Consolidated Financial Statements and Notes
Years Ended December 31, 2016 and 2015
March 14, 2017
Independent Auditor’s Report
To the Shareholders of Rocky Mountain Dealerships Inc.
We have audited the accompanying consolidated financial statements of Rocky Mountain Dealerships Inc.
and its subsidiaries, which comprise the consolidated statements of financial position as at December 31,
2016 and December 31, 2015 and the consolidated statements of net earnings, comprehensive income,
changes in equity and cash flows for the years then ended, and the related notes, which comprise a
summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards, and for such internal control
as management determines is necessary to enable the preparation of consolidated financial statements
that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Rocky Mountain Dealerships Inc. and its subsidiaries as at December 31, 2016 and December
31, 2015 and its financial performance and its cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Chartered Professional Accountants
PricewaterhouseCoopers LLP
111 5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3
T: +1 403 509 7500, F: +1 403 781 1825, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Consolidated Statements of Financial Position
Expressed in thousands of Canadian dollars
Assets
Current
Cash
Restricted cash
Trade receivables and other
Inventory
Income taxes receivable
Prepaid expenses
Current portion of derivative financial assets
Assets held for sale
Total current assets
Non-current
Property and equipment
Deferred tax asset
Derivative financial assets
Intangible assets
Goodwill
Total non-current assets
Total assets
Liabilities
Current
Bank indebtedness
Trade payables, accruals and other
Floor plan payable
Deferred revenue
Current portion of long-term debt
Current portion of obligations under finance leases
Current portion of derivative financial liabilities
Liabilities associated with assets held for sale
Total current liabilities
Non-current
Long-term debt
Obligations under finance leases
Derivative financial liabilities
Total non-current liabilities
Total liabilities
Commitments, contingencies and guarantees
Shareholders’ Equity
Common shares
Contributed surplus
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
APPROVED BY THE BOARD
December 31,
2016
$
December 31,
2015
$
Note
6
7
8
29.6
9
9, 11
24.2
29.6
10
12
15
13
14
16
17
29.6
9
16
17
29.6
18, 27
28,542
-
27,504
442,742
487
6,208
290
2,501
508,274
48,586
1,210
578
507
18,776
69,657
577,931
-
47,995
296,061
3,204
6,825
440
1,449
1,606
357,580
40,778
521
1,871
43,170
400,750
87,709
6,065
(2,371)
85,778
177,181
577,931
21,691
879
25,152
499,760
47
5,513
-
10,542
563,584
39,888
2,367
-
671
18,802
61,728
625,312
5,001
33,963
356,568
4,404
4,852
71
4,040
1,562
410,461
40,080
154
4,859
45,093
455,554
87,709
5,929
(3,609)
79,729
169,758
625,312
“Signed” Dennis Hoffman
Dennis Hoffman, Director
The accompanying notes are an integral part of these consolidated financial statements
“Signed” Matthew Campbell
Matthew Campbell, Director
Consolidated Statements of Net Earnings
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share amounts
Sales
Cost of sales
Gross profit
Selling, general and administrative
(Gain) loss on derivative financial instruments
Restructuring charges
Impairment loss on vacant land
Earnings before finance costs and income taxes
Finance costs
Earnings before income taxes
Income taxes
Net earnings
Earnings per share
Basic
Diluted
Note
20
8
21
29.6
22
11
23
24.1
December 31,
2016
$
December 31,
2015
$
930,435
797,028
133,407
97,970
(4,751)
3,564
1,360
35,264
14,343
20,921
5,955
14,966
975,456
833,475
141,981
108,228
3,548
-
-
30,205
14,807
15,398
4,105
11,293
25
25
0.77
0.77
0.58
0.58
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Comprehensive Income
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars
Net earnings
Other comprehensive income (loss)
Items which will subsequently be reclassified to net earnings:
December 31,
2016
$
December 31,
2015
$
Note
14,966
11,293
Unrealized gain (loss) on derivative financial instruments, net of tax
29.6
Total other comprehensive income (loss) for the year, net of tax
Comprehensive income
1,238
1,238
16,204
(1,525)
(1,525)
9,768
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Changes in Equity
Expressed in thousands of Canadian dollars and thousands of common shares
Balance, December 31, 2015
Equity-settled share-based payment expense
Net earnings
Other comprehensive income
Dividends paid
Balance, December 31, 2016
Balance, December 31, 2014
Equity-settled share-based payment expense
Net earnings
Other comprehensive loss
Dividends paid
Balance, December 31, 2015
Common shares
Note
Number
of shares
Amount
$
Contributed
surplus
$
Accumulated
other
comprehensive
loss
$
21
19.2
19.1
19,384
-
-
-
-
19,384
87,709
-
-
-
-
87,709
5,929
136
-
-
-
6,065
(3,609)
-
-
1,238
-
(2,371)
Retained
earnings
$
Total
equity
$
79,729
-
14,966
-
(8,917)
85,778
169,758
136
14,966
1,238
(8,917)
177,181
Common shares
Number of
shares
Amount
$
Note
Contributed
surplus
$
21
19.2
19.1
19,384
-
-
-
-
19,384
87,709
-
-
-
-
87,709
5,429
500
-
-
-
5,929
Accumulated
other
comprehensive
loss
$
Retained
earnings
$
Total
equity
$
(2,084)
-
-
(1,525)
-
(3,609)
77,353
-
11,293
-
(8,917)
79,729
168,407
500
11,293
(1,525)
(8,917)
169,758
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Cash Flows
Years Ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars
Operating activities
Net earnings
Adjustments for:
Depreciation and amortization expense
Deferred tax expense (recovery)
Equity-settled share-based payment expense
Asset impairment loss on vacant land and other assets
Gain on disposal of property and equipment
(Gain) loss on derivative financial instruments
Amortization of deferred debt issuance costs
Changes in non-cash working capital
Total cash generated from operating activities
Financing activities
Repayment of long-term debt
Proceeds from long-term debt
Repayment of obligations under finance leases
Dividends paid
Deferred debt issuance costs
Total cash used from financing activities
Investing activities
Purchase of property and equipment
Disposal of property and equipment including assets held for sale
Purchase of equipment dealerships, net of cash acquired
Total cash used from investing activities
Net increase (decrease) in cash
Cash, beginning of year
Cash, end of year
Taxes paid
Interest paid
Cash, end of period consists of:
Cash
Bank indebtedness
Cash, end of year
December 31,
2016
$
December 31,
2015
$
Note
14,966
11,293
10,11
24.2
21
9
11
29.6
26
19.2
11
11
5
7,755
678
136
1,460
(208)
(4,751)
70
7,057
27,163
(5,083)
7,800
(378)
(8,917)
(116)
(6,694)
(10,184)
2,307
(740)
(8,617)
11,852
16,690
28,542
5,704
14,093
7,803
(1,229)
500
-
(302)
3,548
-
13,847
35,460
(19,008)
15,566
(237)
(8,917)
(192)
(12,788)
(13,284)
1,041
(16,691)
(28,934)
(6,262)
22,952
16,690
12,042
14,745
15
28,542
-
28,542
21,691
(5,001)
16,690
The accompanying notes are an integral part of these consolidated financial statements
1
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
1.
General information
Rocky Mountain Dealerships Inc. (the “Company”) is incorporated under the Business Corporations Act (Alberta). Through its
wholly-owned subsidiaries, the Company sells, leases and provides product and warranty support for a wide variety of
agriculture and industrial equipment in Western Canada. All of the Company’s operating subsidiaries are incorporated in
Alberta, Canada and all of the equipment dealership locations operate under the name “Rocky Mountain Equipment”.
The head office, principal address, registered and records office of the Company are located at Suite 301, 3345 8th Street
S.E., Calgary, Alberta, T2G 3A4.
2.
Basis of preparation
2.1.
Statement of compliance
The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards.
These consolidated financial statements were authorized for issue by the Board of Directors on March 14, 2017.
2.2.
Adoption of new and revised standards and interpretations
No new standards, interpretations or amendments were adopted for the first time from January 1, 2016, which had a material
impact on the Company’s financial statements.
At the date of authorization of these consolidated financial statements, the IASB and the IFRS Interpretations Committee
(IFRIC) have issued the following new and revised standards and interpretations which are not yet effective for the relevant
reporting periods. The Company has not early adopted these standards, amendments or interpretations, however the Company
is currently assessing what impact the application of these standards or amendments will have on the consolidated financial
statements.
IFRS 9, ‘Financial instruments’
IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial
assets: amortized cost and fair value. The basis of classification depends on the entity’s business model and the contractual
cash flow characteristics of the financial asset. The guidance in IAS 39 on impairment of financial assets and hedge accounting
continues to apply. This standard is effective for fiscal periods beginning on or after January 1, 2018.
Amendment to IFRS 7, ‘Financial instruments: Disclosures on derecognition’
In conjunction with the transition from IAS 39 to IFRS 9 for fiscal years beginning on or after January 1, 2018, IFRS 7 will also
be amended to require additional disclosure in the year of transition.
IFRS 15, ‘Revenue from contracts with customers’
IFRS 15 provides a single, comprehensive revenue recognition model for all contracts with customers to improve comparability
within industries, across industries, and across capital markets. The underlying principle is that an entity will recognize revenue
to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for
those goods or services. This standard is effective for fiscal periods beginning on or after January 1, 2018.
IFRS 16, ‘Leases’
IFRS 16 replaces IAS 17 and requires most leases to be recognized as assets and liabilities on the statement of financial
position. This standard includes an optional exemption for certain short-term leases and leases of low-value assets and is
effective for fiscal periods beginning on or after January 1, 2019.
2
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
3.
Summary of significant accounting policies
3.1.
Basis of measurement
The fundamental valuation method applied in the consolidated financial statements is historical cost except for certain financial
instruments and cash-settled share-based payments which are measured at fair value as explained below. Historical cost is
generally based on the fair value of the consideration given in exchange for assets.
These consolidated financial statements are presented in Canadian dollars, which is the Company’s functional and
presentation currency. All financial information presented in Canadian dollars has been rounded to the nearest thousand,
except per share and per option amounts or unless otherwise stated.
3.2.
Basis of consolidation
The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries.
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power over the investee; is
exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect
its returns, to an extent generally accompanying a shareholding that confers more than half of the voting rights. Subsidiaries
are included in the consolidated financial statements of the Company from the date control of the subsidiary commences until
the date that control ceases. Intercompany transactions and balances are eliminated on consolidation.
3.3.
Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each
acquisition is measured at the aggregate of the fair values (at the acquisition date) of assets given, liabilities incurred or
assumed, and equity instruments issued by the Company in exchange for control of the acquiree. Acquisition-related costs
incurred have been included in selling, general and administrative expenses in the period in which they are incurred.
Where applicable, the consideration for the acquisition may include any asset or liability resulting from a contingent
consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in fair values of contingent
consideration are adjusted against the cost of the acquisition where they qualify as measurement period adjustments. All other
subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in
accordance with relevant IFRS.
Goodwill is measured as the excess of the consideration transferred over the net of the acquisition-date fair value of the
identifiable assets acquired and the liabilities assumed. If the net of the acquisition-date amounts of the identifiable assets
acquired and liabilities assumed exceeds the sum of the consideration transferred, the excess is recognized immediately in
net earnings as a bargain purchase gain.
The measurement period is the period from the date of acquisition to the date the Company obtains complete information
about facts and circumstances that existed as of the acquisition date and is subject to a maximum of one year.
3.4.
Segment reporting
The Company had two reportable operating segments, the agriculture segment and the industrial segment. As part of the
amalgamations of the industrial facilities into existing agricultural facilities during 2016, the majority of the Company’s industrial
equipment distribution assets were transferred to agriculture branches. After these amalgamations the Company only has one
reportable segment.
3
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
3.5.
Cash
Cash consists of cash on hand.
3.6.
Restricted cash
Restricted cash consists of cash equivalents designated for a specific purpose and not available for immediate and general
use by the Company.
3.7.
Bank indebtedness
Bank indebtedness consists of draws on the Company’s Operating Facility.
3.8.
Property and equipment
All items in property and equipment are recorded at cost less accumulated depreciation and any accumulated impairment
losses.
Each part of an item of property and equipment with a useful life that is significantly different from the useful lives of other parts
is depreciated separately.
Items of property and equipment are depreciated commencing on the date they are ready for use using the following methods
and rates:
Land
Buildings
Computer equipment
Furniture and fixtures
Leasehold improvements
Shop tools and equipment Straight-line over 3 – 10 years
Vehicles
Not depreciated
Straight-line over 20 years
Straight-line over 3 – 6 years
Straight-line over 5 – 10 years
Straight-line over the lesser of the lease term (including renewals) and useful life
Straight-line over 3 – 5 years
An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise
from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment
is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in net
earnings. Items of property and equipment are tested for impairment as discussed in Note 3.12.
3.9.
Key estimates and judgements
The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
By nature, asset valuations are subjective and do not necessarily result in precise determinations. Should underlying
assumptions change, estimated net recoverable values could change by a material amount.
Balances in these consolidated financial statements that are subject to estimation include the allowance for doubtful accounts
(Note 7), the net realizable value of inventory (Note 3.15), the valuation of equipment taken in on trade (Note 3.15), the timing
of revenue recognition (Note 3.16), the depreciation periods and methods applied to items of property and equipment (Note
3.8), the net recoverable value of goodwill (Note 12), the fair value of derivative financial instruments (Note 3.22.10), impairment
of assets other than goodwill (Note 3.12), shared-based transactions (Note 3.18), and the fair value of business combinations
(Note 3.3).
4
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
Management also makes certain estimates with respect to manufacturer incentives. Certain manufacturers offer annual
performance incentives which are linked to the Company’s market share achievement and annual sales volumes. The
Company uses estimated annual market share statistics derived from current and historical results which have been adjusted
for any anticipated changes in the current year, as well as annual sales volume to accrue manufacturer incentives earned
during the year.
3.10.
Identifiable intangible assets
Identifiable intangible assets are initially recorded at cost. Finite lived intangible assets are amortized on a straight-line basis
over their estimated useful lives. The Company’s identifiable intangible assets consist of intellectual properties acquired
pursuant to the acquisition of NGF Geomatics Inc. (“NGF”) during 2015. The Company expects the useful life of these assets
to be five years.
3.11.
Goodwill and impairment of goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable
assets of the acquiree at the date of acquisition. Goodwill arising on an acquisition of a business is carried at cost as
established at the date of acquisition of the business less accumulated impairment losses, if any. Goodwill generated on initial
recognition is not deductible for tax purposes and has an indefinite useful life.
For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash-generating units (“CGUs”) which
are expected to benefit from the synergies of the combination.
A CGU to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication
that the unit may be impaired. If the recoverable amount of the CGU is less than its carrying amount, the impairment loss is
allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-
rata based on the carrying amount of each asset in the unit. The recoverable amount of a CGU is the greater of its value in
use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their
present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks
specific to the asset. Any impairment loss for goodwill is recognized in net earnings. Such impairment losses are not reversed
in subsequent periods.
3.12.
Impairment of assets other than goodwill
At the end of each reporting period, the Company reviews the carrying amounts of its identifiable assets to determine whether
there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable
amount of the assets is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to
estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the CGU to which
the asset belongs. Corporate assets are also allocated to individual CGUs on the basis of the distribution of assets deployed
in the CGU. The CGUs are subject to impairment testing as described in Note 3.11.
Where an impairment loss subsequently reverses, the carrying amount of the assets (or CGU) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would
have been determined net of amortization or depreciation had no impairment loss been recognized for the asset. A reversal
of impairment loss is recognized immediately in net earnings.
3.13.
Earnings per share
Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect the potential dilution that could occur if options to purchase common
5
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
shares were exercised. The treasury stock method is used to determine the dilutive effect of options, whereby any proceeds
received by the Company from their exercise are assumed to be used to purchase common shares at the average market
price during the period.
The average market price of the Company’s shares for the purposes of calculating the dilutive effect of options is based upon
quoted market prices for the periods during which the options are outstanding.
3.14.
Leases
Assets held under finance leases are initially recognized as assets, recorded at their fair value at the inception of the lease or,
if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the
consolidated statement of financial position as an obligation under finance lease.
Lease payments are apportioned between interest expense and reductions of the lease obligation so as to achieve a constant
rate of interest on the remaining balance of the liability. Interest expense is recognized immediately in net earnings.
Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another
systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.
3.15.
Inventory
Equipment inventory is valued at the lower of cost and net realizable value, with cost being determined on a specific item,
actual cost basis. Net realizable value is estimated using recent sales of the same or similar equipment inventory or market
values as established by industry publications, less the costs to sell. Value is assigned to equipment inventory acquired
through trade-in by using recent sales of the same or similar equipment inventory or market values as established by industry
publications. Parts inventory is recorded at the lower of cost and net realizable value, with cost being determined on an average
cost basis. Net realizable value is estimated using recent sales of the same or similar parts inventory less the costs to sell.
Work-in-progress is valued on a specific item, actual cost basis.
3.16.
Revenue recognition
Sales are measured at the fair value of the consideration received or receivable.
3.16.1. Sale of goods
Revenue from the sale of goods including new and used equipment and parts is recognized when all the following conditions
are satisfied:
the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;
the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor
effective control over the goods sold;
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the Company; and
the costs incurred or to be incurred in respect of the transaction can be measured reliably.
6
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
3.16.2. Rendering of services
Revenue derived from the rendering of services is recognized when:
the amount of revenue can be measured reliably;
it is probable that the economic benefits associated with the transaction will flow to the Company;
the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
3.16.3. Other revenue
Other revenue consists of commission revenue from finance and insurance, recognized when the finance contract is signed.
3.17.
Deferred revenue
Deferred revenue comprises equipment sales in which cash has been received but not all terms and conditions have been
fulfilled to meet the requirements of revenue recognition, and maintenance plans sold to customers in which all services have
not yet been provided.
3.18.
Share-based transactions
Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the
equity instruments at the grant date. The Company follows the fair value based method of accounting, using the Black-Scholes
option pricing model, whereby compensation expense is recognized over the vesting period and is based on the Company’s
estimate of awards that will ultimately vest, with a corresponding increase to contributed surplus.
Cash-settled share-based payments are recorded as liabilities and are measured initially at their fair values. At the end of
each reporting period and at the date of settlement, these liabilities are remeasured at fair value, with any changes recognized
in net earnings for the period. Details regarding the determination of the fair value of cash-settled share-based payments are
set out in Note 19.4 and Note 19.5.
3.19.
Employee Share Ownership Plan
The Company has an Employee Share Ownership Plan (“ESOP”). Under the ESOP, the Company matches eligible employee
contributions, subject to certain limitations based on employee tenure. The Company’s formerly-constituted Compensation,
Governance and Nominating Committee, now its Compensation and Human Resources Committee, may approve
modifications to these limitations as part of executive compensation plans. The Company’s contributions vest immediately to
the employee and are expensed as incurred.
ESOP shares are purchased on the open market. Dividends paid on the Company’s common shares held for the ESOP are
used to purchase additional common shares on the open market.
3.20.
Income taxes
Current tax is the expected tax payable or recoverable on the taxable income or loss for the year, using tax rates enacted or
substantively enacted at the reporting date.
Deferred tax is recognized using the asset and liability method on temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not
recognized if it arises from goodwill generated on a business combination or an asset or liability in a transaction other than a
business combination that, at the time of the transaction, affects neither accounting net earnings nor taxable income. Deferred
7
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
tax is determined using tax rates and laws that have been enacted or substantively enacted at the reporting date and are
expected to apply when the related deferred tax asset is expected to be realized or the deferred tax liability is expected to be
settled.
A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which
the temporary difference can be applied. Deferred tax assets are reviewed at each reporting date and are recognized only to
the extent that it is probable that the related tax benefit will be realized.
Current and deferred tax expenses (recoveries) are recognized in net earnings except, to the extent that they relate to items
that are recognized within other comprehensive income or directly within equity. In such cases, the current and deferred tax
expenses (recoveries) are also recognized in other comprehensive income or directly in equity, respectively. Where current
or deferred tax positions arise from the initial accounting for a business combination, the tax effect is included in the allocation
of the purchase price.
3.21.
Foreign currency translation
Transactions in currencies other than the Company’s functional currency are recorded at the rates of exchange prevailing on
the dates of the transactions. At the date of each statement of financial position, monetary assets and liabilities denominated
in foreign currencies are retranslated at prevailing rates.
3.22.
Financial instruments
Financial assets and liabilities are recognized when the Company becomes party to the contractual provisions of the
instrument.
On initial recognition, financial instruments are measured at fair value. Transaction costs that are directly attributable to the
acquisition or issue of financial instruments, other than financial instruments at fair value through profit or loss (“FVTPL”), are
added to or deducted from the fair value of the financial instrument, as appropriate. Transaction costs directly attributable to
the acquisition of financial instruments at FVTPL are recognized immediately in net earnings.
3.22.1. Classification of financial instruments
Financial instruments are classified into the following specified categories: financial assets at FVTPL, held-to-maturity
investments, available-for-sale (“AFS”) financial assets, loans and receivables, financial liabilities at FVTPL and other financial
liabilities. The classification depends on the nature and purpose of the financial instrument and is determined at the time of
initial recognition. The Company has no financial assets classified as held-to-maturity or AFS.
3.22.2. Effective interest method
The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest over
the relevant period. The effective interest rate is the rate that discounts estimated future cash receipts (including all fees,
transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a
shorter period, to the net carrying amount on initial recognition.
3.22.3. Financial instruments at FVTPL
Financial instruments are classified as at FVTPL when the instrument is either held for trading or it is designated as at FVTPL.
A financial asset (liability) is classified as held for trading if:
it has been acquired principally for the purpose of selling (repurchasing) it in the near term;
8
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
on initial recognition, it is part of a portfolio of identified financial instruments that the Company manages together and
has a recent actual pattern of short-term profit-taking; or
it is a derivative that is not designated and effective as a hedging instrument.
A financial instrument other than one held for trading may be designated as at FVTPL upon initial recognition if:
such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise
arise;
the financial instrument forms part of a group of financial assets or financial liabilities or both, which is managed and
its performance is evaluated on a fair value basis, in accordance with the Company’s documented risk management
or investment strategy, and information about the grouping is provided internally on that basis; or
it forms part of a contract containing one or more embedded derivatives, and IAS 39, ‘Financial instruments:
Recognition and measurement’ permits the entire combined contract (asset or liability) to be designated as at FVTPL.
Financial assets classified as at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized
in net earnings. The net gains or losses recognized in net earnings incorporate any dividends or interest associated with the
financial instrument. The Company has designated its derivative financial instruments as at FVTPL. The methods for
determining fair value and the presentation of gains and losses are described in Notes 3.22.10 and 29.6.
3.22.4. Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. Loans and receivables are measured at amortized cost using the effective interest method, less any provisions for
impairment.
The Company has classified its cash, restricted cash, and trade receivables and other as loans and receivables.
3.22.5. Other financial liabilities
Other financial liabilities are measured at amortized cost using the effective interest method.
The Company has classified its bank indebtedness, trade payables, accruals and other (with the exception of the Directors’
share units and share appreciation rights), floor plan payable (including any portion classified as liabilities associated with
assets held for sale), long-term debt, and obligations under finance leases as other financial liabilities.
3.22.6. Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period.
For financial assets carried at amortized cost, the amount of the impairment loss, if any, is the difference between the asset’s
carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective
interest rate. As indicated above, the Company’s financial assets carried at amortized cost consist only of cash and trade
receivables and other. Any impairment determined on trade receivables and other reduces the carrying amount through the
use of an allowance account and is recorded when an account is considered uncollectible. Subsequent recoveries of amounts
previously provided for are credited against the allowance. Changes in the carrying amount of the allowance are recognized
in selling, general and administrative expenses.
3.22.7. Derecognition of financial instruments
The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or when it
transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.
9
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration
received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and
accumulated equity is recognized in net earnings.
The Company derecognizes a financial liability when the Company’s obligations are discharged, cancelled or they expire. The
difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is
recognized in net earnings.
3.22.8. Classification as debt or equity
Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with
the substance of the contractual arrangement and the definitions of a financial liability and equity instrument.
3.22.9. Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its
liabilities. Equity instruments issued by the Company are recognized at a value equal to the proceeds received, net of direct
issue costs. Repurchases of the Company’s own equity instruments are recognized as direct reductions to equity. No gain or
loss is recognized in net earnings on the purchase, sale, issuance or cancellation of the Company’s own equity instruments.
3.22.10. Derivative financial instruments and hedging activities
Derivatives are initially recognized on the date a derivative contract is entered into and are subsequently re-measured at their
fair values. The fair values of interest rate swaps are calculated as the net present value of the estimated future cash flows
expected to arise on the variable and fixed streams, determined using applicable yield curves at each measurement date.
Swap curves, which incorporate credit spreads applicable to large commercial banks, are typically used to calculate expected
future cash flows and the present values thereof. Adjustments are also made to reflect the Company’s own credit risk and the
credit risk of the counter party, if different from the spread implicit in the swap curve.
The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument,
and if so, the nature of the item being hedged. The Company may designate derivatives of a particular risk associated with a
recognized asset or liability or highly probable forecast transaction as cash flow hedges.
The Company documents at the inception of the transaction, the relationship between hedging instruments and hedged items,
as well as its risk management objectives and strategy for undertaking various hedging transactions.
The Company has designated certain floating-to-fixed interest rate swaps as cash flow hedges. The Company uses the
regression method to determine whether these interest rate swaps are highly effective in offsetting changes in fair values or
cash flows of these hedged items and use the cumulative dollar offset method to measure the ineffective portion. The
documentation identifies the anticipated cash flows being hedged, the risk that is being hedged, and the type of hedging
instrument used and how effectiveness will be assessed. The hedging instrument must be highly effective in accomplishing
the objective of offsetting changes in anticipated cash flows attributable to the risk being hedged both at inception and
throughout the life of the hedge. Hedge accounting is discontinued prospectively when it is determined that the hedging
instrument is no longer effective as a hedge, the hedging instrument is terminated, or upon early settlement of the hedged
item.
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes,
is recognized in other comprehensive income while the ineffective portion is recognized within net earnings. Amounts in
accumulated other comprehensive loss are reclassified to net earnings in the periods when the hedged item affects profit or
loss.
10
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
Gains or losses on derivatives not designated as hedges are recognized in net earnings.
When a hedging instrument expires or no longer meets the criteria for hedge accounting, any cumulative gain or loss existing
in equity remains in equity and is recognized when the forecast transaction is ultimately recognized in the consolidated
statement of net earnings.
The Company has several total return swaps to hedge the exposure associated with increases in its share value on its
outstanding Director Share Units (DSUs) and Share Appreciation Rights (SARs). The Company does not apply hedge
accounting to this relationship and as such, gains and losses arising from marking these derivatives to market are recognized
in earnings in the period in which they arise.
4.
Prior year comparative disclosures
Certain prior period information in the statement of net earnings has been revised to conform to the current period presentation.
The revisions had no impact on net earnings, cash flows or the financial position of the Company.
5.
Acquisitions
The Company completed no new business acquisitions during the year ended December 31, 2016 (2015 - two business
acquisitions completed). The acquired locations expand the Company’s sales and service territory and provide synergistic
sales growth and cost leveraging opportunities. Acquisitions completed during 2015 are as follows:
NGF Geomatics Inc.
On February 12, 2015, the Company acquired 100% of the issued and outstanding common shares of NGF, a geomatics
company specializing in the collection of geospatial survey data using unmanned aerial vehicles. NGF is a start-up company
with minimal assets and liabilities. The operating results of the business acquired are consolidated from February 12, 2015,
the date control was acquired. The final purchase price was $902 and was funded with cash.
Chabot Implements
On April 1, 2015, the Company acquired 100% of the issued and outstanding common shares of the entities forming Chabot
Implements (“Chabot”), a Manitoba-based dealer of Case IH agriculture equipment with stores in Portage La Prairie, Steinbach
and Elie. Chabot also represented various short-lines including Bourgault, MacDon and Kubota through its Neepawa, Manitoba
location. The operating results of the business acquired are consolidated from April 1, 2015, the date control was acquired.
The final purchase price was $9,396 and was funded with cash and various credit facilities.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
The table below illustrates the purchase price allocations as reported in the Company’s annual consolidated financial
statements for the year ended December 31, 2015.
11
Purchase price allocation
Cash consideration
Paid
Payable
Purchase consideration
Net working capital
Cash
Trade receivables and other
Income tax receivable
Inventory
Bank indebtedness
Trade payables, accruals and other
Floor plan payable
Current portion of long-term debt
Property and equipment
Deferred tax liability
Intangible assets
Goodwill
Net assets
NGF
Final
$
2015
Chabot
Preliminary
$
Total
$
902
-
902
7
41
15
-
-
(3)
-
-
60
20
(220)
822
220
902
8,656
751
9,407
-
1,132
369
43,587
(7,140)
(2,609)
(32,782)
(4,977)
(2,420)
8,309
(372)
-
3,890
9,407
9,558
751
10,309
7
1,173
384
43,587
(7,140)
(2,612)
(32,782)
(4,977)
(2,360)
8,329
(592)
822
4,110
10,309
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
The table below illustrates the measurement period adjustments made during 2016 to Chabot’s preliminary purchase price
allocation as reported in the Company’s annual consolidated financial statements for the year ended December 31, 2015 in
order to arrive at the final purchase price allocation in 2016.
12
Purchase price allocation
Cash consideration
Paid
Payable
Purchase consideration
Net working capital
Trade receivables and other
Income tax receivable
Inventory
Bank indebtedness
Trade payables, accruals and other
Floor plan payable
Current portion of long-term debt
Property and equipment
Deferred tax liability
Goodwill
Net assets
December 31,
2015
$
December 31,
2016
$
Measurement
period
adjustments
$
8,656
751
9,407
1,132
369
43,587
(7,140)
(2,609)
(32,782)
(4,977)
(2,420)
8,309
(372)
3,890
9,407
9,396
-
9,396
1,132
369
43,587
(7,140)
(2,651)
(32,782)
(4,977)
(2,462)
8,387
(393)
3,864
9,396
740
(751)
(11)
-
-
-
-
(42)
-
-
(42)
78
(21)
(26)
(11)
Cash flows outflows associated with business combinations are presented net of cash acquired and bank indebtedness
assumed as summarized in the following table:
Cash consideration paid
Less: cash acquired
Plus: bank indebtedness assumed
Cash outflows - December 31, 2015
Cash consideration paid
Cash outflows – December 31, 2016
NGF
$
Chabot
$
Total
$
902
(7)
-
895
-
-
8,656
-
7,140
15,796
740
740
9,558
(7)
7,140
16,691
740
740
The Company incurred $Nil of acquisition related costs during the year ended December 31, 2016 (2015 – $188). These costs
are recognized as administrative expenses within selling, general and administrative expenses in the period in which they are
incurred.
The acquisitions effected during the year ended December 31, 2015, generated revenue of $34,483 during the year of
acquisition and a net loss of $562. Had these business combinations been effected at January 1 of the acquisition year, the
Company estimates that consolidated revenue and net earnings for the year ended December 31, 2015 would have been
13
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
$983,700 and $11,294, respectively. The pro forma revenues and earnings are not necessarily indicative of the results that
actually would have occurred had these acquisitions taken place on January 1, or of the results which may be obtained in the
future.
In determining these amounts, management has assumed that the fair value adjustments, determined provisionally, that arose
on the date of acquisition would have been the same had these acquisitions occurred on January 1 of the acquisition year.
Goodwill arose on these acquisitions due to the potential future revenue growth and synergies expected to occur. This amount
is not recognized separately as it does not meet the recognition criteria for identifiable intangible assets. Goodwill generated
on acquisitions is not deductible for tax purposes.
6.
Restricted cash
Restricted cash as at December 31, 2016 is $Nil (December 31, 2015 - $879). The entire amount of restricted cash at
December 31, 2015 related to a holdback on the Chabot acquisition that was held in trust. These funds were released during
2016.
7.
Trade receivables and other
Trade receivables
Current
Aged between 61 – 120 days
Aged greater than 120 days
Allowance for doubtful accounts
Net trade receivables
Contracts in transit
Warranty receivables
December 31,
2016
$
December 31,
2015
$
9,639
948
1,627
12,214
(1,206)
11,008
15,275
1,221
27,504
11,866
1,415
2,528
15,809
(1,939)
13,870
9,732
1,550
25,152
The Company considers its trade receivables and other which are neither past due nor impaired to be of good credit quality.
Contracts in transit and warranty receivables are due from retail finance institutions and original equipment manufacturers,
respectively.
The allowance for doubtful accounts can be reconciled as follows:
As at January 1,
Net (recovery) provision
Written-off during the year
As at December 31,
December 31,
2016
$
December 31,
2015
$
1,939
(87)
(646)
1,206
1,745
479
(285)
1,939
The allowance for doubtful accounts is reviewed by management and accounts receivable are considered for impairment on
a case-by-case basis when they are past due or when objective evidence is received that a customer will default. The Company
takes into consideration the customer’s payment history, their creditworthiness and the current economic environment in which
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
the customer operates to assess impairment. The Company’s historical bad debt expenses have not been significant and are
generally limited to specific customer circumstances.
14
8.
Inventory
New equipment
Used equipment
Parts
Work-in-progress
December 31,
2016
$
December 31,
2015
$
113,517
289,485
37,781
1,959
442,742
172,335
287,784
37,872
1,769
499,760
For the year ended December 31, 2016, inventory recognized as an expense amounted to $782,802 (2015 – $819,064), which
is included in cost of sales in the consolidated statement of net earnings.
For the year ended December 31, 2016, there were net write downs of inventory to net realizable value of $4,702 (2015 –
$6,497) in cost of sales in the consolidated statement of net earnings. The Company’s inventory has been pledged as security
for its bank indebtedness, floor plan payable and long-term debt.
9.
Assets held for sale
Assets held for sale and liabilities associated with assets held for sale for the respective years ended are disclosed below:
Assets held for sale
Inventory
$
Land
$
Buildings
$
Total
$
December 31, 2014
Classified as held for sale during the period (Note 11)
Assets no longer held for sale (Note 11)
December 31, 2015
Classified as held for sale during the period (Note 11)
Disposed of during the period
Impairment charges recognized during the period
December 31, 2016
Non-current – presented within property and equipment (Note 11)
Current
-
2,070
-
2,070
3,899
(3,468)
-
2,501
-
2,501
2,252
8,311
(2,252)
8,311
-
(39)
(1,360)
6,912
6,912
-
-
161
-
161
495
(556)
(100)
-
-
-
2,252
10,542
(2,252)
10,542
4,394
(4,063)
(1,460)
9,413
6,912
2,501
During 2016, two parcels of land with a net book value of $8,272, were reclassified as non-current assets held for sale as they
are no longer expected to be sold within the next twelve months. These assets have been presented within property and
equipment.
The Company also recorded in 2016, asset impairment charges of $1,360 (2015 - $Nil) on vacant land which was considered
redundant (2015 - $Nil) and $100 (2015 - $Nil) on operational assets that were disposed of during the year.
15
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
Liabilities associated with assets held for sale:
December 31, 2014
Classified as held for sale during the period
Assets no longer held for sale
December 31, 2015
Classified as held for sale during the period
Disposed of during the period
December 31, 2016
10.
Intangible assets
Inventory
$
Land
$
-
1,562
-
1,562
2,617
(2,573)
1,606
253
-
(253)
-
-
-
-
Total
$
253
1,562
(253)
1,562
2,617
(2,573)
1,606
Intangible assets are comprised of intellectual properties acquired pursuant to the acquisition of NGF during 2015.
Cost
December 31, 2014
Business combinations (Note 5)
December 31, 2015
December 31, 2016
Accumulated amortization
December 31, 2014
Amortization charge
December 31, 2015
Amortization charge
December 31, 2016
Net book value
December 31, 2014
December 31, 2015
December 31, 2016
Intangible
Assets
$
-
822
822
822
-
151
151
164
315
-
671
507
The amortization expense of $164 (2015 - $151) has been recorded in selling, general and administrative expense.
16
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
11.
Property and equipment
Cost
December 31, 2014
Additions
Business combinations (Note 5)
Assets held for sale (Note 9)
Assets no longer held for sale (Note 9)
Disposals
December 31, 2015
Additions
Business combinations (Note 5)
Assets held for sale (Note 9)
Disposals
December 31, 2016
Accumulated depreciation
December 31, 2014
Depreciation charge
Disposals
December 31, 2015
Depreciation charge
Disposals
December 31, 2016
Net book value
December 31, 2014
December 31, 2015
December 31, 2016
Land
$
Buildings
$
Computer
equipment
$
Furniture
and fixtures
$
Leasehold
improve-
ments
$
Shop tools
and
equipment
$
Vehicles
$
10,909
1,203
2,787
(8,311)
2,252
-
8,840
81
-
6,912
(349)
15,484
-
-
-
-
-
-
-
10,909
8,840
15,484
3,979
5,516
4,693
(161)
-
(67)
13,960
4,110
78
(495)
(422)
17,231
366
386
(15)
737
778
(237)
1,278
3,613
13,223
15,953
8,942
980
-
-
-
(39)
9,883
1,801
-
-
(3,263)
8,421
5,558
1,676
(38)
7,196
1,742
(3,239)
5,699
3,384
2,687
2,722
3,608
670
179
-
-
(70)
4,387
1,242
-
-
(424)
5,205
2,437
460
(70)
2,827
459
(384)
2,902
1,171
1,560
2,303
5,355
525
107
-
-
(53)
5,934
1,065
-
-
(858)
6,141
1,841
660
(50)
2,451
668
(504)
2,615
3,514
3,483
3,526
9,846
1,649
222
-
-
(452)
11,265
882
-
-
(512)
11,635
7,072
1,463
(328)
8,207
1,294
(320)
9,181
2,774
3,058
2,454
17,612
2,741
341
-
-
(1,999)
18,695
2,117
-
-
(2,685)
18,127
10,091
3,007
(1,440)
11,658
2,650
(2,325)
11,983
7,521
7,037
6,144
Total
$
60,251
13,284
8,329
(8,472)
2,252
(2,680)
72,964
11,298
78
6,417
(8,513)
82,244
27,365
7,652
(1,941)
33,076
7,591
(7,009)
33,658
32,886
39,888
48,586
Included in selling, general and administrative expenses for the year ended December 31, 2016 is depreciation expense of $7,591 (2015 – $7,652) and a gain on the
disposal of property and equipment of $208 (2015 – gain of $302). As at December 31, 2016, assets under finance leases included in computer equipment and vehicles
have net carrying amounts of $1,053 and $28 (2015 – $186 and $63), respectively. Certain items of property and equipment have been pledged as security for the
Company’s bank indebtedness, long-term debt and obligations under finance leases. Included in additions in 2016 are assets under finance lease of $1,114.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
12.
Goodwill
Opening balance
Recognized on business acquisitions (Note 5)
Ending balance
17
December 31,
2016
$
December 31,
2015
$
18,802
(26)
18,776
14,692
4,110
18,802
Goodwill recognized pursuant to a business combination is allocated, at the time of acquisition, to the Company’s CGU that is
expected to benefit from that business combination. As at December 31, 2016 and 2015, the Company has identified two CGU’s,
agriculture and industrial. All goodwill has been allocated to the agriculture CGU.
The agriculture CGU has been assessed for impairment annually on December 31, 2016 and 2015. The recoverable amount of
the CGU was determined from value in use calculations. The key assumptions made for the value in use calculations are those
regarding the discount and growth rates. These key assumptions are based on past experience which has been adjusted for
expected changes in future conditions.
As at December 31, 2016 and 2015, the Company prepared cash flow forecasts derived from the most recent financial plans
prepared by management and extrapolated these cash flows into perpetuity using growth assumptions relevant to the business
sector. The growth rate used for the purposes of these analyses was 2.0%.
As at December 31, 2016, the rate used to discount the forecasted cash flows was 10.3% (2015 – 10.9%), and represents the
Company’s estimate of the pre-tax discount rate reflecting current market assessments of the time value of money and the risks
specific to the agriculture CGU. The recoverable amount of the agriculture CGU exceeded its carrying value at the impairment
test dates.
The Company has conducted a sensitivity analysis based on possible changes in the key assumptions used for the impairment
tests. Had the estimated cost of capital used in determining the pre-tax discount rates been 7.3% (2015 – 6.4%) higher than
management’s estimates or the estimated growth rate used in extrapolating forecasted results been 14.5% (2015 – 13.8%)
lower, the recoverable amount of the CGU would equal its carrying amount for the respective periods. Any additional negative
change in the assumption would cause goodwill to be impaired.
13.
Trade payables, accruals and other
Trade payables and accruals
Directors’ share units (Note 19.4)
Share appreciation rights (Note 19.5)
14.
Floor plan payable
December 31,
2016
$
December 31,
2015
$
46,528
667
800
47,995
33,466
454
43
33,963
The Company utilizes floor plan financing arrangements with various suppliers and creditors to finance equipment inventory on
hand. The terms of these arrangements may include up to a twelve month interest-free period followed by a fixed or variable
interest rate term ranging from 0.0% to the bank’s prime rate plus 4.3% at December 31, 2016 (2015 – ranging from 0.0% to the
bank’s prime rate plus 4.3%). At December 31, 2016, the Company had unused floor plan of approximately $293,727 available
(2015 – $233,372). The amounts due are secured by specific new and used equipment inventories and the payments are due
when the equipment is sold or transferred, up to a maximum term of 48 months. At December 31, 2016, the Company’s US
18
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
denominated floor plan payable translated into Canadian currency was $2,014 (2015 – $6,818). The entire amount of floor plan
payable has been classified as current, as the corresponding inventory to which it relates has also been classified as current.
Pursuant to agreements with lenders, the Company is required to monitor and report certain non-IFRS measures (Note 30).
15.
Bank indebtedness
Bank indebtedness outstanding at December 31, 2016 was $Nil (2015 - $5,001).
The Company’s bank indebtedness is comprised of the Operating Facility made available to the Company through a syndicate
of lenders. Advances under the Operating Facility are limited to the lesser of the established borrowing base and $60,000 (2015
- $70,000). During 2016, the Company requested and received a $10,000 dollar reduction in its Operating Facility limit to
$60,000. The reduction eliminates redundant room on the facility and the carrying costs associated therewith. The borrowing
base is supported by otherwise unencumbered assets including certain accounts receivable, inventory and items of property
and equipment, less priority payables. This facility may be used to finance general corporate operating requirements.
The Operating Facility is a revolving facility which matures on September 24, 2019, and which is secured in favour of the
syndicate by a general security agreement. Advances under the Operating Facility may be made based on our lenders’ prime
rate or the U.S. base rate plus 1.0% - 2.5% (2015 – 1.0% - 2.5%) or based on the banker’s acceptance (“BA”) rate plus 2.0% –
3.5% (2015 – 2.0% - 3.5%). The Company pays standby fees of between 0.4% – 0.7% (2015 – 0.4% - 0.7%) per annum on
any undrawn portion of the Operating Facility. The standby fees and premiums on base interest rates within the respective
ranges are determined based on the Company’s ratio of debt to tangible net worth. Within the Operating facility is a $7,000 letter
of credit pledged as security for the hedged position on the total return swaps (Note 29.6). The effective interest rate at December
31, 2015 was 3.7%.
16.
Long-term debt
During 2016, the Company renewed its Syndicated Facility extending the maturity date to September 24, 2019.
The following table summarizes the Company’s long-term debt under the assumption that the Syndicated Facility is renewed
prior to maturity.
Term Facility, revolving facility with tranches payable in quarterly principal instalments
plus interest over periods of 7 to 15 years (2015 – 7 years). The effective interest
rate at December 31, 2016 was 3.0% (2015 – 2.9%)
Various other facilities
Less: current portion
Less: deferred debt issuance cost
Long-term portion
17.
Obligations under finance leases
December 31,
2016
$
December 31,
2015
$
47,818
45,000
23
47,841
(6,825)
(238)
40,778
124
45,124
(4,852)
(192)
40,080
Finance leases relate to vehicles and computer equipment with lease terms ranging from three to five years. The lessors’ title to
the leased assets provides security for the Company’s obligations under finance leases.
Interest rates underlying all obligations under finance leases are fixed at the respective contract dates ranging from 1.9% to
5.5% at December 31, 2016 (2015 – 2.7% to 7.1%).
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
The fair values of the obligations under finance leases approximate their carrying amounts as interest rates are consistent with
market rates for similar debt.
Future minimum payments under finance leases along with the balance of the obligations under finance leases are as follows:
19
Due within one year
Due later than one year and not later than five years
Due later than five years
Total future minimum lease payments
Less: future finance charges
Present value of future minimum lease payments
Current portion of obligations under finance leases
Long-term portion of obligations under finance leases
18.
Contingency and guarantee
December 31,
2016
$
December 31,
2015
$
458
529
-
987
(26)
961
(440)
521
77
160
-
237
(12)
225
(71)
154
The Company is subject to various degrees of recourse, arising in the ordinary course of business, by assisting its customers in
financing the purchase or rental of equipment. The Company is exposed to potential losses arising from the difference between
the assessed value of the underlying security and the amounts guaranteed by the Company. Any resulting losses are recorded
as soon as the amount of the loss can be reasonably estimated. As the assessed value of the underlying security generally
exceeds the amount guaranteed by the Company, management believes that the net exposure is not significant. As at December
31, 2016, gross recourse amounted to $2,066 (2015 - $4,662), prior to any consideration of the value associated with the
securitized assets. As at December 31, 2016, the Company has accrued $715 (2015 - $664) for anticipated losses in trade
payables, accruals and other.
19.
Share capital
19.1.
Common shares
The Company is authorized to issue an unlimited amount of common shares with no par value. As at December 31, 2016,
19,384 thousand shares were issued and outstanding (2015 – 19,384 thousand). All issued and outstanding shares were fully
paid as at December 31, 2016 and 2015.
19.2.
Dividends paid
Dividends declared and paid during the year ended December 31, 2016 were $8,917 or $0.46 per share (2015 – $8,917 or $0.46
per share).
On January 25, 2017, the Board of Directors declared a dividend of $0.115 per common share on the Company’s outstanding
common shares. The dividend is payable on March 31, 2017, to shareholders of record at the close of business on February
28, 2017.
19.3.
Stock options
The Company has a stock option plan under which the Board of Directors may grant options to directors, officers, and employees
of the Company at an exercise price equal to the market price of the Company’s common shares at the time of the grant. The
plan is limited to 10% of the issued and outstanding common shares. Options granted carry neither voting rights nor rights to
dividends.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
The general terms of stock options granted under the plan include a maximum exercise period of five years and a vesting period
of three years with one-third of the grant vesting on each anniversary date.
The reconciliation of options outstanding during the years ended December 31 is as follows:
20
January 1,
Expired
Forfeited
December 31,
2016
2015
Number of
options
(thousands)
1,165
(172)
(89)
904
Weighted
average
exercise
price
$
Number of
options
(thousands)
Weighted
average
exercise
price
$
11.66
9.00
12.09
12.13
1,236
-
(71)
1,165
11.68
-
11.97
11.66
No new options were granted and no options were exercised during the years ended December 31, 2016 and December 31,
2015.
Options outstanding at December 31, 2016 are summarized as follows:
Grant date
Options outstanding
(thousands)
Options exercisable
(thousands)
Weighted average
exercise price
($)
Weighted average
contractual life
(years)
March 28, 2012
March 13, 2013
March 13, 2014
210
334
360
904
210
334
240
784
11.96
12.89
11.52
12.13
0.2
1.2
2.2
1.4
19.4.
Directors’ share unit plan
The Company has instituted a Directors’ share unit plan (“DSU”). Under this plan, the Board of Directors may grant DSUs to
non-officer Directors of the Company for services rendered. The DSUs are notional grants of shares and are to be settled in
cash within 30 days of a Director’s termination date. Additional DSUs are credited to the Directors’ accounts when cash
dividends are paid to the common shareholders of the Company. Such amount of additional DSUs is determined by dividing
the dividends which would have been paid on the DSUs had they been common shares of the Company by the volume weighted
average trading price of the Company’s shares over the 20 day trading period immediately preceding the date the dividends are
paid.
Upon redemption, and at each reporting date, the DSUs are valued on a per DSU basis at an amount equal to the volume
weighted average trading price of the Company’s shares over the immediately preceding 20 day trading period. At December
31, 2016, $667 was included in trade payables, accruals and other with respect to the DSUs (2015 – $454). During the year
ended December 31, 2016, 36 thousand DSUs were redeemed (2015 – 26 thousand DSUs were redeemed).
21
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
DSUs granted and redeemed and the unrealized losses recognized on the DSUs during the years ended December 31 are as
follows:
January 1,
Granted(1)
Redeemed
(Gain) loss on mark to market revaluation(1)
December 31,
(1) Included in selling general and administrative expenses.
2016
2015
DSUs
(thousands)
$
DSUs
(thousands)
$
75
32
(36)
-
71
454
221
(228)
220
667
75
26
(26)
-
75
680
220
(235)
(211)
454
As at December 31, 2016 and 2015, the Company has several total return swaps as an economic hedge for the Company’s
DSUs (Note 29.6)
19.5.
Share appreciation rights plan
The Company maintains a share appreciation rights (“SAR”) plan as a component of overall compensation of certain directors,
officers and employees. These SARs vest after a three year period, are exercisable for two years thereafter and will be settled
in cash. The SARs terminate five years after their initial date of grant. During the vesting period, the SARs are revalued at each
reporting period using the Black-Scholes option pricing model. The Company recognizes a liability to the extent that the fair
value of the SARs has been earned by the holder, with the coinciding expense being recognized within selling, general and
administrative expense.
In 2016, no SARS were granted (2015 – 673 thousand SARs with an exercise price of $8.82). As at December 31, 2016, 1,057
thousand SARs were outstanding (2015 – 1,146 thousand). As at December 31, 2016, the Company recognized a liability of
$800 (2015 - $43) and an expense of $757 (2015 - $24).
The weighted average fair value of the SARs outstanding using the Black-Scholes option pricing model and assumptions used
in their determination as at December 31 are as follows:
Risk-free interest rate
Expected option life (years)
Expected volatility(1)
Expected annual dividend per share
Exercise price
Share price
Fair value
(1) Expected volatility has been based on the historical volatility of the Company’s publicly traded shares
2016
2015
0.5%
2.1
29.8%
$0.46
$9.67
$9.69
$1.24
0.6%
2.7
27.6%
$0.46
$9.74
$6.24
$0.13
As at December 31, 2016 and 2015, the Company has several total return swaps as an economic hedge for the Company’s
SARs (Note 29.6).
19.6.
Employee share ownership plan
During the year ended December 31, 2016, the Company recognized $1,163 in selling, general and administrative expenses
with respect to Company matched ESOP contributions (2015 – $1,191).
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
20.
Sales
The Company’s annual sales consist of the following for the respective years ended:
New equipment sales
Used equipment sales
Parts sales
Sale of goods
Service sales
Other sales
Rendering of services
Total sales
22
December 31,
2016
$
December 31,
2015
$
409,872
375,273
108,807
893,952
31,811
4,672
36,483
930,435
449,997
377,482
107,509
934,988
35,865
4,603
40,468
975,456
21.
Selling, general and administrative
The Company’s selling, general and administration expenses consist of the following for the respective years ended:
Compensation and related expenses
Administrative expenses
Rent and other facility expenses
Depreciation and amortization expense
Equity-settled share-based payment expense
Total selling, general and administrative expenses
December 31,
2016
$
December 31,
2015
$
64,211
12,628
13,240
7,755
136
97,970
67,273
18,216
14,436
7,803
500
108,228
Included in compensation and related expenses for the year ended December 31, 2016 are variable sales commissions of
$13,210 (2015 – $14,323).
Depreciation and amortization expense for year ended December 31, 2016 is comprised of depreciation of property and
equipment of $7,591 (2015 - $7,652) and amortization of intangible assets of $164 (2015 - $151).
Administrative expenses consist of marketing, training, insurance, travel, professional fees and other miscellaneous expenses.
22.
Restructuring costs
During the year ended December 31, 2016, the Company recognized $3,564 (2015 - $Nil), of costs associated with the
amalgamation of the Company’s Calgary and Red Deer industrial facilities into existing agriculture facilities in those areas.
Included in these expenses are accruals associated with terminating the leases on these facilities, one of which is leased from
a related party (see Note 28).
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
23.
Finance costs
Finance costs include interest and other finance-related charges, including amortization of deferred finance costs. The
Company’s finance costs associated with its short- and long-term debt facilities for the respective years ended are as follows:
23
Finance costs associated with short-term debt
Finance costs associated with long-term debt
Finance costs
24.
Income taxes
24.1.
Income tax recognized in net earnings
December 31,
2016
$
December 31,
2015
$
12,548
1,795
14,343
12,747
2,060
14,807
Income tax expense is comprised of current and deferred tax expense (recovery) for the respective years ended as follows:
Current
Deferred
Income tax expense
December 31,
2016
$
December 31,
2015
$
5,277
678
5,955
5,334
(1,229)
4,105
Total taxes recognized in net earnings were different than the amount computed by applying the combined statutory Canadian
and Provincial tax rates to income before taxes. The difference resulted from the following:
Earnings before income taxes
Computed tax at statutory tax rate of 27% (2015 – 26%)
Non-deductible expenses
Income tax credits
Change in enacted rates
Adjustment from prior year income tax expenses
Other
December 31,
2016
$
December 31,
2015
$
20,921
5,649
500
(102)
-
(38)
(54)
5,955
15,398
4,003
253
(74)
(55)
(49)
27
4,105
24
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
24.2.
Deferred tax asset (liability)
Share
issue costs
$
Cumulative
eligible
capital
$
Property
and
equipment
$
Intangible
assets
$
Cash settled
share based
payments
$
Derivative
financial
instruments
$
Total
$
December 31, 2014
Added in acquisition
(Note 5)
Recognized in net
earnings
Recognized in equity
(Note 29.6)
December 31, 2015
Added in acquisition
(Note 5)
Recognized in net
earnings
Recognized in equity
(Note 29.6)
December 31, 2016
187
-
139
-
(147)
(370)
-
(222)
170
-
837
1,186
-
(592)
(98)
(23)
334
41
(47)
1,022
1,229
-
89
-
(62)
-
27
-
116
-
(29)
-
87
-
(183)
(21)
379
-
175
-
(181)
-
44
-
(137)
-
123
-
273
-
396
544
2,403
544
2,367
-
(21)
(1,283)
(678)
(458)
662
(458)
1,210
The Company has net allowable capital losses in the amount of $3,753 with no fixed expiry date for which no deferred tax asset
has been recognized as the Company does not expect to have sufficient future taxable profit against which these losses can be
utilised.
The Company also has non-capital losses of $1,671 which expire between 2033 and 2034 for which no deferred tax asset has
been recognized as these non-capital losses are available within an entity that has no reasonable expectation of future taxable
profit.
25.
Earnings per share
During the year ended December 31, 2016, there were no dilutive and 904 anti-dilutive stock options outstanding (2015 – no
dilutive and 1,165 anti-dilutive stock options outstanding). Net earnings and the weighted average number of ordinary shares
used in the calculations of basic and diluted EPS for the respective periods were as follows:
Thousands
Net earnings used in the calculation of basic and diluted EPS ($)
Weighted average number of ordinary shares used in the
calculation of basic and diluted EPS (thousands)
Basic and diluted EPS ($)
December 31,
2016
December 31,
2015
14,966
19,384
0.77
11,293
19,327
0.58
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
26.
Changes in non-cash working capital
The net change in non-cash working capital for the years ended December 31 is comprised of the following sources (uses) of
cash:
25
Restricted cash
Trade receivables and other
Income taxes receivable
Inventory
Prepaid expenses
Assets held for sale
Trade payables, accruals and other
Income taxes payable
Floor plan payable
Liabilities associated with assets held for sale
Deferred revenue
27.
Operating lease arrangements
December 31,
2016
$
December 31,
2015
$
879
(2,352)
(440)
57,018
(695)
(431)
14,741
-
(60,507)
44
(1,200)
7,057
3,681
9,828
337
69,830
(35)
(2,070)
(3,809)
(6,661)
(58,295)
1,562
(521)
13,847
Operating leases relate primarily to the Company’s facilities with lease terms of between one and eleven years. Most building
leases contain five-year renewal options. During the year ended December 31, 2016, the Company recognized $9,033 of
operating lease payments as expenses (2015 – $9,397).
Non-cancellable operating lease commitments at December 31 are due as follows:
Not later than one year
Later than one year and not later than five years
Later than five years
December 31,
2016
$
December 31,
2015
$
8,169
17,214
6,442
31,825
8,921
20,988
3,771
33,680
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
28.
Related party transactions
The Company entered into the following transactions with related parties for the respective years ended:
26
Equipment and product support sales
Expenditures
Rental payment on Company facilities
Equipment purchases
Flight costs
Contributions(1)
Other expenses
(1) Contributions include payments to Ag for Life and Alberta Prosperity Fund
December 31,
2016
$
December 31,
2015
$
514
1,394
5,832
271
74
157
33
5,589
665
83
-
92
All related parties are either directly or indirectly owned by a member of senior management of the Company and/or a close
family member thereof. These transactions were made on terms equivalent to those that prevail in arm’s length transactions
and are made only if such terms can be substantiated.
The remuneration of the directors and officers of the Company is determined by the Company’s formerly-constituted
Compensation, Governance and Nominating Committee (now its Compensation and Human Resources Committee) of the
Board of Directors based on performance and is consistent with market trends. The remuneration of directors and senior officers
of the Company identified as key management is as follows for the respective years ended:
Salary and short-term benefits
Post-retirement benefits
Share-based compensation
December 31,
2016
$
December 31,
2015
$
2,754
25
1,115
3,894
1,897
25
290
2,212
Key management personnel are comprised of the Company’s senior officers and directors. As at December 31, 2016, there is
a $1,528 commitment (2015 – $1,044) relating to the termination of employment of the key management personnel.
Amounts due from (to) related parties are included in the consolidated statements of financial position under trade receivables
and other (trade payables, accruals and other) and are as follows:
Due from related parties
Due to related parties
December 31,
2016
$
December 31,
2015
$
45
(766)
111
(13)
The amounts due from related parties are not secured and are to be settled in cash. As at December 31, 2016 and 2015, the
amounts due from related parties are considered collectible and therefore have not been provided for in the allowance for
doubtful accounts. During the year ended December 31, 2016, $Nil has been recognized in bad debt expenses with respect to
related party transactions (2015 – $Nil).
27
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
The amount due to related parties includes a $724 accrual for net costs associated with vacating one of the industrial facilities
which is currently leased from a related party. This accrual represents the Company’s full remaining contractual obligation under
the lease.
The Company has contractual obligations to related parties in the form of facility leases. As at December 31, 2016, these
contractual obligations and due dates, inclusive of the aforementioned vacated facility are as follows:
$ thousands
Total
2017
2018-2019
2020-2021
Thereafter
Operating lease obligations
26,062
5,535
7,511
6,574
6,442
29.
Financial instruments and financial risk management
The Company, through its financial assets and liabilities, has exposure to the following risks from its use of financial instruments:
credit risk, market risk (consisting of foreign currency exchange risk, interest rate risk and equity price risk), and liquidity risk.
The following analysis provides a measurement of these risks as at December 31, 2016 and 2015.
29.1.
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the
Company. The Company has a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where
appropriate, as a means of mitigating the risk of financial loss from defaults. The creditworthiness of counterparties is determined
using information supplied by independent rating agencies where available and, if not available, the Company uses other publicly
available financial information and its own trading records to rate its major customers. The Company’s exposure and the credit
ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst
approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed regularly.
The Company’s exposure to credit risk on its cash balance is mitigated as these financial assets are held with major financial
institutions with strong credit ratings.
The aging of the Company’s trade receivables is disclosed in Note 7. Contracts in transit and warranty receivables are due from
counterparties who maintain strong credit ratings and the Company has a history of collecting on these accounts. Trade
receivables consist of amounts due from a large number of customers, spread across diverse industries and geographic areas.
On-going credit evaluation is performed on the financial condition of the customers.
29.2.
Market risk
Market risk is the risk from changes in market prices, such as changes in foreign currency exchange rates, interest rates, and
the Company’s stock price which will affect the Company’s earnings as well as the value of the financial instruments held and
cash-settled share based instruments outstanding.
29.2.1. Foreign currency exchange risk and sensitivity analysis
Certain of the Company’s financial instruments are exposed to fluctuations in the U.S. dollar (“USD”). When considered
appropriate, the Company purchases forward contracts for USD as a means of mitigating this risk.
The following table details the Company’s exposure to currency risk at December 31, 2016 and 2015 and a sensitivity analysis
to changes in currency (a 5.0% change in currency was used for obligations that would be retired in 30 days or less and a 10.0%
change in currency for obligations that would be retired within one year). The sensitivity analysis includes USD denominated
monetary items and adjusts their translation at year end for their respective change in the USD. For the respective weakening
of the USD, there would be an equal and opposite impact on the Company’s net earnings.
28
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
December 31, 2016
December 31, 2015
Change in
currency rates
%
Denominated
in CAD
$
Effect on net
earnings year
ended
$
Denominated
in CAD
$
Effect on net
earnings year
ended
$
Cash
Trade payables, accruals and other
Floor plan payable
5.0
5.0
10.0
2,577
(289)
(2,014)
274
94
(11)
(148)
(65)
1,764
(378)
(6,818)
(5,432)
65
(14)
(505)
(454)
Included in selling, general and administrative expenses are net gains recognized due to foreign currency translation for
transactions and balances aggregating $715 for the year ended December 31, 2016 (2015 – losses of $650).
29.2.2.
Interest rate risk and sensitivity analysis
The Company’s financial liabilities are exposed to fluctuations in interest rates with respect to certain of its long-term liabilities,
bank indebtedness and floor plan payable.
The Company manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps when appropriate. Generally,
the Company will raise floor plan financing and/or long-term debt at floating rates. When the Company enters into a floating-to-
fixed interest rate swap, it agrees with a third party to exchange the difference between the fixed and floating contract rates
based on agreed notional amounts.
The following table details the Company’s exposure to interest rate risk as at December 31, 2016 and 2015 and a sensitivity
analysis to an increase of interest rates by 0.5% on net earnings. The sensitivity includes floating rate financial liabilities and
adjusts their effect at period end for a 0.5% increase in interest rates. A decrease of 0.5% would result in an equal and opposite
effect on net earnings. This analysis excludes floating rate financial liabilities for which the Company has hedged its exposure
to interest rate fluctuations though the use of floating-to-fixed interest rate swaps, as well as interest rate swaps themselves.
December 31, 2016
December 31, 2015
Change in
interest
rates
%
Floating rate
financial
liabilities
$
Effect on
net earnings
year ended
$
Floating rate
financial
liabilities
$
Effect on net
earnings
year ended
$
0.5
0.5
0.5
89,964
28,568
-
118,532
328
104
-
432
144,618
20,885
76
165,579
528
76
-
604
Floor plan payable(1)
Term Facility
Other long-term debt
(1) 2016 and 2015 includes liabilities associated with assets held for sale
29
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
29.2.3. Equity price risk and sensitivity analysis
The Company’s financial assets (liabilities) are exposed to fluctuations in its stock price with respect to the total return swaps.
The following table details the Company’s exposure to equity price risk as at December 31, 2016 and 2015, including a sensitivity
analysis measuring the impact on net earnings of a 5% decrease in the Company’s share price. An increase of 5% would result
in an equal and opposite effect on net earnings.
December 31, 2016
December 31, 2015
Total return
swap
financial
asset
$
Effect on net
earnings year
ended
$
Total return
swap
financial
liability
$
Effect on net
earnings year
ended
$
Change in
stock price
%
Total return swaps
5.0
869
(449)
(3,606)
(288)
29.3.
Liquidity risk
The Company’s objective is to have sufficient liquidity to meet its liabilities when due. The Company monitors its cash balance
and cash flows generated from operations as well as available credit facilities to meet its requirements.
The Company has credit facilities with a syndicate of lenders to help finance the general day-to-day cash requirements of its
operations (the “Operating Facility”), to finance its inventory (the “Flooring Facility”), and to finance acquisitions, and real estate
transactions (the “Term Facility”), (collectively the “Syndicated Facility”).
The Syndicated Facility is a revolving facility secured in favour of the syndicate by a general security agreement. During both
2016 and 2015, advances under the Syndicated Facility may be made based on our lender’s prime rate or the US base rate plus
1.0% – 2.5% or based on the banker’s acceptance (“BA”) rate plus 2.0% – 3.5%. The Company paid standby fees of between
0.4% and 0.7% per annum on any undrawn portion of the Syndicated Facility. The Syndicated Facility matures on September
24, 2019, however, it is the Company’s intention to renew this facility prior to its maturity date.
The facilities included in the Syndicated Facility have the following limits:
Operating Facility
Term Facility
Flooring Facility
December 31,
2016
$
December 31,
2015
$
60,000
75,000
125,000
70,000
75,000
125,000
In addition to the Flooring Facility, the Company has additional floor plan facilities of approximately $467,000 as at December
31, 2016 (2015 – $467,000).
30
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
The Company assesses its liquidity based on the expected period in which cash flows will occur. The following tables summarize
the Company’s undiscounted cash flows expected for its financial liabilities as at December 31. The analysis is based on foreign
exchange rates and interest rates in effect at the date of the consolidated statement of financial position and includes both
principal and interest cash flows.
As at December 31, 2016
Trade payables, accruals and other(1)
Floor plan payable(2)
Long-term debt
Obligations under finance leases
Derivative financial liabilities
As at December 31, 2015
Trade payables, accruals and other(1)
Floor plan payable(2)
Long-term debt
Obligations under finance leases
Derivative financial liabilities
Interest and
principal
outstanding
$
46,528
307,665
53,066
987
3,614
411,860
Interest and
principal
outstanding
$
33,466
370,861
49,869
237
9,589
464,022
(1) Trade payables, accruals and other excludes DSUs and SARs which are not financial instruments.
(2) Includes liabilities associated with assets held for sale
2017
$
2018-2019
$
2020-2021
$
Thereafter
$
46,528
307,665
8,206
458
1,468
364,325
-
-
15,794
523
1,750
18,067
-
-
14,987
6
396
15,389
-
-
14,079
-
-
14,079
2016
$
2017-2018
$
2019-2020
$
Thereafter
$
33,466
370,861
6,145
77
4,051
414,600
-
-
14,784
146
4,320
19,250
-
-
14,031
14
1,218
15,263
-
-
14,909
-
-
14,909
The Term Facility included in long-term debt is governed by a syndicate credit agreement which, if not renewed, will mature on
September 24, 2019. The tables presented above assumes the agreement is renewed prior to maturity. In the event that the
Syndicated Facility is not renewed prior to its maturity, the cash outflow for the long-term debt outstanding as at December 31,
2016 would be $42,643 in 2018-2019 and $Nil in subsequent periods (2015 – $41,908 for 2017-2018 and $Nil in subsequent
periods).
29.4.
Fair value of financial instruments carried at amortized cost
The carrying amounts of cash, trade receivables and other, bank indebtedness and trade payables, accruals and other
(excluding DSUs and SARs) approximate their fair values because of the short-term maturities of these items. The carrying
amounts of floor plan payable, long-term debt and obligations under finance leases approximate their fair values as the interest
rates are consistent with market rates for similar debt. Substantially all short- and long-term interest expense pertains to financial
liabilities that are not at FVTPL.
31
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
29.5.
Fair value measurements recognized in the consolidated statement of financial position
The Company’s financial instruments which are measured subsequent to initial recognition at fair value and are categorized as
follows:
Level 1 financial instruments are those whose fair value can be derived from quoted market prices (unadjusted) in active
markets for similar financial assets or liabilities. The Company does not have any Level 1 financial instruments.
Level 2 financial instruments are those whose fair value can be derived from inputs that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The Company’s Level 2 financial instruments
consist of derivative financial liabilities in the form of interest rate swaps and total return swaps, which had a net fair
value of $2,452 at December 31, 2016 (2015 – $8,899).
Level 3 financial instruments are those whose fair value is derived from valuation techniques that include inputs for the
financial asset or liability which are not based on observable market data (unobservable inputs). The Company has no
Level 3 financial instruments.
There were no transfers between Level 1 and 2 during the year 2016 and 2015.
29.6.
Derivative financial instruments and hedges
The Company has long and short-term debt raised at floating interest rates based on the prevailing Bankers’ Acceptance rate
and hedges a portion of this risk by using floating-to-fixed interest rate swaps. Under the interest rate swaps, the Company
hedges interest rate risk by exchanging, at monthly intervals, the difference between fixed contract rates and floating-rate interest
amounts calculated by reference to the agreed notional amounts. The interest rate swaps hedge the Company’s exposure to
interest rate fluctuations on portions of the Term and Flooring Facilities. The accumulated amounts recognized within
accumulated other comprehensive loss will be reversed into net earnings over the remainder of the term of the derivatives.
Future changes in fair value will be recognized within net earnings in the period in which they arise. For the year ended,
December 31, 2016, the Company recognized a gain of $276 (2015 – loss of $50) associated with its interest rate swaps in the
statement of net earnings and a gain of $1,238 (2015 – loss of $1,525) net of tax in other comprehensive income (loss).
Interest rate swaps outstanding for the years ended December 31 are as follows:
December 31,
2016
December 31,
2015
Notional amount
Effective fixed interest rate
Effective floating interest rate
Maturity dates
$ 129,250
4.9%
3.6%
April 2017 – September 2022
$ 134,115
4.8%
3.5%
May 2016 – September 2022
The Company has several total return swaps to hedge the exposure associated with increases in its share value on its
outstanding DSUs and SARs. The Company does not apply hedge accounting to this relationship and as such, gains and losses
arising from marking these derivatives to market are recognized in earnings in the period in which they arise.
As at December 31, 2016, the Company’s total return swaps cover 1,270 thousand of the Company’s underlying common shares
(2015 – 1,270 thousand). For the year ended, December 31, 2016, the Company recognized a gain of $4,475 (2015 – loss of
$3,498) associated with its total return swaps.
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
Derivative financial instruments recognized as (assets) liabilities are as follows:
Current portion – total return swap
Current portion – interest rate swap
Long-term portion – total return swap
Long-term portion – interest rate swap
Losses (gains) on derivative financial instruments are as follows:
Opening net derivative financial liability
(Gain) loss recognized in net earnings
(Gain) loss recognized in other comprehensive income (loss) – net of tax
Tax on (gain) loss recognized in other comprehensive income (loss)
Ending net derivative financial liability
32
December 31,
2016
$
December 31,
2015
$
(290)
1,449
(578)
1,871
2,452
2,130
1,910
1,476
3,383
8,899
December 31,
2016
$
December 31,
2015
$
8,899
(4,751)
(1,238)
(458)
2,452
3,282
3,548
1,525
544
8,899
These accumulated losses will be continuously released to the consolidated statement of net earnings within finance costs and
(gain) loss on derivative financial instruments until full repayment of the underlying debt.
During the years presented and cumulatively to date, changes in counterparty credit risk have not significantly contributed to the
overall changes in the fair value of these derivative financial instruments.
30.
Management of capital
The Company’s objectives when managing capital are:
(a) To maintain a flexible capital structure which optimizes the cost of capital at acceptable risk; and
(b) To maintain capital in a manner which balances the interests of equity and debt holders.
In the management of capital, the Company includes shareholders’ equity, long-term debt and obligations under finance leases
(including current portions thereof), and floor plan payable.
The Company manages its capital structure and makes adjustments due to changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount
of dividends paid to shareholders, purchase shares for cancellation pursuant to normal course issuer bids, issue new shares,
issue new debt, and/or issue new debt to replace existing debt with different characteristics.
The Company monitors debt to equity capitalization. This ratio is a non-IFRS measure which does not have a standardized
meaning prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers.
The Company calculates debt to equity capitalization including and excluding floor plan payable. Debt to equity capitalization
(excluding floor plan payable) is calculated as total long-term debt including obligations under finance leases, (both current and
long-term portions), divided by total equity, (common shares, contributed surplus, accumulated other comprehensive loss and
retained earnings). Debt to equity capitalization (including floor plan payable) includes the balance of floor plan payable in the
calculation of the numerator.
33
Notes to the Consolidated Financial Statements
Years ended December 31, 2016 and 2015
Expressed in thousands of Canadian dollars except per share and per option amounts
The debt to equity ratio target excluding floor plan payable is between 0.2 and 0.4 to 1. As at December 31, 2016 and 2015, the
Company was within its target range for this ratio. The debt to equity ratio target for the Company including floor plan payable is
debt between 2.0 and 3.0 to 1.0. As at December 31, 2016 the Company was outside its target range for this ratio (2015, the
Company was within its target range for this ratio).
The components of debt to equity ratios are as follows:
Current portion of long-term debt
Current portion of obligations under finance leases
Long-term debt
Obligations under finance leases
Total debt excluding floor plan payable
Floor plan payable(1)
Total debt including floor plan payable
Shareholders’ equity
Debt equity ratios
- excluding floor plan payable
- including floor plan payable
(1) 2016 and 2015 Includes liabilities associated with assets held for sale
December 31,
2016
$
December 31,
2015
$
6,825
440
40,778
521
48,564
297,667
346,231
4,852
71
40,080
154
45,157
358,130
403,287
177,181
169,758
0.27
1.95
0.27
2.38
Pursuant to agreements with lenders, the Company is also required to monitor and report certain non-IFRS measures on a
quarterly basis. These measures and the applicable compliance ranges are as follows:
Fixed charge coverage of at least
Debt to tangible net worth less than
Current ratio of at least
December 31,
2016
December 31,
2015
1.15-1.20:1
4.00-5.00:1
1.15-1.20:1
1.20-1.50:1
4.00-5.00:1
1.15-1.20:1
Each lender has its own definition of which account balances are to be included in these computations. As at December 31,
2016 and 2015, the Company was in compliance with all externally imposed capital requirements.
31.
Economic dependence
The Company is a retail dealer of CNH Industrial N.V. (“CNH”) equipment, and is therefore party to dealership and distribution
contracts with various affiliates of CNH. These contracts grant the Company the right to act as an authorized dealer of CNH
equipment brands including Case IH agriculture, Case Construction and New Holland. This also entitles the Company to use
certain floor plan facilities as provided by CNH-affiliated entities. These dealership contracts, as well as the associated floor
plan facilities, can be cancelled by CNH if the Company does not observe certain established guidelines and covenants. This
is a common provision in the industry in which the Company operates.
32.
Subsequent event
On February 28, 2017, the Company disposed of inventory that was classified as held for sale at December 31, 2016, in the
amount of $2,501, along with floor plan associated with the inventory of $1,606 that was classified as a current liability at
December 31, 2016.
ROCKY
MOUNTAIN
DEALERSHIPS
1
ROCKY MOUNTAIN DEALERSHIPS INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2016
This Management’s Discussion and Analysis (“MD&A”) was prepared as of March 14, 2017, and is provided to assist readers
in understanding Rocky Mountain Dealerships Inc.’s financial performance for the year ended December 31, 2016. It should
be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2016 and 2015
together with the notes thereto and the auditor’s report thereon. The results reported herein have been derived from
consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board and are presented in Canadian dollars.
Unless the context otherwise requires, use in this MD&A of “Rocky”, “the Company”, “we”, “us”, or “our” means Rocky
Mountain Dealerships Inc. and its wholly-owned subsidiaries including Rocky Mountain Equipment Canada Ltd. (“RME
Canada”) and Rocky Mountain Dealer Acquisition Corp. (“RMDAC”).
Rocky’s common shares trade on the Toronto Stock Exchange under the symbol ‘RME’. Additional information relating to
Rocky, including the Company’s Annual Information Form, dated March 14, 2017 (“AIF”), is available on the System for
Electronic Document Analysis and Retrieval (“SEDAR”) website at www.sedar.com.
This MD&A contains forward-looking statements (“FLS”). Please see the section “Caution Regarding Forward-Looking
Information and Statements” for a discussion of the risks, uncertainties and assumptions relating to those statements.
Unless otherwise indicated, changes in financial results for the quarter and year ended December 31, 2016, have been
calculated using the same periods in the prior year as comparative figures, whereas changes in our financial position as at
December 31, 2016, are calculated using December 31, 2015 as the comparative.
SUMMARY OF THE YEAR ENDED DECEMBER 31, 2016
Adjusted Diluted Earnings per Share(1) increased by $0.12 or 16.9% to $0.83.
Adjusted EBITDA(1) increased by $3.0 million or 10.5% to $31.6 million.
Operating SG&A(1) declined by $11.4 million to $89.2 million (9.6% of sales, down from 10.3% in 2015)
Equipment inventory declined by $57.1 million to $403.0 million, surpassing our targeted reduction for the year.
Sales declined by 4.6% to $930.4 million.
Gross profit declined by 6.0% to $133.4 million (14.3% of sales, down from 14.6% in 2015).
Generated Operating Cash Flow before Changes in Floor Plan(1) of $87.6 million, down from $92.2 million in 2015.
Amalgamated industrial distribution facilities in Calgary and Red Deer, Alberta into existing agriculture facilities,
incurring one-time charges of $3.6 million.
Completed the construction of our new, $10.3 million state-of-the-art facility in Yorkton, Saskatchewan.
SUMMARY OF THE QUARTER ENDED DECEMBER 31, 2016
Inventory declined by $2.9 million to $442.7 million.
Adjusted Diluted Earnings per Share(1) declined by $0.02 or 8.0% to $0.23.
Adjusted EBITDA(1) declined by $0.8 million or 8.8% to $8.2 million.
Operating SG&A(1) declined by $2.2 million to $23.0 million (8.1% of sales, down from 8.8% in 2015)
Generated Operating Cash Flow before Changes in Floor Plan(1) of $14.5 million, up from $6.8 million in 2015.
Sales of $285.7 million were in line with the fourth quarter of 2015.
Gross profit declined by 9.1% to $34.1 million (11.9% of sales, down from 13.1% in 2015).
(1) – See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below.
COMPANY OVERVIEW
Headquartered in Calgary, Alberta, Rocky is one of Canada’s largest agriculture equipment dealers with a network of full-
service equipment stores across the Canadian Prairie Provinces.
Rocky is Canada’s largest retail dealer of CNH Industrial N.V. (“CNH”) equipment, which includes Case IH, New Holland,
and Case Construction. We are also a major independent dealer of equipment from a number of other short-line agriculture
and industrial manufacturers.
We offer our customers a one-stop solution for their equipment needs through new and used equipment sales, parts sales,
repairs and maintenance services and third-party equipment financing and insurance services. In addition, we provide or
arrange other ancillary services such as GPS signal subscriptions and geomatics services.
ROCKY
MOUNTAIN
DEALERSHIPS
2
The Company’s operations in Alberta, Saskatchewan and Manitoba are conducted through RME Canada under the name
Rocky Mountain Equipment.
MARKET FUNDAMENTALS AND OUTLOOK
Our agriculture equipment sales are made primarily to grain, pulse and oilseed crop farmers in Western Canada. Demand
for our equipment is largely driven by equipment and agricultural commodity prices, input costs and weather. Changes in
these demand drivers can cause our customers’ buying patterns to shift. Equipment utilization rates, by contrast, are
comparatively less volatile as agriculture equipment tends to incur hours in the field regardless of weather or economic
conditions. Farmers are required to work their fields each year, however circumstances may exist whereby farmers opt for
used equipment in lieu of new equipment, or they may elect to maintain rather than replace their fleets. Our broad range of
product and service offerings enable us to respond to these shifts in buying patterns and provide a measure of stability within
our financial results.
The Canadian Prairies were seeded corner-to-corner during 2016. Ideal growing conditions throughout the late spring and
summer months improved yields relative to a year ago and, as a result, Agriculture and Agri-Food Canada is calling for a
7.5% increase in overall production of principal field crops in 2016, resulting in a level of production second only to 2013’s
bumper crop.
Rain and early snowfalls did, however, prolong the harvest in certain regions. Once harvesting activities had ceased for the
winter, approximately 90 – 95% of the crop had been combined, with the remainder in swath or left standing to be picked-up
or harvested in the spring. The grade of the harvested crop is expected to deteriorate to some extent as a result. Despite
that, and given the overall yields and healthy commodity prices for key Western Canadian crops, farmers are expected to
generate yet another year of strong earnings and cash flows and continue to build their balance sheet strength heading into
2017.
In recent years, agriculture equipment manufacturers have pulled back their production levels in response to changes in
market demand. As our manufacturers curtailed production and drew down existing inventories, we, and our customers,
experienced reduced lead-times on new equipment deliveries. With this incremental supply now largely absorbed by the
market, we are beginning to see lead-times grow on certain products during peak demand times such as the third and fourth
quarters, an indication that market supply and demand have largely realigned. While we do not expect these longer lead-
times to have a material impact on our total sales activity ultimately realized, they have and are likely to continue to shift
sales activity between quarters.
Agriculture, as a whole, exhibits cyclical surges in demand and profitability driven by the aforementioned macroeconomic
factors, as well as other factors that can impact our industry. While weather continues to have a significant influence on
overall demand, advances made in farming practices, seed technology and application techniques, have helped to mitigate
this exposure to some extent and reinforce the agriculture industry fundamentals.
Our underlying business fundamentals remain strong. We have distribution rights for some of the world’s leading equipment
brands over a vast sales territory. Furthermore, significant barriers to entry exist in this market, which help us maintain our
position as an exclusive supplier of these brands. Our installed base and customer relationships create an annuity of
equipment sales and product support revenue, which help drive dependable earnings and cash flow.
ROCKY
MOUNTAIN
DEALERSHIPS
3
SELECTED ANNUAL FINANCIAL INFORMATION
$ thousands, except per share amounts
2016
2015
2014
Sales
Cost of sales
Gross profit
Selling, general and administrative
(Gain) loss on derivative financial instruments
Restructuring charges
Impairment loss on vacant land
Earnings before finance costs and income taxes
Finance costs
Earnings before income taxes
Income taxes
Net earnings
Earnings per share
Basic
Diluted
Dividends per share
Book value per share – diluted (as at December 31)
Adjusted Diluted Earnings per Share(1)
Adjusted EBITDA(1)
Operating SG&A(1)
Operating Cash Flow before Changes in Floor Plan(1)
930,435
797,028
133,407
100.0%
85.7%
14.3%
97,970
(4,751)
3,564
1,360
35,264
14,343
20,921
5,955
14,966
0.77
0.77
0.460
9.14
0.83
31,621
89,238
87,626
10.5%
(0.5%)
0.4%
0.1%
3.8%
1.6%
2.2%
0.6%
1.6%
3.4%
9.6%
9.4%
975,456
833,475
141,981
108,228
3,548
-
-
30,205
14,807
15,398
4,105
11,293
0.58
0.58
0.460
8.78
0.71
28,622
100,612
92,193
100.0%
85.4%
14.6%
11.1%
0.4%
0.0%
0.0%
3.1%
1.5%
1.6%
0.4%
1.2%
2.9%
10.3%
9.5%
965,407
819,785
145,622
105,688
68
-
-
39,866
13,665
26,201
7,276
18,925
0.98
0.98
0.445
8.72
0.97
35,303
98,836
(22,993)
100.0%
84.9%
15.1%
10.9%
0.1%
0.0%
0.0%
4.1%
1.4%
2.7%
0.7%
2.0%
3.7%
10.2%
(2.4%)
(1) – See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below
Sales and Gross Profit
The Company uses the terms “acquired” versus “same store” in assessing its revenue. Each acquired store has an average
historical level of sales prior to being acquired by Rocky. When the Company discusses “acquired” results, it is referring to
these average historical levels. This base level of activity continues to be classified as acquired until such time as the
acquired store has been included in our dealership network for twelve months after which point, all activity is classified as
same store.
$ thousands
2016
2015
Total
Sales
New equipment
Used equipment
Parts
Service
Other
Total sales
Gross profit
Gross margin
409,872
375,273
108,807
31,811
4,672
930,435
133,407
14.3%
449,997
377,482
107,509
35,865
4,603
975,456
141,981
14.6%
(40,125)
(2,209)
1,298
(4,054)
69
(45,021)
(8,574)
(0.3%)
Change
Acquired
Same Store
5,074
1,668
993
225
-
7,960
(45,199)
(3,877)
305
(4,279)
69
(52,981)
For the year ended December 31, 2016, total sales decreased by $45.0 million or 4.6% as compared to the same period in
2015. Excluding acquired sales of $8.0 million, total sales declined by $53.0 million or 5.4%. The decline in sales levels
reflects the overall contraction in the Canadian agriculture equipment market during 2016, which experienced reductions in
tractor and combine deliveries of 8.6% and 8.0%, respectively, according to the Association of Equipment Manufacturers.
The reduction also reflects the impact of our recent facility consolidations as our sales functions worked to digest the changes.
Same store equipment sales declined by $49.1 million or 5.9% year-over-year. With the rebalancing of equipment supply
throughout the industry, we are beginning to experience longer lead-times during periods of peak demand. As at December
31, 2016, these longer lead-times have increased our backlog of presold combine harvesters and high horsepower tractors
as compared to 2015. We expect to deliver these presold units during the first half of 2017. As a result, our new equipment
sales reported during 2016 declined.
Our sales efforts throughout 2016 included targeting used equipment inventory as well as reducing new equipment procured
for, and sold out of stock. These efforts contributed positively to our used equipment sales during 2016, neutralizing the
ROCKY
MOUNTAIN
DEALERSHIPS
4
impact of reduced overall market demand. The successful execution of these strategies allowed Rocky to surpass its
inventory reduction target, drawing inventory down by $57.0 million or 11.4% during 2016.
For the year ended December 31, 2016, same store product support sales declined by $4.0 million, primarily on lower service
revenues. As part of our cost reduction measures, we downsized our technician headcount during 2016, focusing on areas
of underperformance. The reduction in headcount did have a dilutive effect on our service revenues for the year. Product
support sales for the year ended December 31, 2016, also included $1.2 million of acquired sales.
Certain product support activity is performed for the benefit of other departments within the Company. This activity is
excluded from reported parts and service revenues. Management assesses overall product support activity to ensure that
the resources deployed are adequate in light of total activity. Total parts and service activity is reconciled to our reported
revenues for the respective departments as follows:
$ thousands
Parts activity
Total activity
Internal activity eliminated
Reported revenues
Service activity
Total activity
Internal activity eliminated
Reported revenues
2016
2015
121,782
(12,975)
108,807
49,414
(17,603)
31,811
121,690
(14,181)
107,509
57,451
(21,586)
35,865
Gross profit for the year ended December 31, 2016, decreased by $8.6 million or 6.0%, due predominantly to reduced
revenues. Gross margin for the year ended December 31, 2016, decreased by 0.3%, as we continued to focus our sales
efforts on inventory reduction and the deleveraging of our statement of financial position. This sales activity resulted in some
lower margin transactions. The effect of this margin reduction was most pronounced during the fourth quarter of 2016.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses include sales and marketing expenses, sales commissions, payroll
and related benefit costs, insurance expenses, professional fees, rent and other facility costs and administration overhead
including depreciation of property and equipment and amortization of intangible assets. Many of these costs are fixed. When
we acquire new stores, these costs typically increase as we incur additional expenditures related to the direct selling, general
and administrative functions. Over time, as these acquisitions are amalgamated into the business, the costs generally
decrease as we incorporate their finance and other administrative functions into our centralized corporate resources.
Similarly, our costs will increase as we add direct customer-related resources such as equipment specialists, but will
normalize relative to sales volumes as those positions drive incremental revenue and increase our customer base.
Fixed costs are subject to price increases, driven primarily by real estate and labour demand in Western Canada. Variable
costs included within SG&A expenses consist primarily of sales commissions.
The Company assesses its Operating SG&A relative to total sales in analyzing its results (see the definition and reconciliation
of Operating SG&A in the “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below). The
Company targets a sub-10% Operating SG&A as a percentage of sales on an annual basis.
For the year ended December 31, 2016, Operating SG&A decreased by $11.4 million or 11.3% over 2015. The reduction in
Operating SG&A reflects enhancement to the efficiency of our operating cost structure through a combination of facility and
distribution consolidation as well as other cost containment measures aimed at realigning our cost structure with current
market conditions. The decrease during 2016 comes despite an additional $1.9 million of expenses associated with stores
acquired during 2015.
These cost reductions successfully realigned our cost structure with current industry demand, yielding an Operating SG&A
of 9.6% of sales, down from 10.3% in 2015 and within our targeted range.
Other Expense (Income)
For the year ended December 31, 2016, the Company recognized a net gain on our derivative financial instruments of $4.8
million (2015 – net loss of $3.5 million) and an impairment loss on vacant land of $1.4 million (2015 – $Nil). The gains
(losses) associated with the derivatives arose primarily as a result of fluctuations in the Company’s common share price and
the associated impact on its total return swap positions. The impairment loss on vacant land pertains to certain redundant
real estate assets and reflects our assessment of the value of Western Canadian real estate in the current economic
environment.
ROCKY
MOUNTAIN
DEALERSHIPS
5
Pursuant to the amalgamation of our industrial distribution network, we recognized a $3.6 million non-recurring charge
associated with vacating our Calgary and Red Deer industrial facilities. Included in this charge are the remaining contractual
lease payments on these facilities amounting to $2.2 million. The Company continues to seek subtenants for these properties
for the duration of the leases to offset these accrued costs. A portion of the accrued contractual lease payments are due to
a related party in their capacity as a landlord (see the “Related Party Transactions” section below for additional details).
Finance Costs
During the year ended December 31, 2016, finance costs declined by approximately $0.5 million. Strong cash generation
resulted in a decrease in the average balance of interest-bearing debt outstanding, decreasing overall finance costs year-
over-year. The increase in the Company’s hedged position with respect to its short-term floating-rate debt did, however,
increase our effective cost of funds and serve to partially offset the aforementioned interest savings. We currently have
37.2% of our floor plan hedged and 40.4% of our long term debt (2015 – 30.8% and 53.7%, respectively).
Net Earnings
Net earnings for the year ended December 31, 2016, increased by $3.7 million (an increase of 32.5% or $0.19 per diluted
share over 2015). Adjusted Diluted Earnings per Share increased by $0.12 to $0.83 over the same period. See the definition
and reconciliation of Adjusted Diluted Earnings per Share in the “Non-IFRS Measures” and “Reconciliation of Non-IFRS
Measures to IFRS” sections below. During the year, the reduction in gross profit was more than offset by reduced Operating
SG&A resulting in increased Adjusted Diluted Earnings per Share. An increase in our effective tax rate during 2016
negatively impacted net earnings by $0.4 million.
SUMMARY OF QUARTERLY RESULTS
$ thousands, except per
share amounts
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Q4
2015
Q3
2015
Q2
2015
Q1
2015
Q4
2014
Sales
Gross profit
Gross margin
285,749
34,116
11.9%
222,647
36,861
16.6%
232,575
34,147
14.7%
189,464
28,283
14.9%
285,587
37,538
13.1%
255,986
40,042
15.6%
213,460
32,941
15.4%
220,423
31,460
14.3%
294,092
39,469
13.4%
SG&A
Other (income) expense
Finance costs
Income taxes
Net earnings
Diluted earnings per share
25,205
(605)
3,346
1,466
4,704
0.24
23,855
(236)
3,700
2,910
6,632
0.34
24,693
762
3,751
1,575
3,366
0.17
24,217
252
3,546
4
264
0.01
27,175
274
3,813
1,696
4,580
0.24
26,896
3,438
3,795
1,561
4,352
0.23
26,960
(597)
3,830
719
2,029
0.10
27,197
433
3,369
129
332
0.02
27,471
77
3,480
2,220
6,221
0.32
Fluctuating seasonal revenue cycles are common in the agriculture industry as a result of weather conditions, the timing of
crop receipts and farming cycles and the timing of equipment deliveries from manufacturers. As a result, our financial results
typically vary between quarters. The first quarter is generally the weakest due to the lack of agriculture activity and winter
shutdowns, while the fourth quarter is the strongest due to the post-harvest purchases that are typical in the agriculture
sector.
Seeding activity typically commences between the latter part of the first quarter and the beginning part of the second quarter.
Conversely, harvest typically begins towards the middle of the third quarter, and continues through into the fourth quarter.
Our financial results vary between quarters accordingly.
Over time, we expect second and third quarter sales activity to increase relative to the fourth quarter as our increased
installed base drives more parts and service activity and our customers decide to trade their equipment earlier in the year to
take advantage of advancements in technology before the harvest season.
Weather conditions, such as a late spring or harvest, excess moisture or drought conditions may also positively or negatively
impact sales activity and profitability for any given period.
ROCKY
MOUNTAIN
DEALERSHIPS
STATEMENT OF FINANCIAL POSITION – SUMMARY
$ thousands
Assets
Inventory
Other current assets
Total current assets
Property and equipment
Deferred tax asset
Derivative financial assets
Intangible assets
Goodwill
Total assets
Liabilities and equity
Floor plan payable
Other current liabilities
Total current liabilities
Long-term debt
Obligations under finance leases
Derivative financial liabilities
Total liabilities
Shareholders’ equity
Total liabilities and equity
6
December 31,
2016
December 31,
2015
December 31,
2014
442,742
65,532
508,274
48,586
1,210
578
507
18,776
577,931
296,061
61,519
357,580
40,778
521
1,871
400,750
177,181
577,931
499,760
63,824
563,584
39,888
2,367
-
671
18,802
625,312
356,568
53,893
410,461
40,080
154
4,859
455,554
169,758
625,312
526,003
69,049
595,052
32,886
1,186
-
-
14,692
643,816
382,081
57,261
439,342
32,776
9
3,282
475,409
168,407
643,816
Current assets at December 31, 2016, consisted primarily of new and used equipment inventory. The Company’s new and
used equipment inventory is comprised predominantly of agriculture equipment. Rocky has a diverse customer base for its
agriculture equipment and strives to carry an appropriate mix of both new and used equipment to best serve our customers.
Typically, our agriculture customers trade their used equipment in when making equipment purchases. Industrial equipment,
by contrast, is generally utilized to the end of its useful life by one owner. Trades of used industrial equipment are less
common and as such, the Company carries less used industrial equipment relative to new. The composition of the
Company’s equipment inventory is as follows:
$ thousands
New agriculture equipment
New industrial equipment
Total new equipment
Used agriculture equipment
Used industrial equipment
Total used equipment
Total equipment inventory
December 31,
2016
December 31,
2015
December 31,
2014
77,642
35,875
113,517
283,279
6,206
289,485
113,182
59,153
172,335
282,868
4,916
287,784
159,620
54,065
213,685
267,922
5,384
273,306
403,002
460,119
486,991
During the year ended December 31, 2016, total equipment inventory declined by $57.1 million or 12.4%, surpassing our
targeted reduction for the year of $50.0 million. The reduction in overall equipment inventory reflects a two-fold strategy
whereby presell arrangements comprise a larger proportion of our new sales business, reducing equipment procured for
inventory as well as sales efforts focused on turning used equipment more frequently. As trades are often taken on the sale
of used equipment as well as new, some proportion of the used equipment inventory reduction due to sale is replenished via
the trade. Although the overall used equipment inventory level remained relatively flat year-over-year, the inventory turnover
has improved with the incremental used sales activity.
Having realigned our overall investment in inventory with current market demand, our focus heading into 2017 will be to
continue to optimize our inventory mix. Through stringent procurement procedures and targeted sales efforts, we aim to
continue our recent trend of improving inventory turns.
Current liabilities are comprised predominantly of floor plan payable for financed equipment inventory of approximately
$296.1 million as at December 31, 2016 (December 31, 2015 – $356.6 million). As a percentage of equipment inventory,
floor plan payable was 73.5% as at December 31, 2016, down from 77.5% at December 31, 2015. The reduction in floor
ROCKY
MOUNTAIN
DEALERSHIPS
7
plan payable as a percentage of equipment inventory reflects cash generation for the year, which was used to pay down
floor plan and reduce the associated carrying cost.
LIQUIDITY AND CAPITAL RESOURCES
We assess liquidity in terms of our ability to generate sufficient cash flow, along with other sources of liquidity including cash
and borrowings, to fund our operations and growth in operations. Net cash flow is affected by the following items:
Operating activities, including, the levels of accounts receivable, inventory, accounts payable and floor plan payable;
Financing activities, including bank credit facilities, long-term debt and other capital market activities; and,
Investing activities, including capital expenditures, dispositions of fixed assets and acquisitions of complementary
businesses.
Summary of Cash Inflows (Outflows)
$ thousands
Net earnings
Effect of non-cash items in net earnings and changes in working capital
Cash flows from operating activities
Cash flows from financing activities
Cash flows from investing activities
Net increase (decrease) in cash
Cash, beginning of period
Cash, end of period
2016
2015
2014
14,966
12,197
27,163
(6,694)
(8,617)
11,852
16,690
28,542
11,293
24,167
35,460
(12,788)
(28,934)
(6,262)
22,952
16,690
18,925
(2,201)
16,724
(17,589)
(10,905)
(11,770)
34,722
22,952
Operating Cash Flow before Changes in Floor Plan (1)
87,626
92,193
(22,993)
(1) – See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below
Cash Flows from Operating Activities
The Company assesses its Operating Cash Flow before Changes in Floor Plan in analyzing its cash flows from operating
activities. See the definition and reconciliation of Operating Cash Flow before Changes in Floor Plan in the “Non-IFRS
Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below.
Rocky is eligible to finance its equipment inventory using its various floor plan facilities. Floor plan facilities are asset-backed
lending arrangements whereby each draw is associated with a specific piece of equipment. The Company is under no
obligation to finance any of its equipment inventory and, as a general rule, financed units can be paid out for a period of time
and refinanced at a later date. Adjusting cash flows from operating activities for changes in the balance of floor plan payable
allows management to isolate and analyze cash flows from operating activities, prior to any sources or uses of cash
associated with equipment financing decisions.
For the year ended December 31, 2016, Operating Cash Flow before Changes in Floor Plan decreased by $4.6 million or
5.0% as compared to the same period last year. As we rationalized our inventory levels over the past two years and realized
the associated cash inflows, our cash investment in our inventory declined and the rate at which we were able to generate
cash inflows moderated accordingly.
A period of strong sales leading up to 2015 also resulted in an elevated level of accounts receivable carried into 2015 which
were realized as operating cash inflows during the comparative period.
Cash flows from operating activities for the year ended December 31, 2016, declined by $8.3 million to $27.2 million, down
from $35.5 million in 2015. The decrease during the quarter is primarily the result of the aforementioned cash flows
associated with changes in inventory and receivables in the comparative period, plus $3.7 million of additional cash outflows
to floor plan providers. Strong cash flows enabled the Company to apply cash generated to its floor plan payables, reducing
floor plan as a percentage of equipment inventory to 73.5% at December 31, 2016 from 77.5% a year ago, and in so doing,
reduce the associated interest burden.
Cash Flows from Financing Activities
Cash flows from financing activities pertained primarily to debt and dividend payments as well as net proceeds associated
with the financing of acquisitions and real estate assets. For the year ended December 31, 2016, cash outflows from
financing activities declined by $6.1 million to $6.7 million, down from $12.8 million in 2015. During 2015, the Company
restructured its Syndicated Facility, extending the amortization period of the Term Facility and providing an interest-only
period thereon which extended through the first quarter of 2016. As a result, the repayments of long-term debt during 2016
ROCKY
MOUNTAIN
DEALERSHIPS
8
include only three of the now reduced quarterly payments. As part of the 2015 restructuring, the Company also extinguished
its former Fleet Facility with a draw on the Operating Facility, increasing cash outflows during the comparative period by $5.1
million.
Debt and dividend payments during 2016 were offset by a $7.8 million draw on the Term Facility used to finance our recently
constructed facility in Yorkton, Saskatchewan. During 2015, cash flows from financing activities also included the settlement
of debt assumed pursuant to business combinations, net of draws on the Term Facility to fund the acquisition purchase
consideration.
Cash Flows from Investing Activities
Cash utilized for investing activities was the result of our normal capital expenditures, investment in new facility construction
and the net cash consideration paid pursuant to business combinations, offset by proceeds on the disposition of property
and equipment. During 2016, cash outflows from investing activities decreased by $20.3 million to $8.6 million, down from
$28.9 million in 2015. The decrease during the year pertained largely to the purchase consideration paid on the acquisitions
affected during 2015, inclusive of $7.1 million of bank indebtedness assumed.
ADEQUACY OF CAPITAL RESOURCES
We use operating cash flows to finance the purchase of inventory, service our debt requirements, pay dividends, and fund
our operating activities, including working capital, both operating and finance leases and floor plan payable. Our ability to
service our debt and distribute dividends to shareholders will depend upon our ability to generate cash, which depends on
our future operating performance, general economic conditions, availability of adequate credit facilities, compliance with debt
covenants, as well as other factors, some of which are beyond our control. Based on our current operational performance,
we believe that cash flows from operations, along with existing credit facilities, will provide for our capital needs.
Finance Facilities
The Company has a credit facility with a syndicate of lenders (the “Syndicated Facility”). The Syndicated Facility is a revolving
facility, secured in favour of the syndicate by a general security agreement. Advances under the Syndicated Facility may be
made based on our lenders’ prime rate or the U.S. base rate plus 1.0% – 2.5% or based on the banker’s acceptance (“BA”)
rate plus 2.0% – 3.5%. The Company pays standby fees of between 0.4% – 0.7% per annum on any undrawn portion of the
Syndicated Facility. The standby fees and premiums on base interest rates within the respective ranges are determined
based on the Company’s ratio of debt to tangible net worth. During 2016, the Syndicated Facility was amended, extending
the maturity date to September 24, 2019.
The Syndicated Facility consists of:
The “Operating Facility” – which may be utilized to advance up to the lesser of the established borrowing base and
$60.0 million. The borrowing base is supported by otherwise unencumbered assets including certain accounts
receivable, inventory and items of property and equipment, less priority payables. This facility may be used to
finance general corporate operating requirements.
The “Flooring Facility” – which may be utilized to finance up to 75% of the value of eligible equipment inventory to a
maximum of $125.0 million. Draws against the Flooring Facility are repayable over a term of 28 months, however
they become due in full upon the sale of the associated equipment.
The “Term Facility” – which may be utilized to finance up to 60% of the cost of acquisitions and 75% of the cost of
real estate to a maximum of $75.0 million. Draws are repayable in quarterly installments with acquisition and real
estate related draws amortized over periods of 7 and 15 years, respectively. The initial balance on the Term Facility
had a seven year repayment period which commenced in April of 2016.
Including the syndicated Flooring Facility, we have total floor plan facilities of approximately $592.0 million (inclusive of
seasonal increases) from various lending institutions for the purpose of financing equipment inventory. These facilities are
made available to Rocky by the equipment manufacturers’ captive finance companies or divisions (such as CNH Industrial
Capital Canada Ltd.), as well as by banks and specialty lenders. The Company also has an additional $75.0 million of floor
plan availability with its OEMs, to be made available to the Company if required as a result of business combinations.
ROCKY
MOUNTAIN
DEALERSHIPS
9
In addition to our available cash balance of $28.5 million as at December 31, 2016, we have approximately $380.9 million
available on our various credit facilities.
$ millions
Facility limit
Amount drawn
Available
Operating Facility
Term Facility
Various floor plan facilities(1)
OEM floor plan facilities
Syndicated Flooring Facility
Other floor plan facilities
Total
60.0
75.0
205.0
125.0
262.0
727.0
-
47.8
101.2
64.0
133.1
346.1
60.0
27.2
103.8
61.0
128.9
380.9
(1) – Inclusive of floor plan payable classified as liabilities associated with assets held for sale and presented on a gross basis before deferred financing costs.
In addition to the facility limits, the availability of funds under these credit facilities may be limited by the adequacy of the
underlying assets available to securitize a proposed draw and/or otherwise constrained by customary negative covenants.
These restrictions are not expected to affect the Company’s access to required capital in the foreseeable future. The existing
credit facilities are considered sufficient and appropriate for the Company’s capital requirements.
During 2016, the net debt component of our capital structure, declined by $8.4 million or 29.7%. The net debt component of
our capital structure as at December 31, was comprised of the following:
$ thousands
Long-term debt (including current portion)
Obligations under finance leases (including current portion)
Debt component of capital structure
Cash (net of bank indebtedness)
Net debt component of capital structure
Financial Covenants
2016
2015
47,603
961
48,564
(28,542)
20,022
44,932
225
45,157
(16,690)
28,467
Pursuant to agreements with lenders, the Company is required to monitor and report certain financial ratios on a quarterly
basis. The Company’s financial covenants and applicable compliance ranges are as follows:
Fixed charge coverage of at least
Debt to tangible net worth less than
Current ratio of at least
December 31,
2016
December 31,
2015
1.15-1.20:1
4.00-5.00:1
1.15-1.20:1
1.20-1.50:1
4.00-5.00:1
1.15-1.20:1
Each lender has its own definition of inclusions and exclusions within these computations. Failing to meet these covenants
would constitute a default event which may result in, among other restrictions and remedies, the associated debt becoming
due and restrictions being placed on the Company’s ability to draw on its facilities or make distributions to shareholders.
As at December 31, 2016 and 2015, the Company was in compliance with all externally imposed capital requirements.
The Company’s continued compliance with its financial covenants is dependent on various factors which influence our
financial results including, but not limited to, overall demand for our products and services and the timing of that demand
driven by weather and other factors. As agriculture equipment demand remains at the low end of the cycle and our industrial
results continue to be impacted by considerable economic headwinds in Alberta, there is a risk that the Company’s financial
results and/or position may weaken and that we may not comply with our financial covenants, most notably, our fixed charge
coverage ratios.
ROCKY
MOUNTAIN
DEALERSHIPS
Derivative Financial Instruments
10
The Company utilizes derivative financial instruments to hedge its exposure to changes in interest rates and fluctuations in
the valuation of its common shares. We do not use derivatives to speculate, but rather as a risk management tool. The
Company’s portfolio of derivative financial instruments consists of interest rate and total return swaps.
(Gains) losses recognized on derivative financial instruments are as follows:
$ thousands
(Gain) loss recognized in net earnings
(Gain) loss recognized in accumulated other comprehensive loss – net of tax
(Gain) loss recognized in deferred tax position
Interest Rate Swaps
2016
2015
(4,751)
(1,238)
(458)
3,548
1,525
544
The Company has several interest rate swaps related to portions of its Term Facility and various floor plan facilities
(collectively, the “Hedged Facilities”).
The Hedged Facilities each bear interest at a floating rate based on the prevailing BA rate. The interest rate swaps hedge
our exposure to fluctuations in the BA rate. The Company’s hedged and at risk positions are summarized as follows:
Maturity
Type
December 31, 2016
December 31, 2015
Effective
rate
Amount
($ thousands)
Effective
Rate
Amount
($ thousands)
Hedged position
Current debt
Floor plan facility #1
Floor plan facility #2
Floor plan facility #3
August, 2018
September, 2020
September, 2022
Non-amortizing
Non-amortizing
Non-amortizing
Long-term debt
Term Facility #1(1)
Term Facility #2(2)
May, 2016
April, 2017
Amortizing
Amortizing
Total
Position at risk – floating-rate debt
Position hedged
(1) – Formerly the Acquisition Facility.
(2) – Formerly the Debenture Repayment Facility.
4.2%
5.1%
5.4%
5.0%
-
4.1%
4.1%
4.9%
25,000
35,000
50,000
110,000
-
19,250
19,250
129,250
247,783
52.2%
4.2%
5.1%
5.4%
5.0%
3.5%
4.1%
4.0%
4.8%
25,000
35,000
50,000
110,000
1,365
22,750
24,115
134,115
299,694
44.8%
At inception, these instruments were designated as hedges and were accounted for using hedge accounting. Subsequently,
the interest rate swaps on the Term Facility failed their effectiveness testing and as such, hedge accounting was
discontinued. The $21 thousand accumulated loss associated with the Term Facility #2 swap which has been recognized
within accumulated other comprehensive loss will be reversed into net earnings over the remainder of the term of the
derivative. Future changes in the fair value of this derivative will be recognized within net earnings in the period in which
they arise.
The interest rate swaps on the various floor plan facilities continue to remain effective and as such, we continue to account
for these cash flow hedges using hedge accounting. If we sell or terminate a hedged item, or it matures before the related
hedging instrument is terminated, we recognize in income any realized or unrealized gain or loss on the derivative instrument.
In accounting for these cash flow hedges, changes in fair value of the swaps are included in the consolidated statement of
other comprehensive income to the extent the hedge continues to be effective. The related other comprehensive amounts
are allocated to net earnings in the same period in which the hedged item affects net earnings. To the extent that changes
in the fair value of these derivatives are not completely offset by changes in the fair value of the hedged items, the ineffective
portions of the hedging relationships are recorded immediately in net earnings.
For the year ended December 31, 2016, we recognized in net earnings, a net mark-to-market gain of $0.3 million on our
interest rate swaps (2015 – $0.1 million).
ROCKY
MOUNTAIN
DEALERSHIPS
Total Return Swaps
11
The Company has several total return swap arrangements to hedge the exposure associated with increases in its share
price on its outstanding Director Share Units (“DSUs”) and Share Appreciation Rights (“SARs”). If not renewed by the
Company, these arrangements mature between April 2017 and July 2018. It is the Company’s intention to maintain a hedged
position which matches the terms associated with the DSUs and SARs. The hedging relationship with the SARs is ineffective
to the extent that the Company’s share price falls below the strike price of the SARs.
During the vesting period, the accounting treatment of the SARs creates an inherent discrepancy from the total return swaps
in terms of the timing of the impact on net earnings. Changes in the Company’s share price are factored into the Black-
Scholes option pricing model to determine the fair value of the SARs at each reporting date. This fair value will then be
expensed over the remainder of the vesting period. The derivative financial instruments, by contrast, are marked-to-market
at each reporting date. Once vested, the SARs will also be marked-to-market at each reporting date, eliminating the timing
discrepancy.
The Company does not apply hedge accounting to these relationships and as such, gains and losses arising from marking
these derivatives to market are recognized in net earnings in the period in which they arise. For the year ended December
31, 2016, the Company recognized a mark-to-market gain of $4.5 million (2015 – loss of $3.5 million).
The Company’s hedged and at risk positions are summarized as follows:
In thousands of shares/units except per share amounts
Hedged position
DSUs
SARs
Total
Position at risk
DSUs
SARs
Total
Position hedged
Dividends
December 31, 2016
December 31, 2015
Weighted
average
price/share
$
Shares/
units
Weighted
average
price/share
$
Shares/
units
10.54
9.21
9.31
100
1,170
1,270
71
1,057
1,128
10.54
9.21
9.31
100
1,170
1,270
75
1,146
1,221
112.6%
104.0%
On January 25, 2017, Rocky’s Board of Directors (the "Board") approved a quarterly dividend of $0.115 per common share
on its outstanding common shares. The common share dividend is payable on March 31, 2017, to shareholders of record
at the close of business on February 28, 2017.
This dividend is designated by Rocky to be an “eligible dividend” for the purposes of the Income Tax Act (Canada) and any
similar provincial or territorial legislation. An enhanced dividend tax credit applies to “eligible dividends” paid to Canadian
residents. Please consult with your own tax advisor for advice with respect to the income tax consequences to you from
Rocky designating its dividends as “eligible dividends.” Investors are cautioned that quarterly dividends remain subject to
approval by Rocky’s Board, and that the Board may, at any time, increase, decrease or suspend payment of the dividend.
ROCKY
MOUNTAIN
DEALERSHIPS
SHARE CAPITAL – OUTSTANDING SHARES
12
During the year ended December 31, 2016 and 2015, there were no changes in the issued and outstanding common shares
of the Company. As at December 31, 2016 and 2015 as well as March 14, 2017, there were 19,384,086 shares outstanding.
The options outstanding at December 31, 2016 are as follows:
Grant date
Options outstanding
(thousands)
Options exercisable
(thousands)
Weighted average
exercise price
($)
Weighted average
contractual life
(years)
March 28, 2012
March 13, 2013
March 13, 2014
Total
210
334
360
904
210
334
240
784
11.96
12.89
11.52
12.13
0.2
1.2
2.2
1.4
As at March 14, 2017, there were 895,166 options outstanding.
CONTRACTUAL OBLIGATIONS
The Company’s contractual obligations consist primarily of its floor plan payable used to finance the purchase of new, and
to a lesser extent, used equipment. The Company has classified its floor plan payable as current as the corresponding
inventory to which it relates has also been classified as current.
Floor plan payable as well as trade payables, accruals and other form the majority of the Company’s contractual obligations
which will be discharged within the next 12 months.
Other significant contractual obligations outstanding as at December 31, 2016, include long-term debt consisting
predominantly of the Term Facility and operating lease commitments which relate primarily to the Company’s facilities. Lease
terms are between one and eleven years and most building leases contain renewal options for periods ranging from three to
five years.
The Company assesses its liquidity based on the period in which cash flows are expected to occur. The following table
summarizes the Company’s expected undiscounted cash flows as at December 31, 2016, assuming the Syndicated Facility
is renewed prior to maturity on September 24, 2019. The analysis is based on foreign exchange rates and interest rates in
effect at the date of the consolidated statement of financial position, and includes both principal and interest cash flows.
$ thousands
Total
2017
2018-2019
2020-2021
Thereafter
Trade payables, accruals and other
Floor plan payable(1)
Long-term debt
Obligations under finance leases
Operating lease obligations
Derivative financial liabilities
Total contractual obligations
47,995
307,665
53,066
987
31,825
3,614
445,152
47,995
307,665
8,206
458
8,169
1,468
373,961
-
-
15,794
523
10,473
1,750
28,540
-
-
14,987
6
6,741
396
22,130
-
-
14,079
-
6,442
-
20,521
(1) – Includes floor plan payable classified as liabilities associated with assets held for sale.
In the event that the Syndicated Facility is not renewed prior to its maturity, the cash outflow for long-term debt outstanding
as at December 31, 2016, would be $42.6 million in 2018-2019 and $Nil thereafter.
The Company is also subject to various degrees of recourse, arising in the ordinary course of business, by assisting its
customers in financing the purchase or rental of equipment. The Company is exposed to potential losses arising from the
difference between the assessed value of the underlying security and the amounts guaranteed by the Company. Any
resulting losses are recorded as soon as the amount of the loss can be reasonably estimated. As the assessed value of the
underlying security generally exceeds the amount guaranteed by the Company, management believes that the net exposure
is not significant. As at December 31, 2016, gross recourse amounted to $2.1 million ($2015 - $4.7 million), prior to any
consideration of the value associated with the securitized assets. As at December 31, 2016, the Company has accrued $0.7
million (2015 - $0.7) for anticipated losses.
ROCKY
MOUNTAIN
DEALERSHIPS
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2016, the Company entered into the following transactions with related parties:
13
$ thousands
Equipment and product support sales
Expenditures
Rental payments on Company facilities
Equipment purchases
Flight costs
Contributions(1)
Other expenses
2016
2015
514
1,394
5,832
271
74
157
33
5,589
665
83
-
92
(1) – Contributions include payments to Ag for Life and Alberta Prosperity Fund.
All related parties are either directly or indirectly owned by a member of senior management or director of the Company
and/or a close family member thereof. These transactions were made on terms equivalent to those that prevail in arm’s
length transactions and are made only if such terms can be substantiated.
The remuneration of the directors and officers of the Company was determined for the years presented by the then-
constituted Compensation, Governance and Nominating Committee of the Board of Directors of the Company, based on
performance and is consistent with market trends. The remuneration of directors and officers of the Company identified as
key management is as follows for the respective years ended December 31:
$ thousands
Salary and short-term benefits
Post-retirement benefits
Share-based compensation
Total
2016
2015
2,754
25
1,115
3,894
1,897
25
290
2,212
Key management personnel are comprised of the Company’s senior officers and directors. As at December 31, 2016, there
is a $1.5 million commitment (2015 – $1.0 million) relating to the termination of employment of the key management
personnel.
Amounts due from (to) related parties are included in the consolidated statement of financial position under trade receivables
and other (trade payables, accruals and other) and are as follows:
$ thousands
Due from related parties
Due to related parties
2016
2015
45
(766)
111
(13)
The amounts due from related parties are not secured and are to be settled in cash. As at December 31, 2016 and 2015,
the amounts due from related parties are considered collectible and therefore have not been provided for in the allowance
for doubtful accounts. During the years ended December 31, 2016, $Nil has been recognized in bad debt expenses with
respect to related party transactions (2015 – $Nil).
The amount due to related parties includes a $0.8 million accrual for net costs associated with vacating one of the industrial
facilities which is currently leased from a related party. This accrual represents the Company’s full remaining contractual
obligation under the lease.
The Company has contractual obligations to related parties in the form of facility leases. As at December 31, 2016, these
contractual obligations and due dates, inclusive of the aforementioned vacated facility, are as follows:
$ thousands
Total
2017
2018-2019
2020-2021
Thereafter
Operating lease obligations
26,062
5,535
7,511
6,574
6,442
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OFF-BALANCE SHEET ARRANGEMENTS
14
We use off-balance sheet financing in connection with numerous operating leases. These leases relate to the Company’s
buildings and certain operating assets with lease terms of between one and eleven years. Most building leases contain
renewal options for periods of three to five years. We have paid monthly amounts under these operating leases of up to
$64.2 thousand. In some instances, the counterparty to the Company’s operating lease obligations is a related party. Refer
to the “Related Party Transactions” section of this MD&A for a discussion of the terms and amounts of such arrangements.
The range of expiry dates on the current operating leases extend until August 2026.
SELECTED FOURTH QUARTER FINANCIAL INFORMATION
$ thousands, except per share amounts
2016
2015
2014
Sales
Cost of sales
Gross profit
Selling, general and administrative
(Gain) loss on derivative financial instruments
Earnings before finance costs and income taxes
Finance costs
Earnings before income taxes
Income taxes
Net earnings
Earnings per share
Basic
Diluted
Dividends per share
Adjusted Diluted Earnings per Share(1)
Adjusted EBITDA(1)
Operating SG&A(1)
Operating Cash Flow before Changes in Floor Plan(1)
285,749
251,633
34,116
100.0%
88.1%
11.9%
285,587
248,049
37,538
100.0%
86.9%
13.1%
294,092
254,623
39,469
100.0%
86.6%
13.4%
25,205
(605)
9,516
3,346
6,170
1,466
4,704
0.24
0.24
0.1150
0.23
8,176
23,044
14,542
8.8%
(0.2%)
3.3%
1.1%
2.2%
0.6%
1.6%
2.9%
8.1%
5.1%
27,175
274
10,089
3,813
6,276
1,696
4,580
0.24
0.24
0.1150
0.25
8,966
25,260
6,844
9.5%
0.1%
3.5%
1.3%
2.2%
0.6%
1.6%
3.1%
8.8%
2.4%
27,471
77
11,921
3,480
8,441
2,220
6,221
0.32
0.32
0.1150
0.32
10,746
25,767
7,822
9.3%
0.0%
4.1%
1.2%
2.9%
0.8%
2.1%
3.7%
8.8%
2.7%
(1) – See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below
Sales and Gross Profit
$ thousands
Sales
New equipment
Used equipment
Parts
Service
Other
Total sales
Gross profit
Gross margin
2016
2015
Change
148,926
107,324
20,414
7,806
1,279
285,749
34,116
11.9%
162,424
92,676
20,614
8,714
1,159
285,587
37,538
13.1%
(13,498)
14,648
(200)
(908)
120
162
(3,422)
(1.2%)
For the quarter ended December 31, 2016, total sales were $285.7 million, flat as compared to the same period in 2015.
Fourth quarter 2016 sales benefited from a drawn-out harvest in 2016 resulting in a carryover of activity from the third quarter.
As was the case during the third quarter of 2016, extended lead-times impacted the timing of equipment deliveries from our
manufacturers, which in turn delayed delivery to the end customer. The reduction in new sales quarter-over-quarter reflects
these longer delivery horizons.
As previously alluded to, the consolidation of our industrial distribution network into our existing agriculture footprint also
caused some interruption to our sales functions. Given that sales orders are often initiated months in advance, the effects
of this interruption on our sales activity lingered into the fourth quarter of 2016.
Product support revenues declined by $1.1 million or 3.8% during the quarter ended December 31, 2016, as compared to
the same period last year. The decline reflects a reduction in technician headcount quarter-over-quarter.
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15
Gross profit for the quarter ended December 31, 2016, decreased by $3.4 million over 2015. Gross margin decreased to
11.9% from 13.1% in the fourth quarter of 2015. The decrease in gross profit and gross margin stem from the disposal of
certain aged used agriculture units at liquidation values.
Selling, General and Administrative
The Company assesses its Operating SG&A relative to total sales in analyzing its results. See the definition and
reconciliation of Operating SG&A in the “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections
below.
For the quarter ended December 31, 2016, Operating SG&A was $23.0 million (8.1% of sales), down from $25.3 million
(8.8% of sales) in 2015. The reduction in Operating SG&A reflects cost reductions realized through the amalgamation of our
distribution footprint earlier in 2016.
Finance Costs
During the quarter ended December 31, 2016, finance costs declined by approximately $0.5 million. Strong cash generation
resulted in a decrease in the average balance of interest-bearing debt outstanding, decreasing overall interest expense as
compared to the same period in 2015.
Net Earnings
For the quarter ended December 31, 2016, we generated net earnings of $4.7 million, relatively flat as compared to 2015.
The Company’s Adjusted Diluted Earnings per Share for the quarter ended December 31, 2016, was $0.23 compared to
$0.25 for the fourth quarter of 2015. During the fourth quarter of 2016, the benefit of our reduced cost structure was more
than offset by weaker gross profit for the period.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the consolidated financial statements requires that certain estimates and judgments be made with respect
to the reported amounts of sales and expenses and the carrying amounts of assets and liabilities. These estimates are
based on historical experience and management’s judgment. Anticipating future events involves uncertainty and
consequently, the estimates used by management in the preparation of the consolidated financial statements may change
as future events unfold, additional information is acquired or the Company’s operating environment changes. Management
considers the following items to be the most significant of these estimates:
Allowance for Doubtful Accounts
The allowance for doubtful accounts is reviewed by management on a monthly basis. Accounts receivable are considered
for impairment on a case-by-case basis when they are past due or when objective evidence is received that a customer will
default. The Company takes into consideration the customer’s payment history, their creditworthiness and the current
economic environment in which the customer operates to assess impairment. The Company’s historical bad debt expenses
have not been significant and are usually limited to specific customer circumstances. Bad debt expenses are reported with
SG&A expenses.
Inventory Valuation
Equipment is valued at the lower of cost and net realizable value, with cost being determined on a specific item, actual cost
basis, and net realizable value being determined by the recent sales of the same or similar equipment inventory or market
values as established by industry publications, less the costs to sell. Value is assigned to equipment inventory acquired
through trade-in by using recent sales of the same or similar equipment inventory or market values as established by industry
publications. Parts inventory is recorded at the lower of cost and net realizable value, with cost being determined on an
average cost basis and net realizable value being determined by recent sales of the same or similar parts inventory, less the
costs to sell. Work-in-progress is valued on a specific item, actual cost basis. Impairment losses and reversals of impairment
losses are recorded within cost of sales.
Net Recoverable Amount of Goodwill
For the purposes of impairment testing, goodwill is allocated to the Company’s cash-generating units (“CGUs”). The
recoverable amount of each CGU is determined using a value in use calculation. The key assumptions for the value in use
calculations are those regarding discount and growth rates. These key assumptions are based on past experience, which
has been adjusted for anticipated changes in future periods.
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16
As at December 31, 2016 and 2015, the Company prepared cash flow forecasts derived from the most recent financial plans
prepared by management and extrapolated these cash flows into perpetuity using growth assumptions relevant to the
business sector. The growth rate used for the purposes of these analyses was 2.0%.
As at December 31, 2016, the rate used to discount the forecasted cash flows was 10.3% (2015 – 10.9%), and represents
the Company’s estimate of the pre-tax discount rate reflecting current market assessments of the time value of money and
the risks specific to the particular CGU. The recoverable amount of the CGU to which goodwill has been allocated exceeded
its carrying value at the impairment test dates.
The Company has conducted a sensitivity analysis based on possible changes in the key assumptions used for the
impairment tests. Had the estimated cost of capital used in determining the pre-tax discount rates been 7.3% (2015 – 6.4%)
higher than management’s estimates or the estimated growth rate used in extrapolating forecasted results been 14.5% (2015
– 13.8%) lower, the recoverable amount of the CGU would equal its carrying amount for the respective periods. Any
additional negative change in the assumption would cause goodwill to be impaired with such impairment loss recognized in
net earnings.
Manufacturer Incentives
Certain manufacturers offer annual performance incentives which are linked to the Company’s market share achievement
and annual sales and settlement volumes. The Company uses estimated annual market share statistics derived from
historical results which have been adjusted for any anticipated changes in the current year, as well as eligible sales and
settlement volumes to date to accrue the proportion of these annual manufacturer incentives earned during the period.
Manufacturer incentives are recorded as reductions in the cost of inventory or, if the underlying item has been sold, within
cost of sales.
Derivative Financial Instruments
The Company utilizes floating-to-fixed interest rate swaps to manage its interest rate exposure. These derivatives are initially
recognized on the date the contract is entered into and are subsequently re-measured at their fair values. The fair values of
the interest rate swaps are calculated as the net present value of the estimated future cash flows expected to arise on the
variable and fixed legs, determined using applicable yield curves at each measurement date. Swap curves, which
incorporate credit spreads applicable to large commercial banks, are typically used to calculate expected future cash flows
and the present values thereof. Adjustments are also made to reflect the Company’s own credit risk and the credit risk of
the counterparty, if different from the spread implicit in the swap curve.
The Company also has several total return swap arrangements to hedge the exposure associated with increases in its share
price on its outstanding DSUs and SARs. These derivatives accrue to the Company, any gains (losses) associated with
changes in the value of its common shares as well as dividends paid on its hedged position, net of interest costs charged by
the bank to build and hold their positions. These derivatives are initially recognized on the date the contract is entered into
and are subsequently re-measured at their fair values. The fair values are calculated as the net present value of estimated
future cash flows.
In a cash flow hedging relationship, the effective portion of the change in the fair value of the hedging derivative, net of taxes,
is recognized in other comprehensive income (loss) while the ineffective portion is recognized in the consolidated statement
of net earnings. Amounts in accumulated other comprehensive loss are reclassified to profit or loss in the periods when the
hedged item affects profit or loss.
Gains or losses on derivatives not designated as hedges are recognized in the consolidated statement of net earnings within
SG&A expenses.
Business Combinations
Assets acquired and liabilities assumed pursuant to business combinations are measured at their acquisition date fair values.
Where appropriate, management bases its fair value estimates on observable third party data as reported by sources
deemed both reputable and qualified. In the case of inventory acquired, management estimates the value in the manner
discussed within the “Net Realizable Value of Inventory” section above.
Goodwill is measured as the excess of the fair value of consideration transferred over the acquisition-date fair value of the
net identifiable assets acquired.
The purchase price allocation is subject to change throughout the duration of the measurement period. The measurement
period is the period from the date of acquisition, to the date the Company obtains complete information about facts and
circumstances that existed as of the acquisition date and is subject to a maximum of one year.
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KEY FINANCIAL STATEMENT COMPONENTS
Equipment Sales
17
Equipment revenues are derived from the sale of new and used agriculture and industrial equipment. Revenue is recognized
when the customer has signed the sales agreement, has paid or is credit-approved, and title to and risk of loss for the piece
of equipment have transferred. New equipment sales also include certain rental revenues.
Parts Sales
Parts revenue is recognized when title to the product has transferred to the customer and collection is reasonably assured.
This is evidenced by the goods being shipped or physically taken by the customer, or in the case of parts drawn to complete
service work, when the service work order is completed.
Service Revenue
Revenue from service is recognized by reference to the stage of completion of the contract when the outcome can be
estimated reliably.
Cost of Sales
Cost of sales is the accumulation of the costs attributable to the sources of revenue set forth in the financial statements.
Revenues are matched to cost of sales attributable to specific revenue sources. The cost of equipment sales is determined
based on the actual cost of the equipment. The cost of parts sales is determined based on the average actual cost for those
parts. The cost of service revenues is determined based on actual costs to complete the service job, which include, without
limitation, wages paid to service technicians and the actual cost of externally sourced labour, plus applicable overheads.
Selling, General and Administrative Expenses
SG&A expenses include sales and marketing expenses, sales commissions, payroll, and related benefit costs, insurance
expenses, professional fees, rent, and other facility costs and administrative overhead including depreciation of property and
equipment.
Finance Costs
Finance costs include interest and other finance-related expense, including amortization of deferred finance costs. These
costs are primarily associated with the floor plan financing of our new and used equipment inventory. Finance costs were
also incurred on the Company’s Operating and Term facilities, as well as its former debenture repayment, acquisition, real
estate and fleet facilities for the comparative period (refer to "Adequacy of Capital Resources – Finance Facilities” for facility
terms).
CHANGES IN ACCOUNTING POLICIES
No new standards, interpretations or amendments were adopted for the first time from January 1, 2016, which had a material
impact on the Company’s financial statements.
At the date of this MD&A, the International Accounting Standards Board (“IASB”) and the IFRS Interpretations Committee
(“IFRIC”) have issued the following new and revised standards and interpretations which are not yet effective for the relevant
reporting periods. The Company has not early adopted these standards, amendments or interpretations, however the
Company is currently assessing what impact the application of these standards or amendments will have on the consolidated
financial statements.
IFRS 9, ‘Financial instruments’
IFRS 9 retains but simplifies the mixed measurement model and establishes two primary measurement categories for
financial assets: amortized cost and fair value. The basis of classification depends on the entity’s business model and the
contractual cash flow characteristics of the financial asset. The guidance in IAS 39 on impairment of financial assets and
hedge accounting continues to apply. This standard is effective for fiscal periods beginning on or after January 1, 2018.
Amendment to IFRS 7, ‘Financial instruments: Disclosures on derecognition’
In conjunction with the transition from IAS 39 to IFRS 9 for fiscal years beginning on or after January 1, 2018, IFRS 7 will
also be amended to require additional disclosure in the year of transition.
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18
IFRS 15, ‘Revenue from contracts with customers’
IFRS 15 provides a single, comprehensive revenue recognition model for all contracts with customers to improve
comparability within industries, across industries, and across capital markets. The underlying principle is that an entity will
recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled
to in exchange for those goods or services. This standard is effective for fiscal periods beginning on or after January 1,
2018.
IFRS 16, ‘Leases’
IFRS 16 replaces IAS 17 and requires most leases to be recognized as assets and liabilities on the statement of financial
position. This standard includes an optional exemption for certain short-term leases and leases of low-value assets and is
effective for fiscal periods beginning on or after January 1, 2019.
RISKS AND UNCERTAINTIES
Risk factors faced by Rocky are listed in the Company’s AIF, which can be found on SEDAR. These risk factors include
industry risks associated with agriculture and industrial equipment dealerships and others, including but not limited to:
economic conditions; weather and climate conditions; commodity prices; inventory risk; industry oversupply; the seasonality
and cyclicality of the industries we service; foreign exchange exposure; our reliance on key manufacturers; the nature of our
dealership agreements; interest rates and interest rate changes; changes in Common Share value; our continued ability to
pay our dividend; information systems and cybersecurity threats; government regulations in the areas we operate;
competition within our industry; credit facilities; consolidation within the equipment manufacturing industry; customer credit
risks, available floor plan financing; unfavorable conditions (economic, weather or otherwise) in key geographic markets;
import product restrictions and foreign trade risks; the non-exclusive nature of key geographic markets; insurance matters;
branch leases; the retention of key personnel; labour relations; labour costs and shortages; the issuance of additional
Common Shares by the Corporation; freight costs; future warranty claims; product liability risks; restrictions and impediments
on acquisitions; aviation risks; growth risks; our ability to successfully integrate our acquisitions; and the risk that forward-
looking information may prove inaccurate.
Our success largely depends on the abilities and experience of our senior management team and other key personnel.
These employees carry a significant amount of the management responsibility of our business and are important for setting
strategic direction and dealing with certain significant customers.
Our future performance will also depend on our ability to attract, develop, and retain highly qualified employees in all areas
of our business. We face significant competition for individuals with the skills required to develop, market and support our
products and services. If we fail to recruit and retain sufficient numbers of these highly skilled employees, we may not be
able to achieve our growth objectives and our business may be adversely affected.
RISKS RELATED TO FINANCIAL INSTRUMENTS
Through its financial instruments, the Company has exposure to the following risks: credit risk, market risk (consisting of
foreign currency exchange risk, interest rate risk and equity price risk), and liquidity risk.
Credit Risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the
Company. The Company has a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral,
where appropriate, as a means of mitigating the risk of financial loss from defaults. The creditworthiness of counterparties
is determined using information supplied by independent rating agencies where available and, if not available, the Company
uses other publicly available financial information and its own trading records to rate its major customers. The Company’s
exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions
concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed
regularly.
The Company’s exposure to credit risk on its cash balance is mitigated as these financial assets are held with major financial
institutions with strong credit ratings.
During 2016, the Company recognized a $0.1 million recovery of bad debts (2015 – expense of $0.5 million). Bad debt
expense (recovery) is recognized within SG&A expenses.
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Market Risk
19
Market risk is the risk from changes in market prices, such as changes in foreign currency exchange rates, interest rates and
the market price of the Company’s common shares, which will affect the Company’s earnings as well as the value of the
financial instruments held and cash-settled share-based instruments outstanding.
Foreign Currency Exchange Risk
The OEMs we do business with are geographically diversified, requiring us to conduct business in two currencies: U.S.
dollars and Canadian dollars. As a result, we have foreign currency exposure with respect to purchases of U.S. dollar
denominated products (inventory) and we experience foreign currency gains and losses thereon. The nature of exposure to
foreign exchange fluctuations differs between equipment manufacturers and the various dealer agreements with them.
A weakening of the U.S. dollar in comparison to the Canadian dollar will generally have a positive effect on our performance
by lowering our cost of goods sold. However, as the markets in which we operate are highly competitive, a declining U.S.
dollar also has the effect of reducing sales prices in Canadian dollars and, as a consequence, we cannot capture the entire
potential benefit of a declining U.S. dollar environment. By contrast, a strengthening U.S. dollar will increase the cost of
equipment purchases. If we are unable to fully offset the increase in cost of goods through price increases, our financial
results will be negatively affected. We mitigate some of this risk by occasionally purchasing forward contracts for U.S. dollars
on large transactions to cover the period from the time the equipment is ordered from the manufacturer to the payment date.
During 2016, the Company recognized a net foreign exchange gain of $0.7 million (2015 – loss of $0.6 million). Foreign
exchange gains (losses) are recognized within SG&A expenses.
Interest Rate Risk
We finance our equipment inventory, certain capital expenditures, business acquisitions and occasionally, our other general
working capital requirements, by way of various financing facilities under which we are charged interest at floating rates. As
a result, rising interest rates have the effect of increasing our overall costs. To the extent that we cannot pass on such
increased costs to our customers, our net earnings or cash flow may decrease. In addition, some of our customers finance
the equipment they purchase from us. A customer’s decision to purchase may be affected by interest rates available to
finance the purchase.
The Company manages its interest rate risk by using floating-to-fixed interest rate swaps when appropriate. Generally, the
Company will obtain floor plan financing and long-term debt at floating rates. When the Company enters into a floating-to-
fixed interest rate swap, it agrees with a third party to exchange the difference between the fixed and floating contract rates
based on agreed notional amounts.
Refer to the “Derivative Financial Instruments” section of this MD&A for additional information and gains (losses) on derivative
financial instruments.
Equity Price Risk
As part of its overall compensation of directors, officers and employees, the Company has issued cash-settled share-based
payments in the form of DSUs and SARs. The DSUs are valued on a per DSU basis at an amount equal to the volume
weighted average trading price of the Company’s common shares over the immediately preceding 20 day trading period.
The SARs are revalued at each reporting date using the Black-Scholes option pricing model. Increases in the Company’s
share value result in additional compensation expense to the Company related to these two programs. As cash-settled
share-based payments, the DSUs and SARs are not accounted for as financial instruments.
The Company has entered into several total return swaps to hedge the exposure associated with increases in its share value
on its outstanding DSUs and SARs. The total return swaps are classified as derivative financial instruments. The intent of
these derivatives is to offset the incremental cost to the Company associated with increases in its common share price on
its cash-settled share-based payments.
Refer to the “Derivative Financial Instruments” section of this MD&A for additional information and gains (losses) on derivative
financial instruments.
Liquidity Risk
The Company’s objective is to have sufficient liquidity to meet its liabilities when due. The Company monitors its cash
balance and cash flows generated from operations as well as available credit facilities to meet its requirements.
Refer to the “Adequacy of Capital Resources” section of this MD&A for a discussion of the liquidity risks faced by the
Company as well as the Company’s various credit facilities.
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SUBSEQUENT EVENT
20
Subsequent to year end, the Company completed the disposition of $2.5 million of short-line assets classified as held-for-
sale as at December 31, 2016. Floor plan financing associated with these assets amounting to $1.6 million was also
transferred to the purchaser pursuant to the sale.
NON-IFRS MEASURES
Throughout this MD&A, we use terms which do not have standardized meanings under IFRS. As these non-IFRS financial
measures do not have standardized meanings prescribed by IFRS, they are unlikely to be comparable to similar measures
presented by other issuers. Our definition for each term is as follows:
“Adjusted Diluted Earnings per Share” is calculated by eliminating from net earnings, the after-tax impact of the losses
(gains) arising from the Company’s derivative financial instruments and DSUs, as well as the expense (recovery)
associated with its SARs. These items arise from changes in the Company’s share price as well as fluctuations in
interest rates and are not reflective of the Company’s core operations.
The Company also adjusts for any non-recurring charges (recoveries) recognized in net earnings. Management deems
non-recurring charges (recoveries) to be unusual or infrequent items that the Company incurs outside of its common
day-to-day operations. Adjusting for these items allows management to isolate and analyze diluted earnings per share
from core business operations. For the periods presented, costs associated with amalgamating the industrial operations
and impairment losses recognized on vacant land have been classified as non-recurring charges. The impairment losses
are not expected to give rise to a reduction in our tax provision.
“EBITDA” is a commonly used metric in the dealership industry. EBITDA is calculated by adding finance costs
associated with long-term debt, income taxes and depreciation and amortization to net earnings. Adding back non-
operating expenses allows management to consistently compare periods by removing changes in tax rates, long-term
assets and financing costs related to the Company’s capital structure. During 2016, the Company has revised the
description of what has historically been presented as interest on long-term debt. These costs are now described as
finance costs associated with long-term debt and are included within finance costs on the statement of net earnings.
This change in description did not impact the composition of the underlying metric.
“Adjusted EBITDA” is calculated by eliminating from EBITDA, the impact of the losses (gains) arising from the
Company’s derivative financial instruments and DSUs, as well as the expense (recovery) associated with its SARs.
These items arise from changes in the Company’s share price as well as fluctuations in interest rates and are not
reflective of the Company’s core operations.
The Company also adjusts for any non-recurring charges (recoveries) recognized in EBITDA. Management deems non-
recurring charges (recoveries) to be unusual or infrequent items that the Company incurs outside of its common day-to-
day operations. Adjusting for these items allows management to isolate and analyze EBITDA from core business
operations. For the periods presented, costs associated with amalgamating the industrial operations and impairment
losses recognized on vacant land have been classified as non-recurring charges.
“Operating SG&A” is calculated by eliminating from SG&A, depreciation and amortization expense as well as the impact
of the losses (gains) arising from the Company’s DSUs and the expense (recovery) associated with its SARs. These
items arise from changes in the Company’s share price as well as fluctuations in interest rates and are not reflective of
the Company’s core operations. The assessment of Operating SG&A facilitates the evaluation of discretionary expenses
from ongoing operations. We target a sub-10% Operating SG&A as a percentage of total sales on an annual basis.
Historically, the Company eliminated the impact of unrealized losses (gains) arising from the revaluation of derivative
financial instruments as well as non-recurring charges (recoveries) recognized within SG&A when calculating Operating
SG&A. During 2016, the Company revised the presentation of certain items within its statement of net earnings. Among
these revisions is the separate presentation of unrealized losses (gains) arising from the revaluation of derivative financial
instruments as well as costs associated with amalgamating the industrial operations and impairment losses recognized
on vacant land, all of which had been previously classified as non-recurring charges and eliminated from SG&A. As
these items are no longer included within SG&A, they no longer require elimination in the calculation of Operating SG&A.
“Operating Cash Flow before Changes in Floor Plan” is calculated by eliminating the impact of the change in floor
plan payable (excluding floor plan assumed pursuant to business combinations) from cash flows from operating activities.
Adjusting cash flows from operating activities for changes in the balance of floor plan payable allows management to
isolate and analyze operating cash flows during a period, prior to any sources or uses of cash associated with equipment
financing decisions. This measure was previously defined as Floor Plan Neutral Operating Cash Flow. Management
believes that the new nomenclature is a more intuitive description of the metric.
21
For the year ended
December 31,
2015
2014
2016
For the quarter ended
December 31,
2015
2014
2016
4,704
(605)
16
230
-
-
97
4,580
274
(53)
6
-
-
(61)
6,221
77
(127)
18
-
-
8
14,966
(4,751)
220
757
3,564
1,360
11,293
3,548
(211)
24
-
-
57
(907)
18,925
68
(223)
18
-
-
34
4,442
4,746
6,197
16,173
13,747
18,822
19,384
0.23
19,272
0.25
19,272
0.32
19,384
0.83
19,327
0.71
19,309
0.97
ROCKY
MOUNTAIN
DEALERSHIPS
RECONCILIATION OF NON-IFRS MEASURES TO IFRS
Adjusted Diluted Earnings per Share
$ thousands
Earnings used in the calculation of diluted
earnings per share
(Gain) loss on derivative financial instruments
Loss (gain) on DSUs
SAR expense
Industrial restructuring charges
Impairment loss on vacant land – not tax
deductible
Tax effect of adjustments (2016 & 2015 – 27%,
2014 – 25%)
Earnings used in the calculation of Adjusted
Diluted Earnings per Share
Weighted average diluted shares used in the
calculation of diluted earnings per share (in
thousands)
Adjusted Diluted Earnings per Share
EBITDA and Adjusted EBITDA
$ thousands
For the quarter ended
December 31,
2015
2014
2016
Net earnings
Finance costs associated with long-term debt
Depreciation expense
Income taxes
EBITDA
(Gain) loss on derivative financial instruments
Loss (gain) on DSUs
SAR expense
Non-recurring industrial amalgamation charges
Impairment loss on vacant land
Adjusted EBITDA
4,704
450
1,915
1,466
8,535
(605)
16
230
-
-
8,176
4,580
501
1,962
1,696
8,739
274
(53)
6
-
-
8,966
6,221
524
1,813
2,220
10,778
77
(127)
18
-
-
10,746
For the year ended
December 31,
2015
2014
2016
14,966
1,795
7,755
5,955
30,471
(4,751)
220
757
3,564
1,360
31,621
11,293
2,060
7,803
4,105
25,261
3,548
(211)
24
-
-
28,622
18,925
2,182
7,057
7,276
35,440
68
(223)
18
-
-
35,303
For the year ended
December 31,
2015
2014
2016
Operating SG&A
$ thousands
SG&A
Depreciation expense
(Loss) gain on DSUs
SAR expense
Operating SG&A
Operating SG&A as a % of revenue
For the quarter ended
December 31,
2015
2014
2016
25,205
(1,915)
(16)
(230)
23,044
8.1%
27,175
(1,962)
53
(6)
25,260
8.8%
27,471
(1,813)
127
(18)
25,767
8.8%
97,970
(7,755)
(220)
(757)
89,238
9.6%
108,228
(7,803)
211
(24)
100,612
10.3%
105,688
(7,057)
223
(18)
98,836
10.2%
ROCKY
MOUNTAIN
DEALERSHIPS
Operating Cash Flow before Changes in Floor Plan
$ thousands
Cash flow from operating activities
Net decrease (increase) in floor plan payable(1)
Floor plan assumed pursuant to business
combinations
Operating Cash Flow before Changes in Floor
22
For the year ended
December 31,
2015
2014
2016
For the quarter ended
December 31,
2015
2014
2016
12,917
1,625
12,839
(5,995)
12,898
(5,076)
27,163
60,463
35,460
23,951
16,724
(39,717)
-
-
-
-
32,782
-
Plan
14,542
6,844
7,822
87,626
92,193
(22,993)
(1) – Includes change in floor plan payable classified as liabilities associated with assets held for sale.
INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) are responsible for establishing and maintaining
the Company’s disclosure controls and procedures, (“DC&P”), to provide reasonable assurance that material information
related to the Company is made known. In addition, internal controls over financial reporting (“ICFR”) have been designed
by or have been caused to be designed under the supervision of the CEO and CFO to provide reasonable assurance
regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with
IFRS.
The CEO and CFO have evaluated the effectiveness of our DC&P and assessed the design of our ICFR, as of December
31, 2016, pursuant to the requirements of National Instrument 52-109, and have concluded that:
(i)
(ii)
The DC&P are effective to provide reasonable assurance that all material or potentially material information
about activities of the Company are made known to them; and
Information required to be disclosed by the Company in its annual filings, interim filings or other reports filed
or submitted by it under securities legislation is recorded, processed, summarized and reported within the
time periods specified in securities legislation.
Management has concluded that, as of December 31, 2016, the Company has sufficiently documented and tested the
effectiveness of the ICFR for the Company and can conclude that these controls are working effectively. It should be noted
that while the Company’s management believes that the Company’s ICFR and DC&P provide a reasonable level of
assurance that they are effective, they do not expect these controls will prevent all errors or fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the
control system are met.
CAUTION REGARDING FORWARD-LOOKING INFORMATION AND STATEMENTS
This MD&A contains FLS within the meaning of applicable securities legislation which involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance or achievements of Rocky or industry
results, to be materially different from any future results, events, expectations, performance or achievements expressed or
implied by such FLS. FLS typically contain words or phrases such as “may”, “outlook”, “objective”, “intend”, “estimate”,
“anticipate”, “should”, “could”, “would”, “will”, “expect”, “believe”, “plan”, “predict” and other similar terminology suggesting
future outcomes or events. FLS involve numerous assumptions and should not be read as guarantees of future performance
or results. Such statements will not necessarily be accurate indications of whether or not such future performance or results
will be achieved. Readers of this MD&A should not unduly rely on FLS as a number of factors, many of which are beyond
the control of Rocky, could cause actual performance or results to differ materially from the performance or results discussed
in the FLS.
In particular, FLS in this MD&A include, but are not limited to, the following: (i) disclosure under the heading “Market
Fundamentals and Outlook”; (ii) continuing demand for Rocky's products and services, and the cyclical nature of agriculture
equipment demand and any revenue or inventory statements or forecasts attributed thereto; (iii) statements pertaining to the
growth of Rocky's business and operations, including through acquisitions; (iv) statements pertaining to weather conditions
and the anticipated effect of such conditions on crop quality and yield; (v) statements regarding the disparity between the
Canadian and U.S. dollars and the impact such disparity may have on Rocky's business; (vi) any discussion on the
anticipated mix of new and used equipment sales for 2017; (vii) discussion on the fundamentals of Rocky's business,
including discussion regarding growth in GDP, farmers' crop receipts, and the future demand for agriculture equipment and
commodities; (viii) statements regarding customer buying patterns, including the extent to which we are able to convert new
equipment customers to used equipment customers and attract U.S. customers looking to capitalize on favorable U.S.-
Canadian foreign exchange rates; (ix) statements pertaining to Rocky's ability to negotiate early terminations or sub-
tenancies for its vacated Calgary and Red Deer properties; (x) any statements or discussions regarding Rocky's inventory
ROCKY
MOUNTAIN
DEALERSHIPS
23
management and any expected increases or decreases in Rocky's inventory levels, and the timing and delivery thereof; (xi)
statements that we believe cash flow from operations, along with existing credit facilities, will provide for our capital needs;
(xii) discussion around SG&A expenses including the seasonal variances and expectations in operating SG&A; (xiii)
discussion that our first quarter is generally the weakest financial quarter due to lack of agricultural activity and winter
shutdowns, that the fourth quarter is generally our strongest quarter financially, and discussion that we expect our second
and third quarter sales activity to increase as our installed equipment- and customer-base increases; (xiv) statements that
as acquisitions are integrated into the business, the associated SG&A costs for Rocky will generally decrease; (xv)
statements related to our per-location revenue expectations, any assessment of the economies of scale associated with any
facility, and the effect the delivery of presold equipment during the first half of 2017 will have on new equipment sales; (xvi)
statements that our installed base and customer relationships create an annuity of equipment sales and product support
revenue, which help drive dependable earnings and cash flow; (xvii) statements that weather conditions may impact sales
activity for any given period; (xviii) statements concerning the Company's ongoing compliance with, or potential breaches of,
its covenants under its credit facilities, including the Syndicated Facility; (xix) statements concerning the Company’s expected
undiscounted cash flows as at December 31, 2016; and, (xxii) statements regarding the ongoing quantitative significance of
our industrial segment.
With respect to the FLS listed above and contained in this MD&A, Rocky has made assumptions regarding, among other
things: (i) expectations that commodity prices will continue to remain above historical levels; (ii) increasing food demand, as
well as increasing crop land dedicated to bio-fuel production, will cause producers to improve their productivity, and as a
result invest in new equipment, (iii) expectations that increases in farmer liquidity would generally correlate to farmers making
capital re-investments in their business, so as to increase their productivity and lower their input costs, which investments
may include Rocky’s products and services, (iv) inventory levels will fluctuate during a year, both positively and negatively,
based on timing of equipment deliveries, and volume of whole-good sales involving a unit taken in on trade, (v) the general
GDP growth and/or relative economic stability in the markets we operate in, (vi) the trend towards larger farms in the
agriculture sector will continue to benefit further farm equipment sales as larger farm operations tend to replace their
equipment more frequently, (vii) the Company’s cash flow will remain sufficient to, in connection with its credit facilities,
adequately finance its capital needs, (viii) as stores are consolidated, certain functions can be centralized thereby reducing
SG&A costs as a result, (ix) the anticipated improvement in ongoing revenue and cash-flow, including parts and service
revenue, as our installed base increases, (x) expectations that no material change will happen to our OEM relationships; (xi)
expectations that customers who purchase their equipment from the Company will, generally, return to the Company for their
product support needs; (xii) our realigned investment in inventory is consistent with current market demand; and, (xiii) the
Company will remain in compliance with all of its debt covenants under the terms of the Syndicated Facility and will be able
to renew its Syndicated Facility prior to maturity on September 24, 2019.
Rocky’s actual results could differ materially from those anticipated in the FLS in this MD&A as a result of the risk factors set
forth herein under the heading “Risks and Uncertainties” and the risk factors set forth in Rocky’s AIF. Although the FLS
contained in this MD&A are based upon what management of Rocky believes are reasonable assumptions, Rocky cannot
assure investors that actual performance or results will be consistent with these FLS. These statements reflect current
expectations regarding future events and operating performance and are based on information currently available to Rocky’s
management. There can be no assurance that the plans, intentions or expectations upon which these FLS are based will
occur. All FLS in this MD&A are qualified in their entirety by the cautionary statements herein and those set forth in Rocky’s
AIF available on SEDAR at www.sedar.com. These FLS and outlook are made as of the date of this document and, except
as required by applicable law, Rocky assumes no obligation to update or revise them to reflect new events or circumstances.