derecognized. impairment of non-financial assets Ag Growth assesses at each reporting date whether there is an indication that an asset may be impaired. If such an indication exists, or when annual testing for an asset is required, Ag Growth estimates the asset’s recoverable amount. The recoverable amount of goodwill as well as intangible assets not yet available for use is estimated at statement of income if an asset’s carrying amount or that of the CGU to which it is allocated is higher than its recoverable amount. Impairment losses of CGUs are first charged against the carrying value of the goodwill balance included in the CGU and then against the value of the other assets, in proportion to their carrying amount. In the consolidated statement of income, the impairment losses are recognized in those expense categories consistent with the function of the impaired asset. that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, Ag Growth estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset or CGU in prior years. Such a reversal is recognized in the consolidated statement of income. Goodwill is tested for impairment annually as at December 31 and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. Intangible assets with indefinite useful lives are tested for impairment annually as at December 31, either individually or at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired. Cash and cash equivalents All highly liquid temporary cash investments with an receivables or (iii) available-for-sale, and its financial Derivatives embedded in host contracts are accounted for liabilities as either (i) financial liabilities at fair value as separate derivatives and recorded at fair value if their original maturity of three months or less when purchased through profit or loss or (ii) other financial liabilities. economic characteristics and risks are not closely related are considered to be cash equivalents. For the purpose of Derivatives are designated as hedging instruments in an to those of the host contracts and the host contracts the consolidated statement of cash flows, cash and cash effective hedge, as appropriate. Appropriate classification are not held-for-trading. These embedded derivatives equivalents consist of cash and money market funds, net of of financial assets and liabilities is determined at the are measured at fair value with changes in fair value outstanding bank overdrafts. time of initial recognition or when reclassified in the recognized in the consolidated statement of income. inventory Inventory is comprised of raw materials and finished consolidated statement of financial position. Reassessment only occurs if there is a change in the terms All financial instruments are recognized initially at fair value of the contract that significantly modifies the cash flows that would otherwise be required. goods. Inventory is valued at the lower of cost and net plus, in the case of investments and liabilities not at fair realizable value, using a first-in, first-out basis. For value through profit or loss, directly attributable transaction Loans and receivables finished goods, costs include all direct costs incurred in costs. Financial instruments are recognized on the trade Loans and receivables are non-derivative financial assets production, including direct labour and materials, freight, date, which is the date on which Ag Growth commits to with fixed or determinable payments that are not quoted directly attributable manufacturing overhead costs based purchase or sell the asset. on normal operating capacity and property, plant and equipment depreciation. Financial assets at fair value through profit or loss (“FVTPL”) Inventories are written down to net realizable value when Financial assets at FVTPL include financial assets held- the cost of inventories is estimated to be unrecoverable for-trading and financial assets designated upon initial due to obsolescence, damage or declining selling prices. recognition at FVTPL. Financial assets are classified as Net realizable value is the estimated selling price in the held-for-trading if they are acquired for the purpose of ordinary course of business, less estimated costs of selling or repurchasing in the near term. This category completion and the estimated costs necessary to make includes derivative financial instruments entered into in an active market. Assets in this category include receivables and cash and cash equivalents. Loans and receivables are initially recognized at fair value plus transaction costs. They are subsequently measured at amortized cost using the effective interest method less any impairment. The effective interest amortization is included in finance income in the consolidated statement of income. The losses arising from impairment are recognized in the consolidated statement of income in finance costs. the sale. When the circumstances that previously caused that are not designated as hedging instruments in hedge Available-for-sale financial investments inventories to be written down below cost no longer exist, relationships as defined by IAS 39. or when there is clear evidence of an increase in selling prices, the amount of the write-down previously recorded is reversed. Financial instruments Financial assets and liabilities Ag Growth classifies its financial assets as (i) financial assets at fair value through profit or loss, (ii) loans and Financial assets at FVTPL are carried in the consolidated statement of financial position at fair value with changes in the fair value recognized in finance income or finance costs in the consolidated statement of income. Ag Growth has currently not designated any financial assets upon initial recognition as FVTPL. Available-for-sale financial investments include equity and debt securities. Equity investments classified as available-for-sale are those which are neither classified as held-for-trading nor designated at FVTPL. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. 59 After initial measurement, available-for-sale financial has occurred after the initial recognition of the asset (an Loans and receivables, together with the associated investments are subsequently measured at fair value incurred “loss event”) and that loss event has an impact on allowance, are written off when there is no realistic with unrealized gains or losses recognized as other the estimated future cash flows of the financial asset or the prospect of future recovery. If, in a subsequent year, comprehensive income in the available-for-sale reserve group of financial assets that can be reliably estimated. the amount of the estimated impairment loss increases until the investment is derecognized, at which time the cumulative gain or loss is recognized in other operating income, or determined to be impaired, at which time the cumulative loss is reclassified to the consolidated statement of income in finance costs and removed from the available-for-sale reserve. For financial assets carried at amortized cost, Ag Growth first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If Ag Growth determines that no objective evidence of impairment exists or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to finance costs in the consolidated statement of income. For a financial asset reclassified out of the available-for- for an individually assessed financial asset, it includes For available-for-sale financial investments, Ag Growth sale category, any previous gain or loss on that asset that the asset in a group of financial assets with similar assesses at each reporting date whether there is objective has been recognized in equity is amortized to profit or loss credit risk characteristics and collectively assesses them evidence that an investment or a group of investments over the remaining life of the investment using the effective for impairment. Assets that are individually assessed is impaired. In the case of equity investments classified interest method. Any difference between the new amortized for impairment and for which an impairment loss is, or as available-for-sale, objective evidence would include cost and the expected cash flows is also amortized over continues to be, recognized are not included in a collective a significant or prolonged decline in the fair value of the the remaining life of the asset using the effective interest assessment of impairment. method. If the asset is subsequently determined to be impaired, then the amount recorded in equity is reclassified to the consolidated statement of income. Derecognition If there is objective evidence that an impairment loss has occurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows. The present A financial asset is derecognized when the rights to receive value of the estimated future cash flows is discounted at cash flows from the asset have expired or when Ag Growth the financial asset’s original effective interest rate. has transferred its rights to receive cash flows from the asset. Impairment of financial assets The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. Interest income continues to Ag Growth assesses at each reporting date whether there be accrued on the reduced carrying amount and is accrued is any objective evidence that a financial asset or a group using the rate of interest used to discount the future cash of financial assets is impaired. A financial asset is deemed flows for the purpose of measuring the impairment loss. to be impaired if, and only if, there is objective evidence The interest income is recorded as part of finance income of impairment as a result of one or more events that in the consolidated statement of income. investment below its cost. “Significant” is evaluated against the original cost of the investment and “prolonged” against the period in which the fair value has been below its original cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognized in the statement of income is removed from other comprehensive income and recognized in the consolidated statement of income. Impairment losses on equity investments are not reversed through the consolidated statement of income; increases in their fair value after impairment are recognized directly in other comprehensive income. In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same criteria as financial assets carried at amortized cost. However, the amount recorded for impairment is the instruments and amortized using the effective interest value. Derivatives are carried as financial assets when the the cumulative loss measured as the difference between rate method. The effective interest expense is included in fair value is positive and as financial liabilities when the fair the amortized cost and the current fair value, less any finance costs in the consolidated statement of income. value is negative. impairment loss on that investment previously recognized in the statement of income. If, in a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income. Financial liabilities at FVTPL Financial liabilities at FVTPL include financial liabilities held-for-trading and financial liabilities designated upon initial recognition at FVTPL. Financial liabilities are classified as held-for-trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Gains or losses on liabilities held-for-trading are recognized in the statement of income. Derecognition Ag Growth analyzes all of its contracts, of both a financial A financial liability is derecognized when the obligation and non-financial nature, to identify the existence of under the liability is discharged or cancelled or expires. any “embedded” derivatives. Embedded derivatives are When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a accounted for separately from the host contract at the inception date when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value. derecognition of the original liability and the recognition of Any gains or losses arising from changes in the fair value a new liability, and the difference in the respective carrying of derivatives are recorded directly in the consolidated amounts is recognized in the consolidated statement statement of income, except for the effective portion of income. Interest income of cash flow hedges, which is recognized in other comprehensive income. For all financial instruments measured at amortized cost, For the purpose of hedge accounting, hedges are interest income or expense is recorded using the effective classified as: interest method, which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of Ag Growth has not designated any financial liabilities upon the financial asset or liability. Interest income is included in initial recognition as FVTPL. finance income in the consolidated statement of income. Other financial liabilities Derivative instruments and hedge accounting Financial liabilities are measured at amortized cost using Ag Growth uses derivative financial instruments such as the effective interest rate method. Financial liabilities forward currency contracts and interest rate swaps to include long-term debt issued, which is initially measured hedge its foreign currency risk and interest rate risk. Such at fair value, which is the consideration received, net of derivative financial instruments are initially recognized transaction costs incurred. Transaction costs related to the at fair value on the date on which a derivative contract long-term debt instruments are included in the value of is entered into and are subsequently remeasured at fair • Fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (except for foreign currency risk). • Cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognized firm commitment. At the inception of a hedge relationship, Ag Growth formally designates and documents the hedge relationship 61 to which Ag Growth wishes to apply hedge accounting If the forecast transaction or firm commitment is no longer techniques that are recognized by market participants. and the risk management objective and strategy for expected to occur, the cumulative gain or loss previously Such techniques may include using recent arm’s length undertaking the hedge. The documentation includes recognized in equity is transferred to the consolidated market transactions, reference to the current fair value identification of the hedging instrument, the hedged item statement of income. If the hedging instrument expires or of another instrument that is substantially the same, or transaction, the nature of the risk being hedged and is sold, terminated or exercised without replacement or discounted cash flow analysis or other valuation models. how the entity will assess the effectiveness of changes rollover, or if its designation as a hedge is revoked, any in the hedging instrument’s fair value in offsetting the cumulative gain or loss previously recognized in other exposure to changes in the cash flows attributable to comprehensive income remains in other comprehensive the hedged risk. Such hedges are expected to be highly income until the forecast transaction or firm commitment effective in achieving offsetting changes in cash flows and affects profit or loss. provisions Provisions are recognized when Ag Growth has a present obligation, legal or constructive, as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation Ag Growth uses primarily forward currency contracts as and a reliable estimate can be made of the amount of hedges of its exposure to foreign currency risk in forecast the obligation. Where Ag Growth expects some or all of a transactions and firm commitments. provision to be reimbursed, for example under an insurance are assessed on an ongoing basis to determine whether they have been highly effective throughout the financial reporting periods for which they were designated. Hedges that meet the strict criteria for hedge accounting are accounted for as follows: Cash flow hedges Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position The effective portion of the gain or loss on the hedging if, and only if, there is a currently enforceable legal right to instrument is recognized directly as other comprehensive offset the recognized amounts and there is an intention to income in the cash flow hedge reserve, while any settle on a net basis, or to realize the assets and settle the ineffective portion is recognized immediately in the liabilities simultaneously. consolidated statement of income in other operating income or expenses. Amounts recognized as other comprehensive income are transferred to the consolidated statement of income when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognized or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognized as other comprehensive income are transferred to the initial carrying amount of the nonfinancial asset or liability. Fair value of financial instruments Fair value is the estimated amount that Ag Growth would pay or receive to dispose of these contracts in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices, without any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of income, net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. Warranty provisions Provisions for warranty-related costs are recognized when the product is sold or service provided. Initial recognition is based on historical experience. The initial estimate of warranty-related costs is revised quarterly. profit per share The computation of profit per share is based on the weighted average number of shares outstanding during the period. Diluted profit per share is computed in a similar In transactions involving the sale of specific customer • The usual payment terms apply. way to basic profit per share except that the weighted products, Ag Growth applies layaway sales accounting. average shares outstanding are increased to include Under layaway sales, Ag Growth recognizes revenue prior additional shares assuming the exercise of share options, to the product being shipped, provided the following criteria share appreciation rights and convertible debt options, are met as of the reporting date: if dilutive. Construction contracts Ag Growth from time to time enters into arrangements with its customers that are considered construction contracts. These contracts (or a combination of contracts) revenue recognition Revenue is recognized to the extent that it is probable this implies the goods have been produced to the or a combination of assets that are closely interrelated or specifications of the customer and Ag Growth has interdependent in terms of their design, technology and that the economic benefits will flow to Ag Growth and the assessed, through its quality control processes, that the function or their ultimate purpose or use. • The goods are ready for delivery to the customer; are specifically negotiated for the construction of an asset revenue can be reliably measured, regardless of when the goods comply with the specifications; • A deposit of more than 80% of the total contract value If the outcome of such a contract can be reliably measured, for the respective goods has been received; revenue associated with the construction contract is Ag Growth principally operates fixed price contracts. payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. Ag Growth assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. Ag Growth has • The goods are specifically identified for the customer in Ag Growth’s inventory tracking system; and concluded that it is acting as a principal in all of its revenue • Ag Growth does not have any other obligation than arrangements. The following specific recognition criteria to ship the product, or to store the product until the must also be met before revenue is recognized: customer picks it up. Sale of goods Bill and hold Revenue from the sale of goods is in general recognized Ag Growth applies bill and hold sales accounting. Under bill when significant risks and rewards of ownership and hold sales, Ag Growth recognizes revenue when the are transferred to the customer. Ag Growth generally buyer takes title, provided the following criteria are met as recognizes revenue when products are shipped, free on of the reporting date: • It is probable that delivery will be made; board shipping point; the customer takes ownership and assumes risk of loss; collection of the related receivable is probable; persuasive evidence of an arrangement exists; and, the sales price is fixed or determinable. Customer deposits are recorded as a current liability when cash is received from the customer and recognized as revenue at • The buyer specifically acknowledges the deferred the time product is shipped, as noted above. delivery instructions; and recognized by reference to the stage of completion of the contract activity at period end (the percentage of completion method). The outcome of a construction contract can be estimated reliably when: (i) the total contract revenue can be measured reliably; (ii) it is probable that the economic benefits associated with the contract will flow to the entity; (iii) the costs to complete the contract and the stage of completion can be measured reliably; and (iv) the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates. When the outcome of a construction contract cannot be of costs incurred that are expected to be recoverable. In applying the percentage of completion method, revenue 63 • The item is on hand, identified and ready for delivery to estimated reliably (principally during early stages of a the buyer at the time the sale is recognized; contract), contract revenue is recognized only to the extent recognized corresponds to the total contract revenue • Where the deferred tax liability arises from the initial Deferred tax items are recognized in correlation to the (as defined above) multiplied by the actual completion recognition of goodwill or of an asset or liability in a underlying transaction either in the income statement, rate based on the proportion of total contract costs (as transaction that is not a business combination and, other comprehensive income or directly in equity. defined above) incurred to date and the estimated costs at the time of the transaction, affects neither the to complete. accounting profit nor the taxable profit or loss. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to offset current tax assets income taxes Ag Growth and its subsidiaries are generally taxable under • In respect of taxable temporary differences associated against current income tax liabilities and the deferred with investments in subsidiaries, where the timing of the taxes relate to the same taxable entity and the same the statutes of their country of incorporation. reversal of the temporary differences can be controlled taxation authority. Current income tax assets and liabilities for the current and prior period are measured at the amount expected and it is probable that the temporary differences will not reverse in the foreseeable future. Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition to be recovered from or paid to the taxation authorities. Deferred tax assets are recognized for all deductible at that date, would be recognized subsequently if The tax rates and tax laws used to compute the amount temporary differences, carryforward of unused tax credits information about facts and circumstances changed. are those that are enacted or substantively enacted at the and unused tax losses, to the extent that it is probable that The adjustment would either be treated as a reduction reporting date in the countries where Ag Growth operates taxable profit will be available against which the deductible to goodwill if it occurred during the measurement period and generates taxable income. Current income tax relating temporary differences and the carryforward of unused tax or in profit or loss, when it occurs subsequent to the to items recognized directly in equity is recognized in credits and unused tax losses can be utilized. measurement period. equity and not in the consolidated statement of income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. The carrying amount of deferred tax assets is reviewed Sales tax at each reporting date and reduced to the extent that it Revenues, expenses and assets are recognized net of the is no longer probable that sufficient taxable profit will be amount of sales tax, except where the sales tax incurred available to allow all or part of the deferred tax asset to be on a purchase of assets or services is not recoverable utilized. Unrecognized deferred tax assets are reassessed from the taxation authority, in which case the sales tax is Ag Growth follows the liability method of accounting at each reporting date and are recognized to the extent recognized as part of the cost of acquisition of the asset for deferred taxes. Under this method, income tax that it has become probable that future taxable profits will or as part of the expense item as applicable and where liabilities and assets are recognized for the estimated tax allow the deferred tax asset to be recovered. Deferred tax receivables and payables are stated with the amount of consequences attributable to the temporary differences assets and liabilities are measured at the tax rates that are sales tax included. between the carrying value of the assets and liabilities on expected to apply in the year when the asset is realized the financial statements and their respective tax bases. or the liability is settled, based on tax rates (and tax laws) Deferred tax liabilities are recognized for all taxable temporary differences, except: that have been enacted or substantively enacted at the reporting date. The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the consolidated statement of financial position. Share-based compensation plans Employees of Ag Growth may receive remuneration in surplus are reversed and credited to shareholders’ equity. liability. The liability is remeasured to fair value at each The amount of cash, if any, received from participants is reporting date up to and including the settlement date, the form of share-based payment transactions, whereby also credited to shareholders’ equity. with changes in fair value recognized in the consolidated employees render services and receive consideration in the form of equity instruments (equity-settled transactions, long-term incentive plan and directors deferred compensation plan) or cash (cash-settled transactions, share award incentive plan). In situations where equity instruments are issued and some or all of the goods or services received by the entity as consideration cannot be specifically identified, the unidentified goods or services received are measured as the difference between the fair value of the share-based payment transaction and the fair value of any identifiable goods or services received at the grant date and are capitalized or expensed as appropriate. Equity-settled transactions The cost of equity-settled transactions is recognized, together with a corresponding increase in other capital reserves, in equity, over the period in which the performance and/or service conditions are fulfilled. Where the terms of an equity-settled transaction award are modified, the minimum expense recognized is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense statement of income in the line of the function the respective employee is engaged in. post-retirement benefit plans Ag Growth contributes to retirement savings plans subject is recognized for any modification that increases the total to maximum limits per employee. Ag Growth accounts for fair value of the share-based payment transaction, or is such defined contributions as an expense in the period otherwise beneficial to the employee as measured at the in which the contributions are required to be made. date of modification. Where an equity-settled award is cancelled, it is treated as if it vested on the date of cancellation and any expense not yet recognized for the award (being the total expense as calculated at the grant date) is recognized immediately. This includes any award where vesting conditions within the control of either the Company or the employee are not met. However, if a new award is substituted for the Ag Growth does not have any defined benefit plans. Certain of Ag Growth’s plans classify as multi-employer plans and would ultimately provide the employee a defined benefit pension. However, based upon the evaluation of the available information, Ag Growth is not required to account for the plans in accordance with the defined benefit accounting rules, and accounts for such plans as it does defined contribution plans. cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new research and development expenses Research expenses, net of related tax credits, are charged The cumulative expense recognized for equity-settled awards are treated as if they were a modification of the to the consolidated statement of income in the period they transactions at each reporting date until the vesting period original award. reflects the extent to which the vesting period has expired and Ag Growth’s best estimate of the number of the shares that will ultimately vest. The expense or credit recognized for a period represents the movement in cumulative expense recognized as at the beginning and end of that period and is recognized in the consolidated statement of income in the respective function line. When options and other share-based compensation awards are exercised or exchanged, the amounts previously credited to contributed The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share. Cash-settled transactions The cost of cash-settled transactions is measured initially at fair value at the grant date using the Black-Scholes model (note 21). This fair value is expensed over the period until the vesting date, with recognition of a corresponding are incurred. Development costs are charged to operations in the period of the expenditure unless they satisfy the condition for recognition as an internally generated intangible asset. Government grants Government grants are recognized at fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. Where the grants relate to an asset, the fair value is credited to the 65 4. SiGniFiCAnt ACCOUntinG JUDGMEntS, EStiMAtES AnD ASSUMptiOnS The preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of cost of the asset and is released to the income statement concerning the future and other key sources of estimation evaluate goodwill and other non-financial assets could over the expected useful life in a consistent manner with uncertainty at the reporting date that have a significant risk result in a material change to the results of operations. the depreciation method for the relevant assets. of causing a material adjustment to the carrying amounts The key assumptions used to determine the recoverable investment tax credits Federal and provincial investment tax credits are accounted of assets and liabilities within the next financial year are amount for the different CGUs are further explained in described below. note 12. for as a reduction of the cost of the related assets or expenditures in the year in which the credits are earned Construction contracts The percentage of completion and the revenue to recognize Development costs Development costs are capitalized in accordance with the and when there is reasonable assurance that the credits are determined on the basis of estimates. Consequently, accounting policy described in note 3. Initial capitalization can be used to recover taxes. Ag Growth has implemented an internal financial budgeting of costs is based on management’s judgment that technical and reporting system. In particular, Ag Growth reviews and economical feasibility is confirmed, usually when a the estimates of contract revenue and contract costs on a project has reached a defined milestone according to an quarterly basis. established project management model. assets, liabilities, income, expenses and the disclosure or fair value less cost to sell calculations that use a impairment of non-financial assets Ag Growth’s impairment test is based on value in use Useful lives of key property, plant and equipment and intangible assets The depreciation method and useful lives reflect the of contingent liabilities. The estimates and related discounted cash flow model. The cash flows are derived pattern in which management expects the asset’s future assumptions are based on previous experience and other from the forecast for the next five years and do not include economic benefits to be consumed by Ag Growth. Refer to factors considered reasonable under the circumstances, the restructuring activities that Ag Growth is not yet committed note 3 for the estimated useful lives. results of which form the basis of making the assumptions to or significant future investments that will enhance about carrying values of assets and liabilities that are not the asset’s performance of the CGU being tested. These readily apparent from other sources. However, uncertainty calculations require the use of estimates and forecasts about these assumptions and estimates could result in of future cash flows. Qualitative factors, including market outcomes that require a material adjustment to the carrying presence and trends, strength of customer relationships, amount of the asset or liability affected in future periods. strength of local management, strength of debt and capital The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The key assumptions markets, and degree of variability in cash flows, as well as other factors, are considered when making assumptions with regard to future cash flows and the appropriate discount rate. The recoverable amount is most sensitive to the discount rate as well as the forecasted margins and growth rate used for extrapolation purposes. A change in any of the significant assumptions or estimates used to Fair value of financial instruments Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flow models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. Share-based payments Ag Growth measures the cost of equity-settled share-based the respective company’s domicile. As Ag Growth assesses applicable at a future date. The Company intends to adopt the probability for a litigation and subsequent cash outflow those standards when they become effective. payment transactions with employees by reference to the with respect to taxes as remote, no contingent liability has fair value of equity instruments at the grant date, whereas been recognized. Deferred tax assets are recognized for the fair value of cash-settled share-based payments all unused tax losses to the extent that it is probable that is remeasured at every reporting date. Estimating fair taxable profit will be available against which the losses value for share-based payments requires determining can be utilized. Significant management judgment is the most appropriate valuation model for a grant of required to determine the amount of deferred tax assets these instruments, which is dependent on the terms and that can be recognized, based upon the likely timing and conditions of the grant. This also requires determining the the level of future taxable profits together with future tax most appropriate inputs to the valuation model including planning strategies. the expected life of the option, volatility and dividend yield. taxes Uncertainties exist with respect to the interpretation of Acquisition accounting For acquisition accounting purposes, all identifiable assets, complex tax regulations, changes in tax laws and the combination are recognized at fair value at the date of amount and timing of future taxable income. Given the acquisition. Estimates are used to calculate the fair value wide range of international business relationships and the of these assets and liabilities as of the date of acquisition. long-term nature and complexity of existing contractual Contingent consideration resulting from business agreements, differences arising between the actual results combinations is valued at fair value at the acquisition date and the assumptions made, or future changes to such as part of the business combination. Where the contingent assumptions, could necessitate future adjustments to consideration meets the definition of a derivative and, taxable income and expenses already recorded. Ag Growth thus, a financial liability, it is subsequently remeasured establishes provisions, based on reasonable estimates, to fair value at each reporting date. The determination of for possible consequences of audits by the tax authorities the fair value is based on discounted cash flows. The key of the respective countries in which it operates. The assumptions take into consideration the probability of amount of such provisions is based on various factors, meeting each performance target and the discount factor. presentation of financial statements (amendments to iAS 1) On June 16, 2011, the IASB issued amendments to IAS 1, Presentation of Financial Statements. The amendments enhance the presentation of other comprehensive income (“OCI”) in the financial statements, primarily by requiring the components of OCI to be presented separately for items that may be reclassified to the statement of earnings from those that remain in equity. The amendments are effective for annual periods beginning on or after January 1, 2012. The Company is currently assessing the impact of the Financial instruments: classification and measurement (“iFrS 9”) IFRS 9 as issued reflects the first phase of the International Accounting Standards Board’s (“IASB”) work on the replacement of the existing standard for financial instruments (“IAS 39”) and applies to classification and measurement of financial assets and liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after January 1, 2015. In subsequent phases, the IASB will address classification and measurement of hedge accounting. The adoption of the first phase of IFRS 9 will have an effect on the liabilities and contingent liabilities acquired in a business amendments on its consolidated financial statements. such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. 5. StAnDArDS iSSUED BUt nOt YEt EFFECtiVE Standards issued but not yet effective up to the date of classification and measurement of Ag Growth’s financial assets. The Company will quantify the effect in conjunction issuance of the Company’s financial statements are listed with the other phases, when issued, to present a Such differences of interpretation may arise on a wide below. This listing is of standards and interpretations comprehensive picture. variety of issues, depending on the conditions prevailing in issued, which the Company reasonably expects to be 67 Employee benefits (“iAS 19”) On June 16, 2011, the IASB revised IAS 19, Employee periods. The Corporation is currently assessing the impact SIC-13, Jointly-controlled Entities – Non-monetary of adopting these amendments on the consolidated Contributions by Venturers. IFRS 11 uses some of the terms Benefits. The revisions include the elimination of the option financial statements. to defer the recognition of gains and losses, enhancing the guidance around measurement of plan assets and defined benefit obligations, streamlining the presentation of changes in assets and liabilities arising from defined benefit plans and introduction of enhanced disclosures for defined benefit plans. The amendments are effective for annual periods beginning on or after January 1, 2013. The Company is currently assessing the impact of the amendments on its consolidated financial statements. iFrS 10 Consolidated financial statements IFRS 10 replaces the portion of IAS 27, Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12, Consolidation – Special Purpose Entities. What remains in IAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. IFRS 10 establishes a single control model that applies to all entities that were used by IAS 31, but with different meanings. Whereas IAS 31 identified three forms of joint ventures (i.e., jointly controlled operations, jointly controlled assets and jointly controlled entities), IFRS 11 addresses only two forms of joint arrangements (joint operations and joint ventures) where there is joint control. IFRS 11 defines joint control as the contractually agreed sharing of control of an arrangement that exists only when the decisions about the relevant activities require the unanimous consent of the parties sharing control. Offsetting Financial Assets and liabilities In December 2011, the IASB issued amendments to IAS 32 (including “special purpose entities” or “structured entity” as Because IFRS 11 uses the principle of control in IFRS 10 they are now referred to in the new standards, or “variable to define joint control, the determination of whether joint Financial Instruments: Presentation. The amendments are interest entities” as they are referred to in US GAAP). The control exists may change. In addition, IFRS 11 removes intended to clarify certain aspects of the existing guidance changes introduced by IFRS 10 will require management to the option to account for jointly controlled entities (“JCEs”) on offsetting financial assets and financial liabilities exercise significant judgment to determine which entities are using proportionate consolidation. Instead, JCEs that due to the diversity in application of the requirements controlled, and therefore are required to be consolidated by meet the definition of a joint venture must be accounted on offsetting. The IASB also amended IFRS 7 to require a parent, compared with the requirements of IAS 27. Under for using the equity method. For joint operations (which information about all recognized financial instruments that IFRS 10, an investor controls an investee when it is exposed, includes former jointly controlled operations, jointly are set off in accordance with IAS 32. The amendments or has rights, to variable returns from its involvement with controlled assets, and potentially some former JCEs), also require disclosure of information about recognized the investee and has the ability to affect those returns an entity recognizes its assets, liabilities, revenues and financial instruments subject to enforceable master netting through its power over the investee. This principle applies to expenses, and/or its relative share of those items, if any. arrangements and similar agreements even if they are not all investees, including structured entities. In addition, when specifying the appropriate accounting, set off under IAS 32. IFRS 10 is effective for annual periods commencing on The amendments to IAS 32 are effective for annual periods or after January 1, 2013. The Company is currently in beginning on or after January 1, 2012. However, the new the process of evaluating the implications of this new offsetting disclosure requirements are effective for annual standard, if any. periods beginning on or after January 1, 2013 and interim periods within those annual periods. The amendments need to be provided retrospectively to all comparative iFrS 11 Joint Arrangements IFRS 11 replaces IAS 3l, Interests in Joint Ventures and IAS 31 focused on the legal form of the entity, whereas IFRS 11 focuses on the nature of the rights and obligations arising from the arrangement. IFRS 11 is effective for annual periods commencing on or after January 1, 2013. The Company is currently in the process of evaluating the implications of this new standard, if any. iFrS 12 Disclosure of interests in other entities IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as Deferred tax: recovery of underlying assets (amendments to iAS 12) On December 20, 2010, the IASB issued Deferred Tax: 6. BUSinESS COMBinAtiOnS 2011 (a) Airlanco inc. (“Airlanco”) Effective October 4, 2011, the Company acquired well as all of the disclosures that were previously included Recovery of Underlying Assets (amendments to IAS 12) substantially all of the operating assets of Airlanco, in IAS 31 and IAS 28, Investment in Associates. These concerning the determination of deferred tax on investment a manufacturer of grain drying systems. The Company disclosures relate to an entity’s interests in subsidiaries, property measured at fair value. The amendments acquired Airlanco to expand its catalogue of aeration and joint arrangements, associates and structured entities. incorporate SIC-21, Income Taxes – Recovery of Revalued dust collection products. A number of new disclosures are also required. One of the Non-Depreciable Assets into IAS 12, Income Taxes for most significant changes introduced by IFRS 12 is that an non-depreciable assets measured using the revaluation entity is now required to disclose the judgments made to model in IAS 16 Property, Plant and Equipment. The aim determine whether it controls another entity. of the amendments is to provide a practical solution for IFRS 12 is effective for annual periods commencing on or after January 1, 2013. The Company is currently in the process of evaluating the implications of this new standard, which will be limited to disclosure requirements for the financial statements. iFrS 13 Fair Value Measurement IFRS 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to measure the fair value of financial and non-financial assets and jurisdictions where entities currently find it difficult and subjective to determine the expected manner of recovery for investment property that is measured using the fair value model in IAS 40, Investment Property. IAS 12 has been updated to include: • A rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale; and liabilities when required or permitted by IFRS. While many • A requirement that deferred tax on non-depreciable The purchase has been accounted for by the acquisition method with the results of Airlanco’s operations included in the Company’s net earnings from the date of acquisition. The assets and liabilities of Airlanco on the date of acquisition have been recorded in the consolidated financial statements at their estimated fair values as follows: Accounts receivable Inventory Prepaid expenses and other Property, plant and equipment Intangible assets Distribution network of the concepts in IFRS 13 are consistent with current assets, measured using the revaluation model in IAS 16, Brand name practice, certain principles, such as the prohibition on should always be measured on a sale basis. blockage discounts for all fair value measurements, could have a significant effect. The disclosure requirements are substantial and could present additional challenges. The amendments are mandatory for annual periods beginning on or after January 1, 2012, but earlier application is permitted. This amendment is not expected IFRS 13 is effective for annual periods commencing on or to have an impact on the Company. Order backlog Patents Goodwill Accounts payable and accrued liabilities Customer deposits after January 1, 2013 and will be applied prospectively. The Company is currently in the process of evaluating the implications of this new standard. $ 1,549 2,134 126 1,747 3,090 1,608 21 4 3,087 (1,192) (204) 11,970 69 The allocation of the consideration transferred to acquired assets and liabilities is preliminary, utilizing information available at the time the consolidated financial statements 7. BUSinESS COMBinAtiOnS 2010 (a) Mepu Effective April 29, 2010, the Company acquired 100% of were prepared, and the final allocation of the consideration the outstanding shares of Mepu, a manufacturer of grain transferred may change when more information drying systems. The acquisition of Mepu provides the becomes available. The goodwill of $3,087 comprises the value of expected synergies arising from the acquisition and the values included in the workforce of the new subsidiary. The Company with a complementary product line, distribution in a region where the Company previously had only limited representation and a corporate footprint near the growth markets of Russia and Eastern Europe. goodwill balance is allocated to the Airlanco CGU and is The purchase has been accounted for by the aquisition expected to be deductible for tax purposes. From the date of acquisition, Airlanco has contributed $2,701 of revenue and a net loss before tax of $92 to the 2011 results of the company. If the acquisition had taken place as at January 1, 2011, revenue and profit from continuing operations would have increased by $9,766 and $2,088, respectively. method with the results of Mepu’s operations included in the Company’s net earnings from the date of acquisition. The assets and liabilities of Mepu as at the date of acquisition have been recorded in the consolidated financial statements at their fair values as follows: Accounts receivable Inventory The consideration transferred of $11,970 was paid in cash. Prepaid expenses and other The impacts on the cash flow on the acquisition of Airlanco Deferred tax asset are as follows: Transaction costs of the acquisition Purchase consideration transferred net cash flow on acquisition $ 160 11,970 12,130 As at December 31, 2011, the Company had restricted cash of $508 relating to the acquisition of Airlanco and $91 of transaction costs payable included in acquisition price, transaction and financing costs payable. Property, plant and equipment Intangible assets Distribution network Brand name Order backlog Goodwill Bank indebtedness Long-term debt Accounts payable and accrued liabilities $ 1,208 4,465 396 330 4,084 1,562 743 363 3,614 (1,035) (382) (2,752) Customer deposits Deferred tax liability purchase consideration transferred (134) (1,188) 11,274 The goodwill of $3,614 comprises the value of expected synergies arising from the acquisition and the values included in the workforce of the new subsidiary. The goodwill balance is allocated to Mepu and certain North American divisions’ CGUs because management is expecting sales synergies from a wider product line and complementary distribution networks. None of the goodwill recognized is expected to be deductible for income tax purposes. From the date of acquisition, Mepu has contributed to the 2010 results $11,089 of revenue and $850 to the net profit before tax of the Company. If the combination had taken place as at January 1, 2010, revenue from continuing operations in 2010 would have increased by $2,378 and the profit from continuing operations for the Company in 2010 would decrease by $1,631. The purchase consideration in the amount of $11,274 was paid in cash. The impacts on the cash flow on the acquisition of Mepu are as follows: Transaction costs of the acquisition Purchase consideration transferred net cash flow on acquisition $ 643 11,274 11,917 Transaction costs of the acquisition are included in cash flows from investing activities. In the three-month period ended June 30, 2011, the conditions related to the cash The acquisition of Franklin was an asset purchase and as The assets and liabilities of Tramco on the date of holdback were met and the Company transferred $572 such the Company does not have access to the books and acquisition have been recorded in the consolidated financial from cash held in trust to the vendors. As at December 31, records of Franklin for any periods prior to the acquisition statements at their estimated fair values as follows: 2011 there are no remaining funds held in trust. date of October 1, 2010. Therefore, the impacts on revenues (b) Franklin Enterprises ltd. (“Franklin”) Effective October 1, 2010, the Company acquired substantially all of the operating assets of Franklin, a custom manufacturer. The Company acquired Franklin and profit of the Company from an acquisition of Franklin at the beginning of 2010 cannot be reported. From the date of acquisition, Franklin has contributed $3,261 of revenue and a net loss before tax of $548 to the 2010 results. to enhance its manufacturing capabilities and to increase The purchase consideration in the amount of $8,856 was production capacity in periods of high in-season demand. paid in cash. The impacts on the cash flow on acquisition Accounts receivable Inventory Prepaid expenses and other Deferred tax asset Property, plant and equipment Intangible assets Distribution network of Franklin are as follows: Transaction costs of the acquisition Purchase consideration transferred net cash flow on acquisition $ 356 8,856 9,212 Brand name Software Order backlog Goodwill $ 4,211 4,162 208 340 8,495 1,701 2,361 1,118 272 7,343 (4,458) (967) (143) (4,550) 20,093 In the three-month period ended December 31, 2011, the conditions related to the cash holdback were met and the Company transferred $250 cash held in trust to the vendors. As at December 31, 2011 there are no remaining funds held in trust. (c) tramco, inc. (“tramco”) Effective December 20, 2010, the Company acquired 100% of the outstanding shares of Tramco, a manufacturer of chain conveyors. Tramco is an industry leader and provides the Company with an entry point into the grain processing sector of the food supply chain. The purchase has been accounted for by the acquisition method with the results of Tramco’s operations included in the Company’s net earnings from the date of acquisition. Accounts payable and accrued liabilities Customer deposits Income taxes payable Deferred tax liability purchase consideration transferred The goodwill of $7,343 comprises the value of expected synergies arising from the acquisition and the values included in the workforce of the new subsidiary. Goodwill at the time of the transaction is not deductible for tax purposes. From the acquisition date of December 20, 2010, Tramco contributed $184 of revenue and a net loss before tax of $78 to 2010 results of the Company. Tramco has 71 The purchase has been accounted for by the acquisition method with the results of Franklin’s operations included in the Company’s net earnings from the date of acquisition. The assets and liabilities of Franklin on the date of acquisition have been recorded in the consolidated financial statements at their estimated fair values as follows: Inventory Prepaid expenses and other Property, plant and equipment Goodwill Obligations under finance lease contracts Accounts payable and accrued liabilities purchase consideration transferred $ 1,557 8 8,171 68 (707) (241) 8,856 The goodwill of $68 comprises the value of expected synergies arising from the acquisition and the values included in the workforce of the new subsidiary. The goodwill balance is allocated to the Franklin CGU and is expected to be deductible for tax purposes. operations in the U.S. and the U.K. and their results were not consolidated on a regular basis. As a result, the Company is not able to quantify the impact Tramco would have had on the Company’s financial results if the acquisition had been made on January 1, 2010. The impacts on the cash flow on acquisition of Tramco are as follows: Purchase consideration paid in 2010 Purchase consideration paid in 2011 Transferred to cash held in trust Transaction costs of the acquisition paid in 2010 Transaction costs of the acquisition paid in 2011 net cash flow on acquisition $ 9,168 9,930 995 339 164 20,596 Transaction costs of the acquisition are included in cash flows from investing activities. At the request of the vendor, the purchase price was paid in two installments. As at December 31, (c) Finance costs Interest on overdrafts and other finance costs 51 49 Interest, including non-cash interest, on debts and borrowings Interest, including non-cash interest, on convertible debentures (note 23) 2,377 2,344 10,220 10,083 Finance charges payable under finance lease contracts 20 8 (d) Cost of goods sold Depreciation Amortization of intangible assets Warranty provision Cost of inventories recognized as an expense 2011, the Company had restricted cash of $1,017 relating to the acquisition of Tramco. (e) Selling, general and administrative expenses Additionally, there is $322 due to vendor included in acquisition price, transaction and Depreciation financing costs payable. 8. OthEr EXpEnSES (inCOME) (a) Other operating expense (income) Cash flow hedge accounting Net loss on disposal of property, plant and equipment Other (b) Finance expense (income) Interest income from banks Loss (gain) on foreign exchange Amortization of intangible assets Minimum lease payments recognized as an operating lease expense Transaction costs Selling, general and administrative (f) Employee benefits expense Wages and salaries Share-based payment transaction expense Pension costs Included in cost of goods sold Included in general and administrative expense 2011 $ 126 76 (302) (100) (117) 276 159 2010 $ (121) 262 (746) (605) (765) (1,300) (2,065) 12,668 12,484 4,933 2,927 503 280 450 748 198,487 204,203 159,833 163,958 485 3,273 943 1,676 48,449 54,826 385 2,968 1,273 1,696 44,736 51,058 67,085 58,686 2,038 1,925 71,048 48,013 23,035 71,048 6,504 1,470 66,660 30,630 36,030 66,660 9. prOpErtY, plAnt AnD EQUipMEnt COSt Balance, January 1, 2011 Additions Acquisitions of a subsidiary land $ 4,777 61 52 Classification as assets held for sale (146) Disposals Exchange differences Balance, December 31, 2011 DEprECiAtiOn Balance, January 1, 2011 Depreciation charge for the year Classification as asset held for sale Disposals Exchange differences Balance, December 31, 2011 Net book value, January 1, 2011 Net book value, December 31, 2011 — 7 4,751 — — — — — — 4,777 4,751 Buildings and building components $ 27,599 9,730 764 (1,089) — 176 37,180 1,492 1,055 (134) — 33 2,446 26,107 34,734 Grounds $ 488 35 71 — — 3 597 124 65 — — 1 190 364 407 $ 431 35 — — — — 466 196 71 — — 3 270 235 196 leasehold improvements Furniture and fixtures Computer hardware Manufacturing equipment Construction in progress $ $ $ $ 982 80 65 — — 21 Vehicles $ 5,283 1,043 101 — (164) 112 31,548 15,039 17,589 (17,294) 1,948 525 25 — (24) 27 668 — (724) 269 1,148 6,375 2,501 46,800 295 105 — — 6 406 687 742 1,889 673 — (68) 8 2,502 3,394 3,873 1,115 308 — (16) 11 1,418 833 1,083 6,512 3,141 — (262) 38 9,429 25,036 37,371 — — — (18) 277 — — — — — — 17,589 277 total $ 90,645 9,254 1,746 (1,235) (912) 597 100,095 11,623 5,418 (134) (346) 100 16,661 79,022 83,434 73 Buildings and building components leasehold improvements Furniture and fixtures land $ Grounds $ $ $ COSt Balance, January 1, 2010 Additions Acquisitions of a subsidiary Disposals Exchange differences 2,919 — 2,023 (66) (99) 235 80 180 — (7) 14,030 3,012 11,159 (170) (432) Balance, December 31, 2010 4,777 488 27,599 DEprECiAtiOn Balance, January 1, 2010 Depreciation charge for the year Disposals Exchange differences Balance, December 31, 2010 Net book value, January 1, 2010 Net book value, December 31, 2010 — — — — — 2,919 4,777 77 47 — — 124 158 364 1,036 490 (23) (11) 1,492 12,994 26,107 453 — — — (22) 431 139 63 — (6) 196 314 235 Vehicles $ 3,870 1,276 161 (146) 122 Computer hardware Manufacturing equipment Construction in progress $ $ $ 1,568 22,451 206 214 (5) (35) 2,902 6,915 (260) (460) 253 17,309 — — 27 total $ 46,635 24,797 20,750 (647) (890) $ 856 12 98 — 16 982 5,283 1,948 31,548 17,589 90,645 214 82 — (1) 295 642 687 1,454 519 (79) (5) 1,889 2,416 3,394 871 254 (3) (7) 1,115 697 833 4,971 1,858 (146) (171) 6,512 17,480 25,036 — — — — — 253 17,589 8,762 3,313 (251) (201) 11,623 37,873 79,022 Construction in progress is comprised primarily of building and equipment, the cost of which are not depreciated until the assets are ready for use in the reporting period. Ag Growth regularly assesses its long-lived assets for impairment. As at December 31, 2011 and 2010, the recoverable amount of each CGU exceeded the carrying amounts of the assets allocated to the respective units. Capitalized borrowing costs No borrowing costs were capitalized in 2010 or 2011. Finance leases Included in manufacturing equipment is equipment held under finance leases, the carrying value of which at December 31, 2011 was $131 (December 31, 2010 – $839, January 1, 2010 – nil). Leased assets are pledged as security for the related finance lease liabilities. 10. intAnGiBlE ASSEtS Distribution networks Brand names patents Software Order backlog Development projects COSt Balance, January 1, 2011 52,346 32,582 1,138 1,092 $ $ $ $ Additions Internal development Acquisition Exchange differences Balance, December 31, 2011 AMOrtiZAtiOn Balance, January 1, 2011 Amortization charge for the year Exchange differences Balance, December 31, 2011 net book value, December 31, 2011 — 3,090 197 55,633 14,509 3,226 139 17,874 37,759 — 1,608 124 34,314 — — — — 34,314 — 4 20 1,162 568 87 10 665 497 — — 25 1,117 — 135 5 140 977 $ 628 — 21 17 666 364 281 21 666 — $ — 2,011 — (1) 2,010 — 47 — 47 1,963 total $ 87,786 2,011 4,723 382 94,902 15,441 3,776 175 19,392 75,510 75 COSt Balance, January 1, 2010 Additions – acquisition of subsidiary Exchange differences Balance, December 31, 2010 AMOrtiZAtiOn Balance, January 1, 2010 Amortization charge for the year Exchange differences Balance, December 31, 2010 net book value, January 1, 2010 net book value, December 31, 2010 Distribution networks $ 49,709 3,263 (626) 52,346 11,763 2,970 (224) 14,509 37,946 37,837 Brand names patents Software Order backlog $ 29,812 3,104 (334) 32,582 — — — — 29,812 32,582 $ 1,184 — (46) 1,138 501 83 (16) 568 683 570 $ — 1,118 (26) 1,092 — — — — — 1,092 $ — 635 (7) 628 — 365 (1) 364 — 264 total $ 80,705 8,120 (1,039) 87,786 12,264 3,418 (241) 15,441 68,441 72,345 The Company is continuously working on research and development projects. The Company annually. For definite life intangibles, the Company assesses whether there are indicators operates a development centre that coordinates the efforts throughout Ag Growth. of impairment at subsequent reporting dates as a triggering event for performing an Development costs capitalized include the development of new products and the impairment test. development of new applications of already existing products and prototypes. Research costs and development costs that are not eligible for capitalization have been expensed and are recognized in selling, general and administrative expenses. Other significant intangible assets are goodwill (note 11) and the distribution network of the Company. The distribution network was acquired in past business combinations and reflects the Company’s dealer network in North America and the dealer network of the Mepu Intangible assets include patents acquired through business combinations, which have operating division. The remaining amortization period for the distribution network ranges a remaining life of seven years. All brand names with a carrying amount of $34,314 from 4 to 19 years. (December 31, 2010 – $32,582, January 1, 2010 – $29,812) have been qualified as indefinite useful life intangible assets, as the Company expects to maintain these brand names and currently no end point of the useful lives of these brand names can be determined. The Company assesses the assumption of an indefinite useful life at least As of the reporting date, the Company had no contractual commitments for the acquisition of intangible assets. 11. GOODWill The Company’s CGUs and goodwill and indefinite life intangible assets allocated thereto are COSt Balance, beginning of year Additions – acquisition of subsidiary Exchange differences Balance, end of year 2011 $ 62,355 3,087 434 65,876 2010 $ 52,187 11,025 (857) 62,355 12. iMpAirMEnt tEStinG For purposes of impairment testing, the Company determined that each of its seven as follows: Westfield Goodwill Intangible assets with indefinite lives Edwards Goodwill Intangible assets with indefinite lives operating divisions were CGUs as of its IFRS transition date. Under the IFRS 1 transition guidance, Ag Growth performed an impairment test as at January 1, 2010. Upon the Hi Roller Goodwill acquisition of Franklin during 2010, Ag Growth reconsidered its CGUs and concluded that Intangible assets with indefinite lives Wheatheart no longer met the CGU definition and management then reallocated the assets and goodwill on a relative fair value basis to the Applegate and Westfield CGUs. Union Iron Goodwill Goodwill acquired through business combinations is allocated on a relative fair value basis to the CGUs that benefit from the acquisition. The Company performs its annual goodwill impairment test as at December 31 on all CGUs. The recoverable amount of the CGUs has Intangible assets with indefinite lives Tramco Goodwill been determined based on value in use for the year ended December 31, 2011 and fair Intangible assets with indefinite lives value less costs to sell calculation as at January 1, 2010, the Transition Date, using cash flow projections covering a five-year period. The various pre-tax discount rates applied to Other Goodwill the cash flow projections are between 11.8% and 17.1% (December 31, 2010 – 12.2% and Intangible assets with indefinite lives December 31 2011 December 31 2010 January 1 2010 $ $ $ 30,435 19,000 30,435 19,000 29,208 19,000 6,438 5,163 5,588 3,296 8,199 2,193 7,450 2,360 7,766 2,302 6,438 5,163 5,465 3,224 8,018 2,144 7,286 2,308 4,713 743 18.9%, January 1, 2010 – 14.3% and 19.8%) and cash flows beyond the five-year period are extrapolated using a 3% growth rate (December 31, 2010 – 3% , January 1, 2010 – 3%), which is management’s estimate of long-term inflation and productivity growth in the industry and geographies in which it operates. Total Goodwill Intangible assets with indefinite lives 65,876 34,314 62,355 32,582 5,123 5,163 5,751 3,392 8,437 2,257 — — 3,668 — 52,187 29,812 77 key assumptions used in valuation calculations The calculation of value in use or fair value less cost to sell for all the CGUs are most 13. ASSEtS hElD FOr SAlE In 2010, Ag Growth transferred all production activities from its Lethbridge, Alberta facility sensitive to the following assumptions: • Gross margin; • Discount rates; • Market share during the budget period; and • Growth rate used to extrapolate cash flows beyond the budget period. Gross margins Forecasted gross margins are based on actual gross margins achieved in the years preceding the forecast period. Margins are kept constant over the forecast period and the terminal period, unless management has started an efficiency improvement process. Discount rates Discount rates reflect the current market assessment of the risks specific to each CGU. The discount rate was estimated based on the weighted average cost of capital for the industry. This rate was further adjusted to reflect the market assessment of any risk specific to the CGU for which future estimates of cash flows have not been adjusted. Market share assumptions These assumptions are important because, as well as using industry data for growth rates (as noted below), management assesses how the CGU’s position, relative to its competitors, might change over the forecast period. Growth rate estimates Rates are based on published research and are primarily derived from the long-term CPI expectations for the markets in which Ag Growth operates. Management considers CPI to be a conservative indicator of the long-term growth expectations for the agricultural industry. to Nobleford, Alberta. Ag Growth concluded that the land and building in Lethbridge, Alberta, Canada met the definition of an asset held for sale. The carrying amounts of the assets as presented in the consolidated statement of financial position solely consist of the land and building. The land carrying value is $146 as at December 31, 2011. 14. AVAilABlE-FOr-SAlE inVEStMEnt On December 22, 2009, the Company purchased two million common shares at $1.00 per share in a private Canadian corporate farming organization (“Investco”). The Company’s investment represents approximately 2.0% of the outstanding shares of Investco. At this point in time, management intends to hold the investment for an indefinite period of time. In the year ended December 31, 2011, Investco completed a private placement of 22,193,921 common shares at $1.40 per common share. The private placement included a large number of unrelated parties and increased Investco’s outstanding common shares by approximately 40%. The private placement was determined to represent a quoted market price and as a result the Company assessed the fair value of its 2,000,000 common shares at $1.40 per common share. Accordingly, the Company increased the value of its investment by $800 with the offsetting amount recorded in other comprehensive income. As at December 31, 2011, given there has been no recent market activity, the $2.8 million represents cost which is deemed to be the fair value carrying amount. 15. CASh AnD CASh EQUiVAlEntS/ChAnGES in nOn-CASh WOrkinG CApitAl Cash and cash equivalents as at the date of the consolidated statement of financial position 16. rEStriCtED CASh Restricted cash of $2,439 (2010 – $1,860) consists of holdbacks related to the acquisition and for the purpose of the consolidated statement of cash flows are as follows: of Tramco (note 7), and Airlanco (note 6), $885 of funds advanced to Ag Growth as collateral Cash at banks and on hand Short-term deposits total cash and cash equivalents December 31 2011 December 31 2010 January 1 2010 $ 6,839 — 6,839 $ 11,201 23,780 34,981 $ 41,110 67,984 109,094 for a receivable from an end user of Ag Growth products and $29 related to the long-term incentive plan (note 21). Subsequent to December 31, 2011, the $885 receivable from the end user was collected and the restricted cash was released. 17. ACCOUntS rECEiVABlE As is typical in the agriculture sector, Ag Growth may offer extended terms on its accounts receivable to match the cash flow cycle of its customer. The following table sets forth details of the age of trade accounts receivable that are not overdue, as well as an analysis of Cash at banks earns interest at floating rates based on daily bank deposit rates. Short-term overdue amounts and the related allowance for doubtful accounts: deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Company, and earn interest at the respective short-term deposit rates. The change in the non-cash working capital balances related to operations is calculated as follows: Accounts receivable Inventory Prepaid expenses and other assets Accounts payable and accrued liabilities Customer deposits Provisions 2011 $ (9,607) (9,850) 5,034 (1,755) 1,445 280 2010 $ (9,664) (1,321) (5,248) 2,046 (2,868) 748 (14,453) (16,307) December 31 2011 December 31 2010 January 1 2010 $ 50,188 (497) 49,691 $ 39,019 (484) 38,535 $ 25,571 (499) 25,072 Total accounts receivable Less allowance for doubtful accounts total accounts receivable, net Of which Neither impaired nor past due 33,412 17,661 17,552 Not impaired and past the due date as follows: Within 30 days 31 to 60 days 61 to 90 days Over 90 days Less allowance for doubtful accounts total accounts receivable, net 9,356 2,761 957 3,702 (497) 49,691 7,231 7,044 3,295 3,788 (484) 38,535 3,457 927 795 2,840 (499) 25,072 79 Trade receivables assessed to be impaired are included in selling, general and administrative Assumptions used to calculate the provision for warranties were based on current sales expenses in the period of the assessment. The movement in the Company’s allowance for levels and current information available about returns. doubtful accounts for the periods ended December 31, 2011 and December 31, 2010 was as follows: 2011 $ 484 10 (1) 34 (33) 3 497 2010 $ 499 113 (5) 17 (137) (3) 484 Balance, beginning of year Costs recognized Amounts charged against provision Balance, end of year 20. EQUitY (a) Common shares Authorized Unlimited number of voting common shares without par value 2011 $ 1,942 3,032 (2,752) 2,222 2010 $ 1,194 2,971 (2,223) 1,942 Balance, beginning of year Additional provision recognized Amounts written off during the period as uncollectible Amounts recovered during the period Unused provision reversed Exchange differences Balance, end of year 18. inVEntOrY Raw materials Finished goods December 31 2011 December 31 2010 January 1 2010 $ 37,159 27,399 64,558 $ 29,516 23,058 52,574 $ 21,581 18,040 39,621 Inventory is recorded at the lower of cost and net realizable value. During the year ended December 31, 2011, no provisions (2010 – nil) were expensed through cost of goods sold. There were no write-downs of finished goods and no reversals of write-downs included in cost of goods sold during the year. 19. prOViSiOnS Provisions consist of the Company’s warranty provision. A provision is recognized for expected claims on products sold based on past experience of the level of repairs and returns. It is expected that most of these costs will be incurred in the next financial year. Issued 12,411,620 common shares Balance, January 1, 2010 number Amount # $ 13,020,099 157,279 Purchase of common shares under LTIP (167,900) Purchase of common shares under normal course issuer bid (674,600) Settlement of LTIP obligation – vested shares Settlement of SAIP obligation –vested shares 81,951 140,000 (6,032) (8,057) 2,737 5,449 Balance, December 31, 2010 12,399,550 151,376 Purchase of common shares under LTIP (note 21(a)) (67,996) (3,346) Conversion of subordinated debentures Settlement of LTIP obligation – vested shares (note 21(e)) Balance, December 31, 2011 2,556 77,510 115 2,894 12,411,620 151,039 The 12,411,620 common shares at December 31, 2011 are net of 134,376 common shares with a stated value of $5,428 that are being held by the Company under the terms of the LTIP until vesting conditions are met. The 12,399,550 common shares at December 31, 2010 are net of 143,890 common shares Foreign currency translation reserve with a stated value of $5,027 that are being held by the Company under the terms of the LTIP The foreign currency translation reserve is used to record exchange differences arising from until vesting conditions are met. the translation of the financial statements of foreign subsidiaries. It is also used to record the (b) normal course issuer bid On November 17, 2011, Ag Growth commenced a normal course issuer bid for up to effect of hedging net investments in foreign operations. Available-for-sale reserve 994,508 common shares, representing 10% of the Company’s public float at the time. The The available-for-sale reserve contains the cumulative change in the fair value of available- normal course issuer bid will terminate on November 20, 2012 unless terminated earlier by for-sale investment. Gains and losses are reclassified to the consolidated statement of Ag Growth. In the year ended December 31, 2011, no common shares were purchased under income when the available-for-sale investment is impaired or derecognized. the normal course issuer bid. On December 10, 2009, Ag Growth commenced a normal course issuer bid for up to (e) Dividends paid and proposed In the year ended December 31, 2011, the Company declared dividends of $30,109 or $2.40 1,272,423 common shares, representing 10% of the Company’s public float at that time. The per common share (2010 – $26,854 or $2.12 per common share). Ag Growth’s dividend normal course issuer bid terminated on December 9, 2010. In the year ended December 31, policy is to pay cash dividends on or about the 30th of each month to shareholders of record 2010, Ag Growth purchased and cancelled 674,600 common shares under the normal course on the last business day of the previous month and the Company’s current monthly dividend issuer bid for $23,391. (c) Contributed surplus Balance, beginning of year Equity-settled director compensation Obligation under LTIP Exercise price on vested SAIP awards Settlement of LTIP obligation – vested shares Balance, end of year 2011 $ 6,121 345 1,769 — (2,894) 5,341 2010 $ 3,859 227 4,279 18 (2,262) 6,121 (d) Accumulated other comprehensive income Accumulated other comprehensive income is comprised of the following: Cash flow hedge reserve The cash flow hedge reserve contains the effective portion of the cash flow hedge relationships incurred as at the reporting date. rate is $0.20 per common share. Subsequent to December 31, 2011, the Company declared dividends of $0.20 per common share on each of January 31, 2012 and February 28, 2012. (f) Shareholder protection rights plan On December 20, 2010, the Company’s Board of Directors adopted a Shareholders’ Protection Rights Plan (the “Rights Plan”). Specifically, the Board of Directors has implemented the Rights Plan by authorizing the issuance of one right (a “Right”) in respect of each common share (the “Common Shares”) of the Company outstanding at the close of business on December 20, 2010 (the “Record Time”). In addition, the Board of Directors authorized the issuance of one Right in respect of each additional Common Share issued from treasury after the Record Time. If a person or a Company, acting jointly or in concert, acquires (other than pursuant to an exemption available under the Rights Plan) beneficial ownership of 20% or more of the Common Shares, Rights (other than those held by such acquiring person which will become void) will separate from the Common Shares and permit the holder thereof to purchase that number of Common Shares having an aggregate market price (as determined in accordance with the Rights Plan) on the date of consummation or occurrence of such acquisition of 81 Common Shares equal to four times the exercise price of the Rights for an amount in cash consultants or other service providers to the Company and its affiliates (“Service Providers”). equal to the exercise price. The exercise price of the Rights pursuant to the Rights Plan is Share Awards may not be granted to non-management Directors. Under the terms of the $150 per Right. 21. ShArE-BASED COMpEnSAtiOn plAnS (a) long-term incentive plan (“ltip”) The LTIP is a compensation plan that awards common shares to key management based on SAIP, any Service Provider may be granted Share Awards. Each Share Award will entitle the holder to be issued the number of common shares designated in the Share Award, upon payment of an exercise price of $0.10 per common share. The shareholders reserved for issuance 220,000 common shares, subject to adjustment in the Company’s operating performance. Pursuant to the LTIP, the Company establishes the lieu of dividends, if applicable, and no additional awards may be granted without shareholder amount to be allocated to management based upon the amount by which distributable cash, approval. As at December 31, 2011, 220,000 (2010 – 220,000) Share Awards have been as defined in the LTIP, exceeds a predetermined threshold. The service period commences granted and 40,000 (2010 – 80,000) remain outstanding. on January 1 of the year the award is generated and ends at the end of the fiscal year. The award vests on a graded scale over an additional three-year period from the end of the respective performance year. The LTIP provides for immediate vesting in the event of retirement, death, termination without cause or in the event the participant becomes disabled. The cash awarded under the plan formula is used to purchase Ag Growth common shares at market prices. All vested awards are settled with participants in common shares purchased by the administrator of the plan and there is no cash settlement alternative. During the year ended December 31, 2011, 40,000 Share Awards vested and were exercised, at which time the participants received a cash payment of $1,998. On January 1, 2010, 73,333 Share Awards vested and were exercised, at which time common shares of the Company were issued for $2,586. On October 15, 2010, the Company announced the passing of its Chief Executive Officer. Upon his passing, 66,667 Share Awards vested and were exercised, at which time common shares of the Company were issued for $2,863, of which $2,411 had been expensed prior to October 15, 2010 and included in the SAIP liability. The amount owing to participants is recorded as an equity award in contributed surplus Subsequent to December 31, 2011, the remaining 40,000 Share Awards vested, at which as the award is settled with participants with treasury shares purchased in the open time the participants received a cash payment of $1,490. For the year ended December 31, market. The expense is recorded in the different consolidated statement of income lines by 2011, Ag Growth recorded income of $76 (2010 – expense of $2,707) for the Share Awards. function depending on the role of the respective management member. For the year ended December 31, 2011, Ag Growth expensed $1,769 (2010 – $3,570) for the LTIP. Additionally, there is $29 in restricted cash related to the LTIP. (c) Directors’ Deferred Compensation plan (“DDCp”) Under the DDCP, every Director receives a fixed base retainer fee, an attendance fee for meetings and a committee chair fee, if applicable, and a minimum of 20% of the total During the year ended December 31, 2011, the administrator purchased 67,996 common compensation must be taken in common shares. A Director will not be entitled to receive shares (2010 – 167,900 common shares) in the market for $3,346 (2010 – $6,032). The fair the common shares he or she has been granted until a period of three years has passed value of this share-based payment equals the share price as of the respective measurement since the date of grant or until the Director ceases to be a Director, whichever is earlier. date as dividends related to the shares in the administrated fund are paid annually to the The Directors’ common shares are fixed based on the fees eligible to him for the respective LTIP participants. (b) Share award incentive plan (“SAip”) The Company has a share award incentive plan that authorizes the Directors to grant awards (“Share Awards”) to employees or officers of Ag Growth or any affiliates of the Company or period and his decision to elect for cash payments for dividends related to the common shares; therefore, the Director’s remuneration under the DDCP vests directly in the respective service period. The three-year period (or any shorter period until a Director ceases to be a Director) qualifies only as a waiting period to receive the vested common shares. For the years ended December 31, 2011 and 2010, the Directors elected to receive the As at December 31, 2011, a total of 935,325 options (2010 - 970,319) are available for majority of their remuneration in common shares. For the year ended December 31, 2011, grant. No options have been granted as at December 31, 2011. an expense of $345 (2010 – $227) was recorded for the share grants, and a corresponding amount has been recorded to contributed surplus. The share grants were measured with the contractual agreed amount of service fees for the respective period. The total number of common shares issuable pursuant to the DDCP shall not exceed 35,000, subject to adjustment in lieu of dividends, if applicable. For the year ended December 31, 2011, 9,161 common shares were granted under the DDCP and as at December 31, 2011, a total of 23,144 common shares had been granted under the DDCP and no common shares had been issued. (d) Stock option plan On June 3, 2009, the shareholders of Ag Growth approved a stock option plan (the “Option Plan”) under which options may be granted to officers, employees and other eligible service providers in order to allow these individuals an opportunity to increase their proprietary interest in Ag Growth’s long-term success. The Company’s Board of Directors or a Committee thereof shall administer the Option Plan (e) Summary of expenses recognized under share-based payment plans For the year ended December 31, 2011, an expense of $2,038 (2010 – $6,504) was recognized for employee and Director services rendered. The total carrying amount of the liability for the SAIP as of December 31, 2011 was $1,495 (2010 – $3,574). There have been no cancellations or modifications to any of the plans during the years ended December 31, 2011 or December 31, 2010. A summary of the status of the options under the SAIP is presented below: Outstanding, beginning of year Exercised Outstanding, end of year 2011 Shares 2010 Shares # 80,00 (40,000) 40,000 # 220,000 (140,000) 80,000 and designate the individuals to whom options may be granted and the number of common The exercise price on all SAIP awards is $0.10 per common share. All outstanding options shares to be optioned to each. The maximum number of common shares issuable on under the SAIP as of December 31, 2011 vested and were exercised on January 1, 2012. A summary of the status of the shares under the LTIP is presented below: exercise of outstanding options at any time may not exceed 7.5% of the aggregate number of issued and outstanding common shares, less the number of common shares issuable pursuant to all other security-based compensation agreements. The number of common shares reserved for issuance to any one individual may not exceed 5% of the issued and outstanding common shares. Options will vest and be exercisable as to one-third of the total number of common shares subject to the options on each of the first, second and third anniversaries of the date of Vested Granted the grant. The exercise price of the options shall be fixed by the Board of Directors or a Outstanding, end of year Committee thereof on the date of the grant and may not be less than the market price of the common shares on the date of the grant. The options must be exercised within five years of the date of the grant. Outstanding, beginning of year 2011 Shares 2010 Shares # 143,890 (77,510) 67,996 134,376 # 57,941 (81,951) 167,900 143,890 83 The following table lists the inputs to the models used for the SAIP for the years ended The dividend yield was set to 0% for the calculation of the option value, as the Share Award December 31, 2011 and December 31, 2010: Dividend yield (%) Expected volatility (%) Risk-free interest rate (%) Expected life of share options (years) Weighted average share price ($) 2011 $ 0 26.88 1 1 2010 $ 0 23.20 1 1 37.48 50.07 holders already receive during the period between grant date and vesting date of the Share Award the same dividend as all actual shareholders. The expected life of the Share Awards is the period between the reporting date and the vesting date, as the Share Awards can be exercised by the holders only at the vesting date. The expected volatility reflects the assumption that the historical volatility over a period similar to the Share Awards is indicative of future trends, which may also not necessarily be the actual outcome. (f) Accelerated vesting and death benefits On October 15, 2010, Ag Growth announced the passing of its Chief Executive Officer. Upon Model used Black-Scholes Black-Scholes his passing, all previously unvested share-based compensation vested immediately, certain The fair value per option at December 31, 2011 was $37.38. 22. lOnG-tErM DEBt AnD OBliGAtiOnS FrOM FinAnCE lEASES death benefits became payable to his estate and the Company became entitled to proceeds of $3,000 related to an insurance policy, which was recorded in prepaid expenses and other assets as at December 31, 2010. The insurance proceeds were received in 2011. interest rate % Maturity December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ Current portion of interest-bearing loans and borrowings Obligations under finance leases Nordea equipment loan (Euro denominated) GMAC loans total current portion of interest-bearing loans and borrowings non current interest-bearing loans and borrowings Series A secured notes (U.S. dollar denominated) Term debt (U.S. dollar denominated) Nordea equipment loan (Euro denominated) GMAC loans Obligations under finance leases Total non-current interest-bearing loans and borrowings Less deferred financing costs total interest-bearing loans and borrowings 6.5 2.0 0.0 6.8 3.8 2.0 0.0 6.5 2011 – 2012 2013 2011 and 2014 2016 2012 2013 2011 and 2014 2011 – 2012 131 — 16 147 25,425 10,709 — 3 — 36,137 36,284 313 35,971 432 112 16 560 — — 16 16 24,865 26,165 — 196 15 138 25,214 25,774 558 25,216 — — 31 — 26,196 26,212 793 25,419 (a) Bank indebtedness Ag Growth has operating facilities of $10 million and U.S. $2.0 million. The facilities bear interest at a rate of prime plus 0.5% to prime plus 1.5% per annum based on performance calculations. The effective interest rate during the year ended December 31, 2011 on Ag Growth’s Canadian dollar term debt was 3.5% (2010 – 3.1%), and on its U.S. dollar term debt was 3.8% (2010 – 3.8%). As at December 31, 2011 and December 31, 2010, there were no amounts outstanding under these facilities. The facilities mature October 29, 2012. Collateral for the operating facilities rank pari passu with the Series A secured notes and include a general security agreement over all assets, first position collateral mortgages on land and buildings, assignments of rents and leases and security agreements for patents and trademarks. (b) long-term debt The Series A secured notes were issued on October 29, 2009. The non-amortizing notes bear interest at 6.8% payable quarterly and mature on October 29, 2016. The Series A secured notes are denominated in U.S. dollars. Collateral for the Series A secured notes and term loans rank pari passu and include a general security agreement over all assets, first position collateral mortgages on land and buildings, assignments of rents and leases and security agreements for patents and trademarks. Term loans bear interest at rates of prime plus 0.5% to prime plus 1.5% based on performance calculations. As at December 31, 2011, term loans of U.S. $10,530 were outstanding and there were no term loans outstanding at December 31, 2010. Ag Growth’s credit facility provides for term loans of up to $38,000 and U.S. $20,500 and matures The Nordea equipment loan is denominated in Euros, bears interest at 2% and was fully repaid during the year ended December 31, 2011. GMAC loans bear interest at 0% and mature in 2014. The vehicles financed are pledged as collateral. (c) Covenants Ag Growth is subject to certain financial covenants in its credit facility agreements, which must be maintained to avoid acceleration of the termination of the agreement. The financial covenants require Ag Growth to maintain a debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio of less than 2.5 and to provide debt service coverage of a minimum of 1.0. As at December 31, 2011 and December 31, 2010, Ag Growth was in compliance with all financial covenants. 23. COnVErtiBlE UnSECUrED SUBOrDinAtED DEBEntUrES Principal amount Equity component Accretion Financing fees, net of amortization Convertible unsecured subordinated debentures 2011 $ 2010 $ January 1 2010 $ 114,885 115,000 115,000 (7,475) 2,770 (2,978) (7,475) 1,438 (3,823) (7,475) 185 (4,603) 107,202 105,140 103,107 October 29, 2012. In the event the credit facility is not renewed, all outstanding amounts On October 27, 2009, the Company issued convertible unsecured subordinated debentures in become repayable in quarterly installments beginning on January 31, 2014. the aggregate principal amount of $100 million, and on November 6, 2009 the underwriters Subsequent to December 31, 2011, the Company renewed its credit facility on substantially the same terms with its existing lenders. The renewed credit facility includes a $25 million accordion feature, bears interest at rates of prime plus 0.0% to prime plus 1.0% based on performance calculations and matures on the earlier of March 8, 2016 or three months prior to maturity date of convertible unsecured subordinated debentures, unless refinanced on terms acceptable to the Lenders. exercised in full their over-allotment option and the Company issued an additional $15 million of debentures (the “Debentures”). The net proceeds of the offering, after payment of the underwriters’ fee of $4.6 million and expenses of the offering of $0.5 million, were approximately $109.9 million. The Debentures were issued at a price of $1,000 per Debenture and bear interest at an annual rate of 7.0% payable semi-annually on June 30 and December 31 in each year commencing June 30, 2010. The maturity date of the Debentures is December 31, 2014. 85 Each Debenture is convertible into common shares of the Company at the option of the The liability component has been accreted using the effective interest rate method, and holder at any time on the earlier of the maturity date and the date of redemption of the during the year ended December 31, 2011, the Company recorded accretion of $1,332 Debenture, at a conversion price of $44.98 per common share being a conversion rate of (2010 – $1,253), non-cash interest expense related to financing costs of $845 (2010 – $780) approximately 22.2321 common shares per $1,000 principal amount of Debentures. During and interest expense on the 7% coupon of $8,043 (2010 – $8,050). The estimated fair value the year ended December 31, 2011, holders of 115 Debentures exercised the conversion of the holder’s option to convert Debentures to common shares in the amount of $7,475 has option and were issued 2,556 common shares. As at December 31, 2011, Ag Growth has been separated from the fair value of the liability and is included in shareholders’ equity, net reserved 2,554,136 common shares for issuance upon conversion of the Debentures. of income tax of $2,041, and its pro rata share of financing costs of $329. The Debentures are not redeemable before December 31, 2012. On and after December 31, 24. ACCOUntS pAYABlE AnD ACCrUED liABilitiES 2012 and prior to December 31, 2013, the Debentures may be redeemed, in whole or in part, at the option of the Company at a price equal to their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price of the common shares during the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of redemption is given is not less than 125% of the conversion price. On and after December 31, 2013, the Debentures may be redeemed, in whole or in part, at the option of the Company at a price equal to their principal amount plus accrued and unpaid interest. On redemption or at maturity, the Company may, at its option, elect to satisfy its obligation to pay the principal amount of the Debentures by issuing and delivering common shares. The Company may also elect to satisfy its obligations to pay interest on the Debentures by delivering common shares. The Company does not expect to exercise the option to satisfy its obligations to pay interest by delivering common shares and as a result the potentially dilutive impact has been excluded from the calculation of fully diluted earnings per share (note 30). The number of any shares issued will be determined based on market prices at the time of issuance. The Company presents and discloses its financial instruments in accordance with the substance of its contractual arrangement. Accordingly, upon issuance of the Debentures, the Company recorded a liability of $107,525, less related offering costs of $4,735. Trade payables Other payables Personnel-related accrued liabilities Accrued outstanding service invoices Other December 31 2011 December 31 2010 January 1 2010 $ 8,212 4,860 7,176 750 1,266 $ 7,323 7,207 6,687 587 819 $ 4,074 2,418 4,929 330 985 22,264 22,623 12,736 Trade payables and other payables are non-interest bearing and are normally settled on 30- or 60-day terms. Personnel-related accrued liabilities include primarily vacation accruals, bonus accruals and overtime benefits. For explanations on the Company’s credit risk management processes, refer to note 27. 25. inCOME tAXES The major components of income tax expense for the years ended December 31, 2011 and A reconciliation between tax expense and the product of accounting profit multiplied by the Company’s domestic tax rate for the year ended December 31, 2011 and 2010 is as follows: 2010 are as follows: Consolidated statement of income Current tax expense Current income tax charge Deferred tax expense 2011 $ 2010 $ 3,910 5,627 Origination and reversal of temporary differences 5,743 8,049 Accounting profit before income tax At the Company’s statutory income tax rate of 28.05% (2010 – 29.54%) Tax rate changes Recognition of deferred tax assets Foreign rate differential income tax expense reported in the consolidated statement of income Consolidated statement of comprehensive income Deferred tax related to items charged or credited directly to other comprehensive income during the period Unrealized gain on derivatives and available-for-sale investment Exchange differences on translation of foreign operations income tax charged directly to other comprehensive income 9,653 13,676 Permanent differences and others At the effective income tax rate 28.24% (2010 – 30.78%) 2011 $ 2010 $ (1,490) 214 (1,034) (540) (1,276) (1,574) 2011 $ 2010 $ 34,176 44,437 9,586 13,127 265 (91) 901 (1,008) 9,653 (520) — 1,252 (183) 13,676 87 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below: Consolidated statement of financial position Consolidated statement of income Inventories Property, plant and equipment and other assets Intangible assets Deferred financing costs Accruals and long-term provisions Tax loss carryforwards expiring between 2016 to 2027 Investment tax credit carryforward expiring between 2025 and 2030 Canadian exploration expenses Capitalized development expenditures Convertible debentures SAIP liability Equity impact LTIP Foreign exchange gains Other comprehensive income Exchange difference on translation of foreign operations Deferred tax expense net deferred tax assets reflected in the statement of financial position as follows Deferred tax assets Deferred tax liabilities Deferred tax assets, net As at December 31, 2011 As at December 31, 2010 As at January 1, 2010 $ (200) (10,145) (12,900) (63) 1,642 16,809 4,627 29,157 (465) (1,279) 397 1,283 — 269 — $ (192) (9,112) (13,044) 21 748 21,871 4,763 29,157 — (1,628) 977 1,253 6 (1,221) — $ (120) (6,757) (10,154) 165 452 29,736 4,710 29,157 — (1,984) 1,690 989 (487) (2,255) — 29,132 33,599 45,142 38,092 (8,960) 29,132 42,063 (8,464) 33,599 47,356 (2,214) 45,142 2011 $ 8 1,033 (144) 84 (894) 5,062 136 — 465 (349) 580 (30) 6 — (214) 5,743 2010 $ 72 (475) 652 144 (296) 7,865 (53) — — (356) 713 (264) (493) — 540 8,049 reconciliation of deferred tax assets, net Opening balance as at January 1 Deferred tax expense during the period recognized in profit or loss Deferred tax income during the period recognized in other comprehensive income Deferred tax liabilities acquired on acquisitions Opening balance as at December 31 2011 $ 2010 $ 33,599 45,142 (5,743) (8,049) 1,276 — 29,132 1,574 (5,068) 33,599 The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences, loss carryforwards and investment tax credits become deductible. Based on the analysis of taxable temporary differences and future taxable income, the management of the Company is of the opinion that there is convincing evidence available for the probable realization of all deductible temporary differences of the Company’s tax entities. Accordingly, the Company has recorded a deferred tax asset for all deductible temporary differences as of the reporting date and as at December 31, 2010. The Company has recorded tax losses related to its Finnish operations of $1,413 Euros. Based on historical results and an expectation of future profits, a deferred tax asset has been recognized for these losses as it is probable they will be utilized. At December 31, 2011, there was no recognized deferred tax liability (2010 – nil; January 1, 2010 – nil) for taxes that would be payable on the unremitted earnings of certain of the Company’s subsidiaries. The Company has determined that undistributed profits of its subsidiaries will not be distributed in the foreseeable future. The temporary differences associated with investments in subsidiaries, for which a deferred tax asset has not been recognized, aggregate to $622 (December 31, 2010 – $622; January 1, 2010 – nil). Income tax provisions, including current and deferred income tax assets and liabilities, and income tax filing positions require estimates and interpretations of federal and provincial income tax rules and regulations, and judgments as to their interpretation and application to Ag Growth’s specific situation. The amount and timing of reversals of temporary differences will also depend on Ag Growth’s future operating results, acquisitions and dispositions of assets and liabilities. The business and operations of Ag Growth are complex and Ag Growth has executed a number of significant financings, acquisitions, reorganizations and business combinations over the course of its history including the conversion to a corporate entity. The computation of income taxes payable as a result of these transactions involves many complex factors, as well as Ag Growth’s interpretation of and compliance with relevant tax legislation and regulations. While Ag Growth believes that its tax filing positions are probable to be sustained, there are a number of tax filing positions including in respect of the conversion to a corporate entity that may be the subject of review by taxation authorities. Therefore, it is possible that additional taxes could be payable by Ag Growth and the ultimate value of Ag Growth’s income tax assets and liabilities could change in the future and that changes to these amounts could have a material effect on these consolidated financial statements. There are no income tax consequences to the Company attached to the payment of dividends in either 2011 or 2010 by the Company to its shareholders. 26. pOSt-rEtirEMEnt BEnEFit plAnS Ag Growth contributes to group retirement savings plans subject to maximum limits per employee. Ag Growth accounts for such defined contributions as an expense in the period in which the contributions are required to be made. The expense recorded during the year ended December 31, 2011 was $1,925 (2010 – $1,470). Ag Growth expects to contribute $2,000 for the full year 2012. Ag Growth accounts for one plan covering substantially all of its employees of the Mepu division as a defined contribution plan, although it does provide the employees with a defined benefit (average pay) pension. The plan qualifies as a multi-employer plan and is administered by the Government of Finland. Ag Growth is not able to obtain sufficient information to account for the plan as a defined benefit plan. 89 27. FinAnCiAl inStrUMEntS AnD FinAnCiAl riSk MAnAGEMEnt (a) Management of risks arising from financial instruments Ag Growth’s principal financial liabilities, other than derivatives, comprise loans and borrowings and trade and other payables. The main purpose of these financial liabilities is to finance the Company’s operations and to provide guarantees to support its operations. The Company has deposits, trade and other receivables and cash and short-term deposits that are derived directly from its operations. The Company also holds an available-for-sale investment and enters into derivative transactions. The Company’s activities expose it to a variety of financial risks: market risk (including foreign exchange and interest rate), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to The sensitivity analyses in the following sections relate to the position as at December 31, 2011, December 31, 2010 and January 1, 2010. The sensitivity analyses have been prepared on the basis that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives and the proportion of financial instruments in foreign currencies are all constant. The analyses exclude the impact of movements in market variables on the carrying value of provisions and on the non-financial assets and liabilities of foreign operations. The following assumptions have been made in calculating the sensitivity analyses: • The consolidated statement of financial position sensitivity relates to derivatives. minimize potential adverse effects on the Company’s financial performance. The Company • The sensitivity of the relevant consolidated statement of income item is the effect of the uses derivative financial instruments to mitigate certain risk exposures. The Company does assumed changes in respective market risks. This is based on the financial assets and not purchase any derivative financial instruments for speculative purposes. Risk management financial liabilities held at December 31, 2011 and December 31, 2010, including the is the responsibility of the corporate finance function, which has the appropriate skills, effect of hedge accounting. experience and supervision. The Company’s domestic and foreign operations along with the corporate finance function identify, evaluate and, where appropriate, mitigate financial risks. Material risks are monitored and are regularly discussed with the Audit Committee of • The sensitivity of equity is calculated by considering the effect of any associated cash flow hedges at December 31, 2011 for the effects of the assumed underlying changes. the Board of Directors. The Audit Committee reviews and monitors the Company’s financial Foreign currency risk risk-taking activities and the policies and procedures that were implemented to ensure that financial risks are identified, measured and managed in accordance with Company policies. The risks associated with the Company’s financial instruments are as follows: Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Components of market risk to which Ag Growth is exposed are discussed below. Financial instruments affected by market risk include trade accounts receivable and payable, available-for-sale investment and derivative financial instruments. The objective of the Company’s foreign exchange risk management activities is to minimize transaction exposures and the resulting volatility of the Company’s earnings, subject to liquidity restrictions, by entering into foreign exchange forward contracts. Foreign currency risk is created by fluctuations in the fair value or cash flows of financial instruments due to changes in foreign exchange rates and exposure. A significant part of the Company’s sales are transacted in U.S. dollars and as a result fluctuations in the rate of exchange between the U.S. and Canadian dollar can have a significant effect on the Company’s cash flows and reported results. To mitigate exposure to the fluctuating rate of exchange, Ag Growth enters into foreign exchange forward contracts and denominates a portion of its debt in U.S. dollars. As at December 31, 2011, Ag Growth’s The open foreign exchange forward contracts as at December 31, 2011 are as follows: U.S. dollar denominated debt totalled U.S. $35.5 million (2010 – $25.0 million) and the Company has entered into the following foreign exchange forward contracts to sell U.S. dollars in order to hedge its foreign exchange risk on revenue: Settlement dates Face value Average rate January – December 2012 U.S. $ 60,000 Cdn $ $0.99 The Company enters into foreign exchange forward contracts to mitigate foreign currency risk relating to certain cash flow exposures. The hedged transactions are expected to occur within a maximum 24-month period. The Company’s foreign exchange forward contracts reduce the Company’s risk from exchange movements because gains and losses on such contracts offset gains and losses on transactions being hedged. The Company’s exposure to foreign currency changes for all other currencies is not material. notional Canadian dollar equivalent notional amount of currency sold Contract amount Cdn $ equivalent Unrealized loss U.S. $ 60,000 $ 0.9905 $ 59,430 $ 1,828 The open foreign exchange forward contracts as at December 31, 2010 are as follows: notional Canadian dollar equivalent notional amount of currency sold U.S. $ 55,000 Contract amount Cdn $ equivalent Unrealized gain $ 1.08 $ 59,400 $ 4,200 Ag Growth’s sales denominated in U.S. dollars for the year ended December 31, 2011 The terms of the foreign exchange forward contracts have been negotiated to match the were U.S. $214 million, and the total of its cost of goods sold and its selling, general and terms of the commitments. There were no highly probable transactions for which hedge administrative expenses denominated in that currency were U.S. $132 million. Accordingly, accounting has been claimed that have not occurred and no significant element of hedge a 10% increase or decrease in the value of the U.S. dollar relative to its Canadian counterpart ineffectiveness requiring recognition in the consolidated statement of income. would result in a $21.4 million increase or decrease in sales and a total increase or decrease of $13.2 million in its cost of goods sold and its selling, general and administrative expenses. In relation to Ag Growth’s foreign exchange hedging contracts, a 10% increase or decrease in the value of the U.S. dollar relative to its Canadian counterpart would result in a $3.6 million increase or decrease in the foreign exchange gain and a $7.0 million increase or decrease to other comprehensive income. The counterparty to the contracts are three multinational commercial banks and therefore credit risk of counterparty non-performance is remote. Realized gains or losses are included in net earnings and for the year ended December 31, 2011 the Company realized a gain on its foreign exchange contracts of $5.0 million (2010 – $8.7 million). The cash flow hedges of the expected future sales were assessed to be highly effective and a net unrealized loss of $1,828, with a deferred tax asset of $481 relating to the hedging instruments, is included in accumulated other comprehensive income. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Furthermore, as Ag Growth regularly reviews the denomination of its borrowings, the Company is subject to changes in interest rates that are linked to the currency of denomination of the debt. Ag Growth’s Series A secured notes and convertible unsecured subordinated debentures outstanding at December 31, 2011, December 31, 2010 and January 1, 2010 are at a fixed rate of interest. 91 As at December 31, 2011, the Company had outstanding $10,530 of U.S. dollar term debt at At December 31, 2011, the Company had two customers (December 31, 2010 – two a floating rate of interest. A 10% increase or decrease in the Company’s interest rate would customers, January 1, 2010 – four customers) that accounted for approximately 14% result in an increase or decrease of $7 to long-term interest expense. (December 31, 2010 – 30%, January 1, 2010 – 32%) of all receivables owing. The Credit risk Credit risk is the risk that a customer will fail to perform an obligation or fail to pay amounts due, causing a financial loss. A substantial portion of Ag Growth’s accounts receivable are with customers in the agriculture industry and are subject to normal industry credit risks. requirement for an impairment is analyzed at each reporting date on an individual basis for major customers. Additionally, a large number of minor receivables are grouped into homogeneous groups and assessed for impairment collectively. The calculation is based on actual incurred historical data. The Company does not hold collateral as security. This credit exposure is mitigated through the use of credit practices that limit transactions The Company does not believe that any single customer group represents a significant according to the customer’s credit quality and due to the accounts receivable being spread concentration of credit risk. over a large number of customers. Ag Growth establishes a reasonable allowance for non-collectible amounts with this allowance netted against the accounts receivable on the Liquidity risk consolidated statement of financial position. Liquidity risk is the risk Ag Growth will encounter difficulties in meeting its financial liability obligations. Ag Growth manages its liquidity risk through cash and debt management. Accounts receivable and long-term receivables are subject to credit risk exposure and the In managing liquidity risk, Ag Growth has access to committed short and long-term debt carrying values reflect management’s assessment of the associated maximum exposure facilities as well as to equity markets, the availability of which is dependent on market to such credit risk. The Company regularly monitors customers for changes in credit risk. conditions. Ag Growth believes it has sufficient funding through the use of these facilities to Trade receivables from international customers are often insured for events of non-payment meet foreseeable borrowing requirements. through third-party export insurance. In cases where the credit quality of a customer does not meet the Company’s requirements, a cash deposit is received before goods are shipped. The table below summarizes the undiscounted contractual payments of the Company’s financial liabilities as at December 31, 2011: December 31, 2011 Bank debt (includes interest) Trade and other payables Finance lease obligations Dividends payable Convertible unsecured subordinated debentures (include interest) Acquisition price, transaction and financing costs payable total financial liability payments December 31, 2010 Bank debt (includes interest) Trade and other payables Finance lease obligations Dividends payable Convertible unsecured subordinated debentures (include interest) Acquisition price, transaction and financing costs payable total financial liability payments total $ 45,497 24,486 131 2,509 139,011 1,938 213,572 total $ 35,225 24,565 570 2,509 147,200 11,994 222,063 0 – 6 months 6 – 12 months 12 – 24 months 2 – 4 years After 4 years $ 1,073 24,486 66 2,509 4,021 1,429 33,584 $ 1,073 — 65 — 4,021 509 5,668 $ 2,133 — — — 8,042 — 10,175 $ 14,351 — — — 122,927 — 137,278 $ 26,867 — — — — — 26,867 0 – 6 months 6 – 12 months 12 – 24 months 2 – 4 years After 4 years $ 912 24,565 226 2,509 4,025 11,994 44,231 $ 912 — 226 — 4,025 — 5,163 $ 1,824 — 118 — 8,050 — 9,992 $ 3,613 — — — 131,100 — 134,713 $ 27,964 — — — — — 27,964 93 (b) Fair value Set out below is a comparison by class of the carrying amounts and fair value of the Company’s financial instruments that are carried in the consolidated financial statements: December 31, 2011 December 31, 2010 January 1, 2010 Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Financial assets Held-for-trading Derivative instruments Loans and receivables Cash and cash equivalents Cash held in trust Restricted cash Accounts receivable Financial liabilities Other financial liabilities Interest-bearing loans and borrowings Trade and other payables Finance lease obligations Dividends payable Acquisition price, transaction and financing costs payable Derivative instruments $ — 6,839 — 2,439 49,691 36,153 24,486 131 2,509 1,938 1,828 $ $ $ $ $ — 4,200 4,200 9,500 9,500 6,839 — 2,439 49,691 39,593 24,486 131 2,509 1,938 1,828 34,981 822 1,860 38,535 25,204 24,565 570 2,509 11,994 — 105,140 34,981 822 1,860 38,535 28,171 24,565 570 2,509 11,994 — 109,094 109,094 — — — — 25,072 25,072 26,212 13,930 — 2,224 1,028 — 26,338 13,930 — 2,224 1,028 — 116,231 103,107 106,400 Convertible unsecured subordinated debentures 107,202 107,671 The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values: • Cash and cash equivalents, cash held in trust, restricted cash, accounts receivable, dividends payable, finance lease obligations, acquisition price, transaction and financing (c) Fair value (“FV”) hierarchy Ag Growth uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: costs payable, accounts payable and other current liabilities approximate their carrying Level 1 amounts largely due to the short-term maturities of these instruments. The fair value measurements are classified as Level 1 in the FV hierarchy if the fair value is • Fair value of quoted notes and bonds is based on price quotations at the reporting date. determined using quoted, unadjusted market prices for identical assets or liabilities. The fair value of unquoted instruments, loans from banks and other financial liabilities Level 2 as well as other non-current financial liabilities is estimated by discounting future Fair value measurements that require inputs other than quoted prices in Level 1, and for cash flows using rates currently available for debt on similar terms, credit risk and which all inputs that have a significant effect on the recorded fair value are observable, either remaining maturities. directly or indirectly, are classified as Level 2 in the FV hierarchy. • The Company enters into derivative financial instruments with financial institutions Level 3 with investment grade credit ratings. Derivatives valued using valuation techniques Fair value measurements that require unobservable market data or use statistical techniques with market observable inputs are mainly foreign exchange forward contracts and one to derive forward curves from observable market data and unobservable inputs are classified option embedded in a convertible debt agreement. The most frequently applied valuation as Level 3 in the FV hierarchy. techniques include forward pricing, using present value calculations. The models incorporate various inputs including the credit quality of counterparties and foreign exchange spot and forward rates. The FV hierarchy of financial instruments measured at fair value on the consolidated statement of financial position is as follows: Financial assets Cash and cash equivalents Cash held in trust Derivative instruments Restricted cash level 1 $ 6,839 — — 2,439 December 31, 2011 level 2 level 3 $ — — — — $ — — — — level 1 $ 34,981 822 — 1,860 December 31, 2010 level 2 $ — — 4,200 — level 3 $ — — — — 95 During the reporting periods ended December 31, 2011 and December 31, 2010, there were The table below calculates the ratio based on EBITDA achieved in the previous 12 months: no transfers between Level 1 and Level 2 fair value measurements. At December 31, 2011, Ag Growth has $2,439 of restricted cash, which is classified as a current asset (note 16). Interest from financial instruments is recognized in finance costs and finance income. Foreign currency and impairment reversal impacts for loans and receivables are reflected in other income (expense). Net debt EBITDA Ratio December 31 2011 December 31 2010 January 1 2010 $ 136,187 56,038 $ 94,677 66,200 $ 19,416 60,680 2.43 times 1.43 times 0.32 times 28. CApitAl DiSClOSUrE AnD MAnAGEMEnt Ag Growth’s capital structure is comprised of shareholders’ equity and long-term debt. Ag Growth’s optimal capital structure targets to maintain its net debt to shareholders’ equity ratio at levels below 1.0, after taking into consideration the impacts of industry cyclicality and Ag Growth’s objectives when managing its capital structure are to maintain and preserve acquisitions: Ag Growth’s access to capital markets, continue its ability to meet its financial obligations, including the payment of dividends, and finance organic growth and acquisitions. 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. The Company’s capital management objectives have remained unchanged from the prior year. The Company is not subject to any externally imposed capital requirements other than financial covenants in its credit facilities and as at December 31, 2011 and December 31, 2010, all of these covenants were complied with. Ag Growth monitors its capital structure using non-IFRS financial metrics including net debt December 31 2011 December 31 2010 $ 136,187 202,159 $ 94,677 210,294 January 1 2010 $ 19,416 231,395 0.67 times 0.45 times 0.08 times Net debt Shareholders’ equity Ratio 29. rElAtED pArtY DiSClOSUrES relationship between parent and subsidiaries The main transactions between the corporate entity of the Company and its subsidiaries is to EBITDA for the immediately preceding 12-month period and net debt to shareholders’ the providing of cash fundings based on the equity and convertible debt funds of Ag Growth equity. Ag Growth defines net debt as long-term debt plus the liability component of Debentures, less cash and cash equivalents. Ag Growth’s optimal capital structure targets to maintain its net debt to EBITDA ratio at levels below 2.5, after taking into consideration the impacts of industry cyclicality and acquisitions. International Inc. Furthermore, the corporate entity of the Company is responsible for the billing and supervision of major construction contracts with external customers and the allocation of sub-projects to the different subsidiaries of the Company. Finally, the parent company is providing management services to the Company entities. Between the subsidiaries there are limited inter-company sales of inventories and services. Because all subsidiaries are currently 100% owned by Ag Growth International Inc., these inter-company transactions are 100% eliminated on consolidation. Other relationships Burnet, Duckworth & Palmer LLP (“BDP”) provides legal services to the Company and a Director of Ag Growth is a partner of BDP. The total cost of these legal services was $0.4 million during the year ended December 31, 2011 (2010 – $0.1 million). Included in accounts payable and accrued liabilities as at December 31, 2011 is $0.5 million (2010 – $0.1 million) owing to BDP. These transactions are measured at the exchange amount and were incurred during the normal course of business. Compensation of key management personnel of Ag Growth Ag Growth’s key management consists of 25 individuals including its CEO, CFO, its Officers and other senior management, divisional general managers and its Directors. Short-term employee benefits Contributions to defined contribution plans Salaries Accelerated vesting and death benefits Share-based payments total compensation paid to key management personnel 2011 $ 85 165 4,526 — 2,038 6,814 2010 $ 73 122 3,553 2,549 6,504 12,801 key management interests in an employee incentive plan Share Awards held by key management personnel under the SAIP have the following expiry dates and exercise prices: issue date Expiry date 2007 January 1, 2010, 2011 and 2012 $ 0.10 # 40,000 # 80,000 # 220,000 Exercise price number outstanding number outstanding number outstanding December 31, 2011 December 31, 2010 January 1, 2010 Key management employees have been granted the following LTIP awards for the different vesting dates without any exercise price: issue date 2007 2008 2009 2010 Expiry date 2009 – 2011 2010 – 2012 2011 – 2013 2012 – 2014 December 31, 2011 Shares outstanding December 31, 2010 January 1, 2010 # — 2,675 80,704 50,997 134,376 # 17,482 5,352 121,056 — 143,890 # 46,933 7,339 — — 54,272 97 30. EArninGS pEr ShArE Net earnings per share is based on the consolidated net earnings for the period divided by There have been no other transactions involving ordinary shares or potential ordinary the weighted average number of shares outstanding during the period. Diluted earnings shares between the reporting date and the date of completion of these consolidated per share are computed in accordance with the treasury stock method and based on the financial statements. weighted average number of shares and dilutive share equivalents. The following reflects the income and share data used in the basic and diluted earnings per the above diluted net earnings per share because their effect is anti-dilutive. The convertible unsecured subordinated debentures were excluded from the calculation of share computations: Net profit attributable to shareholders for basic and diluted earnings per share December 31 2011 December 31 2010 $ $ 31. rEpOrtABlE BUSinESS SEGMEnt The Company is managed as a single business segment that manufactures and distributes grain handling, storage and conditioning equipment. The Company determines and presents business segments based on the information provided internally to the CEO, who is 24,523 30,761 Ag Growth’s Chief Operating Decision Maker (“CODM”). When making resource allocation Basic weighted average number of shares 12,423,173 12,675,342 decisions, the CODM evaluates the operating results of the consolidated entity. Dilutive effect of DDCP Dilutive effect of LTIP 16,719 122,463 10,593 142,437 All segment revenue is derived wholly from external customers and as the Company has a single reportable segment, inter-segment revenue is zero. Diluted weighted average number of shares 12,562,355 12,828,372 Basic earnings per share Diluted earnings per share 1.97 1.95 2.43 2.40 Canada United States International revenues property, plant and equipment, goodwill, intangible assets and available-for-sale investment 2011 $ 63,746 187,645 54,541 305,932 2010 $ 57,971 174,489 36,807 269,267 2011 $ 152,411 64,787 10,422 227,620 2010 $ 148,108 57,166 10,448 215,722 The revenue information above is based on the location of the customer. The Company has no single customer that represents 10% or more of the Company’s revenues. 32. COMMitMEntS AnD COntinGEnCiES (a) Contractual commitment for the purchase of property, plant and equipment As of the reporting date, the Company has entered into commitments to purchase property, (d) Finance leases The Company has finance leases for various items of manufacturing equipment. Future minimum lease payments under finance leases, together with the present value of the net minimum lease payments, are as follows: plant and equipment of $1.5 million. (b) letters of credit As at December 31, 2011, the Company has outstanding letters of credit in the amount of $1,987 (2010 – $642). (c) Operating leases The Company leases office and manufacturing equipment, warehouse facilities and vehicles under operating leases with minimum aggregate rent payable in the future as follows: Within one year After one year but not more than five years $ 657 1,857 2,514 December 31, 2011 December 31, 2010 Minimum lease payments Minimum lease payments Within one year After one year but not more than five years Total minimum lease payments Less amount representing finance charges present value of minimum lease payments $ 131 — 131 4 127 $ 432 138 570 23 547 These leases have a life of between one and five years with no renewal options included in The leased equipment is pledged as collateral. Interest expense related to obligations under the contracts. capital leases was $23 for the year ended December 31, 2011 (2010 – nil). During the year ended December 31, 2011, the Company recognized an expense of $943 (2010 – $1,273) for leasing contracts. This amount relates only to minimum lease payments. (e) legal actions The Company is involved in various legal matters arising in the ordinary course of business. The resolution of these matters is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows. 99 33. EXplAnAtiOn OF trAnSitiOn tO iFrS The Company’s consolidated annual financial statements were previously prepared in accordance with Canadian GAAP. The Company’s consolidated financial statements for the year ended December 31, 2011 are the first annual financial statements prepared in accordance with IFRS and were prepared as (b) Share-based payments The Company has elected to retrospectively apply the provisions of IFRS 2, Share-based Payments (“IFRS 2”) only to (i) equity instruments granted after November 7, 2002 that are unvested at the Transition Date, and (ii) liability instruments arising from share-based payment transactions that are outstanding at the Transition Date. described in note 3, including application of IFRS 1. (c) Foreign exchange Cumulative currency translation differences for all foreign operations are deemed to be zero IFRS 1 also requires that comparative financial information is provided. As a result, the first date at which the Company has applied IFRS was January 1, 2010 (the “Transition Date”). as at January 1, 2010. IFRS 1 requires first-time adopters to retrospectively apply all effective IFRS standards as of (d) Borrowing costs the reporting date, which for the Company is December 31, 2011. However, it also provides The Company has elected only to capitalize borrowing costs relating to qualifying assets on for certain optional exemptions and certain mandatory exceptions for first-time adopters. or after the date of transition. Elected exemptions from full retrospective application In preparing these consolidated financial statements in accordance with IFRS 1, the Company has applied certain of the optional exemptions from full retrospective application of IFRS. The optional exemptions applied by the Company are described below. (a) Business combinations The Company has applied the business combinations exemption in IFRS 1 to not apply IFRS 3 retrospectively to past business combinations. Accordingly, the Company has not restated business combinations that took place prior to the Transition Date. reconciliation of financial position The following is a reconciliation of the Company’s consolidated statement of financial position reported in accordance with Canadian GAAP to its consolidated statement of financial position reported in accordance with IFRS at the transition date January 1, 2010: ASSEtS Current assets Cash and cash equivalents Accounts receivable Inventories Prepaid expenses and other assets Income taxes recoverable Derivative instruments Deferred taxes non-current assets Property, plant and equipment, net Goodwill Intangible assets, net Available-for-sale investment Derivative instruments Deferred tax asset total assets note Canadian GAAp iFrS Adjustments $ $ 6 2 5, 8 3, 7 3 3 3, 5b, 7, 8 109,094 25,072 39,432 1,858 598 7,652 10,103 193,809 27,779 52,337 69,023 2,000 1,848 41,054 194,041 387,850 — — 189 (86) — — (10,103) (10,000) 10,094 (150) (582) — — 6,302 15,664 5,664 iFrS $ 109,094 25,072 39,621 1,772 598 7,652 — 183,809 37,873 52,187 68,441 2,000 1,848 47,356 209,705 393,514 101 liABilitiES AnD ShArEhOlDErS’ EQUitY Current liabilities Accounts payable and accrued liabilities Customer deposits Long-term incentive plan Dividends payable Acquisition price, transaction and financing costs payable Current portion of deferred credit Current portion of long-term debt Provisions non-current liabilities Long-term debt Convertible unsecured subordinated debentures Deferred tax liability Deferred credit Share award incentive plan total liabilities Shareholders’ equity Common shares Accumulated other comprehensive income Equity component of convertible debentures Contributed surplus Retained earnings total shareholders’ equity note Canadian GAAp iFrS Adjustments $ $ 8 1 5a 8 3, 5b, 7 5a 1 13,930 8,340 2,184 2,224 1,028 9,305 16 — 37,027 25,403 103,107 1,047 38,601 5,866 174,024 211,051 157,279 5,590 — 8,653 5,277 176,799 387,850 (1,194) — (2,184) — — (9,305) — 1,194 (11,489) — — 1,167 (38,601) (9) (37,443) (48,932) — — 5,105 (4,794) 54,285 54,596 5,664 iFrS $ 12,736 8,340 — 2,224 1,028 — 16 1,194 25,538 25,403 103,107 2,214 — 5,857 136,581 162,119 157,279 5,590 5,105 3,859 59,562 231,395 393,514 The following is a reconciliation of the Company’s consolidated statement of financial position reported in accordance with Canadian GAAP to its consolidated statement of financial position reported in accordance with IFRS at December 31, 2010: ASSEtS Current assets Cash and cash equivalents Cash held in trust Restricted cash Accounts receivable Inventories Prepaid expenses and other assets Derivative instruments Deferred taxes non-current assets Property, plant and equipment, net Goodwill Intangible assets, net Available-for-sale investment Deferred tax asset total assets note Canadian GAAp Adjustments $ 34,981 822 1,860 36,910 53,631 7,840 4,200 10,817 151,061 67,206 64,055 72,388 2,000 34,853 240,502 391,563 $ — — — 1,625 (1,057) (212) — (10,817) (10,461) 11,816 (1,700) (43) — 7,210 17,283 6,822 4 4, 6 2 8 7 2, 4 4 5b, 7, 8 iFrS $ 34,981 822 1,860 38,535 52,574 7,628 4,200 — 140,600 79,022 62,355 72,345 2,000 42,063 257,785 398,385 103 liABilitiES AnD ShArEhOlDErS’ EQUitY Current liabilities Accounts payable and accrued liabilities Customer deposits Long-term incentive plan Dividends payable Acquisition price, transaction and financing costs payable Income taxes payable Current portion of deferred credit Current portion of long-term debt Current portion of obligations under finance leases Current portion of share award incentive plan Current portion of deferred tax liability Provisions non-current liabilities Long-term debt Obligations under finance leases Convertible unsecured subordinated debentures Deferred tax liability Deferred credit Share award incentive plan total liabilities Shareholders’ equity Common shares Accumulated other comprehensive income (loss) Equity component of convertible debentures Contributed surplus Retained earnings (accumulated deficit) total shareholders’ equity note Canadian GAAp $ iFrS Adjustments $ 8 1 5a 8 8 5b, 7 5a 1 24,565 6,573 1,870 2,509 11,994 56 8,302 128 432 2,003 426 — 58,858 24,518 138 105,140 6,602 34,018 1,573 171,989 230,847 151,376 (1,026) — 11,121 (755) 160,716 391,563 (1,942) — (1,870) — — — (8,302) — — — (426) 1,942 (10,598) — — — 1,862 (34,018) (2) (32,158) (42,756) — 583 5,105 (5,000) 48,890 49,578 6,822 iFrS $ 22,623 6,573 — 2,509 11,994 56 — 128 432 2,003 — 1,942 48,260 24,518 138 105,140 8,464 — 1,571 139,831 188,091 151,376 (443) 5,105 6,121 48,135 210,294 398,385 reconciliation of equity as reported under Canadian GAAp and iFrS The following is a reconciliation of the Company’s equity reported in accordance with Canadian GAAP to its equity in accordance with IFRS at the Transition Date: note Common shares Equity component of debenture Contributed surplus retained earnings As reported under Canadian GAAP – December 31, 2009 Reclassifications Long-term incentive plan liability Equity component of debenture Differences increasing (decreasing) reported amounts DDCP SAIP Deferred income taxes Transaction costs Translation of foreign operations 1 8 1 1 5b 2 3 Deferred income taxes deferred credit 5a, 7 Inventories Property, plant and equipment 6 7 $ 157,279 — — — — — — — — — — $ — — 7,146 — — (2,041) — — — — — $ 8,653 2,184 (7,146) 168 — — — — — — — As reported under IFRS – January 1, 2010 157,279 5,105 3,859 $ 5,277 — — (168) 9 57 (86) (427) 44,794 189 9,917 59,562 Accumulated other comprehensive income $ 5,590 — — — — — — — — — — 5,590 total $ 176,799 2,184 — — 9 (1,984) (86) (427) 44,794 189 9,917 231,395 105 The following is a reconciliation of the Company’s equity reported in accordance with Canadian GAAP to its equity in accordance with IFRS at December 31, 2010: note Common shares Equity component of debenture Contributed surplus retained earnings As reported under Canadian GAAP – December 31, 2010 Reclassifications Long-term incentive plan liability Equity component of debenture Differences increasing (decreasing) reported amounts DDCP SAIP Income taxes – convertible debentures Transaction costs Translation of foreign operations Deferred income taxes – deferred credit Deferred income taxes – temporary differences Property, plant and equipment Inventories 1 8 1 1 5b 2 3 5a 7 7 6 $ 151,376 — — — — — — — — — — — $ — — 7,146 — — (2,041) — — — — — — $ 11,121 1,870 (7,146) 276 — — — — — — — — As reported under IFRS – December 31, 2010 151,376 5,105 6,121 $ (755) — — (276) 2 413 (1,789) (427) 42,320 (3,632) 11,884 395 48,135 Accumulated other comprehensive income $ total $ (1,026) 160,716 — — — — — — 427 — 224 (68) — (443) 1,870 — — 2 (1,628) (1,789) — 42,320 (3,408) 11,816 395 210,294 nOtES tO thE rECOnCiliAtiOnS 1. Share-based payments The Company elected to retrospectively apply the provisions of IFRS 2 only to equity-settled Date, the impact of this adjustment was to decrease prepaid expenses and other assets and decrease retained earnings by $86. Transaction costs incurred in 2010 related to the business combinations for Mepu, Franklin and Tramco (note 7) resulted in an aggregate awards that were unvested at the Transition Date and liability awards outstanding at the decrease to the goodwill balance in the amount of $1,577 and an additional decrease of Transition Date. $126 to prepaid expenses at December 31, 2010. The differences impacting the statement of financial position at the Transition Date include: • LTIP was classified under Canadian GAAP as a liability plan, whereas under IFRS 2 due to the final settlement of the plan with treasury shares acquired by the administrator for the benefit of the management members, the plan qualifies as an equity-settled plan. Therefore, this change resulted in a reclassification of the balances from liability into shareholders’ equity. At the Transition Date, the impact of this adjustment was to decrease the long-term incentive plan liability and increase contributed surplus by $2,184 (December 31, 2010 – $1,870). • Awards with graded vesting provisions are treated as a single award for both measurement and recognition purposes under Canadian GAAP. IFRS 2 requires such awards to be treated as a series of individual awards, with compensation measured and recognized separately for each tranche of options within a grant that has a different vesting date. This impacts the LTIP and the SAIP of the Company. At the Transition Date, the impact of this adjustment was to decrease the share award incentive plan liability and increase retained earnings by $9 (December 31, 2010 – $2). • For the directors deferred compensation plan (“DDCP”) the share-based remuneration vests under IFRS 2 directly in the respective service period, whereas under Canadian GAAP the expense was allocated over the deferred compensation period of three years. At the transition date, the impact of this adjustment was to decrease retained earnings and increase contributed surplus by $168 (December 31, 2010 – $276). 2. transaction costs In accordance with IFRS 3 (revised 2008) transaction costs incurred in the process of acquiring a business cannot be capitalized, but have to be immediately expensed. Under Canadian GAAP these transaction costs were capitalized by Ag Growth. As at the Transition 3. translation of foreign operations Under Canadian GAAP, until December 31, 2009 the Company had classified all business units as integrated operations and therefore used the Canadian dollar as the functional currency for all foreign entities. As at January 1, 2010, the Company determined that its foreign operations Hi Roller, Union Iron and Applegate had more characteristics of self-sustaining operations than integrated foreign operations. Accordingly, the Company adopted the current rate method of foreign currency translation for these foreign operations, resulting in using the local currency of these foreign operations as their functional currency under Canadian GAAP, applied on a prospective basis. In accordance with IAS 21, for IFRS purposes, every entity of the Company has to be individually reviewed for the determination of its functional currency and this has to be performed retrospectively as of the IFRS transition date. Therefore, for IFRS purposes, Hi Roller, Union Iron and Applegate were classified as U.S. dollar functional currency entities as of the transition date of January 1, 2010, whereas under Canadian GAAP they were still Canadian dollar functional currency entities. This change in the functional currency had the following impacts on the Company’s assets, liabilities and retained earnings: (1) Goodwill: decrease of balance by $150 (2) Property, plant and equipment: increase of balance by $177 (3) Intangible assets: decrease of balance by $582 (4) Deferred tax liability: decrease of balance by $128 (5) Retained earnings: decrease of balance by $427 For the elective exemptions from the retrospective application of IFRS 1 the Company elected to recognize the cumulative translation adjustment existing at the Transition Date directly into retained earnings. Therefore all the above listed impacts were directly recorded in the Company’s retained earnings and have no impact on the other comprehensive income of the Company. 107 4. revenue recognition Under Canadian GAAP all product deliveries were recorded when the risk of ownership b. IFRS requires the bifurcation of convertible debt instruments into a liability and an equity component. IFRS further requires the recognition of a temporary difference based on the was transferred. Similarly, for IFRS purposes, the majority of the revenues of Ag Growth are difference between the carrying amount of the liability at issuance and its underlying tax realized at the time of transfer of the risk of ownership. However, as described in note 3, the basis. All changes in the initial temporary difference for the liability component of the Company has classified certain of its customer contracts as construction contracts resulting convertible debt are recognized in the consolidated statement of income. in the earlier recognition of revenues and gross margin with the application of the percentage of completion method of accounting. As at December 31, 2010, as a result of the adjustment, the Company increased accounts receivable by $1,625, decreased inventory $1,452, decreased goodwill $123, and decreased intangible assets $43 (as the sale adjustment impacted the acquisition accounting). Under Canadian GAAP the tax basis of the liability component of the convertible debenture is considered to be the same as its carrying amount, and therefore the recognition of a temporary difference is not required. This difference between IFRS and Canadian GAAP results in an additional temporary difference for the Company’s $115,000 Debenture. An additional deferred tax liability of $1,984 has to be recorded as of the Transition Date 5. income taxes As noted above, the deferred tax balances as of the Transition Date and as of December 31, (December 31, 2010 - $1,628). The impact of $1,984 as of the Transition Date results in a corresponding debit entry to the equity component of the convertible debenture of $2,041 2010 are impacted by the IFRS and Canadian GAAP adjustments. and increase to retained earnings of $57. Subsequent movements in the deferred tax liability Additionally, the accounting for income taxes under IAS 12 resulted in the following differences for the Company: a. In 2009, the Company converted from an income fund into a corporate entity under a plan of arrangement with a previously unrelated company. As a result of this transaction, the Company received tax attributes for which deferred tax assets in the amount of $69,800 were recorded. The difference between this deferred tax asset and the purchase price of $13,500 for shares of the previously unrelated company was recorded under Canadian of $413 at December 31, 2010 resulted in a decrease to deferred income tax expense. 6. inventories Due to the remeasurement of property, plant and equipment and changes to the depreciation expense, Ag Growth was required to adjust the overhead allocation on the valuation of its inventory by $189 at transition ($395 – December 31, 2010). 7. property, plant and equipment For all items of property, plant and equipment, the provisions of IAS 16 were retrospectively GAAP as a deferred credit. This deferred credit had a carrying amount under Canadian applied. The assessment and annual review criteria of useful lives and depreciation methods GAAP of $47,906 (January 1, 2010) and $42,320 (December 31, 2010), respectively. are more explicit in IFRS, which required Ag Growth to adjust certain carrying amounts For IFRS purposes, the difference between the tax benefits and the purchase price of its assets. Furthermore, the componentization requirements are more explicit in IFRS. cannot be deferred, but the benefit from the higher fair value of the tax benefits has to be Differences relating to the level of componentization, depreciation methods and useful lives retrospectively recorded as of the Transition Date. The adjustment results in an increase resulted in the carrying value of these assets at the transition date to increase from the to retained earnings as of the different reporting dates during the comparison period 2010 recorded amount under Canadian GAAP by $9,917 (December 31, 2010 – $11,816). The and the elimination of the deferred credit as reported under Canadian GAAP. related tax impact of the change in temporary differences resulted in additional deferred tax liability of $3,112 at the Transition Date (December 31, 2010 – $3,408). 8. reclassifications Certain balances have been reclassified between accounts to conform with IFRS. deferred credits are generally not recognized, which ultimately results in an increase in the Company’s non-cash deferred tax expense of $5,586 at December 31, 2010. Reconciliation of profit and loss for the twelve-month period ended December 31, 2010 b. Under IFRS, a temporary difference is recorded related to the convertible debenture note Year ended December 31, 2010 resulting in the recognition of a deferred tax liability on transition. Subsequent movements in the deferred tax liability of $339 at December 31, 2010 resulted in a decrease to deferred income tax expense. Net income reported under Canadian GAAP Differences increasing (decreasing) net income Depreciation expense Cost of sales Deferred income tax Deferred credit Convertible debentures Temporary differences Cost of sales General and administrative General and administrative Translation gain Net profit recorded under IFRS 1 1 2a 2b 2c 3 4 5 6 $ 36,156 2,113 (44) (5,586) 339 (375) 8 (1,703) (115) (32) 30,761 notes to the reconciliations 1. The componentization of property, plant, equipment and change in useful lives and depreciation methods resulted in a decrease to depreciation expense of $2,113, and a reduction to the gain on sale of property, plant and equipment of $44, respectively. c. The temporary differences arising from changes in carrying values of inventories and property, plant and equipment on transition to IFRS result in an increase of $375 to future income tax expense at December 31, 2010. 3. The change in the Company’s depreciation method impacted the Company’s inventory overhead rate, which resulted in a change in inventory values and change in inventories expensed through cost of goods sold. 4. Under IFRS, transaction costs incurred in the process of acquiring a business cannot be capitalized, but instead have to be immediately expensed resulting in an increase to selling, general and administrative expense of $1,703 at December 31, 2010. 5. Under IFRS, the calculation of the expense related to equity-settled compensation plans differs to reflect changes in the measurement and recognition of equity-settled awards that were outstanding and unvested at the Transition Date and those that were granted during the period. The impact of this adjustment was to increase (decrease) the SAIP expense by $(7) and the DDCP by $108 for year ended December 31, 2010. 6. Under IFRS, the Company has identified a limited number of contracts as construction contracts and has recognized revenue based on the percentage of completion methodology, which typically results in earlier recognition of revenues and costs. As a 2. a. The Company converted from an income fund into a corporate entity in 2009 under a result, certain revenues and costs denominated in foreign currencies were recognized in plan of arrangement that resulted in the Company receiving tax attributes and recording different periods compared to Canadian GAAP and were translated to Canadian dollars at a deferred tax asset of $69,800 and a related deferred credit of $56,300. Under IFRS, different rates of foreign exchange. 109 (e) reconciliation of comprehensive income as reported under Canadian GAAp and iFrS The following is a reconciliation of the Company’s comprehensive income reported in accordance with Canadian GAAP to its comprehensive income in accordance with IFRS for the year ended December 31, 2010: Year ended December 31, 2010 note Comprehensive income as reported under Canadian GAAP Differences (decreasing) increasing reported amounts Differences in net income Change in other comprehensive income Foreign currency translation (i) (ii) Comprehensive income as reported under IFRS $ 29,540 (5,395) 583 (4,812) 24,728 (i) Differences in net income Reflects the differences in net income between Canadian GAAP and IFRS as described in note 33. (ii) Foreign currency translation Assets and liabilities of foreign operations having a functional currency other than the Canadian dollar are translated at the rate of exchange prevailing at the reporting date and revenue and expenses at average rates during the period. The increase in property, plant and equipment creates increased foreign currency translation adjustments recorded in OCI. 34. COMpArAtiVE FiGUrES Certain of the comparative figures have been reclassified to conform to the current year’s presentation. Officers Gary Anderson, President, Chief Executive Officer and Director Steve Sommerfeld, CA, Executive Vice President and Chief Financial Officer Dan Donner, Senior Vice President, Sales and Marketing Paul Franzmann, CA, Senior Vice President, Operations Ron Braun, Vice President, Portable Grain Handling Nicolle Parker, Vice President, Finance and Integration Craig Nimegeers, Vice President, Engineering Arto Sainio, Managing Director, European Operations Gurcan Kocdag, Vice President, Storage and Conditioning Eric Lister, Q.C., Counsel Directors Gary Anderson John R. Brodie, FCA, Audit Committee Chairman Bill Lambert, Board of Directors Chairman Bill Maslechko, Governance Committee Chairman David White, CA Additional information relating to the Company, including all public filings, is available on SEDAR (www.sedar.com). 

Continue reading text version or see original annual report in PDF format above