ENGINEERING GROWTH
2017 ANNUAL REPORT
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AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 2
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 20
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Engineering Growth
ANNUAL REPORT
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AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Tim Close
President & CEO
CEO’s Message
2017: Engineering Growth
The global infrastructure required to transport the world’s people
consists of roads, rail, ships, and airports. The infrastructure required
to feed the world’s people consists of a global network of facilities to
store, blend, mix, convey, condition, process, and protect the hundreds
of millions of tons of agriculture inputs and crops that must flow around
the world on a daily basis. We further refine the definition of the global
food infrastructure to include the equipment and technology required to
facilitate the global movement of the inputs to grow our crops, to move
the crops to market, then to process the crops into feed for our animals
and food for people. I would like to re-introduce you to AGI, we don’t
just build augers anymore, we build the world’s food infrastructure.
Clarity of purpose is paramount when setting a strategy that will take
years and decades to fulfill. While we build only a small percentage of
the world’s food infrastructure today, our simple and ambitious goal is
to increase our percentage each year. As we work towards achieving
our goal, we will build a stronger, more diversified, more sustainable
company that delivers a unique offering to create more value for our
customers. Along this path we will also create a more engaging,
fulfilling company for our employees, we will achieve the required
scale and diversification to balance risk, and, when these elements are
combined, we produce better long-term returns for our shareholders.
Our purpose today is much broader than ever in our history. We have
grown over time from a single product, single region company to a
global company with a comprehensive product catalogue. We now
summarize our strategy as 5-6-7:
• We operate across 5 platforms: Fertilizer, Seed, Grain, Feed and
Food.
• We partner with customers in 6 continents.
• We deliver systems for farm and commercial applications which
include 7 components: Storage, Handling, Structural, Processing,
and Controls all based on, and brought together, with Engineering
and Project Management.
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CEO’S MESSAGE
AGI | 2 017 A N N UA L R E P O RT
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH We spent much of our first 22 years in Grain and over the last few years
we have moved into the other 4 platforms.
We spent much of our first 22 years in North America and over the last
few years we have moved into the other 5 continents.
We spent much of our first 22 years in Handling and over the past few
years we have moved into the other 6 components.
These repetitive statements are meant to deliver the dual message that
although we have been successfully building AGI, we are also in the
early days of our growth and we are only just getting started.
The global food infrastructure shares many attributes with traditional
infrastructure:
• Present in developed and emerging markets: Emerging markets
must make substantial investments to not only increase crop
production but also to enable the movement of agriculture
commodities to support imports, exports and domestic
consumption. Mature markets must continue to invest.
• Requires constant maintenance and investment: Continual
investment is required to avoid degradation or loss of capacity due
to wear, weather and increasingly higher rates of usage.
• Constantly evolving requirements and technology: New agriculture
inputs, increased capacity requirements, and new forms of retail
food and industrial feed products require retrofit, adjustment, and
expansion.
• Importance of safety: Heavy equipment combined with high
volumes of often combustible commodities require constant
management of, and investment in, safety equipment.
• Monitoring requirements: All infrastructure must be continuously
monitored to ensure safe and consistent performance.
• Regional considerations: Input and crop volumes change regionally
every year, crops move to different destinations every year,
consumption changes over time, and food demand changes on
AGI | 2 017 A N N UA L R E P O RT
CEO’S MESSAGE
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AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH a regional basis. Constant change requires continual investment
in the infrastructure required to accommodate and sustain each
change.
• Keeping up with growth: The global population is currently
increasing by approximately 85 million people each year. We need
the infrastructure to match this growth.
As you can see, the fundamental attributes of our core markets are
robust, the size of our addressable market is large, and our markets are
driven by the fact that the growing and changing world must eat. We
have pursued a unique strategy of bringing together a market leading
family of businesses to position AGI for long-term growth and success
in this global food infrastructure market.
Year in Review
2017 was a successful year for AGI as we delivered on our 2016
promise of creating sustainable momentum. We group our priorities
around three key pillars within AGI: People, Strategy and Capital
Allocation. With focused execution across our three pillars, we grew
our trade sales by 38% to $756 million, our Adjusted EBITDA grew to
$123 million, an increase of 23%, while FFO grew to $74 million, a 41%
increase over 2016.
People
To deliver on our 5-6-7 strategy and reach customers in 6 continents,
we must be a global company. However, we must also have local
relationships, with strategically placed manufacturing capabilities to
deliver leading solutions in every market. We believe that all businesses
are ultimately governed by their ability to attract and retain top talent.
As we move into new markets around the world we continue to focus
on finding the people that will lead our global and local strategies.
We were busy in 2017 working on recruitment initiatives at each of our
businesses to find the people that will continually reshape and build
our business going forward. We recognize that we have much work to
do as we strive to build industry leading training programs, create an
even more dynamic workplace and find more ways to offer continued
career development opportunities within AGI. We view these as basic
building blocks for any company and one of the most exciting aspects of
executing on our long-term plans.
To facilitate our continued growth of AGI we added to our senior
managment team, restructured sales teams, and built out our regional
hubs in Brazil, Europe, and North America.
In 2017, our team members found more ways to collaborate, more
often than ever, as we invested the time and capital to leverage
our platform perspective to discover and create best practices. Our
platform perspective advantage is based on leaders across AGI working
together to identify best in class performance, for every key metric, and
converging each business toward the established benchmark.
Our success in 2017 was delivered by talented and dedicated people
around the world. I am very proud of the people in AGI and want to
thank each of them for their outstanding contribution.
Strategy
Engineering has moved to the heart of our business as we execute on
the 5-6-7 strategy. The basis for every product and service we offer is
rooted in the efficient design and processes that result in the highest
quality product with the least amount of wasted time and materials.
Our customers have no interest in paying for waste throughout a
process and we couldn’t agree more.
5-6-7 summarizes a broad, global strategy; however, it’s the engineering
and project planning talent that provides the framework and detail
required to bring this strategy to life. The 7 components within our
strategy are individually just products and services but our objective
has been to bring these products and services together to offer system
solutions to our customers. Moving from selling individual products and
services to providing solutions and full systems is an important shift as
we aim to become key strategic partners with our customers.
In 2016, we embarked on an important engineering redesign, as we
sought to improve the method by which we delivered the engineering
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CEO’S MESSAGE
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH
expertise for our products, manufacturing, sales, service, and support.
The investment in engineering continued throughout 2017, and will be
an ongoing focus going forward, with new people and technologies
fueling our growth.
We delivered on our business plan in 2017, substantially growing both
our Farm and Commercial businesses and further integrating recent
acquisitions to provide the next stage of growth. In 2017, we achieved
significant organic growth while also adding seven new companies
through three acquisitions which added key product lines, significantly
expanded our US market presence, and established our applied
technology platform.
Early in 2017, we acquired the Global Group of companies and
significantly enhanced our grain bin and handling distribution reach
across the U.S. and internationally. The Global Group is comprised of
four unique operating divisions, MFS, Neco, Hutchison Mayrath and
Sentinel Buildings Systems, each of which brings new products to AGI
including our first grain dryer in North America, grain loop systems,
steel buildings, grain pumps and top dry systems to name a few. This
transaction also gave us the scale we needed to facilitate continued
growth in this strategic market.
Late in 2017, we acquired CMC Industrial Electronics and Junge
Control, two smaller but important additions that accelerate our applied
technology platform as we build the Controls component in our
5-6-7 strategy. CMC brings market leading hazard and grain monitoring
sensors and controls that provide the critical safety and facility operating
data our customers need to ensure proper working conditions and
facility productivity. Junge Control rounds out our fertilizer platform,
bringing liquid fertilizer metering, measuring and blending products as
well as additional controls capabilities for equipment and overall facility
operations. Two outstanding additions to AGI.
As we welcome outstanding businesses and people to our team, we
are strengthening and differentiating our AGI platform globally. We will
continue to execute on this strategy in 2018 and going forward.
STORAGE
STRUCTUREs
HANDLING
PROCESS
controls
engineering
project
management
CEO’S MESSAGE
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AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH A key customer of ours has taught us the concept of mutuality, wherein
you base your business on building sustainable win - win relationships
with every customer, employee, shareholder and partner. What a
wonderfully simple concept that should be one of the core principles of
every company. At AGI we will embrace this concept across every part
of our business.
On behalf of our Board, our employees and your management team we
thank you for your continued support.
Tim Close
President & CEO
Capital Allocation
Our pace of growth reflects the broadening of our purpose and
perspective, combined with an urgency to achieve the scale and
diversification that strengthens AGI’s foundation. We continue to see
extensive organic and external opportunities to maintain our pace of
growth. We encourage and expect that ideas for our growth will come
from everyone in AGI. It is our responsibility to spend a good amount
of time listening to colleagues, our Board of Directors, and searching
externally for the technologies, process improvements, product
enhancements and evolutionary changes that will become the small
incremental growth initiatives as well as the transformational change
opportunities.
We are biased to finding a way to act on every good idea, but we
balance the timing and size of our investments with the reality of
time management and capital resources. In 2017, our use of internally
generated cash, senior debt, convertible debentures and equity funded
a busy year of baseline maintenance investments, compelling growth
based internal projects, as well as a robust year of acquisitions.
At the end of 2017, our payout ratio had dropped to 52%, from 67%
at year-end 2016, as recent initiatives contributed to increased cash
generation. We closed the year with a solid balance sheet position
with senior debt at 2.0x adjusted EBITDA, total debt inclusive of our
convertible debentures of 4.4x adjusted EBITDA, both net of our year-
end cash balance of $64 million. Our balance sheet remains strong,
providing AGI with the flexibility to continue to invest in the excellent
ideas that come from an engaged and passionate group of people
throughout the company.
As we move into 2018, we are focused on the theme of building out the
engineering talent that is so critical to our 5-6-7 strategy. In early 2018,
we acquired a boutique engineering and project management business
called Danmare, which is focused on food processing projects. We
could not have found a better addition to this platform at this nascent
stage of our food business. Danmare exemplifies our approach to
partnering with our customers and we expect all of AGI to learn from
the core expertise at Danmare.
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CEO’S MESSAGE
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH CEO’S MESSAGE
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AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Management’s
Discussion & Analysis
This Management’s Discussion and Analysis (“MD&A”) should be read
in conjunction with the audited consolidated comparative financial
statements and accompanying notes of Ag Growth International
Inc. (“AGI”, the “Company”, “we”, “our” or “us”) for the year ended
December 31, 2017. Results are reported in Canadian dollars unless
otherwise stated.
The financial information contained in this MD&A has been prepared
in accordance with International Financial Reporting Standards
(“IFRS”). All dollar amounts are expressed in Canadian currency, unless
otherwise noted.
Throughout this MD&A references are made to “trade sales”, “EBITDA”,
“adjusted EBITDA”, “gross margin”, “funds from operations”, “payout
ratio”, “adjusted profit” and “diluted adjusted profit per share”. A
description of these measures and their limitations are discussed below
under “Non-IFRS Measures”.
This MD&A contains forward-looking information. Please refer to the
cautionary language under the heading “Risks and Uncertainties” and
“Forward-Looking Information” in this MD&A and in our most recently
filed Annual Information Form, all of which are available under the
Company’s profile on SEDAR (www.sedar.com).
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MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2 017 A N N UA L R E P O RT | E N G I N E E R I N G G ROW T H
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Summary of Results
[thousands of dollars except per share amounts]
Year Ended December 31
Trade sales (1)(2)
Adjusted EBITDA (1)(3)
Profit
Diluted profit per share
Adjusted profit (1)
Diluted adjusted profit per share (1)(4)
2017
$
755,605
123,329
35,196
2.18
39,449
2.44
2016
$
546,616
100,307
19,306
1.29
36,898
2.47
(1) See “Non-IFRS Measures”.
(2) See “Operating Results – Trade Sales”
(3) See “Operating Results – EBITDA and Adjusted EBITDA”.
(4) See “Detailed Operating Results – Diluted profit per share and diluted adjusted profit per share”.
Trade sales and adjusted EBITDA were at record levels in 2017, as
broad-based strength in both the Farm and Commercial segments was
complemented by contributions from acquisitions made in 2016 and
2017. AGI’s Farm trade sales increased by 47% as a robust Canadian
Farm market was complemented by improving market conditions
in the U.S. and the May 2017 acquisition of Global Industries, Inc.
(“Global”). Commercial trade sales increased by 29%, the result of
higher international sales and contributions from 2016 acquisitions
that expanded AGI’s Commercial product offering and diversified its
geographic reach and customer base. Higher adjusted EBITDA and a
gain on foreign exchange more than offset higher finance costs related
to the Global acquisition, resulting in an increase in unadjusted profit per
share compared to the prior year, while diluted adjusted profit per share
declined compared to 2016.
Outlook
AGI’s Farm business in 2018 is expected to benefit from increased
demand in the U.S. for both portable grain handling equipment and grain
storage systems. U.S. Farm sales are expected to increase due to
pent-up demand, the result of under-investment in equipment over
the last several years, and market expectations for another year of
significant planted acreage. In addition, U.S. tax reform in 2018 may
stimulate demand as many farmers will pay lower taxes and may
be eligible for accelerated depreciation on equipment purchases. In
Canada, demand is expected to continue to benefit from positive
markets, however a dry and early harvest in certain areas has resulted
in a degree of carryover in dealer inventory, and Canadian Farm sales
in fiscal 2018 may not reach the record sales of 2017. Management
anticipates results at recently acquired Global will benefit from
increased demand for grain storage systems, synergies realized
throughout 2017 and improvements in manufacturing efficiencies.
Overall, Farm backlogs are significantly higher than the prior year, and
based on current conditions management anticipates that Farm sales in
fiscal 2018 will be above 2017 levels.
Commercial sales in Canada are expected to increase significantly
in 2018 due to strong demand for both grain and fertilizer storage
and handling facilities. The existing Canadian Commercial sales
order backlog includes a significant portion of the total anticipated
sales in 2018. In the United States, Commercial activity is expected
to approximate 2017 levels due to ongoing maintenance capital
expenditure programs and investments to increase capacity and
productivity. In addition, U.S. tax reform in 2018 may encourage capital
investment. AGI’s fertilizer platform and equipment and system controls
capabilities were strengthened by the acquisition of Junge Control
Inc. (“Junge”) in December 2017, and the continued development of
these platforms is expected to increase Commercial sales in 2018.
International sales will benefit from a record backlog entering fiscal
2018, as AGI delivers on a geographically diverse sales backlog, with
particular strength in Eastern Europe and South America. Overall,
management anticipates sales of Commercial equipment in 2018 will be
higher than the prior year.
Management anticipates a positive contribution from AGI Brazil in
2018, compared to a loss in 2017. Farm sales in Brazil are expected to
benefit from AGI’s investment in its sales team throughout 2017, which
AGI | 2 017 A N N UA L R E P O RT | E N G I N E E R I N G G ROW T H
MANAGEMENT’S DISCUSSION & ANALYSIS
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AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH has led to a higher opening backlog and an active quote log. Sales of
Commercial equipment are expected to benefit from a higher opening
backlog and product technology transferred from North America that
will further enable AGI Brazil to service customers in South America
with a complete Commercial solution. Access to capital and a cautious
approach to capital investment continue to contribute to a competitive
marketplace in Brazil, however AGI anticipates higher sales and
manufacturing efficiencies will lead to a positive EBITDA contribution in
2018, particularly in the second half of the fiscal year.
On balance, management anticipates strength in both the Farm and
Commercial sectors will lead to higher sales and adjusted EBITDA
in 2018. Existing backlogs are high, particularly with respect to the
Company’s Farm business in the U.S. and its Canadian and international
Commercial business. Improved results in Brazil, a higher contribution
from the Global companies and the continued development of AGI’s
fertilizer and controls platforms are also expected to contribute to higher
EBITDA in 2018.
Trade sales and adjusted EBITDA in 2018 will be influenced by,
among other factors, weather patterns, crop conditions, the timing
of harvest and conditions during harvest and changes in input prices,
including steel. Dry soil conditions in certain regions of Canada and
the United States have the potential to worsen, and may negatively
impact crop yields. Steel prices have increased significantly in recent
months, and market participants anticipate continued volatility in steel
markets, which may be exacerbated by U.S. trade actions, including
the recent announcement of import tariffs under Section 232 of the
Trade Expansion Act (USA). The Company endeavors to mitigate its
exposure to higher input costs through strategic procurement of steel,
sales price increases and limiting the length of time commercial quotes
remain valid, however the pace and volatility of input price increases
may negatively impact earnings. Other factors that may impact
results in 2018 include the rate of exchange between the Canadian
and U.S. dollars, changes in global macroeconomic factors as well as
sociopolitical factors in certain local or regional markets, and the timing
of Commercial customer commitments and deliveries.
Basis of Presentation – Acquisitions
When comparing current year results to 2016, we have in some cases
noted the impact of acquisitions made in 2016 and 2017. When noted,
both the 2016 and 2017 periods exclude results from the acquisitions
of Entringer Industrial S.A. (“Entringer”) (March 15, 2016), NuVision
Industries Inc. (“NuVision”) (April 1, 2016), Mitchell Mill Systems
Canada Lt. and Mitchell Mill Systems USA, Inc. (collectively, “Mitchell”)
(July 18, 2016), Yargus Manufacturing, Inc. (“Yargus”) (November 15,
2016), Global (April 4, 2017), CMC Industrial Electronics Ltd. And CMC
Industrial Electronics USA, Inc. (collectively “CMC”) (December 22,
2017) and Junge (December 28, 2017).
In the disclosure that follows, the above acquisitions are categorized
as Commercial divisions, with the exception of Global which has four
operating divisions, three of which are categorized as Farm divisions.
Operating Results
Trade Sales (see “Non-IFRS Measures” and “Basis of Presentation -
Acquisitions”)
[thousands of dollars]
Year Ended December 31
Sales
Foreign exchange loss (1)
Trade Sales
2017
$
754,715
890
755,605
2016
$
531,616
15,000
546,616
Change
$
223,099
(14,110)
208,989
(1) A portion of foreign exchange gains and losses are allocated to sales.
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MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Trade Sales by Geography
Trade Sales by Category (1)
[thousands of dollars]
Year Ended December 31
[thousands of dollars]
Year Ended December 31
2017
$
2016
$
Change
$
Canada, excluding acquisitions
Acquisitions
Total Canada
228,972
215,988
51,915
22,163
280,887
238,151
12,984
29,752
42,736
Farm
Farm – acquisitions
Total Farm
4,455
Commercial
Commercial – acquisitions
Total Commercial
U.S., excluding acquisitions
Acquisitions
Total U.S.
International, excluding acquisitions
Acquisitions
Total International
Total excluding acquisitions
Total acquisitions
Total Trade Sales
202,248
120,884
323,132
111,179
40,407
151,586
542,399
213,206
755,605
197,793
8,849
206,642
93,675
8,148
101,823
507,456
39,160
112,035
116,490
17,504
32,259
49,763
34,943
174,046
546,616
208,989
2017
$
2016
$
Change
$
305,258
88,578
393,836
237,514
124,255
361,769
267,173
—
38,085
88,578
267,173
126,663
240,283
39,160
279,443
(2,769)
85,095
82,326
Total Trade Sales
755,605
546,616
208,989
(1) See “Basis of Presentation – Farm and Commercial”
Canada
• Trade sales in Canada, excluding acquisitions, increased 6%
compared to 2017. Farm sales increased across all product
categories including storage, aeration and handling equipment as
positive farmer economics and favourable crop yields more than
offset the negative impact of an early and dry harvest. Commercial
sales in Canada decreased compared to 2016, largely due to timing
as some projects were deferred by customers into 2018. AGI’s
Canadian Commercial sales backlog is at record levels entering 2018.
• Sales from acquisitions were $52 million in fiscal 2017. These sales
relate primarily to ongoing investment in fertilizer distribution
facilities and AGI’s growing Food platform and, to a lesser extent,
Canadian sales related to recently acquired Global.
United States
• Excluding acquisitions, trade sales in the United States increased
2% compared to 2017, as a 21% increase in Farm sales was largely
MANAGEMENT’S DISCUSSION & ANALYSIS
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AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH offset by lower Commercial sales. The increase in Farm sales
appears to signal the beginning of a recovery for AGI in the U.S.
Farm market, as strong in-season sales of portable grain handling
equipment in 2017 and high levels of participation in post-harvest
sales programs has resulted in a significantly higher sales order
backlog entering 2018 compared to the prior year. Commercial sales
decreased in 2017, in part due to a challenging profit environment
for commercial grain traders and indications that capital investment
priorities for multinationals may lie outside of the United States.
• Trade sales from acquisitions in the United States were $121
million, and relate almost entirely to the recent acquisitions of
Yargus and Global. Domestic sales of Yargus fertilizer blending and
other fertilizer related products were in line with expectations and
are expected to benefit in future years from the overall AGI fertilizer
platform. Demand for grain storage systems produced by the Global
companies remained at cyclical lows in 2017, however signs of a
recovery in this product category began to appear later in 2017, and
sales order backlogs are currently well above those at the same time
in 2017.
International
• International sales, excluding acquisitions, increased 19% over 2016,
as AGI’s sales order backlog significantly increased in the latter half
of 2017 and the Company began to deliver on projects in the fourth
quarter. Sales in 2017 reflect AGI’s broadening geographic reach,
with significant sales in EMEA, including Eastern Europe, South
America and southeast Asia/Australia. AGI’s international sales
order backlog is currently at record levels with significant projects
underway in EMEA and South America.
• International sales from acquisitions increased $32 million over 2016,
largely due to $20 million of offshore sales from Global, which were
concentrated in EMEA and Southeast Asia, sales of Yargus fertilizer
equipment in Africa and Southeast Asia and higher sales in Brazil.
Gross Margin (see “Non-IFRS Measures” and “Basis of Presentation -
Acquisitions”)
[thousands of dollars]
Year Ended December 31
Trade sales (1)
Cost of inventories
Gross Margin (1)
2017
$
755,605
516,926
238,679
2016
$
546,616
356,765
189,851
Gross margin as a % of trade sales
31.6%
34.7%
(1) See “Non-IFRS measures”.
Gross margin as a percentage of trade sales decreased compared
to 2016 primarily due to the impact of AGI’s Brazilian operations and
acquisitions made in 2016 and 2017. Excluding these items, gross
margin for the twelve-month period ended December 31, 2017
was 35.5% (2016 – 35.7%). Management anticipates gross margin
percentages in Brazil will improve subsequent to final commissioning of
the new production facility, and will benefit from higher sales volumes
and improved manufacturing practices in 2018. In addition, gross margin
percentages at AGI’s most significant recent acquisitions, Yargus and
Global, do not yet fully reflect purchasing and personnel synergies or
ongoing margin improvement initiatives.
EBITDA and Adjusted EBITDA (see “Non-IFRS Measures” and “Basis
of Presentation - Acquisitions”)
The following table reconciles profit from continuing operations before
income taxes to EBITDA and Adjusted EBITDA.
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MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH [thousands of dollars]
Year Ended December 31
[thousands of dollars]
Detailed Operating Results
Profit from continuing operations before
income taxes
Finance costs
Depreciation and amortization
EBITDA (1)
(Gain) loss on foreign exchange
Share based compensation
Gain on financial instruments (2)
M&A expenses
Other transaction expenses (3)
Gain on sale of PP&E
Fair value of inventory from acquisitions (4)
Allowance for net receivables
Impairment (5)
Adjusted EBITDA (1)
2017
$
47,200
35,708
29,474
112,382
(11,578)
8,057
(357)
1,259
7,506
(909)
5,037
—
1,932
2016
$
29,815
24,025
21,984
75,824
14,070
6,891
(9,210)
1,492
2,833
(114)
—
682
7,839
123,329
100,307
(1) See “Non-IFRS Measures”.
(2) See “Equity Compensation Hedge”.
(3) Includes restructuring and other acquisition related transition costs, as well as the accretion and other movement
in contingent consideration and amounts due to vendors.
(4) Non-cash expenses related to the sale of inventory that acquisition accounting required be recorded at a value
higher than manufacturing cost as at the date of acquisition. Amounts in 2016 were not considered material and
accordingly were not added back to adjusted EBITDA.
(5) To record assets held for sale at estimated fair value.
Sales
Trade sales (1)
Foreign exchange loss
Cost of goods sold
Cost of inventories
Depreciation/amortization
Selling, general and administrative expenses
SG&A expenses
M& A expenses
Other transaction expenses (2)
Depreciation/amortization
Other operating income
Net gain on disposal of PP&E
Net gain on financial instruments
Other
Impairment charge
Finance costs
Finance (income) expense
Profit from continuing operations before income
taxes
Income tax expense
Profit for the period from continuing operations
Profit from discontinued operations
Profit for the period
Profit per share
Basic
Diluted
Year Ended December 31
2017
$
2016
$
755,605
(890)
754,715
516,926
19,075
536,001
546,616
(15,000)
531,616
356,765
13,667
370,432
131,942
99,427
1,259
7,506
10,399
151,106
(909)
(357)
(3,379)
(4,645)
1,932
35,708
(12,587)
47,200
12,045
35,155
41
35,196
2.21
2.18
1,492
2,833
8,317
112,069
(114)
(9,210)
(2,272)
(11,596)
7,839
24,025
(968)
29,815
10,862
18,953
353
19,306
1.31
1.29
(1) See “Non-IFRS Measures”.
(2) Includes restructuring and other acquisition related transition costs, as well as the accretion and other movement
in contingent consideration and amounts due to vendors.
MANAGEMENT’S DISCUSSION & ANALYSIS
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AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Impact of Foreign Exchange
Sales and Adjusted EBITDA
AGI’s average rate of exchange in fiscal 2017 was $1.31 (2016 - $1.32).
A stronger Canadian dollar relative to the U.S. dollar results in lower
reported sales for AGI, as U.S. dollar denominated sales are translated
into Canadian dollars at a lower rate. Similarly, a stronger Canadian
dollar results in lower costs for U.S. dollar denominated inputs and
SG&A expenses. In addition, a stronger Canadian dollar may result
in lower input costs of certain Canadian dollar denominated inputs,
including steel. On balance, adjusted EBITDA decreases when the
Canadian dollar strengthens relative to the U.S. dollar.
Gains and Losses on Foreign Exchange
AGI’s realized loss on foreign exchange forward contracts in fiscal
2017 was $0.7 million (2016 – $14.4 million). As at December 31, 2017,
AGI has no outstanding foreign exchange contracts. AGI’s total gain
on foreign exchange, including non-cash translation gains, was $11.6
million in fiscal 2017 (2016 - loss of $14.1), and primarily relates to the
translation of the Company’s U.S. dollar denominated long-term debt at
the rate of exchange in effect at the end of the year. See also “Financial
Instruments – Foreign exchange contracts”.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses in 2017, excluding M&A expenses and depreciation/
amortization, were $131.9 million (17.5% of trade sales) versus $99.4
million in 2016 (18.2%). Excluding acquisitions, SG&A expenses in 2017
were $95.1 million (17.5% of trade sales) versus $93.6 million in fiscal
2016 (17.9%).
The increase, net of acquisitions, in fiscal 2017 compared to 2016 is
primarily the result of the following:
• Share based compensation increased $1.1 million due to new grants
and an increase in anticipated achievement levels.
• Warehouse expenses increased $1.0 million due to increased activity
and because 2017 reflects a full year of operations in recently leased
warehouse space.
• Travel expenses were $1.1 million higher than the prior year due to
increased domestic and international travel.
• The remaining variance resulted from several offsetting factors with
no individual variance larger than $1.0 million.
Finance Costs
Finance costs in 2017 were $35.7 million versus $24.0 million in
2016. The higher expense in 2017 relates primarily to financing the
acquisitions of Yargus (November 2016) and Global (April 2017). Finance
costs in both periods include non-cash interest related to convertible
debenture accretion, the amortization of deferred finance costs related
to the convertible debentures, stand-by fees and other sundry cash
interest.
Finance Income
Finance income in 2017 was $12.6 million compared to $1.0 million in
2016, and in both periods relates primarily to non-cash gains on the
translation of the Company’s U.S. dollar denominated long-term debt at
the rate of exchange in effect at the end of the year.
Other Operating Income
Other operating income in 2017 was $3.4 million (2016 - $2.3 million).
The increase in 2017 is primarily the result of income related to
the delivery of equipment in accordance with the share purchase
agreement with NuVision. Other operating income in both periods
includes gains on financial instruments (see “Equity Compensation
Hedge”) and gains on the sale of property plant and equipment.
Depreciation and Amortization
Depreciation of property, plant and equipment and amortization
of intangible assets are categorized on the income statement in
accordance with the function to which the underlying asset is related.
The increase in 2017 primarily relates to acquisitions made throughout
2016 and the Global acquisition made in April 2017.
13
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Income Tax Expense
Current income tax expense
Effective tax rate
[thousands of dollars]
For the year ended December 31, 2017 the Company recorded current
tax expense of $6.7 million (2016 – $11.1 million). Current tax expense
relates primarily to AGI’s U.S. and Italian subsidiaries.
Deferred income tax expense
For the year ended December 31, 2017, the Company recorded deferred
tax expense of $5.3 million (2016 – recovery ($0.3) million). Deferred tax
expense in 2017 includes a recovery of $3.3 million as U.S. tax reform
resulted in a change in AGI’s future tax rate. The remaining $8.6 million
deferred tax expense relates to the decrease of deferred tax assets
plus an increase in deferred tax liabilities that related to recognition of
temporary differences between the accounting and tax treatment of
deferred financing costs, accruals and long-term provisions, tax loss
carryforwards and Canadian exploration expenses.
Upon conversion to a corporation from an income trust in June 2009
(the “Conversion”) the Company received certain tax attributes that
may be used to offset tax otherwise payable in Canada. The Company’s
Canadian taxable income is based on the results of its divisions
domiciled in Canada, including the corporate office, and realized gains or
losses on foreign exchange. For the year ended December 31, 2017, the
Company offset $12.8 million of Canadian tax otherwise payable (2016
– $0.5 million). Through the use of these attributes and since the date
of Conversion a cumulative amount of $51.0 million has been utilized.
Utilization of these tax attributes is recognized in deferred income tax
expense on the Company’s income statement. As at December 31,
2017, the balance sheet asset related to these unused attributes was
$4.0 million.
Current tax expense
Deferred tax expense (recovery)
Total tax
Profit before taxes
Total tax %
Year Ended December 31
2017
$
6,712
5,333
12,045
47,200
25.5%
2016
$
11,122
(260)
10,862
29,815
36.4%
The effective tax rate in both periods was impacted by items that were
expensed for accounting purposes but were not deductible for tax
purposes. These include non-cash gains and losses on foreign exchange
(see “Gains and Losses on Foreign Exchange”). The effective tax rate
in 2017 was also impacted by tax losses not being recognized as a
deferred tax asset related to the Brazilian operations. AGI’s effective tax
rate is expected to decrease in 2018 as a result of U.S. tax reform.
Diluted Profit Per Share and Diluted Adjusted Profit Per Share
Diluted profit per share in 2017 was $2.18 (2016 - $1.29). The increase is
largely due to higher adjusted EBITDA and a gain on foreign exchange,
compared to a loss in 2016, and a lower impairment charge related to
the valuation of assets held for sale. These factors were offset by higher
transaction costs related to acquisitions and higher finance costs related
to the acquisitions of Yargus and Global. Profit per share in 2016 and
2017 has been impacted by the items enumerated in the table below,
which reconciles profit to adjusted profit:
MANAGEMENT’S DISCUSSION & ANALYSIS
14
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH [thousands of dollars except per share amounts]
Year Ended December 31
Selected Annual Information
[thousands of dollars, other than per share amounts]
Twelve Months Ended December 31
Profit
Diluted profit per share
(Gain) loss on foreign exchange
Fair value of inventory from acquisition (2)
M&A expenses
Other transaction expenses (3)
Gain on financial instruments
(Gain) on sale of PP&E
Impairment charge (4)
Allowance for net receivables
Non-cash accretion related to early redemption
of the 2013 Convertible Debentures
Adjusted profit (1)
Diluted adjusted profit per share (1)
2017
$
35,196
2.18
(11,578)
5,037
1,259
7,506
(357)
(909)
1,932
—
1,363
39,449
2.44
2016
$
19,306
1.29
14,070
—
3,018
1,307
(9,210)
(114)
7,839
682
Sales
EBITDA (1)
Adjusted EBITDA (1)
Profit (loss) from continuing
operations
Basic profit (loss) per share from
continuing operations
Fully diluted profit (loss) per share
from continuing operations
Profit (loss)
Basic profit (loss) per share
(1) See “Non-IFRS Measures”.
(2) Non-cash expenses related to the sale of inventory that acquisition accounting required be recorded at a value
higher than manufacturing cost as at the date of acquisition. Amounts in 2016 were not considered material and
accordingly were not added back to adjusted EBITDA.
(3) Includes restructuring and other acquisition related transition costs, as well as the accretion and other movement
in contingent consideration and amounts due to vendors.
(4) To record assets held for sale at estimated fair value.
Dividends declared per common
share
Total assets
Total long-term liabilities
(1) See “Non-IFRS Measures”.
2017
$
2016
$
2015
$
754,715
112,382
123,329
531,616
75,824
100,307
414,115
28,396
73,337
47,200
29,815
(9,720)
2.20
2.17
35,196
2.21
2.18
1.29
1.27
(0.70)
(0.70)
19,306
(25,229)
1.31
1.29
(1.81)
(1.81)
37,791
89%
2.40
52%
2.40
67%
2.40
1,137,274
568,373
850,151
480,821
745,920
358,742
—
Fully diluted profit (loss) per share
36,898
Funds from operations (1)
74,465
52,766
2.47
Payout ratio (1)
The following factors impact comparability between years in the table
above:
• Acquisitions in 2016 and 2017 (see “Basis of Presentation –
Acquisitions”) and the 2015 acquisitions of Vis and Westeel
significantly impact information in the table above.
• Sales, gain (loss) on foreign exchange, profit (loss) and profit
(loss) per share are significantly impacted by the rate of exchange
between the Canadian and U.S. dollars.
15
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH • Profit (loss) and profit (loss) per share were significantly impacted in 2015 by a $13.4 million impairment charge related to assets at the Company’s
Applegate and Mepu divisions.
Quarterly Financial Information
(thousands of dollars other than per share amounts and exchange rate):
Avg USD / CAD
Exchange Rate
1.32
1.35
1.26
1.27
1.31
Sales
$
154,536
221,065
206,614
172,500
754,715
2017
Profit (Loss)
$
5,127
14,749
15,588
(268)
35,196
2016
Basic Profit
(Loss) per Share
$
Diluted Profit
(Loss) per Share
$
0.33
0.92
0.97
(0.02)
2.21
0.33
0.88
0.92
(0.02)
2.18
From Continuing Operations
Total (1)
Avg
USD / CAD
FX Rate
Sales
$
Profit (Loss)
$
Basic Profit
(Loss) per Share
$
Diluted Profit
(Loss) per Share
$
Profit (Loss)
$
Basic Profit
(Loss) per Share
$
Diluted Profit
(Loss) per Share
$
1.38
1.29
1.34
1.32
1.32
111,723
140,837
158,680
120,376
531,616
6,257
4,245
12,952
(4,501)
18,953
0.43
0.29
0.87
(0.30)
1.29
0.42
0.28
0.84
(0.30)
1.27
5,697
5,285
13,034
(4,710)
19,306
0.39
0.36
0.88
(0.32)
1.31
0.38
0.35
0.85
(0.32)
1.29
Q1
Q2
Q3
Q4
YTD
Q1
Q2
Q3
Q4
YTD
(1) Include results from Applegate and Mepu which were classified as discontinued operations in 2016.
MANAGEMENT’S DISCUSSION & ANALYSIS
16
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH The following factors impact the comparison between periods in the
table above:
• AGI’s acquisitions of Entringer (Q1 2016), NuVision (Q2 2016),
Mitchell (Q3 2016), Yargus (Q4 2016) and Global (Q2 2017)
significantly impacts comparisons between periods of assets,
liabilities and operating results. See “Basis of Presentation -
Acquisitions”.
• Sales, gain (loss) on foreign exchange, profit (loss), and profit
(loss) per share in all periods are impacted by the rate of exchange
between the Canadian and U.S. dollars.
Interim period sales and profit historically reflect seasonality. The second
and third quarters are typically the strongest primarily due to the timing
of construction of commercial projects and higher in-season demand at
the farm level. The seasonality of AGI’s business may be impacted by
several factors including weather and the timing and quality of harvest
in North America.
Fourth Quarter
[thousands of dollars]
Trade sales (1)
Adjusted EBITDA (1)
Profit (loss)
Diluted profit (loss) per share
Adjusted profit (1)
Diluted adjusted profit per share (1)
(1) See “Non-IFRS Measures”.
Three Months Ended December 31
2017
$
173,009
21,247
(268)
(0.02)
4,851
$0.30
2016
$
126,430
18,226
(4,710)
($0.32)
4,231
$0.30
Trade Sales by Region
[thousands of dollars]
Three Months Ended December 31
2017
$
44,487
17,517
62,004
47,059
24,386
71,445
24,259
15,301
39,560
115,805
57,204
173,009
2016
$
Change
$
46,237
8,160
54,397
42,633
7,499
50,132
17,397
4,504
21,901
106,267
20,163
126,430
(1,750)
9,357
7,607
4,426
16,887
21,313
6,862
10,797
17,659
9,538
37,041
46,579
Canada, excluding acquisitions
Acquisitions
Total Canada
U.S., excluding acquisitions
Acquisitions
Total U.S.
International, excluding acquisitions
Acquisitions
Total International
Total excluding acquisitions
Total acquisitions
Total Trade Sales
Sales by Category (1)
[thousands of dollars]
Three Months Ended December 31
Farm
Farm – acquisitions
Total Farm
Commercial
Commercial – acquisitions
Total Commercial
2017
$
57,183
23,192
80,375
58,623
34,011
92,634
2016
$
Change
$
58,740
—
58,740
47,527
20,163
67,690
(1,557)
23,192
21,635
11,096
13,848
24,944
Total
173,009
126,430
46,579
(1) See “Basis of Presentation – Farm and Commercial”
17
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Canada
Gross Margin
• Trade sales in Canada, excluding acquisitions, decreased 4%
[thousands of dollars]
Three Months Ended December 31
against a strong 2016 comparative. Commercial sales in the quarter
increased compared to 2016 as AGI began to deliver on a substantial
sales order backlog. Farm sales decreased compared to 2016, due to
a dry and early harvest.
• Sales from acquisitions were $17.5 million in Q4 2017. These sales
relate primarily to ongoing investment in fertilizer distribution
facilities and AGI’s growing Food platform.
Trade sales (1)
Cost of inventories
Gross margin (1)
2017
$
173,009
120,112
52,897
2016
$
126,430
84,358
42,072
United States
• In the United States, trade sales excluding acquisitions increased
10% compared to 2016, due primarily to higher sales of portable
handling equipment. Strong in-season sales and high levels of
participation in post-harvest sales programs provide a further
indication of a recovery in the U.S. Farm market.
• Trade sales from acquisitions in the United States were $24.4
million, and relate almost entirely to the recent acquisitions of Yargus
and Global.
International
• AGI’s international sales, excluding acquisitions, increased 39% over
2016, as AGI’s sales order backlog significantly increased in the latter
half of 2017 and the Company began to deliver on certain projects in
the fourth quarter.
• International sales from acquisitions increased $10.8 million over
2016, largely due to sales from Global and higher sales in Brazil.
Gross margin as a % of trade sales
30.6%
33.3%
Historically, gross margin percentages are lower in the fourth quarter
of a fiscal year due to lower sales volumes and preseason sales
discounts. The decrease in margin compared to Q4 2016 is largely the
result of the impact of AGI’s Brazilian operations and acquisitions made
in 2016 and 2017, as well as the impact of lower in-season sales at
certain divisions that resulted from a dry and early harvest in western
Canada. Management anticipates gross margin percentages in Brazil
will improve subsequent to final commissioning of the new production
facility, and will benefit from higher sales volumes and improved
manufacturing practices in 2018. In addition, gross margin percentages
at AGI’s most significant recent acquisitions, Yargus and Global, do not
yet fully reflect purchasing and personnel synergies or ongoing margin
improvement initiatives.
Selling, General and Administrative Expenses
For the three months ended December 31, 2017, SG&A expenses,
excluding acquisitions, were $23.5 million or 19.2% of trade sales (2016
- $24.3 million and 22.8%). As a percentage of sales, SG&A expenses
in the fourth quarter of a fiscal year are generally higher than the annual
percentage due to seasonally lower sales volumes. The decrease, net of
acquisitions, in Q4 2017 compared to 2016 is primarily the result of the
following:
• Salaries and wages increased $1.0 million due to additions to the
MANAGEMENT’S DISCUSSION & ANALYSIS
18
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH senior management team and a higher company-wide bonus
accrual.
• The fourth quarter of 2016 included a charge of $1.0 million related to
changes in its distribution network. A similar charge was not present
in Q4 2017.
• The remaining variance resulted from several offsetting factors with
no individual variance larger than $1.0 million.
Adjusted EBITDA and Profit (loss)
Adjusted EBITDA for the three months ended December 31, 2017
was $21.2 million (2016 - $18.2 million). The increase from 2016 was
primarily the result of higher Commercial sales in Canada and offshore
and EBITDA related to acquisitions made in Q4 2016 and 2017, partially
offset by the impact of an early and dry harvest in western Canada.
For the three months ended December 31, 2017, the Company reported
loss of $0.3 million (2016 – loss of $4.7 million), basic loss per share of
$0.02 (2016 – loss of $0.32), and a fully diluted loss per share of $0.02
(2016 – loss of $0.32). Profit (Loss) per share in 2016 and 2017 has been
impacted by the items below:
[thousands of dollars]
Three Months Ended December 31
[thousands of dollars except per share amounts]
Three Months Ended December 31
Profit from continuing operations before
income taxes
Finance costs
Depreciation and amortization
EBITDA (1)
(Gain) loss on foreign exchange
Share based compensation
Gain on financial instruments (2)
M&A expenses
Other transaction expenses (3)
Gain on sale of PP&E
Fair value of inventory from acquisitions (4)
Allowance for Net Receivables
Impairment (5)
Adjusted EBITDA (1)
2017
$
2016
$
(2,272)
10,972
7,168
15,868
1,491
1,623
(11)
289
644
57
(1)
—
1,287
21,247
(3,657)
6,081
5,045
7,469
6,932
1,816
(4,050)
290
1,262
45
—
682
3,780
18,226
Loss as reported
Diluted loss per share as reported
Loss on foreign exchange
Non-cash asset impairment
M&A expenses
Other transaction expenses (1)
Fair value of inventory from acquisition
Gain on financial instruments
2017
$
($268)
(0.02)
1,491
1,287
289
644
(1)
(11)
(Gain) loss on sale of property, plant and equipment 57
Allowance for bad debt
Non-cash accretion related to early redemption
of the 2013 Convertible Debentures
Adjusted profit (2)
Diluted adjusted profit per share (2)
—
1,363
4,851
$0.30
2016
$
($4,710)
($0.32)
6,932
3,780
290
1,262
—
(4,050)
45
682
—
$4,231
$0.28
(1) See “Non-IFRS Measures”.
(2) See “Equity Compensation Hedge”.
(3) Includes restructuring and other acquisition related transition costs, as well as the accretion and other movement
in contingent consideration and amounts due to vendors.
(4) Non-cash expenses related to the sale of inventory that acquisition accounting required be recorded at a value
higher than manufacturing cost as at the date of acquisition. Amounts in 2016 were not considered material and
accordingly were not added back to adjusted EBITDA.
(5) To record assets held for sale at estimated fair value.
(1) Includes restructuring and other acquisition related transition costs, as well as the accretion and other movement
in contingent consideration and amounts due to vendors.
(2) See “Non-IFRS Measures”.
19
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Cash Flow and Liquidity
[thousands of dollars]
Year Ended December 31
Profit before tax from continuing operations
Items not involving current cash flows
Cash provided by operations
Net change in non-cash working capital
Non-current accounts receivable and other
Put option costs
Income tax recovered (paid)
Cash flows provided by operating activities
2017
$
47,200
25,419
72,619
(9,466)
(4,180)
(48)
(8,467)
50,458
2016
$
29,815
24,660
54,475
(451)
—
—
(9,720)
44,304
Cash used in investing activities
(213,519)
(129,665)
Cash provided by financing activities
224,227
30,380
Net increase (decrease) in cash from
continuing operations during the period
Net (decrease) increase in cash from
discontinued operations
Cash, beginning of period
Cash, end of period
61,166
(54,981)
41
(479)
2,774
63,981
58,234
2,774
Cash provided by operating activities increased compared to 2016 as
higher adjusted EBITDA was partially offset by increased inventory
purchases that largely resulted in part from the procurement of steel
in advance of input price increases. Cash used in investing activities
includes the acquisition of Global in Q2 2017 and capital expenditures.
Cash provided by financing activities includes $60 million of net
proceeds from AGI’s February 2017 equity offering, a portion of which
were used to partially finance the acquisition of Global, and long-term
debt drawn to partially finance the acquisition of Global.
MANAGEMENT’S DISCUSSION & ANALYSIS
20
Liquidity and Capital Resources
AGI’s financing requirements are subject to variations due to the
seasonal and cyclical nature of its business. Our sales historically
have been higher in the second and third calendar quarters compared
with the first and fourth quarters and our cash flow has been lower
in the first half of each calendar year. Internally generated funds are
supplemented when necessary from external sources, primarily the
Credit Facility (as defined below), to fund the Company’s working
capital requirements, capital expenditures and dividends. The Company
believes that the debt facilities and convertible debentures described
under “Capital Resources”, together with available cash and internally
generated funds, are sufficient to support its working capital, capital
expenditure, dividend and debt service requirements.
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Working Capital Requirements
Interim period working capital requirements typically reflect the
seasonality of the business. AGI’s collections of accounts receivable are
weighted towards the third and fourth quarters. This collection pattern,
combined with historically high sales in the second and third quarters
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. Requirements for 2017 have been generally consistent
with historical patterns however recent acquisitions have had the effect
of increasing working capital requirements in Q4 and Q1. Growth in
international business has resulted in an increase in the number of days
accounts receivable remain outstanding and result in increased usage
of working capital in certain quarters. Working capital has also been
deployed to secure steel supply and pricing. The acquisition of Global
has not significantly impacted AGI’s working capital requirements.
Capital Expenditures
Maintenance capital expenditures in the year ended December 31,
2017 were $11.2 million (1.5% of trade sales) and in 2016 were $3.8
million (0.7%). Management generally anticipates maintenance capital
expenditures in a fiscal year to approximate 1.0% - 1.5% of sales.
Maintenance capital expenditures in 2017 relate primarily to purchases
of manufacturing equipment and building repairs.
AGI defines maintenance capital expenditures as cash outlays required
to maintain plant and equipment at current operating capacity and
efficiency levels. Non-maintenance capital expenditures encompass
other investments, including cash outlays required to increase operating
capacity or improve operating efficiency. AGI had non-maintenance
capital expenditures of $40.5 million in 2017 (2016 - $36.6 million).
In 2017, non-maintenance capital expenditures relate primarily to the
construction of AGI’s production facility in Brazil ($21.6 million) and
the purchase of a previously leased manufacturing facility in Italy
($9.8 million). Capital expenditures related to the facility in Brazil are
substantially complete.
21
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Maintenance and non-maintenance capital expenditures in 2017 have been financed through bank indebtedness, cash on hand or through the
Company’s Credit Facility (see “Capital Resources”).
Contractual Obligations
The following table shows, as at December 31, 2017, the Company’s contractual obligations for the periods indicated:
[thousands of dollars]
2013 Debentures (1)
2014 Debentures
2015 Debentures
2017 Debentures
Long-term debt
Finance lease (2)
Operating leases
Due to vendor (3)
Contingent consideration
Purchase obligations (4)
Total obligations
Total
$
86,155
51,750
75,000
86,250
304,990
1,014
9,745
34,034
9,037
12,909
2018
$
86,155
—
—
—
117
981
3,090
33,309
5,306
12,909
2019
$
—
51,750
—
—
113
21
2,534
—
3,731
—
2020
$
—
—
75,000
—
117
12
1,591
—
—
—
2021
$
—
—
—
—
208,185
—
1,017
—
—
—
2022
$
—
—
—
86,250
40,095
—
755
—
—
—
2023+
$
—
—
—
—
56,363
—
758
725
—
—
670,884
141,867
58,149
76,720
209,202
127,100
57,846
(1) On January 8, 2018, $8,679,000 principal amount of the 2013 Debentures were converted into157,781 common shares and on January 9, 2018, the remaining principal amount of the 2013 Debentures were redeemed by the Company.
Subsequent to December 31, 2017, the Company also issued a new series of debentures (the “2018 Debentures”) with an aggregate principal amount of $86.25 million, a coupon of 4.50% and a maturity date of December 31, 2022.
See “Capital Resources – Debentures”
(2) Includes interest.
(3) Partially settled with AGI inventory.
(4) Net of deposit.
The Debentures relate to the aggregate principal amount of the convertible debentures (see “Capital Resources - Convertible Debentures”)
and long-term debt is comprised of a revolver facility, term debt and non-amortizing notes (see “Capital Resources – Debt Facilities”).
MANAGEMENT’S DISCUSSION & ANALYSIS
22
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Capital Resources
Assets and Liabilities
[thousands of dollars]
Total assets
Total liabilities
Cash
December 31
2017
$
December 31
2016
$
1,137,274
845,062
850,151
605,587
The Company’s cash balance at December 31, 2017 was $64.0 million (2016 - $2.8 million). The increase in cash is partially the result of financing
activities exceeding investing requirements.
Debt Facilities
[thousands of dollars]
Operating Facility
Operating Facility
Revolver (1)(2)
Revolver (2)
Revolver (2)
Term Loan A (1)
Term Loan B (1)
Series B Notes (3)
Series C Notes (3)
Equipment financing (3)
Accordion
Total
Currency
Maturity
Total Facility (CAD)
$
Amount Drawn
$
Effective
Interest Rate
CAD
USD
USD
USD
USD
CAD
CAD
CAD
USD
CAD
CAD
2021
2021
2021
2021
2021
2021
2022
2025
2026
2021
2021
20,000
8,782
165,306
50,000
40,000
25,000
31,363
560
75,000
416,011
—
—
47,671
25,090
85,306
50,000
40,000
25,000
31,363
560
—
304,990
4.10%
5.00%
4.04%
6.19%
5.40%
3.59%
4.32%
4.44%
3.70%
0.00%
5.00%
(1) Interest rate fixed via interest rate swaps. See “Interest Rate Swaps”.
(2) Revolver facilities have a maximum combined total of $165 million and can be drawn in CAD or USD.
(3) Fixed interest rate.
23
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH The Company has a credit facility (the “Credit Facility”) with a syndicate of Canadian chartered banks that includes committed revolver facilities of
$165 million from which CAD or USD can be drawn and a $75 million accordion feature which is undrawn. The Company’s Term Loans A and B are
with the same chartered banks with which it has the Credit Facility. Amounts drawn under the Credit Facility bear interest at LIBOR plus 1.50%
to LIBOR plus 3.00%, prime plus 0.2% to prime plus 1.75%, BA plus 1.50% to BA plus 3.0%, or BA plus 2.50% per annum based on covenant
calculations.
The Company has issued US $25.0 million and CAD $25.0 million aggregate principal amount of secured notes through a note purchase and private
shelf agreement (the “Series B and Series C Notes”). The Series B and C Notes are non-amortizing.
AGI is subject to certain financial covenants, including a maximum leverage ratio and a minimum debt service ratio, and is in compliance with all
financial covenants.
Convertible Debentures
The following table summarizes the key terms of the convertible unsecured subordinated debentures of the Company that were outstanding as at
December 31, 2017:
Year Issued / TSX Symbol
2013 (AFN.DB.A)
2014 (AFN.DB.B)
2015 (AFN.DB.C)
2017 (AFN.DB.D)
Aggregate Principal
Amount
$
Coupon
Conversion Price
$
Maturity
Date
Redeemable
at Par (1)(2)
86,155,000
51,750,000
75,000,000
86,250,000
5.25%
5.25%
5.00%
4.85%
55.00
65.57
60.00
83.45
Dec 31, 2018
Dec 31, 2019
Dec 31, 2020
Jan 1, 2018
Jan 1, 2019
Jan 1, 2020
Jun 30, 2022
Jun 30, 2021
(1) At the option of the Company, at par plus accrued and unpaid interest.
(2) In the twelve-month period prior to the date on which the Company may, at its option, redeem any series of convertible debentures at par plus accrued and unpaid interest, such convertible 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 (“Common Shares”) of the Company 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 redemption or at maturity of any of series of convertible debentures, the Company may, at its option, subject to regulatory approval and provided
that no event of default has occurred with respect to such series of debentures, elect to satisfy its obligation to pay the principal amount of such
debentures, in whole or in part, by issuing and delivering for each $100 due that number of freely tradeable Common Shares obtained by dividing
$100 by 95% of the volume weighted average trading price of the Common Shares on the TSX for the 20 consecutive trading days ending on the
fifth trading day preceding the date fixed for redemption or the maturity date, as the case may be. Any accrued and unpaid interest thereon will
be paid in cash. The Company may also elect, subject to any required regulatory approval and provided that no event of default has occurred with
respect to the applicable series of debentures, to satisfy all or part of its obligation to pay interest on such debentures by delivering sufficient freely
tradeable Common Shares to satisfy its interest obligation.
MANAGEMENT’S DISCUSSION & ANALYSIS
24
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH On January 8, 2018, holders of the 2013 Debentures exercised the
conversion option for $8,679,000 aggregate principal amount, and were
issued 157,781 common shares. On January 9, 2018, the Company
redeemed the remaining 2013 Debentures.
On January 3, 2018 (and January 9, 2018, with respect to the
over-allotment portion), the Company issued a new series of convertible
unsecured subordinated debentures (the “2018 Debentures”) (AFN.
DB.E)) with an aggregate principal amount of $86.25 million, a coupon
of 4.50% and a maturity date of December 31, 2022. The 2018
Debentures have substantially the same terms as the other Debentures
described above including being convertible at the holder’s option at a
conversion price of $88.15 per common share, being redeemable at
par on and after December 31, 2020 (and during the preceding
twelve-month period, 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, and the principal and interest thereon may be satisfied through
the issue of Common Shares in certain circumstances.
Common Shares
The following number of Common Shares were issued and outstanding
at the dates indicated:
December 31, 2016
Share issuance in February 2017
Shares issued under EIAP
Shares issued under DRIP
Conversion of 2013 Debentures
December 31, 2017
Shares issued under EIAP
Shares issued under DRIP
Conversion of 2013 Debentures
March 14, 2018
# Common Shares
14,781,643
1,150,000
133,570
93,976
1,727
16,160,916
81,097
16,025
157,781
16,415,819
25
25
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2 017 A N N UA L R E P O RT | E N G I N E E R I N G G ROW T H
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH At March 14, 2018:
• 16,415,819 Common Shares are outstanding;
• 915,000 Common Shares are available for issuance under the
Company’s Equity Award Incentive Plan (the “EIAP”), 740,466 have
been granted of which 367,227 remain outstanding;
• 70,332 deferred grants of Common Shares have been granted under
the Company’s Directors’ Deferred Compensation Plan and 18,436
Common Shares have been issued; and
necessary to drive organic growth and have historically been financed
by the Company’s operating facility (See “Capital Resources”). Funds
from operations should not be construed as an alternative to cash flows
from operating, investing, and financing activities as a measure of the
Company’s liquidity and cash flows.
[thousands of dollars]
• 4,639,239 Common Shares are issuable on conversion of the
outstanding convertible debentures, of which there are an aggregate
principal amount of $299.2 million outstanding.
Adjusted EBITDA
Interest expense
Non-cash interest
AGI’s Common Shares trade on the TSX under the symbol AFN.
Cash taxes
Maintenance CAPEX
Realized loss on FX contracts
Funds from operations
Dividends
Payout Ratio
Dividends
In the year ended December 31, 2017, AGI declared dividends to
shareholders of $38.4 million (2016 - $35.3 million). AGI’s policy is to pay
monthly dividends. The Company’s Board of Directors reviews financial
performance and other factors when assessing dividend levels. An
adjustment to dividend levels may be made at such time as the Board
determines an adjustment to be appropriate. Dividends in a fiscal year
are typically funded entirely through cash from operations, although due
to seasonality dividends may be funded on a short-term basis by the
Company’s operating lines, and through the DRIP. In 2017, dividends paid
to shareholders were financed $33.5 million (2016 – $30.1 million) from
cash on hand and $4.9 million (2016 – $5.2 million) by the DRIP.
Funds from Operations and Payout Ratio
The Company’s payout ratio in 2016 was negatively impacted by realized
losses on foreign exchange contracts. Excluding these losses, the
Company’s payout ratio in 2016 was 53%. See “Financial Instruments -
Foreign exchange contracts”.
Financial Instruments
Foreign Exchange Contracts
Year Ended December 31
2017
$
2016
$
123,329
(35,708)
7,238
(8,467)
(11,217)
(710)
74,465
38,365
52%
100,307
(24,025)
4,363
(9,720)
(3,751)
(14,408)
52,766
35,297
67%
Funds from operations (“FFO”), defined under “Non-IFRS Measures”,
is adjusted EBITDA less cash taxes, cash interest expense, realized
losses on foreign exchange and maintenance capital expenditures. The
objective of presenting this measure is to provide a measure of free
cash flow. The definition excludes changes in working capital as they are
Risk from foreign exchange arises as a result of variations in exchange
rates between the Canadian and the U.S. dollars and to a lesser extent
to variations in exchange rates between the Euro and the Canadian
dollar. AGI may enter foreign exchange contracts to partially mitigate
its foreign exchange risk. AGI has no foreign exchange contracts
MANAGEMENT’S DISCUSSION & ANALYSIS
26
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH outstanding as at December 31, 2017.
Interest Rate Swaps
The Company has entered into interest rate swap contracts to manage
its exposure to fluctuations in interest rates.
Currency
Maturity
Amount of
Swap (000’s)
$
Fixed Rate (2)
Term Loan A
Term Loan B
Revolver (1)
CAD
CAD
USD
2021
2022
2021
50,000
40,000
47,671
3.59%
4.32%
4.04%
(1) USD $38.0 million converted at the rate of exchange at December 31, 2017.
(2) With performance adjustments.
The change in fair value of the interest rate swap contracts in place
as at December 31, 2017 was an unrealized gain of $1.8 million. The
Company has elected to apply hedge accounting for these contracts
and the unrealized gain has been recognized in other comprehensive
income.
Equity Compensation Hedge
The Company holds an equity swap agreement with a financial
institution to manage the cash flow exposure due to fluctuations in its
share price related to the EIAP. As at December 31, 2017, the equity
swap agreement covered 500,000 Common Shares at a price of $34.10.
The agreement matures on March 22, 2019.
2017 Acquisitions
Global Industries Inc.
On April 4, 2017, AGI acquired Global Industries Inc. (“Global”) for U.S.
$100 million, subject to customary closing adjustments. Global is a
diversified manufacturer of grain storage bins, portable and stationary
grain handling equipment, grain drying and aeration equipment,
structural components, and steel buildings. Global’s normalized EBITDA
averaged approximately U.S. $11.5 million over the three years ended
November 30, 2016, with fiscal 2016 being below the three-year
average. In the four years prior to 2015, being the years before the
current downturn in the U.S. farm market, Global’s normalized EBITDA
averaged approximately U.S. $17 million. Three of Global’s four operating
divisions, representing approximately 85% of sales, are categorized
as Farm divisions in this MD&A. Global’s sales have historically been
weighted approximately 75% in the U.S. with the majority of the
balance overseas, and for its year-ended November 30, 2016, total sales
were U.S. $112 million.
CMC Industrial Electronics and Junge Control Inc.
In December 2017, AGI acquired CMC Industrial Electronics (“CMC”)
and Junge Control Inc. (“Junge”). CMC is a leading supplier of hazard
monitoring sensors and systems used in agricultural material handling
applications. CMC also manufactures commercial bin monitoring
sensors and systems. Junge is a leading manufacturer of automation,
measurement and blending systems for the agriculture and fuel
industries. Combined sales and adjusted EBITDA for the two entities
in their most recently completed fiscal years were approximately $15
million and $4 million, respectively.
Subsequent Event
Acquisition of Danmare
Effective February 22, 2018, AGI acquired Danmare Group Inc. and
its affiliate Danmare, Inc. (collectively, “Danmare”) for a maximum
purchase price of $10.2 million. Danmare provides engineering
solutions and project management services to the food industry, with
a specialization in automated systems for pet food, rice and pasta,
confectionery, ready-to-eat foods, sauce sand meat processing. Upon
closing, a cash amount of $6.5 million was paid to the vendors. The
contingent consideration is payable over three years based on the
achievement of earnings targets in 2019, 2020 and 2021.
27
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Basis of Presentation – Farm and Commercial
Farm and Commercial – Gross Margin
The gross margin of individual product categories within both the Farm
and Commercial businesses may vary significantly, and, as a result,
quarterly margins may vary from period to period. Generally, when
aggregated, gross margin in the Farm segment is slightly higher than
gross margin in the Commercial segment.
AGI is organized into Farm and Commercial segments that are broadly
defined along the lines of the end-use customer. AGI’s Farm business
encompasses product categories where the end user is typically a
farmer, while its Commercial business typically serves larger customers
that require higher capacity storage and handling products. Commercial
applications include port facilities, inland terminals and retail fertilizer
distribution, among others.
Farm
Our Farm products include on-farm storage products such as grain
storage bins, portable grain handling equipment and lower capacity
aeration products. The primary demand driver for AGI’s Farm business
is the volume of grain produced as this dictates on-farm storage
requirements and drives the product replacement cycle for portable
equipment. Farmer net income and weather conditions during harvest
may also impact short-term demand. The majority of our Farm business
is in North America, however we also sell Farm equipment overseas,
primarily in Europe and Australia, and more recently in South America
with our expansion into Brazil.
Commercial
AGI’s Commercial business is comprised primarily of high capacity
grain handling equipment, larger diameter grain storage, and equipment
utilized in commercial fertilizer applications. Demand for Commercial
equipment is less sensitive to a specific harvest than demand for Farm
products but rather is driven primarily by macro factors including the
longer-term trend towards higher crop volumes, the drive towards
improved efficiencies in mature markets and, more recently in Canada,
the dissolution of the Canadian Wheat Board. Offshore, the commercial
infrastructure in many grain producing and importing countries remains
vastly underinvested resulting in significant global opportunities for
AGI’s Commercial business. AGI addresses the offshore market from its
facilities in Brazil, Italy and North America.
MANAGEMENT’S DISCUSSION & ANALYSIS
28
28
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Farm and Commercial trade sales – 2017
[thousands of dollars]
2017 [2016 – $0.1 million], and $4,000 is included in accounts payable
and accrued liabilities as at December 31, 2017.
Q1
$
Q2
$
Q3
$
Q4
$
YTD
2017
$
Critical Accounting Estimates
Farm
Commercial
Total
76,275
78,414
120,853
101,388
116,333
89,333
80,375
92,634
393,836
361,769
154,689
222,241
205,666
173,009
755,605
Farm and Commercial trade sales – 2016
[thousands of dollars]
Q1
$
Q2
$
Q3
$
Q4
$
YTD
2016
$
Farm
Commercial
Total
63,769
49,903
67,548
75,996
77,116
85,854
58,740
67,690
267,173
279,443
113,672
143,544
162,970
126,430
546,616
Related Parties
Burnet, Duckworth & Palmer LLP provides legal services to the
Company and a Director of AGI is a partner of Burnet, Duckworth &
Palmer LLP. The total cost of these legal services related to an equity
offering and general matters were $0.3 million during the year ended
December 31, 2017 [2016 – $0.2 million], and $0.1 million is included in
accounts payable and accrued liabilities as at December 31, 2017. These
transactions are measured at the exchange amount and were incurred
during the normal course of business.
Salthammer Inc. provides consulting services to the Company and a
Director of AGI is the owner of Salthammer Inc. The total cost of these
consulting services related to our international plant expansion project
was $0.2 Million during the twelve-month period ended December 31,
Described in the notes to the Company’s 2017 audited annual
consolidated financial statements are the accounting policies and
estimates that AGI believes are critical to its business. Please refer to
note 4 to the audited consolidated financial statements for the year
ended December 31, 2017 for a discussion of the significant accounting
judgments, estimates and assumptions.
Risks and Uncertainties
The Company and its business are subject to numerous risks and
uncertainties which are described in this MD&A and the Company’s
most recent Annual Information Form, which are available under
the Company’s profile on SEDAR (www.sedar.com). These risks
and uncertainties are not the only risks and uncertainties we face.
Additional risks and uncertainties not currently known to us or that
we currently consider immaterial also may impair operations. If any
of these risks actually occur, our business, results of operations and
financial condition, and the amount of cash available for dividends could
be materially adversely affected. Except as described under “Risks
and Uncertainties” in the Company’s (final) prospectus dated April 8,
2017, which is available under the Company’s profile on SEDAR (www.
sedar.com), no changes or additional risks and uncertainties have been
identified by the Company in the current period.
Changes in Accounting Policies and Future
Accounting Changes
Standards issued but not yet effective up to the date of issuance of
the Company’s consolidated financial statements are listed below. This
listing is of standards and interpretations issued, which the Company
reasonably expects to be applicable at a future date. The Company
intends to adopt those standards when they become effective.
29
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Financial Instruments: Classification and Measurement [“IFRS 9”]
In July 2014, on completion of the impairment phase of the project to
reform accounting for financial instruments and replace IAS 39, Financial
Instruments: Recognition and Measurement, the IASB issued the final
version of IFRS 9, Financial Instruments. IFRS 9 includes guidance on
the classification and measurement of financial assets and financial
liabilities, impairment of financial assets [i.e., recognition of credit
losses], and a new hedge accounting model. Under the classification
and measurement requirements for financial assets, financial assets
must be classified and measured at either amortized cost or at fair
value through profit or loss or through other comprehensive income,
depending on the basis of the entity’s business model for managing
the financial asset and the contractual cash flow characteristics of the
financial asset. The classification requirements for financial liabilities
are unchanged from IAS 39. IFRS 9 requirements address the problem
of volatility in net earnings arising from an issuer choosing to measure
certain liabilities at fair value and require that the portion of the change
in fair value due to changes in the entity’s own credit risk be presented
in other comprehensive income, rather than within net earnings. The
new general hedge accounting model is intended to be simpler and
more closely focused on how an entity manages its risks, replaces
the IAS 39 effectiveness testing requirements with the principle of an
economic relationship, and eliminates the requirement for retrospective
assessment of hedge effectiveness. The new requirements for
impairment of financial assets introduce an expected loss impairment
model that requires more timely recognition of expected credit losses.
IAS 39 impairment requirements are based on an incurred loss model
where credit losses are not recognized until there is evidence of a
trigger event. IFRS 9 is effective for annual periods beginning on or
after January 1, 2018, with early application permitted. The Company
is finalizing its assessment of the impact on the consolidated financial
statements for Q1 2018.
a model for the recognition and measurement of gains or losses from
sales of some non-financial assets. The core principle is that revenue
is recognized to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or
services. The standard will also result in enhanced disclosures about
revenue, provide guidance for transactions that were not previously
addressed comprehensively [for example, service revenue and
contract modifications] and improve guidance for multiple-element
arrangements. IFRS 15 is effective for annual periods beginning on
or after January 1, 2018, and is to be applied retrospectively, with
earlier adoption permitted. Entities will transition following either a
full or modified retrospective approach. The Company has identified
and reviewed its significant revenue contracts. The Company has
determined that it will apply the modified retrospective method for
adopting IFRS 15, and is finalizing its assessment of the quantitative
impact on the consolidated financial statements for Q1 2018.
Leases [“IFRS 16”]
In January 2016, the IASB released IFRS 16, Leases, to replace the
previous leases standard, IAS 17, Leases, and related interpretations.
IFRS 16 sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract,
the customer [lessee] and the supplier [lessor]. IFRS 16 eliminates the
classification of leases as either operating leases or finance leases and
introduces a single lessee accounting model. IFRS 16 also substantially
carries forward the lessor accounting requirements. Accordingly, a
lessor continues to classify its leases as operating lease or finance
leases, and to account for those two types of leases differently.
IFRS 16 will be effective for the Company’s fiscal year beginning on
January 1, 2019. The Company has not yet assessed the impact of the
adoption of this standard on its consolidated financial statements.
Revenue from Contracts with Customers [“IFRS 15”]
Share-based Payment [“IFRS 2”]
IFRS 15, Revenue from Contracts with Customers, issued by the
IASB in May 2014, is applicable to all revenue contracts and provides
In June 2016, the IASB issued amendments to IFRS 2, Share-based
Payment, clarifying how to account for certain types of share-based
MANAGEMENT’S DISCUSSION & ANALYSIS
30
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH payment transactions. The amendments provide requirements on the
accounting for the effects of vesting and non-vesting conditions on
the measurement of cash-settled share-based payments, share-based
payment transactions with a net settlement feature for withholding tax
obligations and a modification to the terms and conditions of a share-
based payment that changes the classification of the transaction from
cash-settled to equity-settled. The amendments apply for annual periods
beginning on or after January 1, 2018. The Company’s assessment has
not identified significant classification, recognition or measurement
differences.
Disclosure Controls and Procedures and Internal Controls
Disclosure controls and procedures are designed to provide reasonable
assurance that all relevant information is gathered and reported to
senior management, including AGI’s Chief Executive Officer and Chief
Financial Officer, on a timely basis so that appropriate decisions can be
made regarding public disclosure.
Management of AGI 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, or caused them to be designed under their supervision,
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the financial statements for external
purposes in accordance with IFRS.
Subsequent to December 31, 2016 AGI acquired Global, CMC and
Junge. See “Basis of Presentation - Acquisitions”. Management has
not completed its review of internal controls over financial reporting
or disclosure controls and procedures for these acquired businesses.
Since the acquisitions 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 these acquisitions, 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 accuracy and completeness of the financial information
of Global, CMC and Junge. The following is the summary financial
information pertaining to Global, CMC and Junge that was included in
AGI’s consolidated financial statements for the year ended December
31, 2017:
[thousands of dollars]
Revenue
Profit (loss)
Current assets1
Non-current assets1
Current liabilities1
Non-current liabilities1
Global/CMC/Junge
$
102,356
(4,876)
60,652
112,104
40,755
3,264
Note 1 - Balance sheet as at December 31, 2017, net of intercompany
There have been no material changes in AGI’s internal controls over
financial reporting that occurred in the three-month period ended
December 31, 2017, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal controls over financial
reporting.
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”, “trade
sales”, “adjusted profit”, and “diluted adjusted profit per share”. A non-
IFRS financial measure is a numerical measure of a company’s historical
performance, financial position or cash flow that excludes (includes)
31
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH amounts, or is subject to adjustments that have the effect of excluding
(including) amounts, that are included (excluded) in the most directly
comparable measures calculated and presented in accordance with
IFRS. Non-IFRS financial measures are not standardized; therefore,
it may not be possible to compare 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.
In this MD&A, we discuss the non-IFRS financial measures, including
the reasons that we believe that these measures 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 this MD&A.
Management believes that the Company’s financial results may provide
a more complete understanding of factors and trends affecting our
business and be more meaningful to management, investors, analysts
and other interested parties when certain aspects of our financial
results are adjusted for the gain (loss) on foreign exchange and other
operating expenses and income. These measurements are non-IFRS
measurements. Management uses the non-IFRS adjusted financial
results and non-IFRS financial measures to measure and evaluate the
performance of the business and when discussing results with the
Board of Directors, analysts, investors, banks and other interested
parties.
References to “EBITDA” are to profit from continuing operations before
income taxes, finance costs, depreciation and amortization. References
to “adjusted EBITDA” are to EBITDA before the Company’s gain or
loss on foreign exchange, gains or losses on the sale of property, plant
& equipment, non-cash share based compensation expenses, gains
or losses on financial instruments, non-cash contingent consideration
expenses, expenses related to corporate acquisition activity, fair value
of inventory from acquisitions and impairment. Adjusted EBITDA
excludes the results of former AGI divisions Applegate and Mepu as
the previously announced strategic review of these assets resulted in
their sale in 2016. 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. See “Operating Results - EBITDA and Adjusted
EBITDA” for the reconciliation of EBITDA and Adjusted EBITDA to profit
from continuing operations before income taxes.
References to “trade sales” are to sales net of the gain or loss on
foreign exchange. Management cautions investors that trade sales
should not replace sales as an indicator of performance. See “Operating
Results - Trade Sales” for the reconciliation of trade sales to sales.
References to “gross margin” are to trade sales less cost of inventories,
and thereby exclude depreciation and amortization from cost of sales.
Management believes that gross margin provides a useful supplemental
measure in evaluating its performance. See “Operating Results – Gross
Margin” for the calculation of gross margin.
References to “funds from operations” are to adjusted EBITDA less
cash taxes, cash interest expense, realized losses on foreign exchange
and maintenance capital expenditures. Management believes that, in
addition to cash provided by (used in) operating activities, funds from
operations provide a useful supplemental measure in evaluating its
performance. References to “payout ratio” are to dividends declared as
a percentage of funds from operations. See “Funds from Operations
MANAGEMENT’S DISCUSSION & ANALYSIS
32
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH and Payout Ratio” for the calculation of funds from operations and
payout ratio.
References to “adjusted profit” and “diluted adjusted profit per share”
are to profit for the period and diluted profit per share for the period
adjusted for (gain) loss on foreign exchange, fair value of inventory from
acquisitions, transaction costs, non-cash loss (profit) on discontinued
operations, contingent consideration expense and gain (loss) on sale
of property, plant and equipment. See “Detailed Operating Results –
Diluted profit per share and Diluted adjusted profit per share” for the
reconciliation of diluted profit per share and diluted adjusted profit per
share to profit as reported.
In addition, this MD&A refers to: “normalized EBITDA” of Global for
certain financial periods, which is earnings of Global before income
taxes, finance costs, depreciation and amortization, and one-time
events, and after certain normalization adjustments including owner/
manager compensation structure, related party transactions, and
rationalizations. The financial information in this MD&A relating to
Global including normalized EBITDA is derived from Global’s financial
statements, which are prepared in accordance with United States
generally accepted accounting principles, which differ in some material
respects from IFRS, and accordingly may not be comparable to the
financial statements of AGI or other Canadian public companies.
Forward-looking Information
This MD&A contains forward-looking statements and information
(collectively, “forward-looking information”) within the meaning of
applicable securities laws that reflect our expectations regarding
the future growth, results of operations, performance, business
prospects, and opportunities of the Company. All information and
statements contained herein that are not clearly historical in nature
constitute forward-looking information, and the words “anticipate”,
“believe”, “continue”, “could”, “expects”, “intend”, “plans”, “postulates”,
“predict”, “will” or similar expressions suggesting future conditions
or events or the negative of these terms are generally intended to
identify forward-looking information. Forward-looking information
involves known or unknown risks, uncertainties and other factors
that may cause actual results or events to differ materially from
those anticipated in such forward-looking information. In addition,
this MD&A may contain forward-looking information attributed to
third party industry sources. Undue reliance should not be placed on
forward-looking information, as there can be no assurance that the
plans, intentions or expectations upon which it is based will occur.
In particular, the forward-looking information in this MD&A includes
information relating to our business and strategy, including our outlook
for our financial and operating performance including our expectations
for our future financial results including sales, EBITDA and adjusted
EBITDA, industry demand and market conditions, and with respect to
our ability to achieve the expected benefits of recent acquisitions and
the contribution therefrom including from purchasing and personnel
synergies and margin improvement initiatives. Such forward-looking
information reflects our current beliefs and is based on information
currently available to us, including certain key expectations and
assumptions concerning: anticipated grain production in our market
areas; financial performance; the financial and operating attributes of
recently acquired businesses and the anticipated future performance
thereof and contributions therefrom; business prospects; strategies;
product pricing; regulatory developments; tax laws; the sufficiency of
budgeted capital expenditures in carrying out planned activities; political
events; currency exchange and interest rates; the cost of materials;
labour and services; the value of businesses and assets and liabilities
assumed pursuant to recent acquisitions; the impact of competition; the
general stability of the economic and regulatory environment in which
the Company operates; the timely receipt of any required regulatory
and third party approvals; the ability of the Company to obtain and
retain qualified staff and services in a timely and cost efficient manner;
the timing and payment of dividends; the ability of the Company to
obtain financing on acceptable terms; the regulatory framework in
the jurisdictions in which the Company operates; and the ability of the
Company to successfully market its products and services. Forward-
looking information involves significant risks and uncertainties. A
number of factors could cause actual results to differ materially from
33
MANAGEMENT’S DISCUSSION & ANALYSIS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Additional Information
Additional information relating to AGI, including AGI’s most recent
Annual Information Form, is available under the Company’s profile on
SEDAR (www.sedar.com).
results discussed in the forward-looking information, including changes
in international, national and local macroeconomic and business
conditions, weather patterns, crop planting, crop yields, crop conditions,
the timing of harvest and conditions during harvest, the ability of
management to execute the Company’s business plan, seasonality,
industry cyclicality, volatility of production costs, agricultural commodity
prices, the cost and availability of capital, currency exchange and
interest rates, the availability of credit for customers, competition, AGI’s
failure to achieve the expected benefits of recent acquisitions including
to realize anticipated synergies and margin improvements; and changes
in trade relations between the countries in which the Company does
business including between Canada and the United States. These risks
and uncertainties are described under “Risks and Uncertainties” in this
MD&A and in our most recently filed Annual Information Form, all of
which are available under the Company’s profile on SEDAR (www.sedar.
com). These factors should be considered carefully, and readers should
not place undue reliance on the Company’s forward-looking information.
We cannot assure readers that actual results will be consistent with
this forward-looking information. Readers are further cautioned that the
preparation of financial statements in accordance with IFRS requires
management to make certain judgments and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses and the
disclosure of contingent liabilities. These estimates may change, having
either a negative or positive effect on profit, as further information
becomes available and as the economic environment changes. The
forward-looking information contained herein is expressly qualified in its
entirety by this cautionary statement. The forward-looking information
included in this MD&A is made as of the date of this MD&A and AGI
undertakes no obligation to publicly update such forward-looking
information to reflect new information, subsequent events or otherwise
unless so required by applicable securities laws.
MANAGEMENT’S DISCUSSION & ANALYSIS
3434
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Consolidated Financial Statements
Independent Auditors’ Report
To the Shareholders of
Ag Growth International Inc.
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, 2017 and 2016, and the consolidated statements of income, comprehensive income, changes in
shareholders’ equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the 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 of the entity’s internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements.
35
35
INDEPENDENT AUDITORS’ REPORT
AGI | 2 017 A N N UA L R E P O RT | E N G I N E E R I N G G ROW T H
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 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, 2017 and
2016, and its financial performance and its cash flows for the
years then ended in accordance with International Financial
Reporting Standards.
Winnipeg, Canada
March 13, 2018
Chartered Professional Accountants
AGI | 2 017 A N N UA L R E P O RT | E N G I N E E R I N G G ROW T H
INDEPENDENT AUDITORS’ REPORT
36
36
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Consolidated Statements of Financial Position
Assets [note 21]
Liabilities and shareholders’ equity
[in thousands of Canadian dollars]
Year Ended December 31
[in thousands of Canadian dollars]
Year Ended December 31
2017
$
2016
$
63,981
15,182
99,017
158,635
17,616
—
89
885
342
82
738
355,405
197,275
304,543
234,669
218,156
900
—
4,180
700
4,230
11,466
183
209,457
227,450
197,215
900
382
—
725
4,079
9,289
231
2,774
5,093
81,033
99,479
Current liabilities
Accounts payable and accrued liabilities [note 17]
Customer deposits
Dividends payable
Current portion of contingent consideration [note 6]
7,734
Due from vendor [note 6]
Income taxes payable
Current portion of long-term debt [note 21]
Current portion of obligations under finance lease
[note 20]
Current portion of derivative instruments [note 30]
Current portion of convertible unsecured subordinated
debentures [note 22]
Provisions [note 19]
Non-current liabilities
Long-term debt [note 21]
Due to vendor [note 18]
Contingent consideration [note 6]
Other liabilities [note 26]
Convertible unsecured subordinated debentures
[note 22]
779,027
649,728
Obligations under finance lease [note 20]
2,842
3,148
Derivative instruments [note 30]
1,137,274
850,151
Deferred tax liability [note 27]
Total liabilities
2017
$
2016
$
96,071
40,662
3,232
5,306
33,309
4,945
117
983
—
86,155
5,909
64,664
22,428
2,956
4,023
16,415
6,411
95
258
862
—
6,654
276,689
124,766
302,859
207,253
725
3,731
3,378
776
16,201
—
199,903
201,210
19
—
57,758
568,373
845,062
975
715
53,691
480,821
605,587
Current assets
Cash and cash equivalents [note 29]
Cash held in trust and restricted cash [notes 6 and 8]
Accounts receivable [note 9]
Inventory [note 10]
Prepaid expenses and other assets
Due from vendor [note 6]
Current portion of note receivable [note 7]
Income taxes recoverable
Non-current assets
Property, plant and equipment, net [note 11]
Goodwill [note 12]
Intangible assets, net [note 13]
Available-for-sale investment [note 15]
Other assets [note 26]
Non-current accounts receivable [note 9]
Note receivable [note 7]
Income taxes recoverable
Derivative instruments [note 30]
Deferred tax asset [note 27]
Assets held for sale [note 16]
Total assets
See accompanying notes
37
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Shareholders’ equity [note 21]
[in thousands of Canadian dollars]
Year Ended December 31
2017
$
2016
$
323,199
251,698
29,638
9,903
20,956
(91,484)
292,212
56,027
6,912
16,940
(87,013)
244,564
850,151
Shareholders’ equity [note 23]
Common shares
Accumulated other comprehensive income
Equity component of convertible debentures
Contributed surplus
Deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
1,137,274
See accompanying notes
On behalf of the Board of Directors:
Bill Lambert, Director
David A. White, CA, ICD.D, Director
CONSOLIDATED FINANCIAL STATEMENTS
38
38
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Consolidated statements of income
Consolidated statements of comprehensive income
[in thousands of Canadian dollars,
except per share amounts]
Year Ended December 31
[in thousands of Canadian dollars]
Year Ended December 31
Sales
Cost of goods sold [note 25[d]]
Gross profit
Expenses
Selling, general and administrative [note 25[e]]
Other operating income [note 25[a]]
Impairment charge [notes 13 and 16]
Finance costs [note 25[c]]
Finance income [note 25[b]]
Profit before income taxes
Income tax expense (recovery) [note 27]
Current
Deferred
Profit from continuing operations
Profit from discontinued operations, net of tax [note 7]
2017
$
2016
$
754,715
536,001
218,714
151,106
(4,645)
1,932
35,708
(12,587)
531,616
370,432
161,184
112,069
(11,596)
7,839
24,025
(968)
171,514
131,369
47,200
29,815
6,712
5,333
12,045
35,155
41
11,122
(260)
10,862
18,953
353
Profit for the year
35,196
19,306
Profit per share from continuing operations [note 28]
Basic
Diluted
Profit per share from discontinued operations [note 28]
Basic
Diluted
Profit per share [note 28]
Basic
Diluted
See accompanying notes
2.20
2.17
0.01
0.01
2.21
2.18
1.29
1.27
0.02
0.02
1.31
1.29
Profit for the year
35,196
19,306
2017
$
2016
$
Other comprehensive income (loss)
Items that may be reclassified subsequently
to profit or loss Change in fair value of derivatives
designated as cash flow hedges
Losses on derivatives designated as cash flow
hedges recognized in net earnings in the year
Exchange differences on translation of
foreign operations
Income tax effect on cash flow hedges
Other comprehensive loss from discontinued
operations [note 7]
Items that will not be reclassified to profit or loss
Actuarial gains (losses) on defined benefit plan
Income tax effect on defined benefit plan
Other comprehensive income (loss) for the year
Total comprehensive income for the year
See accompanying notes
2,435
8,409
910
13,781
(27,953)
(902)
(198)
(25,708)
(933)
252
(681)
(26,389)
8,807
(2,849)
(5,992)
(143)
13,206
357
(96)
261
13,467
32,773
39
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Consolidated statements of changes in shareholders’ equity
[in thousands of Canadian dollars]
Equity
component of
convertible
debentures
$
Common
shares
$
Contributed
surplus
$
Cash flow
hedge
reserve
$
Foreign
currency
reserve
$
Defined
benefit plan
reserve
$
Deficit
$
Total
equity
$
As at January 1, 2017
Profit for the year
Other comprehensive income (loss)
Share-based payment transactions [notes 23[a]] and 23[b]]
Dividend reinvestment plan [note 23[d]]
Dividends to shareholders [note 23[d]]
Dividends on share-based compensation awards [note 23[d]]
Dividend reinvestment plan costs [note 23[d]]
Common share issuance [note 23[a]]
Issuance of convertible unsecured subordinated
debentures [note 22]
Conversion of convertible unsecured subordinated
debentures [note 22]
As at December 31, 2017
[in thousands of Canadian dollars]
As at January 1, 2016
Profit for the year
Other comprehensive income (loss)
Share-based payment transactions [notes 23[a] and 23[b]]
Dividend reinvestment plan [note 23[d]]
Dividends to shareholders [note 23[d]]
Dividends on share-based compensation awards
As at December 31, 2016
See accompanying notes
251,698
6,912
16,940
(87,013)
(1,160)
56,769
—
—
5,300
4,909
—
—
(27)
61,224
—
95
323,199
—
—
—
—
—
—
—
—
2,991
—
9,903
418
—
244,564
35,196
35,196
—
—
—
—
—
(38,365)
(1,302)
—
—
—
—
2,443
(28,151)
(681)
(26,389)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,316
4,909
(38,365)
(1,302)
(27)
61,224
2,991
95
—
—
4,016
—
—
—
—
—
—
—
20,956
(91,484)
1,283
28,618
(263)
292,212
Common
shares
$
Equity
component of
convertible
debentures
$
Contributed
surplus
$
Deficit
$
Cash flow
hedge
reserve
$
Foreign
currency
reserve
$
Defined
benefit plan
reserve
$
Total
equity
$
244,840
6,912
10,193
(69,350)
(17,358)
59,761
—
—
1,640
5,218
—
—
—
—
—
—
—
—
—
—
6,747
—
—
—
19,306
—
—
—
—
—
(35,297)
(1,672)
16,198
(2,992)
—
—
—
—
—
—
—
—
157
—
261
—
—
—
—
235,155
19,306
13,467
8,387
5,218
(35,297)
(1,672)
251,698
6,912
16,940
(87,013)
(1,160)
56,769
418
244,564
CONSOLIDATED FINANCIAL STATEMENTS
40
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Consolidated Statements of Cash Flows
Operating activities
[in thousands of Canadian dollars]
Year Ended December 31
Profit from continuing operations before income
taxes for the year
Add (deduct) items not affecting cash
Depreciation of property, plant and equipment
Amortization of intangible assets
Loss (gain) on sale of property, plant and equipment
Gain on disposal of asset held for sale
Impairment charge
Non-cash component of interest expense
Non-cash movement in derivative instruments
Non-cash investment tax credit
Share-based compensation expense
Dividends on share-based compensation
Dividends receivable on equity swap
Employer contribution to defined benefit plan
Defined benefit plan expense
Contingent consideration
Non-cash transaction costs
Equipment provided to vendor
Translation gain on foreign exchange
Net change in non-cash working capital balances
related to continuing operations [note 29]
Non-current accounts receivable
Put option costs
Income taxes paid
Cash provided by operating activities
from continuing operations
See accompanying notes
2017
$
2016
$
47,200
29,815
16,471
13,003
46
(955)
1,932
7,238
(357)
—
8,057
—
—
(647)
277
861
2,731
(2,150)
(21,088)
72,619
(9,466)
(4,180)
(48)
10,923
11,061
(98)
(16)
7,839
4,363
(9,210)
(68)
6,891
(55)
(100)
(419)
627
(1,712)
—
—
(5,366)
54,475
(451)
—
—
(8,467)
(9,720)
50,458
44,304
41
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Investing activities
Financing activities
[in thousands of Canadian dollars]
Year Ended December 31
[in thousands of Canadian dollars]
Year Ended December 31
Acquisition of property, plant and equipment
Acquisitions, net of cash acquired [note 6]
Transfer to cash held in trust and restricted cash
Proceeds from sale of property, plant and equipment
Proceeds from disposal of assets held for sale [note 16]
Proceeds from disposal of business [note 7]
Development and purchase of intangible assets
Transaction costs paid and payable
Cash used in investing activities from
continuing operations
See accompanying notes
(51,299)
(136,470)
(10,804)
658
4,069
—
(4,910)
(14,763)
2017
$
2016
$
2017
$
(32)
(231)
7,578
2016
$
(33,507)
(353)
190
(40,203)
(95,251)
Repayment of long-term debt
Repayment of obligation under finance leases
(5,093)
Change in interest accrued
665
1,202
7,209
(2,938)
4,744
Issuance of long-term debt, net of issuance costs
107,545
94,129
Issuance of convertible unsecured subordinated
debentures
Common share issuance, net of issuance costs
82,387
60,436
—
—
Dividends paid in cash [note 23[d]]
(33,456)
(30,079)
(213,519)
(129,665)
Cash provided by financing activities
from continuing operations
Net increase (decrease) in cash and cash equivalents
from continuing operations
Net increase (decrease) in cash and cash equivalents
from discontinued operations
Net increase (decrease) in cash and cash
equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information
Interest paid
See accompanying notes
224,227
30,380
61,166
(54,981)
41
(479)
61,207
(55,460)
2,774
63,981
58,234
2,774
18,877
19,903
CONSOLIDATED FINANCIAL STATEMENTS
42
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Notes to consolidated financial statements
[in thousands of Canadian dollars, except where otherwise
noted and per share data]
are prepared on the historical cost basis, except for derivative financial
instruments, assets held for sale and available-for-sale investment,
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.
1. Organization
Principles of consolidation
The consolidated financial statements of Ag Growth International
Inc. [“Ag Growth Inc.”] for the year ended December 31, 2017 were
authorized for issuance in accordance with a resolution of the directors
on March 13, 2018. Ag Growth International Inc. is a listed company
incorporated and domiciled in Canada, whose shares are publicly traded
on the Toronto Stock Exchange. The registered office is located at 198
Commerce Drive, Winnipeg, Manitoba, Canada.
2. Operations
Ag Growth Inc. conducts business in the grain handling, fertilizer,
storage 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 “AGI” 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”].
Basis of preparation
The consolidated financial statements are presented in Canadian
dollars, which is also the functional currency of the parent company,
Ag Growth Inc. All values are rounded to the nearest thousand. They
The consolidated financial statements include the accounts of Ag
Growth Inc. and its wholly owned subsidiaries, Ag Growth Industries
Partnership, AGX Holdings Inc., Ag Growth Holdings Corp., AGI Alpha
Holdings Corp., AGI Bravo Holdings Corp., Westfield Distributing
(North Dakota) Inc., Hansen Manufacturing Corp. [“Hi Roller”], Union
Iron Inc. [“Union Iron”], Airlanco Inc. [“Airlanco”], Westeel USA LLC,
Tramco, Inc. [“Tramco”], Tramco Europe Limited, Euro-Tramco B.V.,
Ag Growth Suomi Oy, Ag Growth Scandinavia, AGI Comercio de
Equipamentos E Montagens Ltda, AGI Latvia Inc., Westeel Canada Inc.
[“Westeel”], G.J. Vis Holdings Inc. [“Vis”], G.J. Vis Properties Inc., G.J.
Vis Enterprises Inc., Westeel EMEA S.L., Frame S.R.L., PTM S.R.L.
Entringer Industrial S.A., NuVision Industries Inc., Mitchell Mill Systems
Canada Ltd., Mitchell Mill Systems USA Inc., Yargus Manufacturing,
Inc., Yargus International Inc., Global Industries, Inc., CMC Industrial
Electronics Ltd., and Junge Control Inc. as at December 31, 2017.
Subsidiaries are fully consolidated from the date of acquisition, it being
the date on which AGI 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 intercompany
balances, income and expenses and unrealized gains and losses
resulting from intercompany 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
43
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH assets acquired and liabilities and contingent liabilities assumed in a
business combination are measured initially at fair values at the date of
acquisition.
Transactions in foreign currencies are initially recorded by AGI entities
at their respective functional currency rates prevailing at the date of the
transaction.
Goodwill is initially measured at cost, being the excess of the cost
of the business combination over AGI’s share in the net fair value of
the acquiree’s identifiable assets, liabilities and contingent liabilities.
Any negative difference is recognized directly in the consolidated
statements 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 AGI’s cash-generating units or groups of
cash-generating units [“CGUs”] that are expected to benefit from the
synergies of the combination, irrespective of whether other assets and
liabilities of the acquiree are assigned to those CGUs. Where goodwill
forms part of a CGU or group of CGUs and part of the operating unit
is disposed of, the goodwill associated with the operation disposed of
is included in the carrying amount of the operation when determining
the gain or loss on disposal of operation. If the Company reorganizes
its reporting structure in a way that changes the composition of one or
more CGUs or group of CGUs to which goodwill has been allocated,
the goodwill is reallocated to the units affected. Goodwill disposed of
or reallocated 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 allocated to a new CGU
compared to the part remaining in the old organizational structure.
Foreign currency translation
Each entity in AGI determines its own functional currency, and items
included in the financial statements of each entity are measured using
that functional currency.
Monetary items are translated at the functional currency spot rate as
of the reporting date. Exchange differences from monetary items are
recognized in the consolidated statements of income. Non-monetary
items that are not carried at fair value are translated using the exchange
rates as at the dates of the initial transaction. Non-monetary items
measured at fair value in a foreign currency are translated using the
exchange rates at the date when the fair value is determined.
The assets and liabilities of foreign operations are translated into
Canadian dollars at the rate of exchange prevailing at the reporting
date and their consolidated statements of 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 statements of income.
Any goodwill arising on the acquisition of a foreign operation and any
fair value adjustments to the carrying 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 are 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.
AGI 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
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AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH embodied with the item can be reliably measured. All other repair and
maintenance costs are recognized in the consolidated statements of
income as an expense when incurred.
the lease liability so as to achieve a constant rate of interest on the
remaining balance of the liability. Finance charges are recognized in
finance costs in the consolidated statements of income.
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets as follows:
Buildings and building components
Manufacturing equipment
Computer hardware
Leasehold improvements
Equipment under finance leases
Furniture and fixtures
Vehicles
20 – 60 years
10 – 20 years
5 years
Over the lease period
10 years
5 – 10 years
4 – 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 derecognition of the asset is included in the consolidated
statements of income when the asset is derecognized.
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 taken on construction in progress until
the asset is placed in use. Amounts representing direct costs incurred
for major overhauls are capitalized and depreciated over the estimated
useful lives of the different components replaced.
Leases
The determination of whether an arrangement is, or contains, a lease is
based on whether fulfillment of the arrangement is dependent on the
use of a specific asset or assets or the arrangement conveys a right to
use the asset.
Finance leases, which transfer to AGI substantially all the risks and
benefits incidental to ownership of the leased item, are capitalized at
the commencement of the lease at the fair value of the leased property
or, if lower, at the present value of the minimum lease payments. Lease
payments are apportioned between finance charges and reduction of
Leased assets are depreciated over the useful life of the asset.
However, if there is no reasonable certainty that AGI 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.
Operating lease payments are recognized as an expense in the
consolidated statements of income on a straight-line basis over the
lease term.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction
or production of an asset that necessarily takes a substantial period of
time, which AGI considers to be 12 months or more, to get ready for its
intended use or sale are capitalized as part of the cost of the respective
assets. All other borrowing costs are expensed in the period they occur.
Intangible assets
Intangible assets acquired separately are measured on initial recognition
at cost. The cost of intangible assets 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 amortization
and any accumulated impairment losses. The useful lives of intangible
assets are assessed as either finite or indefinite. Intangible assets
with finite useful lives are amortized over the useful economic life
and assessed for impairment whenever there is an indication that
the intangible asset may be impaired. The amortization method and
amortization period of an intangible asset with a finite useful life are
reviewed at least annually. Changes in the 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 statements of income in the
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CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH
expense category consistent with the function of the intangible assets.
Impairment of non-financial 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 AGI 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 demos and prototypes are recorded at cost
as internally generated intangible assets. Amortization of the internally
generated intangible assets begins when the development 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.
Finite-life intangible assets are amortized on a straight-line basis over
the estimated useful lives of the related assets as follows:
Patents
Distribution networks
Development projects
Order backlog
Non-compete agreement
Software
4 – 10 years
8 – 25 years
3 – 15 years
3 – 6 months
7 years
5 – 8 years
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 and are recognized in the consolidated
statements of income when the asset is derecognized.
AGI 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, AGI estimates the asset’s
recoverable amount. The recoverable amount of goodwill as well as
intangible assets not yet available for use is estimated at least annually
on December 31. The recoverable amount is the higher of an asset’s or
CGU group’s fair value less costs to sell and its value in use.
Value in use is determined by discounting estimated future cash
flows using a pre-tax 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 taken into account, if available. If no such transactions
can be identified, an appropriate valuation model is used. The
recoverable amount of assets that do not generate independent cash
flows is determined based on the CGU group to which the asset
belongs.
AGI bases its impairment calculation on detailed budgets and forecast
calculations that are prepared separately for each of AGI’s CGU groups
to which the 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.
An impairment loss is recognized in the consolidated statements
of income if an asset’s carrying amount or that of the CGU group to
which it is allocated is higher than its recoverable amount. Impairment
losses of a CGU group are first charged against the carrying value of
the goodwill balance included in the CGU group and then against the
value of the other assets, in proportion to their carrying amount. In
the consolidated statements of income, the impairment losses are
recognized in those expense categories consistent with the function of
the impaired asset.
For assets other than goodwill, an assessment is made at each
reporting date as to whether there is any indication that previously
recognized impairment losses may no longer exist or may have
CONSOLIDATED FINANCIAL STATEMENTS
46
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH
decreased. If such indication exists, AGI estimates the asset’s or CGU
group’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 group in
prior years. Such a reversal is recognized in the consolidated statements
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 group to which the goodwill relates. Where the
recoverable amount of the CGU group 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 group
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 original maturity
of three months or less when purchased are considered to be cash
equivalents. For the purpose of the consolidated statements of cash
flows, cash and cash equivalents consist of cash and money market
funds, net of outstanding bank overdrafts.
Inventory
Inventory is comprised of raw materials and finished goods. Inventory
is valued at the lower of cost and net realizable value, using a first-in,
first-out basis. For finished goods, costs include all direct costs incurred
in production, including direct labour and materials, freight, directly
attributable manufacturing overhead costs based on normal operating
capacity and property, plant and equipment depreciation.
Inventories are written down to net realizable value when the cost of
inventories is estimated to be unrecoverable due to obsolescence,
damage or declining selling prices. Net realizable value is the estimated
selling price in the ordinary course of business, less estimated costs of
completion and the estimated costs necessary to make the sale. When
the circumstances that previously caused inventories to be written
down below cost no longer exist, 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
AGI classifies its financial assets as [i] financial assets at fair value
through profit or loss [“FVTPL”], [ii] loans and receivables or [iii]
available-for-sale, and its financial liabilities as either [i] financial liabilities
at FVTPL or [ii] other financial liabilities. Derivatives are designated as
hedging instruments in an effective hedge, as appropriate. Appropriate
classification of financial assets and liabilities is determined at the time
of initial recognition or when reclassified in the consolidated statements
of financial position.
All financial instruments are recognized initially at fair value plus, in the
case of investments and liabilities not at FVTPL, directly attributable
transaction costs. Financial instruments are recognized on the trade
date, which is the date on which AGI commits to purchase or sell the
asset.
Financial assets at fair value through profit or loss
Financial assets at FVTPL include financial assets classified as held-for-
trading and financial assets designated upon initial recognition at FVTPL.
Financial assets are classified as held-for-trading if they are acquired for
the purpose of selling or repurchasing in the near term. This category
includes cash and cash equivalents and derivative financial instruments
entered into that are not designated as hedging instruments in hedge
relationships as defined by IAS 39.
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CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Financial assets at FVTPL are carried in the consolidated statements of
financial position at fair value, with changes in the fair value recognized
in finance income or finance costs in the consolidated statements of
income.
AGI has currently not designated any financial assets upon initial
recognition as FVTPL.
Derivatives embedded in host contracts are accounted for as separate
derivatives and recorded at fair value if their economic characteristics
and risks are not closely related to those of the host contracts and the
host contracts are not held-for-trading. These embedded derivatives
are measured at fair value with changes in fair value recognized in the
consolidated statements of income. Reassessment only occurs if there
is a change in the terms of the contract that significantly modifies the
cash flows that would otherwise be required.
losses recognized as other comprehensive income in the available-
for-sale reserve 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 statements of income and removed
from the available-for-sale reserve.
For a financial asset reclassified out of the available-for-sale category,
any previous gain or loss on that asset that has been recognized
in equity is amortized to profit or loss over the remaining life of the
investment using the effective interest method. Any difference between
the new amortized cost and the expected cash flows is also amortized
over the remaining life of the asset using the effective interest
method. If the asset is subsequently determined to be impaired,
then the amount recorded in equity is reclassified to the consolidated
statements of income.
Loans and receivables
Derecognition
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. Assets
in this category include receivables. 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 statements of income. The losses arising
from impairment are recognized in the consolidated statements of
income in finance costs.
Available-for-sale financial investments
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.
After initial measurement, available-for-sale financial investments
are subsequently measured at fair value, with unrealized gains or
A financial asset is derecognized when the rights to receive cash flows
from the asset have expired or when AGI has transferred its rights to
receive cash flows from the asset.
Impairment of financial assets
AGI assesses at each reporting date whether there is any objective
evidence that a financial asset or a group of financial assets is impaired.
A financial asset is deemed to be impaired if, and only if, there is
objective evidence of impairment as a result of one or more events that
has occurred after the initial recognition of the asset [an incurred “loss
event”] and that loss event has an impact on the estimated future cash
flows of the financial asset or the group of financial assets that can be
reliably estimated.
Trade receivables and other assets that are not assessed for impairment
individually are assessed for impairment on a collective basis. Objective
evidence of impairment includes the Company’s past experience of
collecting payments as well as observable changes in national or local
economic conditions.
CONSOLIDATED FINANCIAL STATEMENTS
48
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH For financial assets carried at amortized cost, AGI 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 AGI determines
that no objective evidence of impairment exists for an individually
assessed financial asset, it includes the asset in a group of financial
assets with similar credit risk characteristics and collectively assesses
them for impairment. Assets that are individually assessed for
impairment and for which an impairment loss is, or continues to be,
recognized are not included in a collective assessment of impairment.
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 value of the estimated future cash flows is discounted at
the financial asset’s original effective interest rate.
The carrying amount of the asset is reduced through the use of an
allowance account and the amount of the loss is recognized in profit or
loss. Interest income continues to be accrued on the reduced carrying
amount and is accrued using the rate of interest used to discount
the future cash flows for the purpose of measuring the impairment
loss. The interest income is recorded as part of finance income in the
consolidated statements of income.
Loans and receivables, together with the associated allowance, are
written off when there is no realistic prospect of future recovery.
If, in a subsequent year, the amount of the estimated impairment
loss increases 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 available-for-sale financial investments, AGI assesses at each
reporting date whether there is objective evidence that an investment
or a group of investments is impaired. In the case of equity investments
classified as available-for-sale, objective evidence would include a
significant or prolonged decline in the fair value of the 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 consolidated
statements of income – is removed from other comprehensive income
and recognized in the consolidated statements of income. Impairment
losses on equity investments are not reversed through the consolidated
statements 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 cumulative
loss measured as the difference between the amortized cost and
the current fair value, less any impairment loss on that investment
previously recognized in the consolidated statements 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 statements
of income, the impairment loss is reversed through the consolidated
statements 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
consolidated statements of income.
AGI has not designated any financial liabilities upon initial recognition as
FVTPL.
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CONSOLIDATED FINANCIAL STATEMENTS
50
Other financial liabilities
Financial liabilities are measured at amortized cost using the effective
interest rate method. Financial liabilities include long-term debt issued,
which is initially measured at fair value, which is the consideration
received, net of transaction costs incurred, net of equity component.
Transaction costs related to the long-term debt instruments are included
in the value of the instruments and amortized using the effective
interest rate method. The effective interest expense is included in
finance costs in the consolidated statements of income.
Derecognition
A financial liability is derecognized when the obligation under the liability
is discharged or cancelled or expires.
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 derecognition of the original liability and the recognition of
a new liability, and the difference in the respective carrying amounts is
recognized in the consolidated statements of income.
Interest income
For all financial instruments measured at amortized cost, interest
income or expense is recorded using the effective 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 the financial asset or liability. Interest income is included in
finance income in the consolidated statements of income.
Derivative instruments and hedge accounting
AGI uses derivative financial instruments such as forward currency
contracts, interest rate swaps and equity swaps to hedge its foreign
currency risk, interest rate risk and market risk. Such derivative financial
instruments are initially recognized at fair value on the date on which a
derivative contract is entered into and are subsequently remeasured at
fair value. Derivatives are carried as financial assets when the fair value
is positive and as financial liabilities when the fair value is negative.
AGI analyzes all of its contracts, of both a financial and non-financial
nature, to identify the existence of any “embedded” derivatives.
Embedded derivatives are 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.
Any gains or losses arising from changes in the fair value of derivatives
are recorded directly in the consolidated statements of income, except
for the effective portion of cash flow hedges, which is recognized in
other comprehensive income.
For the purpose of hedge accounting, hedges are classified as 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, AGI formally designates
and documents the hedge relationship to which AGI wishes to apply
hedge accounting and the risk management objective and strategy for
undertaking the hedge. The documentation includes identification of
the hedging instrument, the hedged item or transaction, the nature of
the risk being hedged and how the entity will assess the effectiveness
of changes in the hedging instrument’s fair value in offsetting the
exposure to changes in the cash flows attributable to the hedged
risk. Such hedges are expected to be highly effective in achieving
offsetting changes in cash flows and are assessed on an ongoing basis
to determine whether they have been highly effective throughout the
financial reporting periods for which they were designated.
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CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Hedges that meet the strict criteria for hedge accounting are accounted
for as follows:
Cash flow hedges
The effective portion of the gain or loss on the hedging instrument is
recognized directly as other comprehensive income in the cash flow
hedge reserve, while any ineffective portion is recognized immediately
in the consolidated statements of income in other operating income or
expenses. Amounts recognized as other comprehensive income are
transferred to the consolidated statements 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 non-financial
asset or liability.
If the forecast transaction or firm commitment is no longer expected
to occur, the cumulative gain or loss previously recognized in equity
is transferred to the consolidated statements of income. If the
hedging instrument expires or is sold, terminated or exercised without
replacement or rollover, or if its designation as a hedge is revoked, any
cumulative gain or loss previously recognized in other comprehensive
income remains in other comprehensive income until the forecast
transaction or firm commitment affects profit or loss.
AGI uses primarily forward currency contracts and put options as
hedges of its exposure to foreign currency risk in forecast transactions
and firm commitments.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount
reported in the consolidated statements of financial position if, and only
if, there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, or to realize
the assets and settle the liabilities simultaneously.
Fair value of financial instruments
Fair value is the estimated amount that AGI 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 techniques that are recognized
by market participants. Such techniques may include using recent arm’s
length market transactions, reference to the current fair value of another
instrument that is substantially the same, discounted cash flow analysis
or other valuation models.
Provisions
Provisions are recognized when AGI 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 and a reliable estimate can be made of the
amount of the obligation. Where AGI expects some or all of a provision
to be reimbursed, for example under an insurance 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 consolidated statements 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.
CONSOLIDATED FINANCIAL STATEMENTS
52
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Profit per share
Third-party services
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 way to basic profit per share except that the
weighted average shares outstanding are increased to include additional
shares assuming the exercise of share options, share appreciation
rights and convertible debt options, if dilutive.
Revenue recognition
Revenue is recognized to the extent that it is probable that the
economic benefits will flow to AGI and the revenue can be reliably
measured, regardless of when the 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. AGI assesses its revenue arrangements
against specific criteria in order to determine if it is acting as principal
or agent. With the exception of third-party services, AGI has concluded
that it is acting as a principal in all of its revenue arrangements. The
following specific recognition criteria must also be met before revenue
is recognized:
Sale of goods
Revenue from the sale of goods is in general recognized when
significant risks and rewards of ownership are transferred to the
customer. AGI generally recognizes revenue when products are
shipped, free on 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 time product is shipped, as noted above.
AGI applies layaway sales or bill and hold sales accounting in specific
situations provided all appropriate conditions are met as of the reporting
date.
AGI from time to time enters into arrangements with third-party
providers to provide services for AGI’s customers. Where AGI acts
as agent, the revenue and costs associated with these services are
recorded on a net basis and disclosed under other operating income.
Income taxes
AGI and its subsidiaries are generally taxable under the statutes of their
country of incorporation.
Current income tax assets and liabilities for the current and prior period
are measured at the amount expected to be recovered from or paid to
the taxation authorities. The tax rates and tax laws used to compute
the amount are those that are enacted or substantively enacted at
the reporting date in the countries where AGI operates and generates
taxable income. Current income tax relating to items recognized directly
in equity is recognized in equity and not in the consolidated statements
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.
AGI follows the liability method of accounting for deferred taxes. Under
this method, income tax liabilities and assets are recognized for the
estimated tax consequences attributable to the temporary differences
between the carrying value of the assets and liabilities on the
consolidated financial statements and their respective tax bases.
Deferred tax liabilities are recognized for all taxable temporary
differences, except:
• Where the deferred tax liability arises from the initial recognition
of goodwill or of an asset or liability in a transaction that is not a
business combination and, at the time of the transaction, affects
neither the accounting profit nor the taxable profit or loss.
• In respect of taxable temporary differences associated with
investments in subsidiaries, where the timing of the reversal of the
temporary differences can be controlled and it is probable that the
temporary differences will not reverse in the foreseeable future.
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CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Deferred tax assets are recognized for all deductible temporary
differences, carryforward of unused tax losses, to the extent that it is
probable that taxable profit will be available against which the deductible
temporary differences and the carryforward of unused tax losses can
be utilized.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the
deferred tax asset to be utilized. Unrecognized deferred tax assets are
reassessed at each reporting date and are recognized to the extent
that it has become probable that future taxable profits will allow the
deferred tax asset to be recovered. Deferred tax assets and liabilities
are measured at the tax rates that are expected to apply in the year
when the asset is realized or the liability is settled, based on tax rates
[and tax laws] that have been enacted or substantively enacted at the
reporting date.
Deferred tax items are recognized in correlation to the underlying
transaction either in the consolidated statements of income, other
comprehensive income or directly in equity.
Deferred tax assets and deferred tax liabilities are offset if a legally
enforceable right exists to offset current tax assets against current
income tax liabilities and the deferred taxes relate to the same taxable
entity and the same taxation authority.
Tax benefits acquired as part of a business combination, but not
satisfying the criteria for separate recognition at that date, would be
recognized subsequently if information about facts and circumstances
changed. The adjustment would either be treated as a reduction to
goodwill if it occurred during the measurement period or in profit or
loss, when it occurs subsequent to the measurement period.
Sales tax
Revenue, expenses and assets are recognized net of the amount of
sales tax, except where the sales tax incurred on a purchase of assets
or services is not recoverable from the taxation authority, in which case
the sales tax is recognized as part of the cost of acquisition of the asset
or as part of the expense item as applicable and where receivables and
payables are stated with the amount of sales tax included.
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 statements of financial position.
Share-based compensation plans
Employees of AGI may receive remuneration in the form of share-
based payment transactions, whereby employees render services
and receive consideration in the form of equity instruments [equity-
settled transactions, share award incentive plan and directors’
deferred compensation plan] or cash [cash-settled transactions]. 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.
The cumulative expense recognized for equity-settled transactions
at each reporting date until the vesting period reflects the extent to
which the vesting period has expired and AGI’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 statements 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 surplus are reversed and credited to shareholders’ equity.
CONSOLIDATED FINANCIAL STATEMENTS
54
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH The amount of cash, if any, received from participants is also credited to
shareholders’ equity.
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 is recognized for any modification that increases the
total fair value of the share-based payment transaction, or is otherwise
beneficial to the employee as measured at the 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 cancelled
award, and designated as a replacement award on the date that it is
granted, the cancelled and new awards are treated as if they were a
modification of the original award.
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. This fair value is
expensed over the period until the vesting date, with recognition of a
corresponding liability. The liability is remeasured to fair value at each
reporting date up to and including the settlement date, with changes in
fair value recognized in the consolidated statements of income in the
line of the function the respective employee is engaged in.
Employee benefits
Certain employees are covered by defined benefit pension plans, and
certain former employees are also entitled to other post-employment
benefits such as life insurance. The Company’s defined benefit plan
asset (obligation) is actuarially calculated by a qualified actuary at the
end of each annual reporting period using the projected unit credit
method and management’s best estimates of the discount rate, the
rate of compensation increase, retirement rates, termination rates and
mortality rates. The discount rate used to value the defined benefit
obligation for accounting purposes is based on the yield on a portfolio
of high-quality corporate bonds denominated in the same currency
with cash flows that match the terms of the defined benefit plan
obligations. Past service costs (credits) arising from plan amendments
are recognized in operating income in the year that they arise. The
actuarially determined net interest costs on the net defined benefit plan
obligation are recognized in interest cost for the defined benefit plan.
Actual post-employment benefit costs incurred may differ materially
from management estimates.
The fair values of plan assets are deducted from the defined benefit
plan obligations to arrive at the net defined benefit plan asset
(obligation). When the plan has a net defined benefit asset, the
recognized asset is limited to the present value of economic benefits
available in the form of future refunds from the plan or reductions in
future contributions to the plan [the “asset ceiling”]. If it is anticipated
that the Company will not be able to recover the value of the net
defined benefit asset, after considering minimum funding requirements
for future service, the net defined benefit asset is reduced to the
amount of the asset ceiling. When the payment in the future of
minimum funding requirements related to past service would result in
a net defined benefit surplus or an increase in a surplus, the minimum
funding requirements are recognized as a liability to the extent that the
surplus would not be fully available as a refund or a reduction in future
contributions.
Re-measurements including actuarial gains and losses and the impact
of any minimum funding requirements are recognized through other
comprehensive income.
Current employee wages and benefits are expensed as incurred.
Post-retirement benefit plans
AGI contributes to retirement savings plans subject to maximum
limits per employee. AGI accounts for such defined contributions as
55
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH an expense in the period in which the contributions are required to be
made.
Research and development expenses
Research expenses, net of related tax credits, are charged to the
consolidated statements of income in the period they 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 cost of the asset and is released to
the consolidated statements of income over the expected useful life
in a consistent manner with the depreciation method for the relevant
assets.
Investment tax credits
Federal and provincial investment tax credits are accounted for as a
reduction of the cost of the related assets or expenditures in the year in
which the credits are earned and when there is reasonable assurance
that the credits can be used to recover taxes.
Adoption of new accounting policies
IAS 12 Income taxes
In November 2016, the IFRS interpretations Committee [the
“Committee”] published a summary of its meeting discussion regarding
a request to clarify how an entity determines the expected manner
of recovery of an intangible asset with an indefinite useful life for the
purposes of measuring deferred tax in accordance with IAS 12, Income
Taxes. Although the Committee decided not to add this issue to its
agenda, the Committee noted that an intangible asset with an indefinite
useful life is not a non-depreciable asset because a non-depreciable
asset has an unlimited [or infinite] life, and that indefinite does not
mean infinite. Consequently, the fact that an entity does not amortize
an intangible asset with an indefinite useful life does not necessarily
mean that the entity will recover the carrying amount of that asset only
through sale and not through use. As such, the Company changed its
accounting policy retrospectively for the accounting of deferred tax
on intangible assets with indefinite useful lives to be in line with the
Committee discussions.
The following table summarizes the impact of adopting this change
of accounting policy retrospectively on the consolidated statements
of financial position. The change of accounting policy did not have an
impact on the previously reported consolidated statements of income
or consolidated statements of cash flows.
Increase
Goodwill
Deferred income tax liabilities
IAS 7 Statement of Cash Flows
2017
$
2016
$
—
—
977
977
The IASB issued amendments to IAS 7, Statement of Cash Flows,
which were effective as of January 1, 2017. The objective of the
amendments is to enable users of financial statements to evaluate
changes in liabilities arising from financing activities. The amendments
require additional disclosures that enable investors to evaluate
changes in liabilities arising from financing activities, including changes
arising from cash flows and non-cash changes. The adoption of these
amendments has resulted in additional disclosures in the consolidated
financial statements.
CONSOLIDATED FINANCIAL STATEMENTS
56
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 4. Significant accounting judgments,
estimates and assumptions
The preparation of the consolidated financial statements requires
management to make judgments, estimates and assumptions that
affect the reported amounts of assets, liabilities, income, expenses
and the disclosure of contingent liabilities. The estimates and related
assumptions are based on previous experience and other factors
considered reasonable under the circumstances, the results of which
form the basis of making the assumptions about carrying values of
assets and liabilities that are not readily apparent from other sources.
However, uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the carrying
amount of the asset or liability affected in future periods.
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 concerning the
future and other key sources of estimation uncertainty at the reporting
date that have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year
are described below.
Impairment of financial assets
Assessments about the recoverability of financial assets, including
accounts receivable, require significant judgment in determining
whether there is objective evidence that a loss event has occurred and
estimates of the amount and timing of future cash flows. The Company
maintains an allowance for doubtful accounts for estimated losses
resulting from the inability to collect on its trade receivables. A portion
of the Company’s sales are generated in overseas markets, a significant
portion of which are in emerging markets such as countries in Eastern
Europe. Emerging markets are subject to various additional risks,
including currency exchange rate fluctuations, economic conditions
and foreign business practices. One or more of these factors could
have a material effect on the future collectability of such receivables.
In assessing whether objective evidence of impairment exists at
each reporting period, the Company considers its past experience of
collecting payments, historical loss experience, customer credit ratings
and financial data as available, collateral on amounts owing including
insurance coverage from export credit agencies, as well as observable
changes in national or local economic conditions. Future collections of
accounts receivable that differ from the Company’s current estimates
would affect the results of the Company’s operations in future
periods as well as the Company’s trade receivables and general and
administrative expenses, and amounts may be material.
Impairment of non-financial assets
AGI’s impairment test is based on value-in-use calculations that use
a discounted cash flow model. The cash flows are derived from the
forecast for the next five years and do not include restructuring activities
to which AGI has not yet committed or significant future investments
that will enhance the asset’s performance of the CGU being tested.
These calculations require the use of estimates and forecasts of future
cash flows. Qualitative factors, including market presence and trends,
strength of customer relationships, strength of local management,
strength of debt and capital 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 evaluate goodwill and other non-financial assets
could result in a material change to the results of operations. The
key assumptions used to determine the recoverable amount for the
different CGUs are further explained in note 14.
CGUs are defined as the lowest grouping of integrated assets that
generate identifiable cash inflows that are largely independent of the
cash inflows of other assets or groups of assets. The classification of
assets into CGUs requires significant judgment and interpretations
with respect to the integration between assets, the nature of products,
the way in which management allocates resources and other relevant
factors.
57
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Development costs
Income taxes
Development costs are capitalized in accordance with the accounting
policy described in note 3. Initial capitalization of costs is based on
management’s judgment that technical and economic feasibility is
confirmed, usually when a project has reached a defined milestone
according to an established project management model.
Useful lives of key property, plant and equipment
and intangible assets
The depreciation method and useful lives reflect the pattern in which
management expects the asset’s future economic benefits to be
consumed by AGI. Refer to note 3 for the estimated useful lives.
Fair value of financial instruments
Where the fair value of financial assets and financial liabilities recorded
in the consolidated statements of financial position including the
determination of the fair value of the Company’s available-for-sale asset
cannot be derived from active markets, it is 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
AGI measures the cost of equity-settled share-based payment
transactions with employees by reference to the fair value of equity
instruments at the grant date, whereas the fair value of cash-settled
share-based payments is remeasured at every reporting date.
Estimating fair value for share-based payments requires determining
the most appropriate valuation model for a grant of these instruments,
which is dependent on the terms and conditions of the grant. This also
requires determining the most appropriate inputs to the valuation model
including the expected life of the option, volatility and dividend yield.
Uncertainties exist with respect to the interpretation of complex
tax regulations, changes in tax laws and the amount and timing of
future taxable income. Given the wide range of international business
relationships and the long-term nature and complexity of existing
contractual agreements, differences arising between the actual results
and the assumptions made, or future changes to such assumptions,
could necessitate future adjustments to taxable income and expenses
already recorded. AGI establishes provisions, based on reasonable
estimates, for possible consequences of audits by the tax authorities
of the respective countries in which it operates. The amount of such
provisions is based on various factors, such as experience of previous
tax audits and differing interpretations of tax regulations by the taxable
entity and the responsible tax authority.
Such differences of interpretation may arise on a wide variety of issues,
depending on the conditions prevailing in the respective company’s
domicile. As AGI assesses the probability for litigation and subsequent
cash outflow with respect to taxes as remote, no contingent liability has
been recognized. Deferred tax assets are recognized for all unused tax
losses to the extent that it is probable that taxable profit will be available
against which the losses can be utilized. Significant management
judgment is required to determine the amount of deferred tax assets
that can be recognized, based upon the likely timing and the level of
future taxable profits together with future tax planning strategies.
Business combinations
For acquisition accounting purposes, all identifiable assets, liabilities
and contingent liabilities acquired in a business combination are
recognized at fair value at the date of acquisition. Estimates are used
to calculate the fair value of these assets and liabilities as at the date
of acquisition. Contingent consideration resulting from business
combinations is valued at fair value at the acquisition date as part of the
business combination. Where the contingent consideration meets the
definition of a derivative and, thus, a financial liability, it is subsequently
remeasured to fair value at each reporting date. The determination of
CONSOLIDATED FINANCIAL STATEMENTS
58
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH the fair value is based on discounted cash flows. The key assumptions
take into consideration the probability of meeting each performance
target and the discount factor.
5. Standards issued but not yet effective
Standards issued, but not yet effective up to the date of issuance of
the Company’s consolidated financial statements are listed below. This
listing is of standards and interpretations issued that the Company
reasonably expects to be applicable at a future date. The Company
intends to adopt those standards when they become effective.
Financial Instruments [“IFRS 9”]
In July 2014, on completion of the impairment phase of the project
to reform accounting for financial instruments and replace IAS 39,
Financial Instruments: Recognition and Measurement, the IASB issued
the final version of IFRS 9, Financial Instruments. IFRS 9 includes
guidance on the classification and measurement of financial assets
and financial liabilities, impairment of financial assets [i.e., recognition
of credit losses], and a new hedge accounting model. Under the
classification and measurement requirements for financial assets,
financial assets must be classified and measured at either amortized
cost or at FVTPL or through other comprehensive income, depending
on the basis of the entity’s business model for managing the financial
asset and the contractual cash flow characteristics of the financial asset.
The classification requirements for financial liabilities are unchanged
from IAS 39. IFRS 9 requirements address the problem of volatility
in net earnings arising from an issuer choosing to measure certain
liabilities at fair value and require that the portion of the change in fair
value due to changes in the entity’s own credit risk be presented in
other comprehensive income, rather than within net earnings. The
new general hedge accounting model is intended to be simpler and
more closely focused on how an entity manages its risks, replaces
the IAS 39 effectiveness testing requirements with the principle of an
economic relationship, and eliminates the requirement for retrospective
assessment of hedge effectiveness. The new requirements for
59
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH impairment of financial assets introduce an expected loss impairment
model that requires more timely recognition of expected credit losses.
IAS 39 impairment requirements are based on an incurred loss model
where credit losses are not recognized until there is evidence of a
trigger event. IFRS 9 is effective for annual periods beginning on or
after January 1, 2018, with early application permitted. The Company
is finalizing its assessment of the impact on the consolidated financial
statements for Q1 2018.
Revenue from Contracts with Customers [“IFRS 15”]
IFRS 15, Revenue from Contracts with Customers, issued by the
IASB in May 2014, is applicable to all revenue contracts and provides
a model for the recognition and measurement of gains or losses from
sales of some non-financial assets. The core principle is that revenue
is recognized to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or
services. The standard will also result in enhanced disclosures about
revenue, provide guidance for transactions that were not previously
addressed comprehensively [for example, service revenue and
contract modifications] and improve guidance for multiple-element
arrangements. IFRS 15 is effective for annual periods beginning on
or after January 1, 2018, and is to be applied retrospectively, with
earlier adoption permitted. Entities will transition following either a
full or modified retrospective approach. The Company has identified
and reviewed its significant revenue contracts. The Company has
determined that it will apply the modified retrospective method for
adopting IFRS 15, and is finalizing its assessment of the quantitative
impact on the consolidated financial statements for Q1 2018.
Leases [“IFRS 16”]
In January 2016, the IASB released IFRS 16, Leases, to replace the
previous leases standard, IAS 17, Leases, and related interpretations.
IFRS 16 sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract,
the customer [lessee] and the supplier [lessor]. IFRS 16 eliminates the
classification of leases as either operating leases or finance leases and
introduces a single lessee accounting model. IFRS 16 also substantially
carries forward the lessor accounting requirements. Accordingly, a
lessor continues to classify its leases as operating lease or finance
leases, and to account for those two types of leases differently.
IFRS 16 will be effective for the Company’s fiscal year beginning on
January 1, 2019. The Company has not yet assessed the impact of the
adoption of this standard on its consolidated financial statements.
Share-based Payment [“IFRS 2”]
In June 2016, the IASB issued amendments to IFRS 2, Share-based
Payment, clarifying how to account for certain types of share-based
payment transactions. The amendments provide requirements on the
accounting for the effects of vesting and non-vesting conditions on
the measurement of cash-settled share-based payments, share-based
payment transactions with a net settlement feature for withholding tax
obligations and a modification to the terms and conditions of a share-
based payment that changes the classification of the transaction from
cash-settled to equity-settled. The amendments apply for annual periods
beginning on or after January 1, 2018. The Company’s assessment has
not identified significant classification, recognition or measurement
differences.
6. Business combinations
[a] Entringer Industrial S.A. [“Entringer”]
Effective March 9, 2016, the Company acquired 100% of the
outstanding shares of Entringer, a Brazilian-based manufacturer of
grain bins, bucket elevators, dryers and cleaners. The acquisition of
Entringer provides a strategic position for AGI’s entry into the expanding
agricultural market in Brazil.
The purchase has been accounted for by the acquisition method, with
the results of Entringer included in the Company’s net earnings from
the date of acquisition. The assets and liabilities of Entringer on the
CONSOLIDATED FINANCIAL STATEMENTS
60
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH date of acquisition have been recorded in the consolidated financial
statements at their estimated fair values:
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses and other assets
Property, plant and equipment
Intangible assets
Distribution network
Brand name
Goodwill
Accounts payable and accrued liabilities
Income taxes payable
Provisions
Deferred tax liability
Other liabilities
Purchase consideration
$
—
1,246
748
160
4,123
443
968
8,636
(4,198)
(500)
(250)
(94)
(301)
10,981
selling, general and administrative expenses.
During the year ended December 31, 2017, the $1,639 due to vendor
balance was paid in full.
[b] NuVision Industries Inc. [“NuVision”]
Effective April 1, 2016, the Company acquired 100% of the outstanding
shares of NuVision, a Canadian-based designer and builder of complete
turnkey fertilizer blending plants and material handling facilities. The
acquisition of NuVision furthers AGI’s strategic entry into the fertilizer
sector.
The purchase has been accounted for by the acquisition method, with
the results of NuVision included in the Company’s net earnings from the
date of acquisition. The assets and liabilities of NuVision on the date of
acquisition have been recorded in the consolidated financial statements
at their estimated fair values:
Cash
Accounts receivable
Inventory
The impacts on the cash flows on the acquisition of Entringer are as
follows:
Prepaid expenses and other assets
Property, plant and equipment
Cash paid
Due to vendor
Purchase consideration
$
9,342
1,639
10,981
During the three-month period ended March 31, 2017, the allocation of
the purchase price to acquired assets and liabilities was finalized.
Transaction costs related to the Entringer acquisition in the year ended
December 31, 2017 were $186 [2016 – $372], and are included in
Intangible assets
Distribution network
Brand name
Order backlog
Goodwill
Accounts payable and accrued liabilities
Customer deposits
Income taxes payable
Provisions
Deferred tax liability
Purchase consideration
61
CONSOLIDATED FINANCIAL STATEMENTS
$
56
3,604
1,205
35
492
6,408
3,627
741
11,039
(2,590)
(1,476)
(327)
(75)
(2,915)
19,824
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH The impacts on the cash flows on the acquisition of NuVision are as
follows:
Cash paid
Fair value of equipment to be provided to vendor
Contingent consideration
Due from vendor
Purchase consideration
$
6,000
6,000
8,166
(342)
19,824
During the three-month period ended March 31, 2017, the allocation of
the purchase price to acquired assets and liabilities was finalized.
Transaction costs related to the NuVision acquisition in the year ended
December 31, 2017 were $13 [2016 – $105], and are included in selling,
general and administrative expenses.
The contingent consideration is based on NuVision’s earnings in 2015,
2016, 2017 and 2018. Payments totaling $14,000 between 2017 and
2019 would be required if NuVision meets the targets. The Company
believes the likelihood of the maximum payment is moderate. The
present value of the contingent consideration was determined using a
5% discount rate. $1,348 was recorded in current liabilities and $6,818
was recorded in non-current liabilities as at the date of acquisition.
During the year ended December 31, 2017, the Company finalized a
settlement with the vendor of NuVision that resulted in the elimination
of all contingent consideration and all amounts due from vendor.
As a result of the settlement, the Company eliminated the existing
contingent consideration accrual of $9,466 and the amount due from
vendor of $342. The settlement also resulted in the Company recording
a new $3,500 due to vendor in cash and $8,650 due to vendor in
equipment. The increase in the amount ultimately payable to the vendor
was recorded in selling, general and administrative expenses. As a
result of the settlement, the final purchase price consists of $9,500 in
cash and $14,650 in equipment.
CONSOLIDATED FINANCIAL STATEMENTS
62
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH During the year ended December 31, 2017, $3,500 [2016 – $6,000] in
cash was paid and $13,192 [2016 – $307] in equipment was provided to
the vendor. As at December 31, 2017, $1,151 in equipment is still to be
provided to the vendor. The equipment provided and to be provided is
measured at fair value.
[c] Mitchell Mill Systems Canada Ltd. and Mitchell Mill Systems USA
Effective July 18, 2016, the Company acquired 100% of the outstanding
shares of Mitchell Mill Systems Canada Ltd., and its U.S. affiliate
Mitchell Mill Systems USA [collectively, “Mitchell”]. Based in Canada
with a second facility in the U.S., Mitchell manufactures handling
equipment for grain, fertilizer, animal feed, food processing and
industrial applications. The acquisition expands AGI’s commercial
business into eastern Canada and the U.S. and also provides an
expanded product offering.
The purchase has been accounted for by the acquisition method, with
the results of Mitchell included in the Company’s net earnings from the
date of acquisition. The assets and liabilities of Mitchell on the date of
acquisition have been recorded in the consolidated financial statements
at their estimated fair values:
Accounts receivable
Inventory
Prepaid expenses and other assets
Property, plant and equipment
Intangible assets
Brand name
Distribution network
Order backlog
Goodwill
Accounts payable and accrued liabilities
Customer deposits
Income taxes payable
Provisions
Deferred tax liability
Purchase consideration
63
CONSOLIDATED FINANCIAL STATEMENTS
$
6,184
3,319
95
6,923
3,607
6,485
223
7,806
(1,977)
(1,340)
(483)
(100)
(4,374)
26,368
The impacts on the cash flows on the acquisition of Mitchell are as
follows:
Cash paid
Due to vendor
Contingent consideration
Working capital adjustment payable
Purchase consideration
$
16,300
500
9,091
477
26,368
During the three-month period ended June 30, 2017, the allocation of
the purchase price to acquired assets and liabilities was finalized.
Transaction costs related to the Mitchell acquisition in the year ended
December 31, 2017 were nil [2016 – $182], and are included in selling,
general and administrative expenses.
The contingent consideration is based on Mitchell meeting
predetermined earnings targets in 2017 through 2019. Future maximum
payments of $4,200 in 2017, $4,200 in 2018 and $4,800 in 2019 will
be required if Mitchell meets the targets. The Company believes the
likelihood of the maximum payment is moderate. The present value of
the contingent consideration was determined using a 5% discount rate.
$3,914 was recorded in current liabilities and $5,177 was recorded in
non-current liabilities as at the date of acquisition.
During the year ended December 31, 2017, Mitchell met its 2017
predetermined earnings target and a payment of $3,000 was made to
the vendors. In addition, $500 due to vendor recorded at acquisition
was paid in full.
[d] Yargus Manufacturing Inc.
Effective November 18, 2016, the Company acquired 100% of the
outstanding shares of Yargus Manufacturing Inc. and selected assets
of the real estate holding company Clark Center Properties Inc.
[collectively, “Yargus”]. Based in the U.S., Yargus manufactures handling
equipment for grain, fertilizer, feed, food processing and industrial
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH applications. The acquisition continues AGI’s commercial business
expansion into the U.S. and also provides an expanded product offering.
The purchase has been accounted for by the acquisition method, with
the results of Yargus included in the Company’s net earnings from the
date of acquisition. The assets and liabilities of Yargus on the date of
acquisition have been recorded in the consolidated financial statements
at their estimated fair values:
Accounts receivable
Inventory
Prepaid expenses and other assets
Property, plant and equipment
Intangible assets
Brand name
Distribution network
Order backlog
Goodwill
Bank indebtedness
Accounts payable and accrued liabilities
Customer deposits
Deferred revenue
Due to vendor
Provisions
Capital leases
Notes payable
Deferred tax asset
Purchase consideration
$
2,901
7,226
443
13,120
12,868
6,572
2,556
29,262
(91)
(8,105)
(5,595)
(1,723)
(1,085)
(540)
(597)
(98)
1,083
58,197
During the measurement period, commission liabilities relating to
projects completed prior to acquisition were identified in the amount
of $256. As well, $89 of revenue was added to accounts receivable for
project billings that should have occurred prior to acquisition. These
two items resulted in a net increase to goodwill of $167. In addition,
estimated tax amounts included in the purchase price related to a tax
adjustment clause were finalized, resulting in a $1,200 decrease to
goodwill and an offsetting $1,200 decrease in due to vendor in the year
ended December 31, 2017.
The impacts on the cash flows on the acquisition of Yargus are as
follows:
Purchase consideration
Add bank indebtedness acquired
Less cash held in trust
Purchase consideration
$
58,197
91
(5,093)
53,195
During the three-month period ended December 31, 2017, the allocation
of the purchase price to acquired assets and liabilities was finalized.
Transaction costs related to the Yargus acquisition in the year ended
December 31, 2017 were $219 [2016 – $286], and are included in
selling, general and administrative expenses.
[e] Global Industries, Inc.
Effective April 4, 2017, the Company acquired 100% of the outstanding
shares of Global Industries, Inc. [“Global”]. Based in the U.S., Global
manufactures grain storage bins, portable and stationary grain handling
equipment, grain drying and aeration equipment, structural components
and steel buildings. Global has four divisions located in Nebraska and
Kansas, production capacity in South Africa and warehouses in the
U.S., Europe, Australia and Africa. The acquisition expands AGI’s North
American and international grain handling, drying and storage platforms.
The purchase has been accounted for by the acquisition method, with
the results of Global included in the net earnings from the date of
acquisition. The assets and liabilities of Global on the date of acquisition
have been recorded in the consolidated financial statements at their
estimated fair values:
CONSOLIDATED FINANCIAL STATEMENTS
64
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses and other assets
Property, plant and equipment
Intangible assets
Brand name
Distribution network
Order backlog
Goodwill
Deferred tax asset
Accounts payable and accrued liabilities
Customer deposits
Purchase consideration
$
1,935
15,118
45,776
4,773
74,535
9,296
11,563
1,406
1,549
1,973
(19,776)
(5,240)
142,908
During the measurement period, appraisals on land and building
were finalized, resulting in a $2,012 decrease to property, plant, and
equipment, offset by a $1,605 increase to goodwill and $386 increase
to intangible assets. In addition, payroll liabilities existing at acquisition
were identified, resulting in a $314 increase in accounts payable and
accrued liabilities. Also, improved information about acquired inventory
resulted in a $1,914 increase in inventory. In addition, deferred tax asset
increased by $1,154 based on tax treatment of acquired reserves. These
changes resulted in a $446 decrease in goodwill in the year ended
December 31, 2017.
The goodwill of $1,549 comprises the value of the assembled
workforce and other expected synergies arising from the acquisition.
The fair value of the accounts receivable acquired is $15,118. This
consists of the gross contractual value of $15,763 less the estimated
amount not expected to be collected of $645.
From the date of acquisition, Global reported a net loss of $4,803
65
CONSOLIDATED FINANCIAL STATEMENTS
including certain costs related to the transaction. If the acquisition had
taken place as at January 1, 2017, revenue from continuing operations
in 2017 would have increased by an additional $42,577 and profit from
continuing operations in 2017 would have increased by an additional $2.
The components of the purchase consideration are as follows:
Cash paid
Cash held in trust
Due to vendor
Purchase consideration
$
135,641
6,661
606
142,908
The allocation of the purchase price to acquired assets and liabilities is
preliminary, utilizing information available at the time the consolidated
financial statements were prepared. The final allocation of the purchase
price may change when more information becomes available.
Transaction costs related to the Global acquisition in the year ended
December 31, 2017 were $621 [2016 – nil], and are included in selling,
general and administrative expenses.
[f] CMC Industrial Electronics Ltd.
Effective December 22, 2017, the Company acquired 100% of the
outstanding shares of CMC Industrial Electronics Ltd. [“CMC”]. Based
in Canada and the U.S., CMC manufactures industry-leading Hazard
Monitoring Systems for industrial applications. The acquisition expands
AGI’s product catalogue and strengthens AGI’s applied technology
platform.
The purchase has been accounted for by the acquisition method,
with the results of CMC included in the net earnings from the
date of acquisition. The fair value of the assets acquired and the
liabilities assumed have been determined on a provisional basis
utilizing information available at the time the consolidated financial
statements were prepared. Additional information is being gathered to
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH finalize these provisional measurements, particularly with respect to
intangible assets, working capital, and deferred taxes. Accordingly, the
measurement of assets acquired and liabilities assumed may change
upon finalization of the Company’s valuation and completion of the
purchase price allocation, both of which are expected to occur no later
than one year from the acquisition date.
The following table summarizes the provisional fair values of the
identifiable assets and liabilities as at the date of acquisition:
Cash
Accounts receivable
Inventory
Prepaid expenses and other assets
Income taxes recoverable
Property, plant and equipment
Intangible assets
Goodwill
Deferred tax liability
Accounts payable and accrued liabilities
Customer deposits
Capital leases
Purchase consideration
$
974
947
1,647
201
127
142
2,158
3,151
(604)
(926)
(56)
(94)
7,667
The goodwill of $3,151 comprises the value of the assembled workforce
and other expected synergies arising from the acquisition.
The fair value of the accounts receivable acquired is $947. This consists
of the gross contractual value of $997 less the estimated amount not
expected to be collected of $50.
From the date of acquisition, CMC reported a net loss of $73. If
the acquisition had taken place as at January 1, 2017, revenue from
continuing operations in 2017 would have increased by an additional
$7,847 and profit from continuing operations in 2017 would have
increased by an additional $518.
The components of the purchase consideration are as follows:
Cash paid
Cash held in trust
Due to vendor
Purchase consideration
$
5,850
650
1,167
7,667
Transaction costs related to the CMC acquisition in the year ended
December 31, 2017 were $55 [2016 – nil] and are included in selling,
general and administrative expenses.
[g] Junge Control Inc.
Effective December 28, 2017, the Company acquired 100% of the
outstanding shares of Junge Control Inc. [“Junge”]. Based in the
U.S., Junge manufactures automation, measurement and blending
equipment for agriculture, fuel, and aerial applications. The acquisition
expands AGI’s product catalogue and strengthens AGI’s applied
technology platform.
The purchase has been accounted for by the acquisition method,
with the results of Junge included in the Company’s net earnings
from the date of acquisition. The fair value of the assets acquired and
the liabilities assumed have been determined on a provisional basis
utilizing information available at the time the consolidated financial
statements were prepared. Additional information is being gathered to
finalize these provisional measurements, particularly with respect to
intangible assets, working capital, and deferred taxes. Accordingly, the
measurement of assets acquired and liabilities assumed may change
upon finalization of the Company’s valuation and completion of the
purchase price allocation, both of which are expected to occur no later
than one year from the acquisition date.
The following table summarizes the provisional fair values of the
identifiable assets and liabilities as at the date of acquisition:
CONSOLIDATED FINANCIAL STATEMENTS
66
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Cash
Accounts receivable
Inventory
Prepaid expenses and other assets
Property, plant and equipment
Intangible assets
Goodwill
Deferred tax asset
Accounts payable and accrued liabilities
Customer deposits
Purchase consideration
$
3,994
892
2,568
Cash paid
Cash held in trust
Due to vendor
47
Contingent consideration
Purchase consideration
1,901
8,588
8,196
85
(458)
(473)
25,340
Transaction costs related to the Junge acquisition in the year ended
December 31, 2017 were $131 [2016 – nil] and are included in selling,
general and administrative expenses.
Subsequent to December 31, 2017, the amounts due to vendor were
paid in full.
$
1,882
1,882
19,258
2,318
25,340
The goodwill of $8,196 comprises the value of the assembled workforce
and other expected synergies arising from the acquisition.
7. Discontinued operations
The fair value of the accounts receivable acquired is $892. This consists
of the gross contractual value of $955 less the estimated amount not
expected to be collected of $63.
As the acquisition occurred just prior to the year end date, there are
minimal revenues and expense contributed to the overall AGI results in
2017. If the acquisition had taken place as at January 1, 2017, revenue
from continuing operations in 2017 would have increased by an
additional $8,451 and profit from continuing operations in 2017 would
have increased by an additional $2,147.
The components of the purchase consideration are as follows:
During the second quarter of 2016, the Company sold selected assets
of its wholly owned subsidiary Mepu Oy [“Mepu”] for proceeds of
$3,107, of which $1,050 is receivable in ten annual payments of $105
that commenced in June 2017.
During the third quarter of 2016, the Company sold selected assets of
its wholly owned subsidiaries Applegate Livestock Equipment Inc. and
Applegate Trucking Inc. [collectively, “Applegate”] for cash proceeds of
$4,102.
The financial results attributable to Mepu and Applegate have been
presented as discontinued operations.
67
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH The results of discontinued operations for the years ended December
31 are as follows:
Consolidated statements of cash flows from discontinued operations
for the year
Consolidated statements of income from discontinued operations
Sales
Cost of goods sold
Gross profit
Expenses
2017
$
—
22
(22)
2016
$
15,509
13,158
2,351
Cash flows provided by (used in) from
operating activities
Cash flows used in investing activities
Cash flows provided by (used in)
discontinued operations
2017
$
2016
$
41
—
41
(368)
(111)
(479)
Selling, general and administrative
(60)
2,938
(recovery)
Other operating income
Impairment recovery
Profit from discontinued operations for the year
Consolidated statements of comprehensive income
(loss) from discontinued operations
(3)
—
(63)
41
(36)
(904)
1,998
353
2017
$
2016
$
Profit from discontinued operations for the year
41
353
Other comprehensive income (loss)
Item that may be reclassified subsequently
to profit (loss)
Exchange difference on translation
of foreign operations
Other comprehensive loss from discontinued
operations for the year
Total comprehensive income (loss) from
discontinued operations for the year
(198)
(143)
(198)
(143)
(157)
210
CONSOLIDATED FINANCIAL STATEMENTS
68
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 8. Restricted cash
Restricted cash of $1,611 [2016 – nil] consists of cash on hand related
to advance payment guarantees included in a sales contract with a
customer.
9. Accounts receivable
As is typical in the agriculture sector, AGI 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 overdue
amounts and the related allowance for doubtful accounts:
Non-current accounts receivable is the present value of asset-backed
receivables.
Trade receivables assessed to be impaired are included as an allowance
in selling, general and administrative expenses in the period of the
assessment. The movement in the Company’s allowance for doubtful
accounts for the years ended December 31, 2017 and December 31,
2016 was as follows:
Balance, beginning of year
Additional provision recognized
Amounts written off during the year as uncollectible
Total current accounts receivable
Less allowance for doubtful accounts
Non-current accounts receivable
Total accounts receivable, net
Of which
2017
$
100,863
(1,846)
99,017
4,180
2016
$
Exchange differences
Balance, end of year
10. Inventory
82,852
(1,819)
81,033
—
103,197
81,033
Raw materials
Finished goods
Neither impaired nor past due
74,382
54,790
Not impaired and past the due date as follows
2017
$
1,819
919
(859)
(33)
1,846
2016
$
4,296
1,136
(3,598)
(15)
1,819
2017
$
2016
$
83,121
75,514
158,635
54,012
45,467
99,479
Within 30 days
31 to 60 days
61 to 90 days
Over 90 days
Less allowance for doubtful accounts
Total accounts receivable, net
15,419
13,844
Inventory is recorded at the lower of cost and net realizable value.
4,538
2,229
8,475
(1,846)
103,197
3,227
2,312
8,679
(1,819)
81,033
During the year ended December 31, 2017, no provisions [2016 – nil]
were expensed through cost of goods sold and there were no write-
downs of finished goods and no reversals of write-downs during the
year.
69
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 11. Property, plant and equipment
[in thousands of Canadian dollars, except where otherwise noted and per share data]
Land
$
Grounds
$
Buildings
$
Leasehold
Improvements
$
Furniture and
fixtures
$
Vehicles
$
Computer
Hardware
$
Manufacturing
Equipment
$
Construction
in progress
$
Cost
Balance, January 1, 2017
Additions
Acquisitions
Classification as held for sale
[note 16]
Disposals
Impairment [note 16]
Exchange differences
Balance, December 31, 2017
Depreciation
Balance, January 1, 2017
Depreciation
Classification as held for sale
[note 16]
Disposals
Exchange differences
Balance, December 31, 2017
Net book value,
January 1, 2017
Net book value,
December 31, 2017
16,078
4,017
3,648
(1,243)
—
(276)
(502)
21,722
4,013
1,002
—
(59)
—
(64)
92,536
25,895
40,861
(2,763)
(3)
(480)
(175)
4,717
(5,304)
150,742
—
—
—
—
—
—
688
276
—
—
(32)
932
8,086
3,742
(543)
(3)
(223)
11,059
2,724
432
665
—
—
—
(43)
3,778
853
275
—
—
—
1,128
2,432
10,329
389
487
—
(43)
—
2,118
2,720
—
(935)
—
(35)
3,230
(232)
14,000
1,095
280
—
(37)
(12)
1,326
4,749
1,632
—
(441)
(58)
5,882
4,781
1,110
451
—
(303)
—
(91)
5,948
3,023
822
—
(267)
(63)
3,515
Total
$
256,799
51,299
76,578
(4,065)
(2,466)
(820)
92,298
25,749
26,809
—
(1,149)
—
31,608
(9,413)
937
—
(33)
—
(4,187)
139,520
(1,906)
21,193
(12,475)
364,850
28,848
9,444
—
(1,014)
(813)
36,465
—
—
—
—
—
—
47,342
16,471
(543)
(1,762)
(1,201)
60,307
16,078
3,325
84,450
1,871
1,337
5,580
1,758
63,450
31,608
209,457
21,722
3,785 139,683
2,650
1,904
8,118
2,433
103,055
21,193
304,543
CONSOLIDATED FINANCIAL STATEMENTS
70
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH [in thousands of Canadian dollars, except where otherwise noted and per share data]
Land
$
Grounds
$
Buildings
$
Leasehold
Improvements
$
Furniture and
fixtures
$
Vehicles
$
Computer
Hardware
$
Manufacturing
Equipment
$
Construction
in progress
$
Total
$
Cost
Balance, January 1, 2016
13,836
3,000
82,787
2,632
Additions
Acquisitions
Disposals
Impairment
Discontinued operations
Exchange differences
Balance, December 31, 2016
Depreciation
Balance, January 1, 2016
Depreciation
Disposals
Impairment
Discontinued operations
Exchange differences
Balance, December 31, 2016
Net book value,
January 1, 2016
Net book value,
December 31, 2016
582
2,126
(87)
—
(412)
33
365
779
—
—
(91)
(40)
16,078
4,013
—
—
—
—
—
—
—
534
219
—
—
(56)
(9)
688
907
13,144
(53)
—
(3,082)
(1,167)
92,536
6,778
2,299
(49)
—
(866)
(76)
8,086
13,836
2,466
76,009
16,078
3,325
84,450
89
47
(27)
—
—
(17)
2,724
604
257
(5)
—
—
(3)
853
2,028
1,871
2,411
154
38
(19)
—
(135)
(17)
7,707
1,356
2,173
(412)
—
(476)
(19)
2,432
10,329
1,025
195
(5)
—
(108)
(12)
1,095
4,222
1,065
(263)
—
(242)
(33)
4,749
4,489
780
208
(140)
—
(480)
(76)
4,781
3,026
514
(94)
—
(373)
(50)
3,023
91,978
4,208
6,142
(560)
(2,548)
(4,567)
(2,355)
92,298
27,056
6,374
(363)
(109)
(3,610)
(500)
28,848
92
208,932
31,762
—
(189)
—
(52)
(5)
40,203
24,657
(1,487)
(2,548)
(9,295)
(3,663)
31,608
256,799
—
—
—
—
—
—
—
43,245
10,923
(779)
(109)
(5,255)
(683)
47,342
1,386
3,485
1,463
64,922
92
165,687
1,337
5,580
1,758
63,450
31,608
209,457
AGI regularly assesses its long-lived assets for impairment. As at December 31, 2017 and 2016, 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 2017 or 2016.
71
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 12. Goodwill
Balance, beginning of year
Acquisition [note 6]
Impairment
Exchange differences
Balance, end of year
13. Intangible assets
Cost
Balance, January 1, 2017
Internal development
Acquired
Impairment
Exchange differences
Balance, December 31, 2017
Amortization
Balance, January 1, 2017
Amortization
Exchange differences
Balance, December 31, 2017
Net book value,
December 31, 2017
2017
$
2016
$
227,450
170,262
11,770
57,472
—
(4,551)
234,669
(67)
(217)
227,450
Patents
$
Software
$
Order
Backlog
$
Non-compete
agreement
$
Development
project
$
Distribution
networks
$
123,700
—
19,521
—
(2,454)
140,767
43,685
8,517
(1,324)
50,878
Brand
names
$
107,109
—
10,919
—
(2,176)
115,852
—
—
—
—
2,806
71
32
—
(81)
2,828
1,767
172
(24)
1,915
3,337
925
650
—
(121)
4,791
1,931
615
(95)
2,451
6,583
—
1,889
—
(202)
8,270
4,676
3,232
(157)
7,751
Total
$
250,146
4,910
33,011
(395)
(5,187)
282,485
52,931
13,003
(1,605)
64,329
6,497
3,914
—
(395)
(153)
9,863
825
451
(5)
1,271
114
—
—
—
—
114
47
16
—
63
51
89,889
115,852
913
2,340
519
8,592
218,156
CONSOLIDATED FINANCIAL STATEMENTS
72
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Patents
$
Software
$
Order
Backlog
$
Non-compete
agreement
$
Development
project
$
Distribution
networks
$
104,544
—
19,913
—
—
(757)
123,700
37,423
6,797
—
—
(535)
43,685
Brand
names
$
86,526
—
21,071
—
—
(488)
107,109
—
—
—
—
—
—
Cost
Balance, January 1, 2016
Internal development
Acquired
Impairment
Discontinued operations
Exchange differences
Balance, December 31, 2016
Amortization
Balance, January 1, 2016
Amortization
Impairment
Discontinued operations
Exchange differences
Balance, December 31, 2016
Net book value,
December 31, 2016
2,790
53
—
—
—
(37)
2,806
1,550
246
—
—
(29)
1,767
3,332
237
9
—
(151)
(90)
3,337
1,509
594
—
(100)
(72)
1,931
3,128
—
3,521
—
—
(66)
6,583
1,859
2,860
—
—
(43)
4,676
Total
$
207,381
2,938
44,514
(3,007)
(151)
(1,529)
250,146
43,600
11,061
(948)
(100)
(682)
52,931
6,947
2,648
—
(3,007)
—
(91)
6,497
1,228
548
(948)
—
(3)
825
114
—
—
—
—
—
114
31
16
—
—
—
47
67
80,015
107,109
1,039
1,406
1,907
5,672
197,215
The Company is continuously working on research and development
projects. Development costs capitalized include the development of
new products and the development of new applications of 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.
Intangible assets include patents acquired through business
combinations, which have a remaining life between two and nine years.
All brand names with a carrying amount of $115,852 [2016 – $107,109]
have been classified as indefinite-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 annually. For
definite-life intangible assets, the Company assesses whether there are
indicators of impairment at subsequent reporting dates as a triggering
event for performing an impairment test.
Intangible assets and research and development expenses for the year
ended December 31, 2017, are net of combined federal and provincial
scientific research and experimental development [“SR&ED”] tax
credits in the amounts of $55 and $93, respectively. A number of
specific criteria must be met in order to qualify for federal and provincial
SR&ED investment tax credits. As at December 31, 2017, the Company
had federal investment tax credit carryforwards in the amount of $2,324
[2016 – $2,324], federal SR&ED investment tax credit carryforwards in
73
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH the amount of $1,051 [2016 – $980], provincial SR&ED investment tax
credit carryforwards in the amount of $345 [2016 – $287] and provincial
manufacturing or processing tax credits in the amount of $466 [2016 –
$448]; these began expiring in 2015.
Other significant intangible assets are goodwill [note 12] 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. The remaining amortization period for
the distribution network ranges from 2 to 20 years.
The Company had no contractual commitments for the acquisition of
intangible assets as of the reporting date.
14. Impairment testing
The Company performs its annual goodwill impairment test as at
December 31. The recoverable amount of the Company’s group of
CGUs has been determined based on value in use for the year ended
December 31, 2017, using cash flow projections covering a five-year
period. The pre-tax discount rates applied to the cash flow projections
are 12.7% and 12.2% [2016 – 12.8% and 13.2%] and cash flows
beyond the five-year period are extrapolated using a 3% growth rate
[2016 – 3%], which is management’s estimate of long-term inflation
and productivity growth in the industry and geographies in which it
operates.
The Company’s group of CGUs and goodwill and indefinite-life intangible
assets allocated thereto are as follows, which represents how goodwill
and indefinite-life intangible assets are monitored by management:
Farm
Goodwill
Intangible assets with indefinite lives
Commercial
Goodwill
Intangible assets with indefinite lives
Total
Goodwill
Intangible assets with indefinite lives
2017
$
2016
$
131,733
130,371
77,490
69,302
102,936
38,362
97,079
37,807
234,669
115,852
227,450
107,109
Key assumptions used in valuation calculations
The calculation of value in use or fair value less cost to sell for all the
CGUs or group of CGUs is most sensitive to the following assumptions:
• Gross margins;
• 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 or group of CGUs. 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
CONSOLIDATED FINANCIAL STATEMENTS
74
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH assessment of any risk specific to the CGU or group of CGUs 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 or group of CGUs’ 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 Consumer Price Index expectations for the markets in
which AGI operates. Management considers the Consumer Price Index
to be a conservative indicator of the long-term growth expectations for
the agricultural industry.
15. Available-for-sale investment
In fiscal 2009, AGI invested in a privately held Canadian farming
company [“Investco”].
16. Assets held for sale
In 2015, AGI transferred all production activities from its existing facility
to a new facility, both located in Decatur, Illinois. AGI concluded that
the grounds, building and selected equipment at the existing Decatur,
Illinois facility met the definition of assets held for sale. In 2017, the
Company sold the grounds, building and equipment in Decatur, Illinois
at their carrying amount and the assets were removed from assets held
for sale.
In 2017, AGI moved all production from a Winnipeg, Manitoba facility
into other facilities within Canada. AGI concluded that the land and
building at the Winnipeg, Manitoba facility met the definition of assets
held for sale. The related carrying amount of $2,718 was recorded as
assets held for sale. In September 2017, the Company sold the land and
building for a gain of $955 and the assets were removed from assets
held for sale.
In 2015, AGI acquired Westeel, which included land and building in
Regina, Saskatchewan that met the definition of assets held for sale.
The related carrying amount of $4,100 was recorded as assets held for
sale. In 2016, the carrying amount of this land and building was reduced
to $2,745. During 2017, the carrying amount was further reduced to
$2,038. In December 2017, the Company entered into an agreement to
sell the land and building in Regina, Saskatchewan.
In 2017, AGI built a new facility in Candido Mota, Sao Paolo, Brazil and
transferred all production activities from its existing facility in Assis,
Sao Paulo, Brazil. AGI concluded that the land, grounds, and building
at the existing Assis, Sao Paulo, Brazil facility met the definition of and
recorded as assets held for sale at the lower of cost and fair value of
$1,624. During 2017, an impairment of $820 was recorded to reduce the
carrying value of the assets held for sale to $804.
As at December 31, 2017, assets held for sale include the land carrying
value of $1,895 [2016 – $1,674] and the building carrying value of $947
[2016 – $1,474] in Regina, Saskatchewan and Sao Paolo, Brazil.
17. Accounts payable and accrued liabilities
Trade payables
Other payables
Personnel-related accrued liabilities
Accrued outstanding service invoices
2017
$
2016
$
43,924
26,043
23,507
2,597
96,071
34,978
10,929
15,409
3,348
64,664
75
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 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 30.
18. Due to vendor
In the year ended December 31, 2013, the Company recorded a tax
deduction in regards to the write-off of a receivable outstanding as
at the date of the Tramco, Inc. [“Tramco”] acquisition. Per the terms
of the purchase agreement, the tax benefit related to this deduction,
net of 15% which is to the benefit of the Company, is required to be
paid to the vendor of Tramco once the deduction has become statute
barred. The impact of this deduction from taxable income was to reduce
current income tax expense by $118 and income tax payable by $780.
The amount payable to the vendor upon the deduction becoming
statute barred of $725 has been recorded as a long-term liability on the
consolidated statements of financial position.
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. Assumptions
used to calculate the provision for warranties were based on current
sales levels and current information available about returns.
Balance, beginning of year
Costs recognized
Change in reserve
Amounts charged against provision
Balance, end of year
2017
$
2016
$
6,654
5,539
(603)
(5,681)
5,909
6,550
4,427
180
(4,503)
6,654
CONSOLIDATED FINANCIAL STATEMENTS
76
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 20. Obligations under finance lease
Current portion of obligations under finance lease
Real estate lease
Equipment leases
Total current obligations under finance lease
Non-current portion of obligations under finance lease
Real estate lease
Equipment leases
Total non-current obligations under finance lease
Obligations under finance lease
[a] Real estate lease
Interest rate
%
Maturity
Euribor +2
4.7 – 6.6
2018
2020-2021
Euribor +2
4.7 – 6.6
2018
2020-2021
2017
$
960
23
983
—
19
19
1,002
2016
$
206
52
258
904
71
975
1,233
The Company has a real estate lease that matures on March 1, 2018. The lease is denominated in euros and bears interest at Euribor plus 2%.
[b] Equipment lease
The Company has leases for material handling and production equipment that mature between 2020 and 2021. The leases are denominated in U.S.
dollars and Brazilian real and bear interest at rates between 4.7% and 6.6%.
77
77
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2 017 A N N UA L R E P O RT | E N G I N E E R I N G G ROW T H
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 21. Long-term debt
Current portion of long-term debt
Equipment financing
Non-current portion of long-term debt
Equipment financing
Series B secured notes
Series C secured notes [U.S. dollar denominated]
Term A secured loan
Term B secured loan
Revolver line
Less deferred financing costs
Total non-current long-term debt
Long-term debt
[a] Bank indebtedness
AGI has operating facilities of $20.0 million and U.S. $7.0 million. The
facilities bear interest at prime plus 0.2% to prime plus 1.8% per annum
based on performance calculations. As at December 31, 2017, there was
nil [2016 – nil] outstanding under these facilities.
Collateral for the operating facilities ranks pari passu with the Series
A secured notes and includes 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
Interest rate
%
Maturity
2017
$
2016
$
nil
nil
4.4
3.7
3.6
3.9
3.7 – 6.0
2021
2021
2025
2026
2021
2022
2021
117
95
443
25,000
31,363
50,000
40,000
158,067
304,873
2,014
302,859
302,976
404
25,000
33,568
50,000
40,000
60,422
209,394
2,141
207,253
207,348
on May 22, 2025. Collateral for the Series B secured notes and term
loans ranks 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.
The Series C secured notes were issued on October 29, 2016. The non-
amortizing notes bear interest at 3.7% payable quarterly and mature on
October 29, 2026. The Series C secured notes are denominated in U.S.
dollars. Collateral for the Series C secured notes and term loans ranks
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.
The Series B secured notes were issued on May 22, 2015. The non-
amortizing notes bear interest at 4.4% payable quarterly and mature
The Term A secured loan was issued on May 20, 2015 and matures
on April 4, 2021. The facilities bear interest at BA plus 1.5% to BA plus
CONSOLIDATED FINANCIAL STATEMENTS
78
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 3.0% per annum based on performance calculations. Interest on the
non-amortizing loan has been fixed at 3.6% through an interest rate
swap contract [note 30]. Collateral for the Term A loan and secured
notes ranks pari passu and includes 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.
The Term B secured loan was issued on May 20, 2015 and matures
on May 19, 2022. The facilities bear interest at BA plus 2.5% per
annum. Interest on the non-amortizing loan has been fixed at 4.3%
through an interest rate swap contract [note 30]. Collateral for the
Term B loan and secured notes ranks pari passu and includes 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.
AGI has revolver facilities of $165 million from which Canadian or
U.S. funds can be drawn and a $75 million accordion feature, which is
undrawn. The facilities bear interest at LIBOR plus 1.5% to LIBOR plus
3.0% and prime plus 0.2% to prime plus 1.8% per annum based on
performance calculations. The combined effective interest rate for the
year ended December 31, 2017 on AGI’s revolver facilities was 5.1%.
As at December 31, 2017, there was $158 million [2016 – $60 million]
outstanding under these facilities. In April 2017, the Company amended
its credit facilities to extend the maturity to April 4, 2021. Interest on
the revolver line has been fixed at 3.7% through an interest rate swap
contract [note 30]. Collateral for the revolving line ranks pari passu and
includes 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.
[c] Covenants
AGI is subject to certain financial covenants in its credit facility
agreements that must be maintained to avoid acceleration of the
termination of the agreement. The financial covenants require AGI to
maintain a debt to earnings before interest, taxes, depreciation and
amortization [“EBITDA”] ratio of less than 3.25 and to provide debt
service coverage of a minimum of 1.0. The covenant calculations
exclude the convertible unsecured subordinated debentures from the
definition of debt. As at December 31, 2017 and December 31, 2016,
AGI was in compliance with all financial covenants. In April 2017, the
credit facilities were amended to, among other things, require AGI to
maintain a debt to EBITDA ratio of less than 3.75, until January 1, 2018,
when it returns to 3.25.
22. Convertible unsecured subordinated debentures
Current portion of convertible unsecured
subordinated debentures
Non-current portion of convertible unsecured
subordinated debentures
Principal amount
Equity component
Accretion
Financing fees, net of amortization
Total non-current convertible unsecured
subordinated debentures
2017
$
2016
$
86,155
—
213,000
213,000
(14,212)
7,498
(6,383)
(9,922)
4,039
(5,907)
199,903
201,210
Convertible unsecured subordinated debentures
286,058
201,210
2013 Debentures
In December 2013, the Company issued $86.3 million aggregate
principal amount of convertible unsecured subordinated debentures [the
“2013 Debentures”] at a price of $1,000 per 2013 Debenture. The net
proceeds of the offering, after payment of the underwriters’ fee of $3.5
million and expenses of the offering of $0.6 million, were approximately
$82.2 million. The 2013 Debentures bear interest at an annual rate
of 5.25% payable semi-annually on June 30 and December 31. The
maturity date of the 2013 Debentures is December 31, 2018.
79
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Each 2013 Debenture is convertible into common shares of the
Company at the option of the holder at any time on the earlier of the
maturity date and the date of redemption of the 2013 Debenture, at a
conversion price of $55.00 per common share being a conversion rate
of approximately 18.1818 common shares per $1,000 principal amount
of 2013 Debentures. During the year ended December 31, 2017, a
holder of the 2013 Debentures exercised the conversion option for $95
and was issued 1,727 common shares. No conversion options were
exercised during the year ended December 31, 2016. As at December
31, 2017, AGI has reserved 1,566,455 common shares for issuance
upon conversion of the 2013 Debentures.
The 2013 Debentures are not redeemable before December 31, 2016.
On and after December 31, 2016 and prior to December 31, 2017, the
2013 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, 2017, the 2013 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 2013 Debentures
by issuing and delivering common shares. The Company may also elect
to satisfy its obligations to pay interest on the 2013 Debentures by
delivering common shares. The Company does not expect to exercise
the option to satisfy its obligations to pay the principal amount or
interest by delivering common shares. 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 2013 Debentures, the Company
recorded a liability of $86,250, less related offering costs of $3,847. The
liability component has been accreted using the effective interest rate
method, and during the year ended December 31, 2017, the Company
recorded accretion of $1,946 [2016 – $887], non-cash interest expense
relating to financing costs of $1,674 [2016 – $761] and interest expense
of $4,526 [2016 – $4,528]. The residual value assigned to the holder’s
option to convert the 2013 Debentures to common shares in the total
amount of $4,480 has been separated from the fair value of the liability
and is included in shareholders’ equity, net of income taxes of $1,134
and its pro rata share of financing costs of $211.
2014 Debentures
In December 2014, the Company issued $51.8 million aggregate
principal amount of extendible convertible unsecured subordinated
debentures [the “2014 Debentures”] at a price of $1,000 per 2014
Debenture. The 2014 Debentures bear interest at an annual rate of
5.25% payable semi-annually on June 30 and December 31. The
maturity date of the 2014 Debentures is December 31, 2019.
Each 2014 Debenture is convertible into common shares of the
Company at the option of the holder at any time on the earlier of the
maturity date and the date of redemption of the 2014 Debenture, at a
conversion price of $65.57 per common share being a conversion rate
of approximately 15.2509 common shares per $1,000 principal amount
of 2014 Debentures. No conversion options were exercised during the
year ended December 31, 2017 [year ended December 31, 2016 – nil].
As at December 31, 2017, AGI has reserved 789,233 common shares for
issuance upon conversion of the 2014 Debentures.
The 2014 Debentures are not redeemable before December 31, 2017.
On and after December 31, 2017 and prior to December 31, 2018, the
2014 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, 2018, the 2014 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.
CONSOLIDATED FINANCIAL STATEMENTS
80
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH On redemption or at maturity, the Company may, at its option, elect to
satisfy its obligation to pay the principal amount of the 2014 Debentures
by issuing and delivering common shares. The Company may also
elect to satisfy its obligation to pay interest on the 2014 Debentures by
delivering sufficient common shares. The Company does not expect to
exercise the option to satisfy its obligations to pay the principal amount
or interest by delivering common shares. The number of 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 2014 Debentures, the Company
recorded a liability of $51,750, less related offering costs of $2,663 and
the estimated fair value of the holder’s conversion option. The liability
component has been accreted using the effective interest rate method,
and during the year ended December 31, 2017, the Company recorded
accretion of $426 [2016 – $401], non-cash interest expense relating
to financing costs of $495 [2016 – $465] and interest expense on the
5.25% coupon of $2,717 [2016 – $2,717]. The residual value assigned to
the holder’s option to convert the 2014 Debentures to common shares
in the total amount of $2,165 has been separated from the fair value of
the liability and is included in shareholders’ equity, net of income taxes
of $557 and its pro rata share of financing costs of $111.
2015 Debentures
In September 2015, the Company issued $75.0 million aggregate
principal amount of convertible unsecured subordinated debentures [the
“2015 Debentures”] at a price of $1,000 per 2015 Debenture. The 2015
Debentures bear interest at an annual rate of 5.00% payable semi-
annually on June 30 and December 31. The maturity date of the 2015
Debentures is December 31, 2020.
Each 2015 Debenture is convertible into common shares of the
Company at the option of the holder at any time on the earlier of the
maturity date and the date of redemption of the 2015 Debenture, at a
conversion price of $60.00 per common share being a conversion rate
of approximately 16.6667 common shares per $1,000 principal amount
of 2015 Debentures. No conversion options were exercised during the
year ended December 31, 2017 [year ended December 31, 2016 – nil].
As at December 31, 2017, AGI has reserved 1,250,000 common shares
for issuance upon conversion of the 2015 Debentures.
The 2015 Debentures are not redeemable before December 31, 2018.
On and after December 31, 2018 and prior to December 31, 2019, the
2015 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, 2018, the 2015 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 2015 Debentures
by issuing and delivering common shares. The Company may also
elect to satisfy its obligation to pay interest on the 2015 Debentures by
delivering sufficient common shares. The Company does not expect to
exercise the option to satisfy its obligations to pay the principal amount
or interest by delivering common shares. The number of 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 2015 Debentures, the Company
recorded a liability of $75,000, less related offering costs of $3,509 and
the estimated fair value of the holder’s conversion option. The liability
component has been accreted using the effective interest rate method,
and during the year ended December 31, 2017, the Company recorded
accretion of $591 [2016 – $558], non-cash interest expense relating
to financing costs of $604 [2016 – $568] and interest expense on the
5.00% coupon of $3,750 [2016 – $3,750]. The residual value assigned to
the holder’s option to convert the 2015 Debentures to common shares
in the total amount of $3,277 has been separated from the fair value of
81
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH the liability and is included in shareholders’ equity, net of income taxes
of $835 and its pro rata share of financing costs of $162.
2017 Debentures
On April 4, 2017, the Company entered into an agreement with a
syndicate of underwriters pursuant to which AGI issued, on a “bought
deal” basis, $75 million aggregate principal amount of convertible
unsecured subordinated debentures [the “2017 Debentures”] at a
price of $1,000 per 2017 Debenture. AGI also granted the underwriters
an over-allotment option, exercisable in whole or in part for a period
expiring 30 days following closing, to purchase up to an additional
$11.25 million aggregate amount of 2017 Debentures at the same price.
The over-allotment option was fully exercised, and accordingly, the
total gross proceeds to AGI were $86.25 million. On April 25, 2017, the
Company closed the offering of $75 million aggregate principal amount
of convertible unsecured subordinated debentures. On April 28, 2017,
the Company closed the over-allotment option.
The 2017 Debentures bear interest at 4.85% per annum, payable
semi-annually in arrears on June 30 and December 31 each year,
commencing June 30, 2017. The 2017 Debentures have a maturity date
of June 30, 2022.
The 2017 Debentures are convertible at the holder’s option at any
time prior to the close of business on the earlier of the business day
immediately preceding the maturity date and the date specified by
AGI for redemption of the 2017 Debentures into fully paid and non-
assessable common shares of the Company at a conversion price of
$83.45 per common share, being a conversion rate of approximately
11.9832 common shares for each $1,000 principal amount of 2017
Debentures. No conversion options were exercised during the year
ended December 31, 2017 [year ended December 31, 2016 – nil]. As
at December 31, 2017, AGI has reserved 898,740 common shares for
issuance upon conversion of the 2017 Debentures.
The Company presents and discloses its financial instruments in
accordance with the substance of its contractual arrangement.
Accordingly, upon issuance of the 2017 Debentures, the Company
recorded a liability of $86,250 less related offering costs of $3,673 and
the estimated fair value of the holder’s conversion option. The liability
component has been accreted using the effective interest rate method,
and during the year ended December 31, 2017, the Company recorded
accretion of $496 [2016 – nil], non-cash interest expense relating to
finance costs of $424 [2016 – nil] and interest expense on the 4.85%
coupon of $2,791 [2016 – nil]. The estimated fair value of the holder’s
option to convert the 2017 Debentures to common shares in the total
amount of $4,290 has been separated from the fair value of the liability
and is included in shareholders’ equity, net of income tax of $1,106 and
its pro rata share of financing costs of $190.
CONSOLIDATED FINANCIAL STATEMENTS
82
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 23. Equity
[a] Common shares
Authorized
Unlimited number of voting common shares without par value
Issued
16,160,916 common shares
Balance, January 1, 2016
Dividend reinvestment shares issued from
treasury [note 23[d]]
Settlement of 2012 EIAP obligation
Balance, December 31, 2016
Dividend reinvestment shares issued from
treasury [note 23[d]]
Settlement of 2012 EIAP obligation
Issuance of common shares
Convertible unsecured subordinated debentures
Dividend reinvestment plan costs
Balance, December 31, 2017
Shares
#
Amount
$
14,590,368
244,840
144,006
47,269
5,218
1,640
14,781,643
251,698
133,570
1,150,000
1,727
—
5,300
61,224
95
(27)
16,160,916
323,199
On January 26, 2017, the Company entered into an agreement with a
syndicate of underwriters pursuant to which AGI issued, on a “bought
deal” basis, 1,100,000 common shares at a price of $55.10 per share to
raise gross proceeds of approximately $60 million. Also, the Company
granted the underwriters an over-allotment option, exercisable in whole
or in part for a period expiring 30 days following closing, to purchase
an additional 165,000 common shares at the same offering price. On
February 15, 2017, the Company closed the public offering for 1,150,000
common shares at a price of $55.10 per share, which includes 50,000
common shares issued pursuant to the over-allotment option, for gross
proceeds of approximately $63 million. Net proceeds after fees were
approximately $60 million.
83
CONSOLIDATED FINANCIAL STATEMENTS
[b] Contributed surplus
Balance, beginning of year
Equity-settled director compensation [note 24[b]]
Dividends on 2012 EIAP
Obligation under 2012 EIAP [note 24[a]]
Settlement of 2012 EIAP obligation
2017
$
2016
$
16,940
10,193
361
1,302
7,698
375
1,672
6,517
(5,345)
(1,823)
2015 convertible unsecured subordinated debentures
—
6
Balance, end of year
20,956
16,940
[c] Accumulated other comprehensive income
Accumulated other comprehensive income is comprised of the
following:
The cash flow hedge reserve contains the effective portion of the cash
flow hedge relationships incurred as at the reporting date.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange
differences arising from the translation of the financial statements of
foreign subsidiaries. It is also used to record the effect of hedging net
investments in foreign operations.
Defined benefit plan reserve
The defined benefit plan reserve is used to record changes in the
pension liability including actuarial gains and losses and the impact of
any minimum funding requirements.
[d] Dividends paid and proposed
In the year ended December 31, 2017, the Company declared dividends
of $38,365 or $2.40 per common share [2016 – $35,297 or $2.40 per
common share] and dividends on share compensation awards of $1,302
93,976
4,909
Cash flow hedge reserve
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH [2016 – $1,672]. In the year ended December 31, 2017, 93,976 common
shares were issued to shareholders from treasury under the dividend
reinvestment plan [the “DRIP”]. In the year ended December 31, 2017,
dividends paid to shareholders were financed $33,456 [2016 – $30,079]
from cash on hand and $4,909 [2016 – $5,218] by the DRIP.
AGI’s dividend policy is to pay cash dividends on or about the 15th of
each month to shareholders of record on the last business day of the
previous month. The Company’s current monthly dividend rate is $0.20
per common share. Subsequent to December 31, 2017, the Company
declared dividends of $0.20 per common share with record dates of
January 31 and February 28.
[e] Dividend reinvestment plan
On March 5, 2013, the Company announced the adoption of the DRIP.
Eligible shareholders who elect to reinvest dividends under the DRIP
will initially receive common shares issued from treasury at a discount
of 4% from the market price of the common shares, with the market
price being equal to the volume-weighted average trading price of the
common shares on the Toronto Stock Exchange for the five trading days
preceding the applicable dividend payment date. The Company incurred
costs of $27 [2016 – nil] with respect to administration of the DRIP.
[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. 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 Common Shares equal to four times
the exercise price of the Rights for an amount in cash equal to the
exercise price. The exercise price of the Rights pursuant to the Rights
Plan is $150 per Right.
[g] Preferred shares
On May 14, 2014, the shareholders of AGI approved the creation of two
new classes of preferred shares, each issuable in one or more series
without par value and each with such rights, restrictions, designations
and provisions as the Company’s Board of Directors may, at any time
from time to time determine, subject to an aggregate maximum
number of authorized preferred shares. In particular, no preferred shares
of either class may be issued if:
[i] The aggregate number of preferred shares that would then be
outstanding would exceed 50% of the aggregate number of common
shares then outstanding; or
[ii] The maximum aggregate number of common shares into which all of
the preferred shares then outstanding could be converted in accordance
with their terms would exceed 20% of the aggregate number of
common shares then outstanding; or
[iii] The aggregate number of votes, which the holders of all preferred
shares then outstanding would be entitled to cast at any meeting of
the shareholders of the Company [other than meetings at which only
holders of preferred shares are entitled to vote], would exceed 20%
of the aggregate number of votes, which the holders of all common
shares then outstanding would be entitled to cast at any such meeting.
As at December 31, 2017 and December 31, 2016, no preferred shares
were issued or outstanding.
CONSOLIDATED FINANCIAL STATEMENTS
84
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 24. Share-based compensation plans
[a] Equity incentive award plan [“EIAP”]
The 2012 EIAP
On May 11, 2012, the shareholders of AGI approved an Equity Incentive
Award Plan [the “2012 EIAP”], which authorizes the Board to grant
Restricted Awards [“Restricted Awards”] and Performance Awards
[“Performance Awards”] [collectively, the “Awards”] to persons who
are officers, employees or consultants of the Company and its affiliates.
Awards may not be granted to non-management Directors.
On May 5, 2016, the shareholders of AGI approved an amendment to
the 2012 EIAP to increase the number of common shares available
for issuance to 915,000. At the discretion of the Board, the 2012 EIAP
provides for cumulative adjustments to the number of common shares
to be issued pursuant to, or the value of, Awards on each date that
dividends are paid on the common shares. The 2012 EIAP provides
for accelerated vesting in the event of a change in control, retirement,
death or termination without cause.
Each Restricted Award will entitle the holder to be issued the number of
common shares designated in the Restricted Award with such common
shares to be issued as to one-third on each of the third, fourth and
fifth anniversary dates of the date of grant, subject to earlier vesting
in certain events. The Company has an obligation to settle any amount
payable in respect of a Restricted Award by common shares issued
from treasury of the Company.
Each Performance Award requires the Company to deliver to the holder
at the Company’s discretion either the number of common shares
designated in the Performance Award multiplied by a Payout Multiplier
or the equivalent amount in cash after the third and prior to the fourth
anniversary date of the grant. The Payout Multiplier is determined
based on an assessment of the achievement of pre-defined measures
in respect of the applicable period. The Payout Multiplier may not
exceed 200%. As at December 31, 2017, 336,421 [2016 – 321,000]
Restricted Awards and 406,789 [2016 – 357,500] Performance Awards
85
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 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 year ended December 31, 2017, an expense of $361 [2016 –
$375] 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 120,000, subject to adjustment in lieu of dividends, if
applicable. For the year ended December 31, 2017, 6,690 [2016 – 9,070]
common shares were granted under the DDCP, and as at December
31, 2017, a total of 70,332 [2016 – 63,642] common shares had been
granted under the DDCP and 18,436 [2016 – 18,436] common shares
had been issued.
[c] Summary of expenses recognized under share-based
payment plans
For the year ended December 31, 2017, an expense of $8,057 [2016 –
$6,891] was recognized for employee and Director services rendered.
have been granted. The Company has accounted for the 2012 EIAP as
an equity-settled plan. The fair values of the Restricted Awards and the
Performance Awards were based on the share price as at the grant
date and the assumption that there will be no forfeitures. During the
year ended December 31, 2017, AGI expensed $7,698 for the 2012 EIAP
[2016 – $6,517].
A summary of the status of the options under the 2012 EIAP is
presented below:
2012 EIAP
Restricted Awards
#
Performance Awards
$
194,334
64,500
(35,848)
(4,359)
218,627
8,921
(69,948)
(3,530)
154,070
—
247,500
—
—
247,500
39,658
(73,983)
—
213,175
Outstanding, January 1, 2016
Granted
Vested
Forfeited
Balance, December 31, 2016
Granted
Vested
Forfeited
Balance, December 31, 2017
There is no exercise price on the 2012 EIAP awards.
[b] 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 predetermined minimum of the total compensation must be
taken in common shares. A Director will not be entitled to receive the
common shares he or she has been granted until a period of three
years has passed since the date of grant or until the Director ceases to
be a Director, whichever is earlier. The Directors’ common shares are
fixed based on the fees eligible to him or her for the respective period
and his or her decision to elect for cash payments for dividends related
CONSOLIDATED FINANCIAL STATEMENTS
86
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 25. Other expenses (income)
[a] Other operating expense (income)
Net loss (gain) on sale of property, plant
and equipment
Net gain on disposal of assets held for sale
Gain on financial instruments [note 30]
Other
[b] Finance income
Interest income from banks
Gain on foreign exchange
[c] Finance costs
2017
$
2016
$
46
(955)
(357)
(3,379)
(4,645)
(120)
(12,467)
(12,587)
(98)
(16)
(9,210)
(2,272)
(11,596)
(38)
(930)
(968)
[e] Selling, general and administrative expenses
Depreciation
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 [note 24]
Pension costs
Interest on overdrafts and other finance costs
762
139
Interest, including non-cash interest, on debts and
borrowings
Interest, including non-cash interest, on convertible
debentures [note 22]
[d] Cost of goods sold
Depreciation
Amortization of intangible assets
Warranty provision (recovery)
Cost of inventory recognized as an expense
14,449
9,258
Included in cost of goods sold
Included in selling general and administrative expense
20,497
35,708
14,929
4,146
(745)
14,628
24,025
10,019
3,648
104
517,671
356,661
536,001
370,432
2017
$
2016
$
1,542
8,857
2,890
8,765
129,052
151,106
904
7,413
2,908
4,325
96,519
112,069
140,775
128,802
8,057
4,426
6,891
3,150
153,258
138,843
96,717
56,541
86,965
51,878
153,258
138,843
87
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 26. Retirement benefit plans
AGI contributes to group retirement savings plans subject to maximum
limits per employee. The expense recorded during the year ended
December 31, 2017 was $4,426 [2016 – $3,150]. AGI expects to
contribute $4,925 for the year ending December 31, 2018.
On May 20, 2015, AGI acquired Westeel. Included in the acquisition was
a defined benefit plan. For the purposes of the following discussion,
beginning of period is defined as May 20, 2015.
The Company has a defined benefit plan providing pension benefits to
certain of its union employees and former employees. The Company
operates the defined benefit pension plan in Canada. The plan is a
flat-dollar defined benefit pension plan, which provides clearly defined
benefits to members based on negotiated benefit rates and years of
credited service. Responsibility for the governance of the plan and
overseeing the plan including investment policy and performance lies
with the Pension and Investment Committee. Effective May 16, 2017,
new enrolments in the defined benefit pension plan were closed. All
benefits earned by employees up to that date remain in place. As such,
the Company continues to manage any residual obligation for past
service consistent with the plan text and applicable legislation and
will continue to account for the residual obligations based on IAS 19.
In addition, effective May 17, 2017, the group of affected employees
will receive retirement contributions from the Company on a defined
contribution basis when they qualify as enrollees in the new plan.
The Company’s pension committee and appointed and experienced,
independent professional experts such as investment managers and
actuaries assists in the management of the plan.
The Company’s defined benefit pension plan will measure the
respective accrued benefit obligation and the fair value of plan assets at
December 31 of each year. Actuarial valuations are performed annually
or triennially as required. The Company’s registered defined benefit plan
was last valued on December 31, 2017. The present value of the defined
obligation, and the related current service cost and past service cost,
were measured using the Unit Credit Method.
The liabilities were revalued at December 31, 2017. We have used the
same methods and assumptions used at December 31, 2016 for the
purpose of estimating the liabilities at December 31, 2017. The following
assumptions were used to determine the periodic pension expense and
the net present value of the accrued pension obligations:
Expected long-term rate of return on plan assets
Discount rate on benefit costs
Discount rate on accrued pension
and post-employment obligations
Rate of compensation increases
2017
%
3.40
3.40
3.40
n/a
2016
%
3.95
3.95
3.95
n/a
The weighted average duration of the defined benefit obligation as
of December 31, 2017 is 16 years [December 31, 2016 – 17.0 years].
Compensation increases were not included in the valuation of the
accrued pension obligation because the accrued benefit is not a function
of salary. All members receive a fixed benefit rate monthly for each
year of credited service. This same benefit rate is received by all plan
members regardless of salary level.
The following table outlines the key assumptions for 2017 and the
sensitivity of changes in each of these assumptions on the defined
benefit plan obligation. The sensitivity analysis is hypothetical and
should be used with caution. The sensitivities of each key assumption
have been calculated independently of any changes in other key
assumptions. Actual experience may result in changes in a number of
key assumptions simultaneously. Changes in one factor may result in
changes in another, which could amplify or reduce the impact of such
assumptions.
CONSOLIDATED FINANCIAL STATEMENTS
88
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Increase in
assumption
$
Decrease in
assumption
$
The net accrued benefit asset (liability) of $(182) [2016 – $382] is
included in non-current other assets (liabilities). The major categories of
plan assets for each category are as follows:
Impact of 0.5% increase/decrease
in discount rate assumption
Impact of 1 year increase/decrease
in life expectancy assumption
(1,051,580)
1,184,653
377,863
(386,142)
The net expense of $277 [2016 – $627] for the year is included in cost
of goods sold.
Information about the Company’s defined benefit pension plan, in
aggregate, is as follows:
Canadian equity securities
U.S. equity securities
International equity securities
Fixed-income securities
2017
$
4,179
2,373
2,400
4,841
%
30.3
17.2
17.4
35.1
2016
$
3,930
2,252
2,265
4,568
%
30.2
17.3
17.4
35.1
13,793
100.0
13,015
100.0
Plan assets
2017
$
2016
$
Management’s assessment of the expected returns is based on
historical return trends and analysts’ predictions of the market for the
asset over the life of the related obligation. The actual return on plan
assets was a gain of $438 [2016 – $378].
Fair value of plan assets, beginning of year
13,015
12,446
Interest income on plan assets
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets, end of year
Accrued benefit obligation
510
439
647
(817)
13,794
499
378
419
(727)
13,015
Accrued benefit obligation, beginning of year
12,633
12,212
Current service cost
Interest cost
Actuarial gains from changes in financial assumptions
Actuarial gains (loses) from experience adjustments
Benefits paid
Accrued benefit obligation, end of year
286
502
1,150
222
(817)
13,976
621
505
105
(83)
(727)
12,633
Net accrued benefit asset (liability)
(182)
382
All equity and debt securities are valued based on quoted prices in
active markets for identical assets or liabilities or based on inputs other
than quoted prices in active markets that are observable for the asset
or liability, either directly [i.e., as prices] or indirectly [i.e., derived from
prices].
The Company’s asset allocation reflects a balance of fixed-income
investments, which are sensitive to interest rates, and equities, which
are expected to provide higher returns and inflation-sensitive returns
over the long term. The Company’s targeted asset allocations are
actively monitored and adjusted to align the asset mix with the liability
profile of the plan.
The Company expects to make contributions of nil [2017 – $235] to the
defined benefit plan in 2018. The actual amount paid may vary from the
estimate based on actuarial valuations being completed, investment
performance, volatility in discount rates, regulatory requirements and
other factors.
89
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 2017
$
2016
$
6,712
11,122
Through its defined benefit plan, the Company is exposed to a number
of risks, the most significant of which are detailed below:
Asset volatility
The plan liability is calculated using a discount rate set with reference
to corporate bond yields; if plan assets under-perform this yield, this will
create a deficit. The plan holds a significant proportion of equities, which
are expected to outperform corporate bonds in the long term while
contributing volatility and risk in the short term.
27. Income taxes
The major components of income tax expense for the years ended
December 31, 2017 and 2016 are as follows:
Consolidated statements of income
However, the Company believes that due to the long-term nature of
the plan liabilities and the strength of the supporting group, a level
of continuing equity investment is an appropriate element of the
Company’s long-term strategy to manage the plan efficiently.
Current tax expense
Current income tax expense
Deferred tax expense (recovery)
Change in fixed-income security yields
A decrease in corporate fixed-income security yields will increase plan
liabilities, although this will be partially offset by an increase in the value
of the plan’s fixed-income security holdings.
Life expectancy
The plan’s obligation is to provide benefits for the life of the member,
so increases in life expectancy will result in an increase in the plan’s
liability.
Origination and reversal of temporary differences
5,333
(260)
Income tax expense reported in the consolidated
statements of income
12,045
10,862
Consolidated statements of comprehensive income
Deferred tax related to items charged
or credited directly to other comprehensive
income during the year
Unrealized gain on derivatives
Defined benefit plan reserve
Exchange differences on translation of foreign
operations
Income tax charged (credited) directly to other
comprehensive income
2017
$
2016
$
902
(252)
5,992
96
(732)
(268)
(82)
5,820
CONSOLIDATED FINANCIAL STATEMENTS
90
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH The reconciliation between tax expense and the product of accounting
profit multiplied by the Company’s domestic tax rate for the years ended
December 31, 2017 and 2016 is as follows:
2017
$
2016
$
Profit from continuing operations before
income taxes
47,200
29,815
At the Company’s statutory income tax rate
of 27% [2016 – 27%]
Tax rate changes
Non-taxable portion of capital gains
Additional deductions allowed in a foreign jurisdiction
Tax losses not recognized as a deferred tax asset
Foreign rate differential
Non-deductible SAIP expense
State income tax, net of federal tax benefit
Unrealized foreign exchange gain
Impairment of goodwill
Permanent differences and others
12,744
(3,350)
(132)
(456)
3,643
416
492
422
(3,164)
—
1,430
8,050
(481)
—
(600)
1,477
1,674
536
496
(776)
18
468
At the effective income tax rate 25.52%
[2016 – 36.43%]
12,045
10,862
91
91
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 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 statements of financial
position
Consolidated statements
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 2020 to 2037
Investment tax credits
Canadian exploration expenses
Capitalized development expenditures
Convertible debentures
SAIP liability
Equity swap
Other comprehensive income
Exchange difference on translation of foreign operations
Deferred tax expense
Deferred tax liabilities, net
Reflected in the consolidated statements of financial position as follows
Deferred tax asset
Deferred tax liability
Deferred tax liabilities, net
2017
$
—
(157)
(7,838)
254
1,171
1,268
—
11,502
690
(882)
(1,586)
179
—
732
5,333
2016
$
—
(1,189)
(1,621)
136
1,057
250
—
75
(14)
(499)
(1,141)
2,418
—
268
(260)
2017
$
(90)
(21,428)
(38,377)
(213)
5,236
96
(627)
1,641
(1,736)
(1,812)
2,809
(2,597)
(477)
—
2016
$
(90)
(21,567)
(45,638)
(747)
4,106
1,364
(627)
13,143
(1,046)
(1,588)
1,223
(2,418)
425
—
(57,575)
(53,460)
183
(57,758)
(57,575)
231
(53,691)
(53,460)
CONSOLIDATED FINANCIAL STATEMENTS
92
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Reconciliation of deferred tax liabilities, net
2017
$
2016
$
Balance, beginning of year
(53,460)
(41,598)
Deferred tax recovery (expense) during the year
recognized in profit or loss
Deferred tax liability related to change in accounting
policy [note 3]
Deferred tax asset (liability) setup on business
acquisition
Deferred tax recovery during the year recognized
in common shares
Deferred tax expense during the year recognized
in shareholders’ equity
Deferred tax recovery (expense) during the year
recognized in other comprehensive income
Balance, end of year
(5,333)
260
—
(977)
1,454
(5,325)
788
(1,106)
—
—
82
(5,820)
(57,575)
(53,460)
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which these
temporary differences and loss carryforwards become deductible.
Based on the analysis of taxable temporary differences and future
taxable income, 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
incurred, other than temporary differences in its Finnish operations of
5,886 euros [2016 – 5,913 euros] and its Brazilian operations of 40,479
BRL [2016 – 14,179 BRL]. Accordingly, the Company has recorded a
deferred tax asset for all other deductible temporary differences as at
December 31, 2017 and as at December 31, 2016.
Included in the current year’s income tax expense was nil [2016 – nil]
withholding tax paid on the repatriation of surplus from a subsidiary.
As at December 31, 2017, there was no recognized deferred tax liability
[2016 – 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 [2016 – $622].
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 AGI’s specific situation. The amount and timing of reversals of
temporary differences will also depend on AGI’s future operating
results, acquisitions and dispositions of assets and liabilities. The
business and operations of AGI are complex, and AGI has executed
a number of significant financings, acquisitions, reorganizations and
business combinations over the course of its history. The computation
of income taxes payable as a result of these transactions involves many
complex factors, as well as AGI’s interpretation of and compliance with
relevant tax legislation and regulations. While AGI believes that its tax
filing positions are probable to be sustained, there are a number of tax
filing positions that may be the subject of review by taxation authorities.
Therefore, it is possible that additional taxes could be payable by AGI,
and the ultimate value of AGI’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 2017 or 2016 by the Company to its
shareholders.
28. Profit per share
Profit per share is based on the consolidated profit for the year divided
by the weighted average number of shares outstanding during the year.
Diluted profit per share is computed in accordance with the treasury
stock method and based on the weighted average number of shares
and dilutive share equivalents.
93
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH The following reflects the income and share data used in the basic and
diluted profit per share computations:
Profit from continuing operations
Profit from discontinued operations
2017
$
35,155
41
2016
$
18,953
353
statements of cash flows relate to cash at banks and cash on hand.
Cash at banks earns interest at floating rates based on daily bank
deposit rates.
The net change in the non-cash working capital balances related to
continuing operations is calculated as follows:
Profit attributable to shareholders for basic and
diluted profit per share
35,196
19,306
Basic weighted average number of shares
15,932,808
14,708,986
Inventory
Dilutive effect of DDCP
Dilutive effect of RSU
47,685
170,856
40,105
211,555
Prepaid expenses and other assets
Accounts payable and accrued liabilities
Diluted weighted average number of shares
16,151,349
14,960,646
Customer deposits
Provisions
Accounts receivable
Profit per share from continuing operations
Basic
Diluted
Profit per share from discontinued operations
Basic
Diluted
Profit per share
Basic
Diluted
2.20
2.17
0.01
0.01
2.21
2.18
1.29
1.27
0.02
0.02
1.31
1.29
The 2013, 2014, 2015 and 2017 Debentures were excluded from the
calculation of diluted profit per share for the years ended December 31,
2017 and 2016 because their effect is anti-dilutive.
29. Statement of cash flows
[a] Net change in non-cash working capital
Cash and cash equivalents as at the date of the consolidated
statements of financial position and for the purpose of the consolidated
2017
$
(939)
(20,206)
(4,860)
5,710
11,574
(745)
(9,466)
2016
$
6,707
6,753
(4,211)
(967)
(7,871)
(862)
(451)
CONSOLIDATED FINANCIAL STATEMENTS
94
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH [b] Reconciliation of liabilities arising from financing activities
December 31, 2016
$
Cash flows
$
Conversion
$
Foreign
exchange
$
Accretion
$
Amortization
$
Fair value
$
December 31,2017
$
Non-cash changes
207,348
107,513
—
(12,467)
—
582
—
302,976
201,210
1,233
82,387
(231)
715
—
(95)
—
—
—
—
—
3,459
3,197
(4,100)
—
286,058
1,002
—
—
—
—
(2,483)
(1,768)
410,506
189,669
(95)
(12,467)
3,459
3,779
(6,583)
588,268
Long-term debt
Convertible unsecured
subordinated debentures
Finance leases
Derivatives held to hedge
long-term borrowings
Total liabilities from
financing activities
December 31, 2015
$
Cash flows
$
Acquisitions
$
Foreign
exchange
$
Accretion
$
Amortization
$
Fair value
$
December 31, 2016
$
Non-cash changes
Long-term debt
Convertible unsecured
subordinated debentures
Finance leases
Derivatives held to hedge
long-term borrowings
Total liabilities from
financing activities
146,931
60,622
197,585
1,386
2,001
—
(353)
—
347,903
60,269
—
(16)
200
—
184
(927)
—
722
—
—
—
1,846
1,795
—
—
—
—
—
—
—
(1,286)
207,348
201,210
1,233
715
(927)
1,846
2,517
(1,286)
410,506
95
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 30. Financial instruments and financial risk management
[a] Management of risks arising from financial instruments
AGI’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 risk and interest rate risk],
credit risk and liquidity risk. The Company’s overall risk management
program focuses on the unpredictability of financial markets and seeks
to minimize potential adverse effects on the Company’s financial
performance. The Company uses derivative financial instruments to
mitigate certain risk exposures. The Company does not purchase
any derivative financial instruments for speculative purposes. Risk
management is the responsibility of the corporate finance function,
which has the appropriate skills, 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 Board of Directors. The Audit
Committee reviews and monitors the Company’s financial 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 AGI is exposed are discussed
CONSOLIDATED FINANCIAL STATEMENTS
96
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH below. Financial instruments affected by market risk include trade
accounts receivable and payable, available-for-sale investments and
derivative financial instruments.
The sensitivity analyses in the following sections relate to the position
as at December 31, 2017 and December 31, 2016.
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 statements of financial position sensitivity relates
to derivatives.
• The sensitivity of the relevant consolidated statements of income
item is the effect of the assumed changes in respective market
risks. This is based on the financial assets and financial liabilities held
at December 31, 2017 and December 31, 2016, including the effect
of hedge accounting.
• The sensitivity of equity is calculated by considering the effect of any
associated cash flow hedges at December 31, 2017 for the effects
of the assumed underlying changes.
Foreign currency risk
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 euros and as a result, fluctuations in the rate of exchange between
the U.S. dollar, the euro 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, AGI enters into foreign exchange
forward contracts and denominates a portion of its debt in U.S. dollars.
As at December 31, 2017, AGI’s U.S. dollar denominated debt totaled
$151 million [2016 – $70 million].
AGI’s sales denominated in U.S. dollars for the year ended December
31, 2017 were U.S. $314 million, and the total of its cost of goods
sold and its selling, general and administrative expenses denominated
in that currency was U.S. $237 million. Accordingly, a 10% increase
or decrease in the value of the U.S. dollar relative to its Canadian
counterpart would result in a $31 million increase or decrease in sales
and a total increase or decrease of $24 million in its cost of goods sold
and its selling, general and administrative expenses.
The counterparties 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 profit, and for the year
ended December 31, 2017, the Company realized a loss on its foreign
exchange contracts of $0.7 million [2016 – loss of $14.4 million].
To mitigate exposure to fluctuating rate of exchange, during the year
ended December 31, 2017 the Company entered into an agreement
with financial institutions to purchase put options at a premium price
of $48. Each put option gives the Company the right, but not the
obligation, to sell $1.0 million U.S. dollars at a rate of $1.25. The options
have maturity dates ranging between May 2017 and December 2017.
The put options are derivative financial instruments designated as
cash flow hedges, and changes in the fair value are recognized as a
component of other comprehensive income to the extent that it has
been assessed to be effective. As at December 31, 2017, there are no
options outstanding. During the year ended December 31, 2017, realized
losses of $52 were recognized in profit and loss.
The Company had no foreign exchange forward contract as at
December 31, 2017, and the open foreign exchange forward contracts
as at December 31, 2016 are as follows:
97
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Notional Canadian dollar equivalent
Notional
amount of
currency
sold
$
Contract
amount
$
Cdn $
equivalent
$
Unrealized
loss
$
The interest rate swap contracts are derivative financial instruments
designated as a cash flow hedges and changes in the fair value were
recognized as a component of other comprehensive income to the
extent that it has been assessed to be effective.
The open interest rate swap contracts as at December 31, 2017 are as
follows:
U.S. dollar contracts
9,000
1.2462
11,216
(862)
The terms of the foreign exchange forward contracts have been
negotiated to match the terms of the commitments. There were no
highly probable transactions for which hedge accounting has been
claimed that have not occurred and there was no significant element
of hedge ineffectiveness requiring recognition in the consolidated
statements of 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 AGI 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. AGI’s Series
A secured notes, Series B secured notes, Series C secured notes
and convertible unsecured subordinated debentures outstanding at
December 31, 2017 and December 31, 2016 are at a fixed rate of
interest.
Notional amount
$
Contract rate
%
Unrealized gain
$
Canadian dollar contracts
U.S. dollar contracts
90,000
38,000
3.6 – 4.3
3.8
974
794
The open interest rate swap contracts as at December 31, 2016 are as
follows:
Notional amount
$
Contract rate
%
Unrealized gain
(loss)
$
Canadian dollar contracts
U.S. dollar contracts
90,000
38,000
3.6 – 4.3
3.8
(1,078)
363
The amount of gain recorded in other comprehensive income during the
year ended December 31, 2017 was $1,768 [2016 – $1,286].
Interest rate swap contracts
Equity swap
The Company enters into interest rate swap contracts to manage
its exposure to fluctuations in interest rates on its core borrowings.
Through these contracts, the Company agreed to receive interest based
on the variable rates from the counterparty and pay interest based
on fixed rates between 3.6% and 4.32%. The notional amounts are
$141,023 in aggregate, resetting the last business day of each month.
The contracts expire between May 2019 and May 2022.
On March 18, 2016, the Company entered into an equity swap
agreement with a financial institution to manage the cash flow exposure
due to fluctuations in its share price related to the EIAP.
Pursuant to this agreement, the counterparty has agreed to pay the
Company the total return of the defined underlying common shares,
which includes both the dividend income they may generate and any
capital appreciation. In return, the Company has agreed to pay the
CONSOLIDATED FINANCIAL STATEMENTS
98
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH counterparty a funding cost calculated daily based on floating rate
option [CAD-BA-CDOR] plus a spread of 2.0% and any administrative
fees or expenses that are incurred by the counterparty directly.
As at December 31, 2017, the equity swap agreement covered
500,000 common shares of the Company at a price of $34.10, and the
agreement matures on March 22, 2019.
As at December 31, 2017, the unrealized gain on the equity swap was
$9,698 and in the year ended December 31, 2017, the Company has
recorded a gain in the consolidated statements of income of $409 [2016
– $9,210].
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 AGI’s accounts receivable is with customers in the agriculture
industry and are subject to normal industry credit risks. A portion of the
Company’s sales and related accounts receivable are also generated
from transactions with customers in overseas markets, several of which
are in emerging markets such as countries in Eastern Europe. It is often
common business practice for international customers to pay invoices
over an extended period of time. Accounts receivable are subject to
credit risk exposure and the carrying values reflect management’s
assessment of the associated maximum exposure to such credit risk.
The Company regularly monitors customers for changes in credit risk.
The Company’s credit exposure is mitigated through the use of credit
practices that limit transactions according to the customer’s credit
quality and due to the accounts receivable being spread over a large
number of customers. Trade receivables from international customers
are often insured for events of non-payment through third-party export
insurance. In cases where the credit quality of a customer does not
meet the Company’s requirements, a cash deposit or letter of credit is
received before goods are shipped.
Assessments about the recoverability of financial assets, including
accounts receivable, require significant judgment in determining
whether there is objective evidence that a loss event has occurred and
estimates of the amount and timing of future cash flows. The Company
maintains an allowance for doubtful accounts for estimated losses
resulting from the inability to collect on its trade receivables, which is
netted against the accounts receivable on the consolidated statements
of financial position. Emerging markets are subject to various additional
risks including currency exchange rate fluctuations, foreign economic
conditions and foreign business practices. One or more of these
factors could have a material effect on the future collectability of such
receivables. In assessing whether objective evidence of impairment
exists at each reporting period, the Company considers its past
experience of collecting payments, historical loss experience, customer
credit ratings and financial data as available, collateral on amounts
owing including insurance coverage from export credit agencies, as well
as observable changes in national or local economic conditions.
The requirement for an impairment provision 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 Company does not believe that any single customer group
represents a significant concentration of credit risk.
Liquidity risk
Liquidity risk is the risk that AGI will encounter difficulties in meeting
its financial liability obligations. AGI manages its liquidity risk through
cash and debt management. In managing liquidity risk, AGI has access
to committed short- and long-term debt facilities as well as to equity
markets, the availability of which is dependent on market conditions.
AGI believes it has sufficient funding through the use of these facilities
to meet foreseeable borrowing requirements.
The tables below summarize the undiscounted contractual payments of
the Company’s financial liabilities as at December 31, 2017 and 2016:
99
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH December 31, 2017
Trade payables and provisions
Dividends payable
Due to vendor
Contingent consideration
Term debt
Convertible unsecured subordinated debentures
[includes interest]
Total financial liability payments
December 31, 2016
Trade payables and provisions
Dividends payable
Due to vendor
Contingent consideration
Term debt
Convertible unsecured subordinated debentures
[includes interest]
Total financial liability payments
Total
$
0 - 6 months
$
6 - 12 months
$
12 - 24 months
$
2 - 4 years
$
After 4 years
$
101,980
3,232
33,309
9,342
356,296
101,980
3,232
33,309
—
6,807
338,413
842,572
91,480
236,808
—
—
—
5,494
6,807
5,325
17,626
—
—
—
3,848
13,613
62,400
79,861
—
—
—
—
—
—
—
—
222,656
106,413
90,866
313,522
88,342
194,755
Total
$
0 - 6 months
$
6 - 12 months
$
12 - 24 months
$
2 - 4 years
$
After 4 years
$
71,318
2,956
16,415
21,202
249,858
245,208
606,957
71,318
2,956
16,415
4,015
4,099
5,498
104,301
—
—
—
—
4,099
5,498
9,597
—
—
—
9,190
8,199
97,245
114,634
—
—
—
7,997
120,298
136,967
265,262
—
—
—
—
113,163
—
113,163
CONSOLIDATED FINANCIAL STATEMENTS
100
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH [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 as well as their level on the fair value hierarchy:
Financial assets
Loans and receivables
Cash and cash equivalents
Cash held in trust
Accounts receivable
Due from vendor
Derivative instruments
Available-for-sale investment
Note receivable
Assets held for sale
Financial liabilities
Other financial liabilities Interest-bearing loans and borrowings
Trade payables and provisions
Dividends payable
Due to vendor
Contingent consideration
Derivative instruments
Convertible unsecured subordinated debentures
December 31, 2017
December 31, 2016
Level
Carrying amount
$
Fair value
$
Carrying amount
$
Fair value
$
1
1
2
2
2
3
2
2
2
2
2
2
3
2
2
63,981
15,182
99,017
—
11,466
900
789
2,842
303,978
101,980
3,232
33,309
9,037
—
286,058
63,981
15,182
99,017
—
11,466
900
789
2,842
304,306
101,980
3,232
33,309
9,037
—
314,129
2,774
5,093
81,033
342
9,289
900
807
3,148
208,581
71,318
2,956
16,415
20,224
1,577
201,210
2,774
5,093
81,033
342
9,289
900
807
3,148
208,916
71,318
2,956
16,415
20,224
1,577
198,150
101
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH During the reporting years ended December 31, 2017 and December
31, 2016, there were no transfers between Level 1 and Level 2 fair value
measurements.
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, acquisition, transaction and
financing costs payable, accounts payable and accrued liabilities, due
to vendor, contingent consideration and other liabilities approximate
their carrying amounts largely due to the short-term maturities of
these instruments.
• The fair value of unquoted instruments and loans from banks is
estimated by discounting future cash flows using rates currently
available for debt on similar terms, credit risk and remaining
maturities.
• The Company enters into derivative financial instruments with
financial institutions with investment grade credit ratings. Derivatives
valued using valuation techniques with market observable inputs
are mainly foreign exchange forward contracts. The most frequently
applied valuation 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.
on external information and observable conditions where possible,
supplemented by internal analysis as required.
Fair value [“FV”] hierarchy
AGI uses the following hierarchy for determining and disclosing the fair
value of financial instruments by valuation technique:
Level 1
The fair value measurements are classified as Level 1 in the FV
hierarchy if the fair value is determined using quoted, unadjusted
market prices for identical assets or liabilities.
Level 2
Fair value measurements that require inputs other than quoted prices
in Level 1, and for which all inputs that have a significant effect on
the recorded fair value are observable, either directly or indirectly, are
classified as Level 2 in the FV hierarchy.
Level 3
Fair value measurements that require unobservable market data or
use statistical techniques to derive forward curves from observable
market data and unobservable inputs are classified as Level 3 in the FV
hierarchy.
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 finance expense.
31. Capital disclosure and management
• AGI includes its available-for-sale investment, which is in a
private company, in Level 3 of the fair value hierarchy as it trades
infrequently and has little price transparency. AGI reviews the fair
value of this investment at each reporting period and when recent
arm’s length market transactions are not available, management’s
estimate of fair value is determined using a market approach based
The Company’s capital structure is comprised of shareholders’
equity and long-term debt. AGI’s objectives when managing its
capital structure are to maintain and preserve its access to capital
markets, continue its ability to meet its financial obligations, including
the payment of dividends, and finance future organic growth and
acquisitions.
CONSOLIDATED FINANCIAL STATEMENTS
102
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH AGI manages its capital structure and makes adjustments to it in light
of changes in economic conditions and the risk characteristics of
the underlying assets. The Company is not subject to any externally
imposed capital requirements other than financial covenants in its credit
facilities and as at December 31, 2017 and December 31, 2016, all of
these covenants were complied with [note 21[c]].
The Board of Directors does not establish quantitative capital structure
targets for management, but rather promotes sustainable and profitable
growth. Management monitors capital using non-GAAP financial
metrics, primarily total debt to the trailing twelve months EBITDA and
net debt to total shareholders’ equity. There may be instances where
it would be acceptable for total debt to trailing EBITDA to temporarily
fall outside of the normal targets set by management such as in
financing an acquisition to take advantage of growth opportunities or
industry cyclicality. This would be a strategic decision recommended by
management and approved by the Board of Directors with steps taken
in the subsequent period to restore the Company’s capital structure
based on its capital management objectives.
32. Related party disclosures
Relationship between parent and subsidiaries
The main transactions between the corporate entity of the Company
and its subsidiaries are the providing of cash fundings based on the
equity and convertible debt funds of Ag Growth 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 provides management services
to the Company entities. Between the subsidiaries, there are limited
intercompany sales of inventories and services. Because all subsidiaries
are currently 100% owned by Ag Growth Inc., these intercompany
transactions are 100% eliminated on consolidation.
Other relationships
Burnet, Duckworth & Palmer LLP provides legal services to the
Company and a Director of AGI is a partner of Burnet, Duckworth &
Palmer LLP. The total cost of these legal services related to general
matters was $261 during the year ended December 31, 2017 [2016 –
$200], and $50 is included in accounts payable and accrued liabilities
as at December 31, 2017. These transactions are measured at the
exchange amount and were incurred during the normal course of
business.
Salthammer Inc. provides consulting services to the Company, and a
Director of AGI is the owner of Salthammer Inc. The total cost of these
consulting services related to international plant expansion project was
$159 during the year ended December 31, 2017 [2016 – $48], and $4 is
included in accounts payable and accrued liabilities as at December 31,
2017.
Compensation of key management personnel of AGI
AGI’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
Share-based payments
Total compensation paid to key
management personnel
2017
$
120
197
7,044
8,057
2016
$
133
205
6,128
6,891
15,418
13,357
103
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 33. Reportable business segment
34. Commitments and contingencies
The Company manufactures agricultural equipment with a focus on
grain handling, storage and conditioning products. As at December 31,
2017, aggregation of operating segments was applied to determine that
the Company had only one reportable segment. The primary factors
considered in the application of the aggregation criteria included the
similar long-term average gross margins and growth rates across the
segments, the nature of the products manufactured by the segments
all being related to the handling, storage and conditioning of agricultural
commodities, and the similarity in the production processes of the
segments.
The Company operates primarily within three geographical areas:
Canada, United States and International. The following details the sales,
property, plant and equipment, goodwill, intangible assets and available-
for-sale investment by geographical area, reconciled to the Company’s
consolidated financial statements:
Sales
2017
$
280,887
322,242
151,586
754,715
2016
$
238,151
191,643
101,822
531,616
Property, plant and
equipment, goodwill,
intangible assets and
available-for-sale investment
2017
$
2016
$
398,416
267,667
92,185
758,268
393,931
179,015
62,076
635,022
Canada
United States
International
The sales 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 sales.
[a] Contractual commitment for the purchase of property, plant and
equipment
As of the reporting date, the Company has commitments to purchase
property, plant and equipment of $12,909 [2016 – $16,442].
[b] Letters of credit
As at December 31, 2017, the Company has outstanding letters of credit
in the amount of $2,474 [2016 – $2,414].
[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 no more than five years
More than five years
$
3,090
5,897
758
9,745
These leases have a life of between one and eight years.
During the year ended December 31, 2017, the Company recognized an
expense of $2,890 [2016 – $2,908] for leasing contracts. This amount
relates only to minimum lease payments.
[d] 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.
CONSOLIDATED FINANCIAL STATEMENTS
104
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 105
105
CONSOLIDATED FINANCIAL STATEMENTS
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH the outstanding principal amount of the 2013 Debentures redeemed
including accrued and unpaid interest up to but excluding the
Redemption date, less taxes deducted or withheld.
Effective February 22, 2018, the Company acquired 100% of the shares
of Danmare Group Inc. and its affiliate Danmare, Inc. [collectively,
“Danmare”] for a maximum purchase price of $10.2 million. Upon
acquisition, a cash amount of $6.5 million was paid to the vendors.
The contingent consideration is payable over three years based on the
achievement of earnings targets in 2019, 2020 and 2021.
35. Subsequent events
On December 6, 2017, the Company entered into an agreement with a
syndicate of underwriters pursuant to which AGI issued, on a “bought
deal” basis, $75 million aggregate principal amount of convertible
unsecured subordinated debentures [the “2018 Debentures”] at a
price of $1,000 per 2018 Debenture. AGI also granted the underwriters
an over-allotment option, exercisable in whole or in part for a period
of 30 days following closing, to purchase up to an additional $11.25
million aggregate principal amount of Debentures. The over-allotment
option was fully exercised, and accordingly, the total gross proceeds
to AGI were $86.25 million. On January 3, 2018, the Company closed
the offering of $75 million aggregate principal amount of convertible
unsecured subordinated debentures. On January 9, 2018, the Company
closed the over-allotment option.
The 2018 Debentures bear interest at 4.50% per annum, payable semi-
annually in arrears on June 30 and December 31 each year commencing
June 30, 2018. The Debentures will have a maturity date of December
31, 2022.
The 2018 Debentures are convertible at the holder’s option at any
time prior to the close of business on the earlier of the business day
immediately preceding the maturity date and the date specified by AGI
for redemption of the Debentures into fully paid and non-assessable
common shares of the Company at a conversion price of $88.15 per
Common Share, being a conversion rate of approximately 11.3443
Common Shares for each $1,000 principal amount of Debentures.
The net proceeds of the offering will be used to partially fund
the redemption of the Company’s 5.25% convertible unsecured
subordinated debentures due December 18, 2018.
On January 8, 2018, holders of the 2013 Debentures exercised the
conversion option for $8,679 and were issued 157,781 common shares.
On January 9, 2018, the Company redeemed its 2013 Debentures
in accordance with the terms of the supplemental trust indenture
dated December 17, 2013. Upon redemption, AGI paid to the holders
of the 2013 Debentures the redemption price of $77,587 equal to
CONSOLIDATED FINANCIAL STATEMENTS
106
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH Directors
Gary Anderson, Director
Tim Close, Director, President and Chief Executive Officer
Janet Giesselman, Director, Chair of the Human Resources Committee
Bill Lambert, Chair of the Board
Bill Maslechko, Director
Mac Moore, Director, Chair of the Governance Committee
David White, Chair of the Audit Committee
Senior Leadership Team
Tim Close, President and Chief Executive Officer
Steve Sommerfeld, Executive Vice President & Chief Financial Officer
Nicolle Parker, Senior Vice President, Finance & Information Systems
Craig Wilson, Senior Vice President, Human Resources
Dan Donner, Senior Vice President, Commercial
Ron Braun, Senior Vice President, Farm
PHOTO
From the left: Gary Anderson, Janet Giesselman, Bill Lambert, Tim Close, Mac Moore, Bill Maslechko, David White
107
DIRECTORS & OFFICERS
AGI | 2 017 A N N UA L R E P O RT | E N G I N E E R I N G G ROW T H
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH DIRECTORS & OFFICERS
108108108
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH 109
AGI | 2017 ANNUAL REPORT | ENGINEERING GROWTH AGGROWTH.COM