Consolidated Financial Statements and Notes
Years Ended December 31, 2017 and 2016
March 13, 2018
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,
2017 and December 31 2016 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, 2017 and December
31, 2016 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
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
Trade payables, accruals and other
Floor plan payable
Income tax 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
Deferred tax liability
Derivative financial liabilities
Total non-current liabilities
Total liabilities
Commitments, contingencies and guarantees
Shareholders’ Equity
Common shares
Contributed surplus
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
APPROVED BY THE BOARD
December 31,
2017
$
December 31,
2016
$
Note
5
6
26.6
7
7,9
21.2
26.6
8
10
11
12
13
14
26.6
7
13
14
26.6
15,24
20,097
32,931
471,573
-
6,210
2,921
-
533,732
42,229
-
4,109
343
18,776
65,457
599,189
46,748
305,342
1,079
6,724
6,104
445
533
-
366,975
30,919
75
652
464
32,110
399,085
95,477
4,400
481
99,746
200,104
599,189
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
“Signed” Robert Herdman
Robert Herdman, 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, 2017 and 2016
Expressed in thousands of Canadian dollars except per share amounts
Sales
Cost of sales
Gross profit
Selling, general and administrative
Gain on derivative financial instruments
Loss on sale of vacant land
Restructuring charges
Earnings before finance costs and income taxes
Finance costs
Earnings before income taxes
Income taxes
Net earnings
Earnings per share
Basic
Diluted
Note
17
6
18
26.6
7
19
20
21.1
December 31,
2017
$
December 31,
2016
$
959,355
819,926
139,429
99,772
(4,578)
641
-
43,594
11,921
31,673
8,774
22,899
930,435
797,028
133,407
97,970
(4,751)
1,360
3,564
35,264
14,343
20,921
5,955
14,966
22
22
1.18
1.18
0.77
0.77
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Comprehensive Income
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars
December 31,
2017
$
December 31,
2016
$
Note
Net earnings
Other comprehensive income
Items which will subsequently be reclassified to net earnings:
Unrealized gain on derivative financial instruments, net of tax
26.6
Total other comprehensive income for the year, net of tax
Comprehensive income
22,899
14,966
2,852
2,852
25,751
1,238
1,238
16,204
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
Common shares
Note
Number of
shares
Amount
$
16.3
18
16.2
16.1
19,384
493
-
-
-
-
19,877
87,709
7,768
-
-
-
-
95,477
Common shares
Note
Number of
shares
Amount
$
18
16.2
16.1
19,384
-
-
-
-
19,384
87,709
-
-
-
-
87,709
Contributed
surplus
$
Accumulated
other
comprehensive
(loss) income
$
Retained
earnings
$
Total equity
$
6,065
(1,680)
15
-
-
-
4,400
(2,371)
-
-
-
2,852
-
481
85,778
-
-
22,899
-
(8,931)
99,746
177,181
6,088
15
22,899
2,852
(8,931)
200,104
Contributed
surplus
$
Accumulated
other
comprehensive
loss
$
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
Balance, December 31, 2016
Shares issued upon exercise of
stock options
Equity-settled share-based
payment expense
Net earnings
Other comprehensive income
Dividends paid
Balance, December 31, 2017
Balance, December 31, 2015
Equity-settled share-based
payment expense
Net earnings
Other comprehensive income
Dividends paid
Balance, December 31, 2016
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Cash Flows
Years Ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars
Operating activities
Net earnings
Adjustments for:
Depreciation and amortization expense
Deferred tax expense
Equity-settled share-based payment expense
Asset impairment loss on vacant land and other assets
Loss (gain) on disposal of property and equipment
Gain 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
Proceeds from issuance of common shares
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 (decrease) increase in cash
Cash, beginning of year
Cash, end of year
Taxes paid
Interest paid
December 31,
2017
$
December 31,
2016
$
Note
8,9
21.2
18
7
9
26.6
23
13
16.2
9
9
22,899
7,417
807
15
-
519
(4,578)
121
(20,245)
6,955
(10,590)
-
(441)
(8,931)
6,088
(111)
(13,985)
(5,993)
4,578
-
(1,415)
(8,445)
28,542
20,097
6,401
11,491
14,966
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
The accompanying notes are an integral part of these consolidated financial statements
1
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
1.
General information
Rocky Mountain Dealerships Inc. (“RME”) is incorporated under the Business Corporations Act (Alberta). Through its wholly-
owned subsidiaries, RME sells, leases and provides product and warranty support for a wide variety of agriculture equipment
in Western Canada. All of RME’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 and principal address of RME is located at Suite 301, 3345 8th Street S.E., Calgary, Alberta, T2G 3A4. The
registered and records office of RME is located at 1500, 850 2nd Street S.W., Calgary, Alberta, T2P 0R8.
2.
Basis of preparation
2.1.
Statement of compliance
RME 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 13, 2018.
2.2.
Adoption of new and revised standards and interpretations
The IASB issued amendments to International Accounting Standards which are effective for RME’s financial year beginning
on January 1, 2017. For the purpose of preparing and presenting the consolidated financial statements for the relevant periods,
RME has consistently adopted all of these amendments for the relevant reporting periods.
Amendment to IAS 7, ‘Statement of cash flows’
This amendment improves information provided to users of financial statements about changes in liabilities arising from the
entity’s financing activities. The adoption of this amendment had no material impact to RME’s financial statements.
Amendment to IAS 12, ‘Income taxes’
This amendment clarifies how to account for deferred tax assets related to debt instruments measured at fair value. The
adoption of this amendment had no material impact to RME’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. RME has not early adopted these standards, amendments or interpretations, however RME is currently
assessing what impact the application of these standards or amendments will have on the consolidated financial statements.
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. Management has
performed its assessment of the new standard and has assesed there will be no material impact to the consolidated financial
statements, other than additional note disclosure and the presentation of a contract liability for the return of parts on the
statement of financial position.
2
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
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. IFRS 9 also introduces new rules for hedge accounting and a new impairment model for
financial assets. This standard is effective for fiscal periods beginning on or after January 1, 2018. Management has performed
its assessment of the new standard and has assessed there will be no material impact to the consolidated financial statements.
Amendment to IFRS 7, ‘Financial instruments: Disclosures’
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. Management has performed its assessment of the new
standard and has assessed there will be no material impact to the consolidated financial statements, other than additional note
disclosures.
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. Management is currently in the process of assessing this
standard and its impact on the consolidated financial statements. This standard will affect primarily the accounting for RME’s
operating lease commitments.
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 RME’s functional 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 RME and its wholly-owned subsidiaries. Subsidiaries
are entities controlled by RME. Control exists when RME 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 RME 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 RME in exchange for control of the acquiree. Acquisition-related costs are
recognized within net earnings in the period in which they are incurred.
3
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
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 RME 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
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-
maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating
segments and has been identified as RME’s Chief Executive Officer. RME had two reportable operating segments, the
agriculture segment and the industrial segment. The industrial facilities were amalgamated into the existing agricultural facilities
during 2016. As a result the majority of RME’s industrial equipment distribution assets were transferred to agriculture branches.
After these amalgamations, RME only has one reportable segment.
3.5.
Cash
Cash consists of cash on hand.
3.6.
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 3.10.
4
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
3.7.
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 5), the net realizable value of inventory (Note 3.13), the valuation of equipment taken in on trade (Note 3.13), the timing
of revenue recognition (Note 3.14), the depreciation periods and methods applied to items of property and equipment (Note
3.6), the net recoverable value of goodwill (Note 10), the fair value of derivative financial instruments (Note 3.21.10), impairment
of assets other than goodwill (Note 3.10), share-based transactions (Note 3.17), the fair value of business combinations (Note
3.3), and the value of annual performance incentives from manufacturers (Note 3.15.1).
3.8.
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. RME’s identifiable intangible assets consist of intellectual properties acquired pursuant to
the acquisition of NGF Geomatics Inc. (“NGF”) during 2015. RME expects the useful life of these assets to be five years.
3.9.
Goodwill and impairment of goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of RME’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 the cash-generating unit (“CGU”) 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 the 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.
3.10.
Impairment of assets other than goodwill
At the end of each reporting period, RME 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, RME compares the estimated recoverable amount of the CGU to which the asset
belongs to its carrying value to determine whether, and the extent to which, the asset is impaired as described in Note 3.9.
5
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
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.
3.11.
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 reflects the potential dilution that could occur if options to purchase common
shares were exercised. The treasury stock method is used to determine the dilutive effect of options, whereby any proceeds
received by RME 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 RME’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.
3.12.
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.
3.13.
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.
3.14.
Revenue recognition
Sales are measured at the fair value of the consideration received or receivable.
3.14.1. 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:
• RME has transferred to the buyer the significant risks and rewards of ownership of the goods;
• RME 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 RME; and
•
•
6
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
•
the costs incurred or to be incurred in respect of the transaction can be measured reliably.
3.14.2. 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 RME;
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.
3.15.
Manufacturers Incentives
3.15.1. Annual performance incentives
Certain manufacturers offer annual performance incentives which are linked to RME’s market share achievement and annual
settlement volumes. RME 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 settlement volume to accrue manufacturer
incentives earned during the year. The original equipment manufacturer will typically reassess targets on an annual basis.
Annual performance incentives are recorded as a reduction to cost of sales. A credit to our account for the annual performance
incentive is typically received in the first quarter following year end.
3.15.2. Transactional incentives
Certain manufacturers offer incentives for selling volumes of qualifying equipment. This transactional incentive is recognized
when it is earned and it is earned when the unit is sold. A credit to our account is received the following quarter after the unit
is settled with the original equipment manufacturer. Transactional incentives are recorded as a reduction to cost of sales.
3.16.
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.
3.17.
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. RME 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 RME’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 16.4 and Note 16.5.
3.18.
Employee Share Ownership Plan
RME has an Employee Share Ownership Plan (“ESOP”). Under the ESOP, RME matches eligible employee contributions,
subject to certain limitations based on employee tenure. RME’s formerly-constituted Compensation, Governance and
Nominating Committee, now its Compensation and Human Resources Committee, may approve modifications to these
7
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
limitations as part of executive compensation plans. RME’s contributions vest immediately to the employee and are expensed
as incurred.
ESOP shares are purchased on the open market. Dividends paid on RME’s common shares held for the ESOP are used to
purchase additional common shares on the open market.
3.19.
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
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.
3.20.
Foreign currency translation
Transactions in currencies other than RME’s functional currency are recorded at the rates of exchange prevailing on the dates
of the transactions. At each reporting date, monetary assets and liabilities denominated in foreign currencies are retranslated
at prevailing rates.
3.21.
Financial instruments
Financial assets and liabilities are recognized when RME 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.
3.21.1. 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. RME has no financial assets classified as held-to-maturity or AFS.
8
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
3.21.2. 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.
3.21.3. 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;
•
• on initial recognition, it is part of a portfolio of identified financial instruments that RME 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 instruments, which is managed and its performance is
evaluated on a fair value basis, in accordance with RME’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. RME 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 3.21.10 and 26.6.
3.21.4. 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.
RME has classified its cash and trade receivables and other as loans and receivables.
3.21.5. Other financial liabilities
Other financial liabilities are measured at amortized cost using the effective interest method.
RME has classified its 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.
9
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
3.21.6. 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, RME’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.
3.21.7. Derecognition of financial instruments
RME 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.
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.
RME derecognizes a financial liability when RME’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.
3.21.8. Classification as debt or equity
Debt and equity instruments issued by RME 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.
3.21.9. Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of RME after deducting all of its liabilities.
Equity instruments issued by RME are recognized at a value equal to the proceeds received, net of direct issue costs.
Repurchases of RME’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 RME’s own equity instruments.
3.21.10. Derivative financial instruments and hedging activities
Derivative financial insturments 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 RME’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. RME may designate derivatives of a particular risk associated with a recognized
asset or liability or highly probable forecast transaction as cash flow hedges.
RME 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.
10
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
RME has designated its floating-to-fixed interest rate swaps as cash flow hedges. RME 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 income (loss) are reclassified to net earnings in the periods when the hedged item affects
profit or loss.
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.
RME 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). RME does not apply hedge accounting to these
relationships 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 Note 17 and 18 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 RME.
5.
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,
2017
$
December 31,
2016
$
15,088
1,284
1,040
17,412
(847)
16,565
15,916
450
32,931
9,639
948
1,627
12,214
(1,206)
11,008
15,275
1,221
27,504
RME 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.
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
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,
11
December 31,
2017
$
December 31,
2016
$
1,206
(47)
(312)
847
1,939
(87)
(646)
1,206
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. RME takes
into consideration the customer’s payment history, their creditworthiness and the current economic environment in which the
customer operates to assess impairment. RME’s historical bad debt expenses have not been significant and are generally
limited to specific customer circumstances.
6.
Inventory
New equipment
Used equipment
Parts
Work-in-progress
December 31,
2017
$
December 31,
2016
$
115,928
314,994
38,618
2,033
471,573
113,517
289,485
37,781
1,959
442,742
For the year ended December 31, 2017, inventory recognized as an expense amounted to $807,019 (2016 – $782,802), which
is included in cost of sales in the consolidated statement of net earnings.
For the year ended December 31, 2017, there were write downs of inventory to net realizable value of $5,845 (2016 – $4,702)
in cost of sales in the consolidated statement of net earnings. Circumstances that give rise to the write down of primarily used
inventory include fluctuations in market price, profile and age in inventory. For the year ended December 31, 2017, there were
reversals of write downs of inventory to net realizable value of $Nil (2016 – $Nil). RME’s inventory has been pledged as
security for its floor plan payable and long-term debt.
12
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
7.
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, 2015
Classified as held for sale during the period (Note 9)
Disposed of during the period
Impairment charges recognized during the period
December 31, 2016
Non-current – presented within property and equipment (Note 9)
Current
Disposed of during the period
December 31, 2017
Non-current – presented within property and equipment (Note 9)
Current
2,070
3,899
(3,468)
-
2,501
-
2,501
(2,501)
-
-
-
8,311
-
(39)
(1,360)
6,912
6,912
-
(4,699)
2,213
2,213
-
161
495
(556)
(100)
-
-
-
-
-
-
-
10,542
4,394
(4,063)
(1,460)
9,413
6,912
2,501
(7,200)
2,213
2,213
-
During the second quarter of 2017, one parcel of vacant land that was classified as a non-current asset held for sale, was
disposed of, resulting in a loss of $641.
In 2016, RME recorded asset impairment charges of $1,360 on vacant land which was considered redundant and $100 on
operational assets that were disposed of during 2016.
Liabilities associated with assets held for sale include:
December 31, 2015
Classified as held for sale during the period
Repaid during the period
December 31, 2016
Repaid during the period
December 31, 2017
Liability
associated
with assets
held for sale
$
1,562
2,617
(2,573)
1,606
(1,606)
-
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
8.
Intangible assets
Intangible assets are comprised of intellectual properties acquired pursuant to an acquisition in 2015.
Cost
December 31, 2015
December 31, 2016
December 31, 2017
Accumulated amortization
December 31, 2015
Amortization charge
December 31, 2016
Amortization charge
December 31, 2017
Net book value
December 31, 2015
December 31, 2016
December 31, 2017
13
Intangible
Assets
$
822
822
822
151
164
315
164
479
671
507
343
Included in selling, general and administrative expenses for the year ended December 31, 2017 is amortization expense of
$164 (2016 - $164).
14
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
9.
Property and equipment
Cost
December 31, 2015
Additions
Business combinations
Assets held for sale (Note 7)
Disposals
December 31, 2016
Additions
Disposals
December 31, 2017
Accumulated depreciation
December 31, 2015
Depreciation charge
Disposals
December 31, 2016
Depreciation charge
Disposals
December 31, 2017
Net book value
December 31, 2015
December 31, 2016
December 31, 2017
Land
$
Buildings
$
Computer
equipment
$
Furniture
and fixtures
$
Leasehold
improve-
ments
$
Shop tools
and
equipment
$
Vehicles
$
Total
$
8,840
81
-
6,912
(349)
15,484
7
(4,748)
10,743
-
-
-
-
-
-
-
13,960
4,110
78
(495)
(422)
17,231
7
(67)
17,171
737
778
(237)
1,278
868
(37)
2,109
8,840
15,484
10,743
13,223
15,953
15,062
9,883
1,801
-
-
(3,263)
8,421
909
(896)
8,434
7,196
1,742
(3,239)
5,699
1,168
(896)
5,971
2,687
2,722
2,463
4,387
1,242
-
-
(424)
5,205
296
(34)
5,467
2,827
459
(384)
2,902
487
(29)
3,360
1,560
2,303
2,107
5,934
1,065
-
-
(858)
6,141
552
(111)
6,582
2,451
668
(504)
2,615
689
(70)
3,234
3,483
3,526
3,348
11,265
882
-
-
(512)
11,635
643
(49)
12,229
8,207
1,294
(320)
9,181
1,266
(72)
10,375
3,058
2,454
1,854
18,695
2,117
-
-
(2,685)
18,127
3,579
(1,320)
20,386
11,658
2,650
(2,325)
11,983
2,775
(1,024)
13,734
7,037
6,144
6,652
72,964
11,298
78
6,417
(8,513)
82,244
5,993
(7,225)
81,012
33,076
7,591
(7,009)
33,658
7,253
(2,128)
38,783
39,888
48,586
42,229
Included in selling, general and administrative expenses for the year ended December 31, 2017 is depreciation expense of $7,253 (2016 – $7,591) and a loss on the
disposal of property and equipment of $519 (2016 – gain of $208). As at December 31, 2017, assets under finance leases included in computer equipment and vehicles
have net carrying amounts of $755 and $21 (2016 – $1,053 and $28), respectively. Certain items of property and equipment have been pledged as security for RME’s
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, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
10.
Goodwill
Opening balance
Recognized on business acquisitions
Ending balance
15
December 31,
2017
$
December 31,
2016
$
18,776
-
18,776
18,802
(26)
18,776
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. During 2017 RME finished amalgamating its industrial distribution facilities
into existing agriculture facilities, creating one CGU. All of the goodwill has been allocated to the one CGU. In 2016, goodwill
was allocated to the agriculture CGU.
RME’s CGU has been assessed for impairment annually on December 31, 2017 and 2016. 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, 2017 and 2016 RME 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, 2017, the rate used to discount the forecasted cash flows was 12.3% (2016 – 10.3%), and represents
RME’s estimate of the pre-tax discount rate reflecting current market assessments of the time value of money and the risks
specific to RME’s CGU. The recoverable amount of the CGU exceeded its carrying value at the impairment test dates.
RME 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 4.6% (2016 – 7.3%) higher than
management’s estimates or the estimated growth rate used in extrapolating forecasted results been 8.5% (2016 – 14.5%) lower,
the recoverable amount of the CGU would equal its carrying amount for the respective periods. Any additional negative change
in the assumptions would cause goodwill to be impaired.
11.
Trade payables, accruals and other
Trade payables and accruals
Directors’ share units (Note 16.4)
Share appreciation rights (Note 16.5)
12.
Floor plan payable
December 31,
2017
$
December 31,
2016
$
43,400
823
2,525
46,748
46,528
667
800
47,995
RME 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, 2017 (2016 – ranging from 0.0% to the bank’s
prime rate plus 4.3%). At December 31, 2017, RME had unused floor plan of approximately $252,666 available (2016 –
$293,727). The amounts due are secured by specific new and used equipment inventories and the payments are due when the
16
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
equipment is sold or transferred, up to a maximum term of 48 months. At December 31, 2017, RME’s US denominated floor
plan payable translated into Canadian currency was $3,050 (2016 – $2,014). 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, RME is required to monitor and report certain non-IFRS measures (Note 27).
13.
Long-term debt
During 2017, RME renewed its Syndicated Facility extending the maturity date to September 24, 2020.
The following table summarizes RME’s long-term debt:
Term Facility, revolving facility with tranches payable in quarterly principal instalments
plus interest over periods of 7 to 15 years (2016 –7 to 15 years). The effective
interest rate at December 31, 2017 was 3.5% (2016 – 3.0%)
Various other facilities
Less: current portion
Less: deferred debt issuance costs
Long-term portion
December 31,
2017
$
December 31,
2016
$
37,243
47,818
9
37,252
(6,104)
(229)
30,919
23
47,841
(6,825)
(238)
40,778
During 2017, RME applied $4,000 of proceeds received on the disposition of the vacant land against our Term Facility. This
unscheduled debt payment reduces our future quarterly principal payments from $1,730 to $1,557.
14.
Obligations under finance leases
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 RME’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, 2017 (2016 – 1.9% to 5.5%).
The fair values of the obligations under finance leases approximate their carrying amounts as interest rates are consistent with
market rates for similar debt.
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
Future minimum payments under finance leases along with the balance of the obligations under finance leases are as follows:
17
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
Less: current portion of obligations under finance leases
Long-term portion of obligations under finance leases
15.
Contingency and guarantee
December 31,
2017
$
December 31,
2016
$
453
76
-
529
(9)
520
(445)
75
458
529
-
987
(26)
961
(440)
521
RME 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. RME is exposed to potential losses arising from the difference between the assessed
value of the underlying security and the amounts guaranteed by RME. 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 RME, management believes that the net exposure is not significant. As at December 31, 2017, gross recourse
amounted to $1,315 (2016 - $2,066), prior to any consideration of the value associated with the securitized assets. As at
December 31, 2017, RME has accrued $328 (2016 - $715) for anticipated losses in trade payables, accruals and other.
16.
Share capital
16.1.
Common shares
RME is authorized to issue an unlimited amount of common shares with no par value. As at December 31, 2017, 19,877
thousand shares were issued and outstanding (2016 – 19,384 thousand). All issued and outstanding shares were fully paid as
at December 31, 2017 and 2016.
16.2.
Dividends paid
Dividends declared and paid during the year ended December 31, 2017 were $8,931 or $0.46 per share (2016 – $8,917 or $0.46
per share).
On February 7, 2018, the Board of Directors declared a dividend of $0.115 per common share on RME’s outstanding common
shares. The dividend is payable on March 30, 2018, to shareholders of record at the close of business on February 28, 2018.
16.3.
Stock options
RME has a stock option plan under which the Board of Directors may grant options to directors, officers, and employees of RME
at an exercise price equal to the market price of RME’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.
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.
18
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
The reconciliation of options outstanding during the years ended December 31 is as follows:
January 1,
Exercised
Expired
Forfeited
December 31,
2017
2016
Number of
options
(thousands)
Weighted
average
exercise
price
$
904
(493)
(30)
(208)
173
12.13
12.35
12.15
11.96
11.71
Number of
options
(thousands)
1,165
-
(172)
(89)
904
Weighted
average
exercise
price
$
11.66
-
9.00
12.09
12.13
No new options were granted during the years ended December 31, 2017 and December 31, 2016.
Options outstanding at December 31, 2017 are summarized as follows:
Grant date
Options outstanding
(thousands)
Options exercisable
(thousands)
Weighted average
exercise price
($)
Weighted average
contractual life
(years)
March 13, 2013
March 13, 2014
24
149
173
24
149
173
12.89
11.52
11.71
0.2
1.2
1.1
16.4.
Directors’ share unit plan
RME has instituted a directors’ share unit (“DSU”) plan. Under this plan, the Board of Directors may grant DSUs to non-officer
directors of RME 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 RME. 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 RME by the volume weighted average trading price of RME’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 RME’s shares over the immediately preceding 20 day trading period. At December 31, 2017,
$823 was included in trade payables, accruals and other with respect to the DSUs (2016 – $667). During the year ended
December 31, 2017, 37 thousand DSUs were redeemed (2016 – 36 thousand DSUs were redeemed).
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
Loss on mark to market revaluation(1)
December 31,
(1) Included in selling general and administrative expenses.
2017
2016
DSUs
(thousands)
$
DSUs
(thousands)
$
71
26
(37)
-
60
667
264
(353)
245
823
75
32
(36)
-
71
454
221
(228)
220
667
19
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
As at December 31, 2017 and 2016, RME has several total return swaps as an economic hedge for RME’s DSUs (Note 26.6).
16.5.
Share appreciation rights plan
RME 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 expire 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. RME 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.
SARs exercised and forfeited for the years ended December 31 are as follows:
January 1,
Exercised
Forfeited
December 31,
2017
Number of
SARs
(thousands)
2016
Number of
SARs
(thousands)
1,057
(425)
(33)
599
1,146
-
(89)
1,057
As at December 31, 2017, RME recognized a SARs liability of $2,525 (2016 - $800) and an SARs expense of $2,995 (2016 -
$757).
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 RME’s publicly traded shares.
2017
2016
1.4%
1.2
24.7%
$0.46
$8.82
$13.70
$4.56
0.5%
2.1
29.8%
$0.46
$9.67
$9.69
$1.24
As at December 31, 2017 and 2016, RME has several total return swaps as an economic hedge for RME’s SARs (Note 26.6).
16.6.
Employee share ownership plan
During the year ended December 31, 2017, RME recognized $1,201 in selling, general and administrative expenses with respect
to Company matched ESOP contributions (2016 – $1,163).
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
17.
Sales
RME’s annual sales consist of the following for the respective years ended:
New equipment sales
Used equipment sales
Parts sales
Sale of goods
Rendering of services
Total sales
20
December 31,
2017
$
December 31,
2016
$
(Note 4)
435,683
381,577
109,582
926,842
32,513
959,355
412,301
377,516
108,807
898,624
31,811
930,435
18.
Selling, general and administrative
RME’s selling, general and administrative (“SG&A”) 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 SG&A before overhead
Product support overhead
Total SG&A
December 31,
2017
$
December 31,
2016
$
(Note 4)
64,541
19,660
13,319
7,417
15
104,952
(5,180)
99,772
64,211
17,855
13,240
7,755
136
103,197
(5,227)
97,970
Included in compensation and related expenses for the year ended December 31, 2017 are variable sales commissions of
$13,303 (2016 – $13,210).
Depreciation and amortization expense for the year ended December 31, 2017 is comprised of depreciation of property and
equipment of $7,253 (2016 - $7,591) and amortization of intangible assets of $164 (2016 - $164).
Administrative expenses consist of marketing, training, insurance, travel, professional fees and other miscellaneous expenses.
Product support overhead is the allocation of expenses to cost of sales relating to the overhead required to bring equipment
inventory to a saleable state. Product support overhead was included in administrative expenses in previous periods.
19.
Restructuring costs
During the year ended December 31, 2016, RME recognized $3,564 of costs associated with the amalgamation of RME’s
Calgary and Red Deer industrial facilities into existing agriculture facilities in those areas. Included in these expenses are
expenses associated with terminating the leases on these facilities, one of which is leased from a related party (see Note 25).
There were no facilities amalgamated in 2017.
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
20.
Finance costs
Finance costs include interest and other finance-related charges, including amortization of deferred finance costs. RME’s
finance costs associated with its short- and long-term debt facilities for the respective years ended are as follows:
21
Finance costs associated with short-term debt
Finance costs associated with long-term debt
Finance costs
21.
Income taxes
21.1.
Income tax recognized in net earnings
December 31,
2017
$
December 31,
2016
$
10,151
1,770
11,921
12,548
1,795
14,343
Income tax expense is comprised of current and deferred tax expense for the respective years ended as follows:
Current
Deferred
Income tax expense
December 31,
2017
$
December 31,
2016
$
7,967
807
8,774
5,277
678
5,955
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% (2016 – 27%)
Non-deductible expenses and losses
Income tax credits
Adjustment from prior year income tax expenses
Other
December 31,
2017
$
December 31,
2016
$
31,673
8,552
277
(103)
20
28
8,774
20,921
5,649
500
(102)
(38)
(54)
5,955
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
21.2.
Deferred tax asset (liability)
22
Intangible
Share
issue
costs
$
Cumulative
eligible
capital
$
Property
and
equipment
$
December 31, 2015
Added in acquisition
Recognized in net
earnings
Recognized in equity
December 31, 2016
Recognized in net
earnings
Recognized in equity
December 31, 2017
89
-
(62)
-
27
21
-
48
116
-
(29)
-
87
(27)
-
60
(183)
(21)
379
-
175
(80)
-
95
$
(181)
-
44
-
(137)
45
-
(92)
asset
DSUs &
SARs
$
Derivatives
$
Tax
credits
$
123
-
273
-
396
508
-
904
2,403
-
(1,283)
(458)
662
(1,236)
(1,055)
(1,629)
-
-
-
(38)
-
(38)
Total
$
2,367
(21)
(678)
(458)
1,210
(807)
(1,055)
(652)
RME has net allowable capital losses in the amount of $4,077 with no fixed expiry date for which no deferred tax asset has been
recognized as RME does not expect to have sufficient future taxable profit against which these losses can be utilized.
RME also has non-capital losses of $1,671 which expire between 2033 and 2034 for which no deferred tax asset has been
recognized as these non-capital losses are available within an entity that has no reasonable expectation of future taxable profit.
22.
Earnings per share
During the year ended December 31, 2017, there were no dilutive and 173 anti-dilutive stock options outstanding (2016 – no
dilutive and 904 anti-dilutive stock options outstanding). Net earnings and the weighted average number of ordinary shares used
in the calculations of basic and diluted earnings per share (“EPS”) for the respective periods were as follows:
Thousands
Net earnings used in the calculation of basic and diluted EPS ($)
Weighted average number of ordinary shares used in the
calculation of basic and diluted EPS (thousands)
Basic and diluted EPS ($)
December 31,
2017
December 31,
2016
22,899
19,413
1.18
14,966
19,384
0.77
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
23.
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:
23
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
24.
Operating lease arrangements
December 31,
2017
$
December 31,
2016
$
-
(5,427)
487
(28,831)
(2)
2,501
(1,247)
1,079
9,281
(1,606)
3,520
(20,245)
879
(2,352)
(440)
57,018
(695)
(431)
14,741
-
(60,507)
44
(1,200)
7,057
Operating leases relate primarily to RME’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, 2017, RME recognized $9,253 of operating lease
payments as expenses (2016 – $9,033).
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,
2017
$
December 31,
2016
$
7,925
22,007
5,574
35,506
8,169
17,214
6,442
31,825
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
25.
Related party transactions
RME entered into the following transactions with related parties for the respective years ended:
24
Equipment and product support sales
Expenditures
Rental payment on RME facilities
Equipment purchases
Flight costs
Contributions(1)
Other expenses
(1) Contributions include payments to Ag for Life and Alberta Prosperity Fund
December 31,
2017
$
December 31,
2016
$
2,683
514
5,987
1,278
55
57
42
5,832
271
74
157
33
During 2017, RME settled the remaining lease obligation associated with a vacated industrial facility which was leased from a
related party for total consideration of $467. During 2017, RME also received $360 in lease inducements from a related party
as part of a new leasehold agreement. Both of these amounts have been presented above within “Rental payments on RME
facilities”.
All related parties are either directly or indirectly owned by a member of senior management or director of RME 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 RME was determined for the years presented by the Compensation and Human
Resources Committee (formerly, the Compensation, Governance and Nominating Committee) of the Board of Directors, based
on performance and is consistent with market trends. The remuneration of directors and officers of RME identified as key
management is as follows for the respective years ended December 31:
Salary and short-term benefits
Post-retirement benefits
Share-based compensation
December 31,
2017
$
December 31,
2016
$
3,054
35
2,973
6,062
2,754
25
1,115
3,894
Key management personnel are comprised of RME’s senior officers and directors. As at December 31, 2017, there is a $2,038
contingent commitment (2016 – $1,528) 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,
2017
$
December 31,
2016
$
27
(1,087)
45
(766)
25
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
The amounts due from related parties are not secured and are to be settled in cash. As at December 31, 2017 and 2016, 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, 2017, $Nil has been recognized in bad debt expenses with respect to
related party transactions (2016 – $Nil).
RME has contractual obligations to related parties in the form of facility leases. As at December 31, 2017, these contractual
obligations and due dates are as follows:
$ thousands
Total
2018
2019-2020
2021-2022
Thereafter
Operating lease obligations
31,663
5,777
11,011
9,320
5,555
26.
Financial instruments and financial risk management
RME, 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, 2017 and 2016.
26.1.
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to RME.
RME 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, RME uses other publicly available
financial information and its own trading records to rate its major customers. RME’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.
RME’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 RME’s trade receivables is disclosed in Note 5. Contracts in transit and warranty receivables are due from
counterparties who maintain strong credit ratings and RME has a history of collecting on these accounts. Trade receivables
consist of amounts due from a large number of customers, spread across geographic areas. On-going credit evaluation is
performed on the financial condition of the customers.
26.2.
Market risk
Market risk is the risk from changes in market prices, such as changes in foreign currency exchange rates, interest rates, and
RME’s stock price which will affect RME’s earnings as well as the value of the financial instruments held and cash-settled share
based instruments outstanding.
26.2.1. Foreign currency exchange risk and sensitivity analysis
Certain of RME’s financial instruments are exposed to fluctuations in the U.S. dollar (“USD”). When considered appropriate,
RME purchases forward contracts for USD as a means of mitigating this risk.
26
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
The following table details RME’s exposure to currency risk at December 31, 2017 and 2016 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 exchange rate. For the respective
weakening of the USD, there would be an equal and opposite effect on net earnings. The effect of net earnings is presented
net of tax.
December 31, 2017
December 31, 2016
Change in
currency rates
%
Expressed
in CAD
$
Effect on net
earnings year
ended
$
Expressed
in CAD
$
Effect on net
earnings year
ended
$
Cash
Trade payables, accruals and other
Floor plan payable
5.0
5.0
10.0
2,297
(422)
(3,050)
(1,175)
84
(15)
(222)
(153)
2,577
(289)
(2,014)
274
94
(11)
(148)
(65)
Included in selling, general and administrative expense are net gains recognized due to foreign currency translation for
transactions and balances aggregating $692 for the year ended December 31, 2017 (2016 – gains of $715).
26.2.2.
Interest rate risk and sensitivity analysis
RME’s financial liabilities are exposed to fluctuations in interest rates with respect to certain of its long-term liabilities and floor
plan payable.
RME manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps when appropriate. Generally, RME
will raise floor plan financing and/or long-term debt at floating rates. When RME 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 RME’s exposure to interest rate risk as at December 31, 2017 and 2016 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. The effect on net earning is presented net of tax. This analysis excludes floating rate financial liabilities for which
RME has hedged its exposure to interest rate fluctuations through the use of floating-to-fixed interest rate swaps, as well as
interest rate swaps themselves.
Change in
interest rates
%
December 31, 2017
December 31, 2016
Floating rate
financial
liabilities
$
Effect on net
earnings year
ended
$
Floating rate
financial
liabilities
$
Effect on net
earnings year
ended
$
0.5
0.5
82,511
6,572
89,083
301
24
325
89,964
28,568
118,532
328
104
432
Floor plan payable(1)
Term Facility
(1) 2016 includes liabilities associated with assets held for sale.
27
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
26.2.3. Equity price risk and sensitivity analysis
RME’s financial assets (liabilities) are exposed to fluctuations in its stock price with respect to the total return swaps.
The following table details RME’s exposure to equity price risk as at December 31, 2017 and 2016, including a sensitivity analysis
measuring the impact on net earnings of a 5% decrease in RME’s share price. An increase of 5% would result in an equal and
opposite effect on net earnings. The effect on net earning is presented net of tax.
December 31, 2017
December 31, 2016
Total return
swap
financial
asset
$
Effect on net
earnings year
ended
$
Total return
swap
financial
asset
$
Effect on net
earnings year
ended
$
Change in
stock price
%
Total return swaps
5.0
5,343
(585)
869
(449)
26.3.
Liquidity risk
RME’s objective is to have sufficient liquidity to meet its liabilities when due. RME monitors its cash balance and cash flows
generated from operations as well as available credit facilities to meet its requirements.
RME 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
2017 and 2016, advances under the Syndicated Facility could 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%. RME 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,
2020, however, it is RME’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,
2017
$
December 31,
2016
$
60,000
75,000
125,000
60,000
75,000
125,000
In addition to the Flooring Facility, RME has additional floor plan facilities of approximately $433,580 as at December 31, 2017
(2016 – $467,000).
28
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
RME assesses its liquidity based on the expected period in which cash flows will occur. The following tables summarize RME’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, 2017
Trade payables, accruals and other(1)
Floor plan payable
Long-term debt
Obligations under finance leases
Derivative financial liabilities
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
Interest and
principal
outstanding
$
43,400
314,968
41,564
529
1,079
401,540
Interest and
principal
outstanding
$
46,528
307,665
53,066
987
3,614
411,860
(1) Trade payables, accruals and other excludes DSUs and SARs which are not financial instruments.
(2) Includes liabilities associated with assets held for sale.
2018
$
2019-2020
$
2021-2022
$
Thereafter
$
43,400
314,968
7,376
453
570
366,767
-
-
14,107
76
509
14,692
-
-
13,267
-
-
13,267
-
-
6,814
-
-
6,814
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
The Term Facility included in long-term debt is governed by a syndicated credit agreement which, if not renewed, will mature on
September 24, 2020. 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,
2017 would be $32,507 in 2019-2020 and $Nil in subsequent periods (2016 – $42,643 for 2018-2019 and $Nil in subsequent
periods).
26.4.
Fair value of financial instruments carried at amortized cost
The carrying amounts of cash, trade receivables and other, 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.
26.5.
Fair value measurements recognized in the consolidated statement of financial position
RME’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. RME 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). RME’s Level 2 financial instruments consist
29
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
of interest rate swaps and total return swaps. As at December 31, 2017, RME had a net derivative financial asset of
$6,033 associated with these derviatives (2016 – net derivative financial liabilite of $2,452).
• 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). RME has no Level 3
financial instruments.
There were no transfers between Level 1 and 2 during 2017 or 2016.
26.6.
Derivative financial instruments and hedges
RME 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, RME 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 RME’s exposure to interest rate fluctuations on
portions of the Term Facility and various floor plan facilities. The accumulated amounts recognized within accumulated other
comprehensive income (loss) will be reversed into net earnings over the remainder of the term of the derivatives. Future changes
in fair value will be recognized as descrived in Note 3.21.10. For the year ended, December 31, 2017, RME recognized a gain
of $104 (2016 – gain of $276) associated with its interest rate swaps in the statement of net earnings and a gain of $2,852 (2016
– gain of $1,238), net of tax in other comprehensive income.
Interest rate swaps outstanding for the years ended December 31 are as follows:
December 31,
2017
December 31,
2016
Notional amount
Effective fixed interest rate
Effective floating interest rate
Maturity dates
$ 140,671
4.7%
4.0%
August 2018 – April 2023
$ 129,250
4.9%
3.6%
April 2017 – September 2022
RME has several total return swaps to hedge the exposure associated with increases in its share value on its outstanding DSUs
and SARs. RME does not apply hedge accounting to these relationships 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, 2017, RME’s total return swaps cover 1,170 thousand of RME’s underlying common shares (2016 – 1,270
thousand). For the year ended, December 31, 2017, RME recognized a gain of $4,474 (2016 – gain of $4,475) associated with
its total return swaps.
Derivative financial assets consist of:
Total return swaps
Interest rate swaps
Current portion
Long-term portion
December 31,
2017
$
December 31,
2016
$
5,343
1,687
7,030
2,921
4,109
868
-
868
290
578
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
Derivative financial liabilities consist of:
Interest rate swaps
Current portion
Long-term portion
Gains on derivative financial instruments are as follows:
Opening net derivative financial liability
Gain recognized in net earnings
Gain recognized in other comprehensive income – net of tax
Tax on gain recognized in other comprehensive income
Ending net derivative financial (asset) liability
30
December 31,
2017
$
December 31,
2016
$
997
533
464
3,320
1,449
1,871
December 31,
2017
$
December 31,
2016
$
2,452
(4,578)
(2,852)
(1,055)
(6,033)
8,899
(4,751)
(1,238)
(458)
2,452
The balance in accumulated other comprehensive income (loss) relates to changes in the value of RME’s various interest rate
swaps. These accumulated amounts 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.
27.
Management of capital
RME’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, RME includes shareholders’ equity, long-term debt and obligations under finance leases (including
current portions thereof), and floor plan payable.
RME 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, RME 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.
RME 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.
RME 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 income (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.
The debt to equity ratio target excluding floor plan payable is between 0.2 and 0.4 to 1. As at December 31, 2017 RME was
slightly outside its target range for this ratio (2016, RME was within its target range for this ratio). The debt to equity ratio target
31
Notes to the Consolidated Financial Statements
Years ended December 31, 2017 and 2016
Expressed in thousands of Canadian dollars except per share and per option amounts
for RME including floor plan payable is debt between 2.0 and 3.0 to 1.0. As at December 31, 2017 RME was outside its target
range for this ratio (2016, RME was outside its target range for this ratio) due to RME applying avalible cash against interest
bearing debt.
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 Includes liabilities associated with assets held for sale.
December 31,
2017
$
December 31,
2016
$
6,104
445
30,919
75
37,543
305,342
342,885
6,825
440
40,778
521
48,564
297,667
346,231
200,104
177,181
0.19
1.71
0.27
1.95
Pursuant to agreements with lenders, RME 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,
2017
December 31,
2016
1.15-1.20:1
4.00-5.00:1
1.20:1
1.15-1.20:1
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,
2017 and 2016, RME was in compliance with all externally imposed capital requirements.
28.
Economic dependence
RME is a retail dealer of CNH equipment (with a distribution agreement through CNH Industrial Canada Ltd.), and is therefore
party to dealership and distribution contracts with various affiliates of CNH. These contracts grant RME the right to act as an
authorized dealer of CNH equipment brands including Case IH agriculture, Case Construction and New Holland. This also
entitles RME 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 RME does not observe certain established guidelines and covenants.
This is a common provision in the industry in which RME operates.
29.
Subsequent event
In January 2018, RME initiated the unwinding of 510 thousand shares of our equity hedge position in order to realign the hedge
position with the number of SARs and DSUs outstanding. RME anticipates that a loss will be recognized on the unwinding of
this position as a result of the decline in the share price during the unwinding period, with such period culminating during the first
quarter of 2018.
ROCKY
MOUNTAIN
DEALERSHIPS
1
ROCKY MOUNTAIN DEALERSHIPS INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2017
This Management’s Discussion and Analysis (“MD&A”) was prepared as of March 13, 2018, and is provided to assist readers
in understanding Rocky Mountain Dealerships Inc.’s financial performance for the year ended December 31, 2017. It should
be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2017 and 2016
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 “RME”, “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”).
RME’s common shares trade on the Toronto Stock Exchange under the symbol ‘RME’. Additional information relating to
RME, including RME’s Annual Information Form, dated March 13, 2018 (“AIF”), is available on the System for Electronic
Document Analysis and Retrieval (“SEDAR”) website at www.sedar.com.
This MD&A contains forward-looking information and statements (collectively, “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, 2017, have been
calculated using the same periods in the prior year as comparative figures. Changes in our financial position as at December
31, 2017, are calculated using December 31, 2016 as the comparative.
SELECTED FINANCIAL INFORMATION
$ thousands
Sales
Cost of sales
Gross profit
Gross profit as a % of sales
Selling, general and administrative
(Gain) loss on derivative financial instruments
Loss on vacant land
Restructuring charges
Earnings before finance costs and income taxes
Finance costs
Earnings before income taxes
Income taxes
Net earnings
Net earnings as a % of sales
Earnings per share
Basic
Diluted
Dividends per share
Book value / diluted share – December 31
For the quarter ended
December 31,
2016
2017
2015
2017
For the year ended
December 31,
2016
273,389
235,176
38,213
14.0%
285,749
251,633
34,116
11.9%
285,587
248,049
37,538
13.1%
959,355
819,926
139,429
14.5%
930,435
797,028
133,407
14.3%
27,275
(3,131)
-
-
14,069
2,799
11,270
3,099
8,171
3.0%
25,205
(605)
-
-
9,516
3,346
6,170
1,466
4,704
1.6%
0.42
0.42
0.115
0.24
0.24
0.115
27,175
274
-
-
10,089
3,813
6,276
1,696
4,580
1.6%
0.24
0.24
0.115
0.25
8,966
25,260
8.8%
6,844
99,772
(4,578)
641
-
43,594
11,921
31,673
8,774
22,899
2.4%
1.18
1.18
0.46
10.07
1.16
40,163
89,115
9.3%
(720)
97,970
(4,751)
1,360
3,564
35,264
14,343
20,921
5,955
14,966
1.6%
0.77
0.77
0.46
9.14
0.83
31,621
89,238
9.6%
87,626
2015
975,456
833,475
141,981
14.6%
108,228
3,548
-
-
30,205
14,807
15,398
4,105
11,293
1.2%
0.58
0.58
0.46
8.78
0.71
28,622
100,612
10.3%
92,193
Adjusted Diluted Earnings per Share(1)
Adjusted EBITDA(1)
Operating SG&A(1)
Operating SG&A(1) as a % of sales
Operating Cash Flow before Changes in Floor Plan(1)
(1) – See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below.
0.39
12,754
23,066
8.4%
(36,367)
0.23
8,176
23,044
8.1%
14,542
ROCKY
MOUNTAIN
DEALERSHIPS
SUMMARY OF THE QUARTER ENDED DECEMBER 31, 2017
Sales and Margins
2
Total sales decreased 4.3% or $12.4 million to $273.4 million compared with $285.7 million for the same period in
2016 due to an $18.5 million decrease in used equipment sales year-over-year offset by an increase in new
equipment, parts, and service revenues. Used equipment sales in the fourth quarter of 2016 were higher than usual
as a result of lingering harvest activity and our concerted effort to downsize our used equipment inventory levels.
Fourth quarter gross profit increased by 12.0% or $4.1 million to $38.2 million compared with $34.1 million for the
same period in 2016, due to increased profit margins as explained below.
Gross profit as a percent of sales increased to 14.0% for the fourth quarter of 2017 compared with 11.9% during the
same period of 2016 due to higher transactional margins on equipment sales.
Cost Structure and Earnings
Operating SG&A(1) for the fourth quarter of 2017 was flat compared with the same period of last year, but increased as a
percentage of sales to 8.4% from 8.1%, as a result of decreased sales activity during the quarter.
Finance costs for the quarter ended December 31, 2017 decreased 16.3% or $0.5 million to $2.8 million compared with $3.3
million for the same period in 2016, due to reduced financial leverage. This reduction, combined with stronger margins
translated into year-over-year improvements in both:
Adjusted EBITDA(1) for the fourth quarter of 2017, which increased by 56.0% or $4.6 million to $12.8 million compared
with $8.2 million for the same period in 2016; and
Adjusted Diluted Earnings per Share(1) for the fourth quarter of 2017, which increased by 69.6% or $0.16 to $0.39
compared with $0.23 in the same period of 2016.
(1) – See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below.
Balance Sheet and Inventory
We continue to focus our attention on maximizing the return on assets deployed, namely inventory. Through targeted sales
efforts as well as disciplined procurement, including presale orders, we strive to maintain an inventory balance and profile
which is conducive to continued improvement in inventory turns. As anticipated, RME’s inventory increased during the fourth
quarter of 2017, due to a combination of trades taken on fourth quarter new equipment deliveries and restocking in
preparation for the coming sales season.
Since the third quarter of 2017:
Used equipment inventory increased $54.5 million, due in part to late model trade-ins (1-2 years old) associated with
recent new equipment sales. Trade value is typically correlated to age, with later-model equipment incorporating
newer technology, having fewer hours and a higher market price relative to the profile of units sold out of inventory
during the period. Used equipment inventory growth was distributed across equipment categories and is in line with
our overall inventory plan; and
New equipment inventory increased $9.5 million in preparation for future sales.
Inventory turned 1.80 times during 2017, up from 1.64 times last year, a 9.8% improvement year-over-year.
COMPANY OVERVIEW
Headquartered in Calgary, Alberta, RME is Canada’s largest agriculture equipment dealer with a network of full-service
equipment stores across the Canadian Prairie Provinces.
RME is Canada’s largest retail dealer of 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 offerings such as GPS signal subscriptions and geomatics services.
RME’s operations in Alberta, Saskatchewan and Manitoba are conducted through RME Canada under the name Rocky
Mountain Equipment.
ROCKY
MOUNTAIN
DEALERSHIPS
MARKET FUNDAMENTALS AND OUTLOOK
3
RME is primarily engaged in the business of selling agriculture equipment to grain, oilseed and pulse crop farmers in Alberta,
Saskatchewan and Manitoba.
In addition to equipment price, demand for agriculture equipment is supported by farming incomes which in turn, are a
function of commodity prices, quantity and quality of the crop and input costs. Many of these factors are influenced by
weather conditions on both a local and, to an extent, on a global basis. Changes in these demand drivers can cause our
customers’ buying patterns to shift. The agriculture sector exhibits cyclical surges in demand and profitability driven by these
macroeconomic factors, as well as other factors that can impact our industry.
Equipment utilization rates, by contrast, are less volatile as agricultural equipment tends to incur hours in the field regardless
of weather or economic conditions. The business of farming requires producers to work their fields each year.
Circumstances may exist, however, that cause farmers to 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.
Competitive Landscape
We have exclusive distribution rights for some of the world’s leading equipment brands across Canada’s Prairie Provinces.
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.
Our Customers
The fundamentals underlying the Western Canadian farming industry continue to support profitability and create value for
our customer base. Elevated production levels and healthy commodity prices for key Western Canadian crops drove steady
improvements in farm net worth between 2011 and 2015 (2015 being the most recent year for which data is available from
Statistics Canada1). Farmer net worth speaks to our customers’ capacity to invest in their equipment fleets and other services
offered by RME.
Supply
In recent years, the number of new agriculture units delivered to Canadian farmers trailed historical levels as the market
digested an elevated equipment population as well as price increases associated with new technology and a depreciating
Canadian dollar.
In response, agriculture equipment manufacturers curtailed production and focused on moving existing inventory levels
through the supply chain by providing price relief to farmers. After having absorbed this supply, demand for new equipment
remained relatively satiated for a period of time where new unit deliveries declined.
In recent quarters, we have begun to see signs that Western Canada’s agriculture equipment profile is reverting to a more
typical composition, with customer demand for new equipment beginning to pick up. With supply and demand now largely
realigned, we have also begun to see manufacturer delivery lead-times grow on certain products during peak demand times.
Crop Outlook
Unlike a year ago, when late-fall precipitation deferred harvest in some northern regions until the spring, the 2017 harvest
has left very little crop in the field. Although delayed, due in part to the harvesting of these overwintered crops, the Canadian
Prairies were seeded corner-to-corner in 2017. Statistics Canada estimates the total area seeded to principal field crops to
have increased by 0.4% over 2016. Yield estimates have, however, receded as compared to last year. While still robust,
overall crop production levels, are expected to decline 1.2% year-over-year2. The combination of solid production and
healthy commodity prices for key Western Canadian crops serves to reinforce the already strong balance sheets of our
customer base.
1 CANSIM Table 002‐0071.
2 Canada: Outlook for Principal Field Crops – February 16, 2018
ROCKY
MOUNTAIN
DEALERSHIPS
CAPITAL ALLOCATION STRATEGY
4
Our success has enabled us to consider a variety of capital allocation options such as returning capital to shareholders,
accretive acquisitions and further debt reductions. With the improvements we have made to our operational model and
integration capabilities, growth through acquisition is viewed as the primary option. Since inception, RME has grown by
acquiring 19 dealerships throughout the Canadian prairies. However, while we are continuously evaluating potential
transactions to drive accretive growth, we are just as satisfied to be patient for the right opportunities.
Acquisition Strategy
In order to maximize synergistic value, we typically target dealership operations in areas with similar farm demographics and
crop profiles to our existing operations. This means that Case IH and New Holland agriculture equipment dealers in the
Canadian prairies continue to be of interest to us. We view acquisitions in the Canadian prairies as scale acquisitions, where
acquired dealerships are fully integrated into our network. One immediate source of accretion in an acquisition is our ability
to redistribute inventory throughout a broader network of dealerships, enabling us to better scale our investment in inventory.
Another area of interest to us is the area south of our current operations in the United States (“US”). US regions with crops
similar to the crop mix of the Canadian Prairies currently benefit from good economics and the balance sheets of farming
operations in these regions are supportive of ongoing equipment purchases. While we would require manufacturer approval
prior to doing so, an acquisition in these regions of the US would be transformational, giving us further growth opportunities
in the US market.
Dividend and Debt
For the immediate future, RME will maintain its current dividend, continue to pay down debt, and keep its balance sheet
ready in the event a transaction can be consummated. The Board of Directors regularly reviews RME’s capital allocation
strategy and, in the absence of an accretive use of capital, may rebalance how capital is allocated.
ROCKY
MOUNTAIN
DEALERSHIPS
RESULTS OF OPERATIONS
Sales
$ thousands
Sales
New equipment
Used equipment
Parts
Service
Total sales
Gross profit
Gross margin
5
For the quarter ended
December 31,
2016
2017
Change
2017
For the year ended
December 31,
2016
Change
155,214
89,409
20,822
7,944
273,389
38,213
14.0%
149,591
107,938
20,414
7,806
285,749
34,116
11.9%
5,623
(18,529)
408
138
(12,360)
4,097
2.1%
435,683
381,577
109,582
32,513
959,355
139,429
14.5%
412,301
377,516
108,807
31,811
930,435
133,407
14.3%
23,382
4,061
775
702
28,920
6,022
0.2%
Fourth Quarter “Q4” 2017 vs. Q4 2016
For the quarter ended December 31, 2017, total sales were $273.4 million, a decrease of 4.3% or $12.4 million compared
with the same period in 2016 due to an $18.5 million decrease in used equipment sales year-over-year, offset by an increase
in new equipment, parts, and service revenues. Used equipment sales in the fourth quarter of 2016 reflect lingering harvest
activity and our concerted effort to downsize our used equipment inventory levels.
Year-to-Date “YTD” 2017 vs. YTD 2016
For the year ended December 31, 2017, total sales were $959.4 million, an increase of 3.1% or $28.9 million compared with
2016. The increase was largely due to a $23.4 million increase in new equipment sales.
The overall growth in equipment sales in 2017 reflects additional deliveries of in-season harvest equipment, as well as an
uptick in demand and moderate price escalation, both of which enhanced revenues across all product lines.
Parts and Service Activity
Parts and service activity (collectively “Product Support”) is, in some cases, performed for the benefit of other departments
within RME. 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 Product Support 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
For the quarter ended
December 31,
2016
2017
Change
2017
For the year ended
December 31,
2016
Change
24,133
(3,311)
20,822
23,364
(2,950)
20,414
769
(361)
408
122,245
(12,663)
109,582
121,782
(12,975)
108,807
463
312
775
12,201
(4,257)
7,944
11,517
(3,711)
7,806
684
(546)
138
50,435
(17,922)
32,513
49,414
(17,603)
31,811
1,021
(319)
702
Total reported Product Support revenues
28,766
28,220
546
142,095
140,618
1,477
Q4 2017 vs. Q4 2016
Product Support revenues for the quarter increased by 1.9% or $0.5 million to $28.8 million compared with $28.2 million in
the same period of 2016, due to stronger acceptance of Product Support offerings during the quarter.
YTD 2017 vs. YTD 2016
Product Support revenues for 2017 increased by 1.1% or $1.5 million to $142.1 million compared with $140.6 million in 2016,
due to stronger acceptance of preventative maintenance service offerings slightly offset by weaker in-season Product
Support sales stemming from less demanding harvest conditions. A drier, more rapid harvest season, such as the one
experienced during 2017, limits crop throughput and machine failures and ultimately tempers Product Support demand.
ROCKY
MOUNTAIN
DEALERSHIPS
Gross Profit
Q4 2017 vs. Q4 2016
6
Gross profit for the quarter ended December 31, 2017 increased by $4.1 million or 12.0% to $38.2 million compared with
$34.1 million for the same period in 2016, due to higher margin sales and a change in sales mix. Gross profit as a percent
of sales increased to 14.0% for the fourth quarter of 2017 compared with 11.9% during the same period of 2016, led by
improved transactional margins and complimented by increased incentives from our original equipment manufacturers
(“OEMs”) and a shift in sales mix.
YTD 2017 vs. YTD 2016
Gross profit for 2017 increased $6.0 million or 4.5% to $139.4 million due to increased sales and stronger transactional level
margins, offset by changes in sales mix and lower incentives from our OEMs, which were a headwind for gross margins
during the year. Despite increased new equipment sales volumes, manufacturer incentives recognized during the year are
down $0.5 million as compared with last year, as we were unable to fully offset the impact of changes in incentive programs
with incremental sales.
Selling, General and Administrative
RME 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).
Operating SG&A is comprised of facility, administrative and compensation related expenditure, the majority of which are
fixed in the short-term. The largest variable component of RME’s Operating SG&A is commission associated with the sale
of equipment inventory.
RME targets Operating SG&A of less than 10% of sales on an annual basis.
$ thousands
Variable sales commissions
Other Operating SG&A
Operating SG&A
Operating SG&A as a % of sales
Q4 2017 vs. Q4 2016
For the quarter ended
December 31,
2016
2017
Change
2017
For the year ended
December 31,
2016
Change
3,531
19,535
23,066
8.4%
3,304
19,740
23,044
8.1%
227
(205)
22
0.3%
13,303
75,812
89,115
9.3%
13,210
76,028
89,238
9.6%
93
(216)
(123)
(0.3%)
Operating SG&A for the fourth quarter of 2017 was $23.1 million, roughly flat compared with the same period in 2016. Within
Operating SG&A, $0.2 million of additional sales commissions on incremental gross profits were offset by a comparable
reduction in other Operating SG&A costs. The restructuring of our distribution network was completed in early 2016, which
means that Operating SG&A during the current and prior year periods reflect a comparable cost structure.
Flat Operating SG&A on lower sales volumes translated into a 0.3% increase in Operating SG&A as a percentage of sales,
amounting to 8.4% for the fourth quarter of 2017 compared to 8.1% for the same period last year.
YTD 2017 vs. YTD 2016
For the year ended December 31, 2017, Operating SG&A was roughly flat at $89.1 million compared with $89.2 million in
2016.
As a percentage of sales, Operating SG&A for the year ended December 31, 2017 is down 0.3% to 9.3% compared with
9.6% in 2016 as a result of our cost structure holding steady while sales increased.
Finance Costs
Q4 2017 vs. Q4 2016
Finance costs for the quarter ended December 31, 2017 decreased 16.3% or $0.5 million to $2.8 million compared with $3.3
million for the same period in 2016, due to a year-over-year decrease in the average amount drawn on RME’s interest-
bearing credit facilities.
YTD 2017 vs. YTD 2016
Full year finance costs for 2017 decreased 16.9% or $2.4 million to $11.9 million compared with $14.3 million in 2016, as a
result of lower average balances being carried on RME’s interest-bearing credit facilities.
ROCKY
MOUNTAIN
DEALERSHIPS
Net Earnings
Q4 2017 vs. Q4 2016
7
Net earnings for quarter ended December 31, 2017 increased 73.7% or $3.5 million to $8.2 million compared with $4.7 million
for the same period in 2016, as a result of increased gross profit margin, a net gain on RME’s derivative financial instruments,
and lower finance costs on a year-over-year basis. Earnings per share on a basic and diluted basis for the fourth quarter of
2017 increased 75.0% or $0.18 to $0.42 compared with $0.24 for the same period in 2016.
The impact on net earnings of RME’s derivative financial instruments and other unusual or non-recurring items can be
significant. Management uses the Non-IFRS measure Adjusted Diluted Earnings per Share to evaluate earnings excluding
such items. Refer to the “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below for the
definition and reconciliation of Adjusted Diluted Earnings per Share.
Adjusted Diluted Earnings per Share for the quarter ended December 31, 2017 increased 69.6% or $0.16 to $0.39 compared
with $0.23 for the same period in 2016.
YTD 2017 vs. YTD 2016
Net earnings for the year ended December 31, 2017 increased 53.0% or $7.9 million to $22.9 million compared with $15.0
million in 2016, as a result of increased sales, increased gross profit margin and lower finance costs. During 2016, we also
incurred $3.6 million of restructuring charges and $1.4 million of impairment charges/losses on vacant land, versus $0.6
million in 2017. Earnings per share on a basic and diluted basis for 2017 increased 53.2% or $0.41 to $1.18 compared with
$0.77 in 2016.
Adjusted Diluted Earnings per Share for the year ended December 31, 2017 increased 39.8% or $0.33 to $1.16 compared
with $0.83 for the same period in 2016.
Adjusted EBITDA
RME analyzes its Adjusted EBITDA in order to consistently compare periods by removing the impact of fluctuations in tax
rates, long-term assets, financing costs related to our capital structure and our share price. See the definition and
reconciliation of Adjusted EBITDA in the “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections
below.
As part of our analysis of Adjusted EBITDA, RME deconstructs the period-over-period variance in gross profit dollars into
the following components:
Sales volume variance – quantifies the impact on gross profit dollars arising from the change in consolidated sales
volume for the period, holding overall gross margin flat.
Sales price variance – quantifies the impact on gross profit of period-over-period changes in gross margin
percentages. RME quantifies this impact at a revenue stream level with our revenue streams consisting of sales of
new equipment, used equipment, parts and service. The sum of these variances constitutes our sales price variance.
RME notes that the impact of the period-over-period change in OEM incentives is presented separately (see below)
and is therefore excluded from sales price variance.
Change in sales mix – our revenue streams generate differing profit margins, with product support activities
generating comparatively higher margins than equipment sales. The change in sales mix quantifies the impact of
shifts in the relative contributions of our various revenue streams to our overall reported sales for a period. RME
notes that this metric captures only shifts between revenue streams and does not capture the impact of mix within a
revenue stream.
OEM incentives recognized – quantifies the impact on gross profit dollars of the period-over-period change in OEM
incentives recognized.
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Q4 2017 vs. Q4 2016
8
Adjusted EBITDA for the quarter ended December 31, 2017 increased 56.0% or $4.6 million to $12.8 million compared with
$8.2 million for the same period in 2016 due to an increase in gross profit and reduced finance costs associated with RME’s
floor plan facilities. The change in fourth quarter Adjusted EBITDA from 2016 to 2017 can be reconciled as follows:
s
n
o
i
l
l
i
M
$14
$12
$10
$8
$6
$4
$2
$0
Reconciliation of Fourth Quarter Adjusted EBITDA 2016 - 2017
Gross Profit $
$0.0
$0.5
$1.3
$1.5
$1.5
$2.7
$8.2
$12.8
Adj. EBITDA Q4 2017
Plus
Minus
Adj. EBITDA Q4 2016
Invisible
YTD 2017 vs. YTD 2016
For the year ended December 31, 2017, Adjusted EBITDA increased 27.0% or $8.5 million to $40.2 million compared with
$31.6 million in 2016 due to increased gross profit and reduced finance costs associated with RME’s floor plan facilities. The
change in annual Adjusted EBITDA from 2016 to 2017 can be reconciled as follows:
s
n
o
i
l
l
i
M
$45
$40
$35
$30
$25
$20
$4.1
$31.6
Reconciliation of Annual Adjusted EBITDA 2016 - 2017
Gross Profit $
$0.3
$2.7
$0.5
$0.1
$2.4
$40.2
Adj. EBITDA 2017
Plus
Minus
Adj. EBITDA 2016
Invisible
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SUMMARY OF QUARTERLY RESULTS
9
$ thousands, except per share
amounts
Sales
Gross profit
Gross margin
Q4
2017
Q3
2017
Q2
2017
Q1
2017
Q4
2016
Q3
2016
Q2
2016
Q1
2016
Q4
2015
273,389
38,213
14.0%
238,884
38,832
16.3%
237,156
35,611
15.0%
209,926
26,773
12.8%
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%
SG&A
Other expense (income)
Finance costs
Income taxes
Net earnings
Diluted earnings per share
27,275
(3,131)
2,799
3,099
8,171
0.42
24,560
(1,308)
3,105
3,408
9,067
0.47
24,743
923
3,026
2,069
4,850
0.25
23,194
(421)
2,991
198
811
0.04
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
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 may vary
between quarters. The first quarter is generally the weakest due to the lack of agriculture activity and winter shutdowns.
Seeding activity typically commences between the latter part of the first quarter and the beginning of the second quarter.
Harvest generally begins towards the middle of the third quarter, and continues through into the fourth quarter. Fourth quarter
sales activity also includes post-harvest purchases that are typical in the agriculture sector.
Weather conditions including a prolonged winter, excess moisture or drought, may shift the timing of farming activities
between fiscal periods, impacting sales activity and profitability as a consequence. 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.
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
Deferred tax liability
Derivative financial liabilities
Total liabilities
Shareholders’ equity
Total liabilities and equity
December 31,
2017
December 31,
2016
December 31,
2015
471,573
62,159
533,732
42,229
-
4,109
343
18,776
599,189
305,342
61,633
366,975
30,919
75
652
464
399,085
200,104
599,189
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
RME’s asset base is comprised predominantly of inventory. In recent years, RME’s focus has been to reduce the size and
increase the efficiency of our investment in inventory, realigning with the market conditions that prevailed during the low-end
of the agriculture equipment demand cycle. Through targeted sales efforts as well as disciplined procurement, including
presale orders, our mandate going forward will be to maintain an inventory balance and profile which is conducive to
continued improvement in inventory turns.
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10
In measuring inventory turns, RME calculates average inventory as a simple average of five quarterly observations including
opening and ending balances for the period as well as the three intervening quarter-end balances. Inventory turns and days
in inventory for the trailing twelve-month periods ended December 31, are as follows:
$ thousands, except turns and days
December 31,
2017
December 31,
2016
December 31,
2015
Inventory expensed through cost of sales – trailing 12 months
Average total inventory – trailing 12 months (quarterly observations)
Inventory turns
Days in inventory
807,019
448,063
1.80
203
782,802
478,468
1.64
223
819,064
516,732
1.59
230
RME’s inventory profile, consists primarily of new and used agriculture equipment. RME has a diverse customer base for
its equipment and strives to carry an appropriate mix of both new and used equipment to best serve our customers. Typically,
our customers trade their used equipment in when making equipment purchases. RME finances its investment in inventory
through various floor plan facilities. RME is under no obligation to finance any of its equipment inventory and can typically
pay-down and redraw on these facilities to generate or make use of available cash.
The composition of RME’s equipment inventory and associated floor plan payables can be summarized as follows:
$ thousands
New equipment
Used equipment
Total equipment inventory
Floor plan payable
Inventory leverage ratio
December 31,
2017
December 31,
2016
December 31,
2015
115,928
314,994
430,922
305,342
70.9%
113,517
289,485
403,002
296,061
73.5%
172,335
287,784
460,119
356,568
77.5%
As anticipated, RME’s inventory increased during the fourth quarter of 2017, due to a combination of trades taken on fourth
quarter new equipment deliveries and restocking in preparation for the coming sales season. Despite our $28.8 million
investment in inventory during 2017, a year-over-year increase of 6.5%, we continued to reduce our inventory leverage ratio,
limiting the increase in floor plan payable to $9.3 million, or 3.1% year-over-year. As at December 31, 2017, our inventory
leverage ratio was 70.9%, down from 73.5% at December 31, 2016 and constituting a third consecutive year of decline.
The decline in our inventory leverage, to the extent such leverage is interest-bearing, provides carrying cost relief in the form
of reduced finance costs associated with short term debt, a key contributor to the improvement in net earnings during 2017.
Total non-current financial liabilities as at December 31, 2017 amounted to $31.5 million (2016 – $43.2 million, 2015 – $45.1
million).
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, distributions to shareholders and other capital market
activities; and,
Investing activities, including capital expenditures, dispositions of fixed assets and acquisitions of complementary
businesses.
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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 (decrease) increase in cash
Cash, beginning of period
Cash, end of period
11
2017
2016
2015
22,899
(15,944)
6,955
(13,985)
(1,415)
(8,445)
28,542
20,097
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
Operating Cash Flow before Changes in Floor Plan (1)
(720)
87,626
92,193
(1) – See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below.
Cash Flows from Operating Activities
RME 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.
RME 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. RME 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.
Operating Cash Flow before Changes in Floor Plan for the year ended December 31, 2017 was an outflow of $0.7 million
compared to an inflow of $87.6 million during 2016. This change reflects a considerable downsizing of our inventory in the
comparative period, and the cash generated therefrom, as well as a net investment in inventory during 2017.
Cash flows from operating activities for the year ended December 31, 2017 declined by $20.2 million compared to the same
period in 2016. Despite our $28.8 million investment in inventory during 2017, a year-over-year increase of 6.5%, we
continued to reduce our inventory leverage ratio, holding the increase in floor plan payable to $9.3 million, or 3.1% year-
over-year. As at December 31, 2017, our inventory leverage ratio was 70.9%, down from 73.5% at December 31, 2016 and
constituting a third consecutive year of decline.
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 real estate assets.
During the year ended December 31, 2017, cash outflows from financing activities increased by $7.3 million over the same
period in 2016. In addition to our scheduled principal repayment, RME applied $4.0 million of proceeds received on the
disposition of a parcel of vacant land, which had been classified as held for sale, to its outstanding debt obligation under the
Term Facility. This payment was offset by $6.1 million of cash received on the exercise of employee stock options. Cash
outflows for financing activities during 2016 were offset by a $7.8 million draw on our Term Facility associated with the
construction of our new branch in Yorkton, Saskatchewan.
Cash Flows from Investing Activities
Cash flows from investing activities is comprised of maintenance capital spend, facility construction expenditures and
consideration paid for the acquisition of complementary businesses, offset by any proceeds received on the disposition of
such assets. The net cash outflow associated with investing activities for the year ended December 31, 2017 decreased by
$7.2 million compared to the same period last year. This decrease is attributable to facility construction costs incurred during
2016 absent from 2017. RME also disposed of a parcel of vacant land during 2017, resulting in a year-over-year increase
in proceeds received on the disposition of property and equipment while offsetting our capital spend for the year.
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ADEQUACY OF CAPITAL RESOURCES
12
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
RME 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%. RME 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 RME’s
ratio of debt to tangible net worth. During 2017, the Syndicated Facility was amended, extending the maturity date to
September 24, 2020.
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 assets 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.
Including the syndicated Flooring Facility, we have total floor plan facilities of approximately $558.6 million (inclusive of
seasonal increases) from various lending institutions for the purpose of financing equipment inventory. These facilities are
made available to RME by the equipment manufacturers’ captive finance companies or divisions (such as CNH Industrial
Capital Canada Ltd.), as well as by banks and specialty lenders.
In addition to our available cash balance of $20.1 million as at December 31, 2017, we have $350.5 million available on our
various credit facilities.
$ millions
Facility limit
Amount drawn
Available
Operating Facility
Term Facility
Various floor plan facilities
OEM floor plan facilities
Syndicated Flooring Facility
Other floor plan facilities
Total
60.0
75.0
205.0
125.0
228.6
693.6
-
37.2
115.3
63.5
127.1
343.1
60.0
37.8
89.7
61.5
101.5
350.5
In addition to the facility limits, the availability of funds under these credit facilities is limited or otherwise constrained by the
adequacy of the underlying assets available to securitize a proposed draw and by customary negative covenants. These
restrictions are not expected to affect RME’s access to required capital in the foreseeable future. The existing credit facilities
are considered sufficient and appropriate for RME’s capital requirements.
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Financial Covenants
13
Pursuant to agreements with lenders, RME is required to monitor and report compliance with certain financial ratios on a
quarterly basis. Each lender defines its own calculation of these measures. Detailed descriptions of covenant calculations
are available within RME’s various material credit agreements filed on Sedar at www.sedar.com. These financial covenants
are summarized as follows:
December 31, 2017
December 31, 2016
Threshold
Result
Threshold
Result
Fixed charge coverage ratio
Assesses the ability to cover fixed charges by
expressing free-cash flows generated as a ratio of
committed obligations on a trailing 12-month basis.
Debt to tangible net worth
Assesses solvency by expressing debt as a ratio of
tangible net assets.
Current ratio
Assesses liquidity by expressing current assets as a
ratio of current liabilities.
≥ 1.15
≥ 1.20
≤ 4.00
≤ 5.00
2.21
1.67
2.21
1.83
≥ 1.15
≥ 1.20
≤ 4.00
≤ 5.00
1.79
1.46
2.54
2.06
≥ 1.20
1.48
≥ 1.20
1.46
Historically, RME was also required to maintain a current ratio of at least 1.15:1.00. This covenant is no longer required
under the applicable credit agreement. As at December 31, 2017 and December 31, 2016, RME was in compliance with all
externally imposed capital requirements.
RME’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 influenced by
weather and other factors. In the event that our financial results or position deteriorate, there is a risk that we may fail to
comply with our financial covenants, most notably, our fixed charge coverage ratios.
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 RME’s ability to draw on its facilities or make distributions
to shareholders.
Derivative Financial Instruments
RME 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. RME’s
portfolio of derivative financial instruments consists of interest rate and total return swaps.
Gains recognized on derivative financial instruments are as follows:
$ thousands
Recognized in net earnings
Recognized in accumulated other comprehensive loss – net of tax
Recognized in deferred tax position
Interest Rate Swaps
2017
2016
4,578
2,852
1,055
4,751
1,238
458
RME 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. During the year ended December 31, 2017, RME’s Term Facility #1 interest rate
swap matured and was replaced with a new floating-to-fixed interest rate swap with an initial notional amount of $33.3 million,
amortizing to $3.4 million evenly over 24 quarters (the “Term Facility #2” swap).
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RME’s hedged and at risk positions are summarized as follows:
14
Maturity
Type
December 31, 2017
December 31, 2016
Effective
rate
Amount
($ 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
Term Facility #2
Total
April, 2017
April, 2023
Amortizing
Amortizing
Position at risk – floating-rate debt
Position hedged
4.2%
5.1%
5.4%
5.0%
-
3.5%
3.5%
4.7%
25,000
35,000
50,000
110,000
-
30,671
30,671
140,671
229,754
61.2%
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%
The interest rate swaps are accounted for 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 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, 2017, we recognized in net earnings, a mark-to-market gain of $0.1 million on our interest
rate swaps (2016 – gain of $0.3 million).
Total Return Swaps
RME 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 or unwound by RME,
these arrangements mature between July 2018 and April 2019. It is RME’s intention to maintain a hedged position which
approximately matches the quantity of, and terms associated with, the DSUs and SARs. The hedging relationship with the
SARs is ineffective to the extent that RME’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 RME’s share price are factored into the Black-Scholes
option pricing model to determine the estimated fair value of the SARs at each reporting date. Each period, an expense
(recovery) is recognized in net earnings such that the life-to-date expense associated with the SARs reflects the proportion
of the estimated fair value earned by the holder between issuance and the reporting date. The value of the SARs is deemed
earned by the holder evenly throughout the vesting period and is considered fully earned upon vesting. Once vested, the
SARs will also be marked-to-market at each reporting date, eliminating the timing discrepancy.
RME 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,
2017, we recognized an unrealized mark-to-market gain of $4.5 million (2016 – gain of $4.5 million).
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RME’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
15
December 31, 2017
December 31, 2016
Weighted
average
price/share
$
Shares/
units
Weighted
average
price/share
$
Shares/
units
10.54
9.23
9.34
100
1,070
1,170
60
599
659
10.54
9.21
9.31
100
1,170
1,270
71
1,057
1,128
177.5%
112.6%
During late 2017, several SARs were exercised which caused the hedged position to significantly exceed the position at risk.
Subsequent to year end, RME has unwound a portion of its hedged position to realign with the position at risk.
Dividends
On February 7, 2018, RME’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 30, 2018, to shareholders of record
at the close of business on February 28, 2018.
This dividend is designated by RME 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
RME designating its dividends as “eligible dividends.” Investors are cautioned that quarterly dividends remain subject to
approval by RME’s Board, and that the Board may, at any time, increase, decrease or suspend payment of the dividend.
SHARE CAPITAL – OUTSTANDING SHARES
Changes in the number of issued and outstanding common shares during the years ended December 31, 2017 and 2016
are as follows:
$ thousands
Opening balance
Shares issued upon exercise of stock options
Closing balance
2017
2016
19,384
493
19,877
19,384
-
19,384
As at March 13, 2018, there were 19,883,586 common shares outstanding.
RME has a stock option plan under which the Board may grant options to directors, officers, and employees of RME at an
exercise price equal to the market price of RME’s common shares at the time of the grant. The plan limits the number of
options issuable to a maximum of 10% of the issued and outstanding common shares from time to time. Options granted
carry neither voting rights nor rights to dividends.
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 of the first three anniversary dates following the date of
grant.
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16
Options outstanding at December 31, 2017 are as follows:
Grant date
Options outstanding
(thousands)
Options exercisable
(thousands)
Weighted average
exercise price
($)
Weighted average
contractual life
(years)
March 13, 2013
March 13, 2014
Total
24
149
173
24
149
173
12.89
11.52
11.71
0.2
1.2
1.1
As at March 13, 2018, there were 162,500 options outstanding.
CONTRACTUAL OBLIGATIONS
RME’s contractual obligations consist primarily of its floor plan payable used to finance the purchase of new, and to a lesser
extent, used equipment. RME 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 accounts for the majority of RME’s contractual obligations which will be discharged within the next 12
months. In addition to certain curtailment requirements, draws on our floor plan facilities become due upon the sale of the
underlying piece of equipment inventory.
Other significant contractual obligations outstanding as at December 31, 2017, include trade payables, accruals and other,
long-term debt consisting predominantly of the Term Facility and operating lease commitments which relate primarily to
RME’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.
RME assesses its liquidity based on the period in which cash flows are expected to occur. The following table summarizes
RME’s expected undiscounted cash flows for obligations existing at December 31, 2017, assuming the Syndicated Facility
is renewed prior to maturity on September 24, 2020. 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
2018
2019-2020
2021-2022
Thereafter
Trade payables, accruals and other
Floor plan payable
Long-term debt
Obligations under finance leases
Operating lease obligations
Derivative financial liabilities
Total contractual obligations
46,748
314,968
41,564
529
35,506
1,079
440,394
46,748
314,968
7,376
453
7,925
570
378,040
-
-
14,107
76
12,687
509
27,379
-
-
13,267
-
9,320
-
22,587
-
-
6,814
-
5,574
-
12,388
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, 2017, would be $32.5 million in 2019-2020 and $Nil in all subsequent periods.
RME 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. RME is exposed to potential losses arising from the difference between the
assessed value of the underlying security and the amounts guaranteed by RME. 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 RME, management believes that the net exposure is not significant. As at December 31, 2017,
gross recourse amounted to $1.3 million (2016 – $2.1 million), prior to any consideration of the value associated with the
securitized assets. As at December 31, 2017, RME has accrued $0.3 million (December 31, 2016 – $0.7 million) for
anticipated losses.
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RELATED PARTY TRANSACTIONS
During the years ended December 31, RME entered into the following transactions with related parties:
17
$ thousands
Equipment and product support sales
Expenditures
Rental payments on RME facilities
Equipment purchases
Flight costs
Contributions(1)
Other expenses
December 31,
2017
December 31,
2016
2,683
514
5,987
1,278
55
57
42
5,832
271
74
157
33
(1) – Contributions are comprised of payments to Ag for Life and the Alberta Prosperity Fund.
During 2017, RME settled the remaining lease obligation associated with a vacated industrial facility which was leased from
a related party for total consideration of $0.5 million. During 2017, RME also received $0.4 million in lease inducements
from a related party as part of a new leasehold agreement. Both of these amounts have been presented above within “Rental
payments on RME facilities”.
All related parties are either directly or indirectly owned by a member of senior management or director of RME 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 RME was determined for the years presented by the Compensation and
Human Resources Committee (formerly, the Compensation, Governance and Nominating Committee) of the Board of
Directors, based on performance and is consistent with market trends. The remuneration of directors and officers of RME
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
December 31,
2017
December 31,
2016
3,054
35
2,973
6,062
2,754
25
1,115
3,894
Key management personnel consists of RME’s President and Chief Executive Officer, Chief Financial Officer, and members
of its Board of Directors. Key management personnel for 2017 also includes RME’s Chief Sales and Operations Officer,
who was appointed during the year. As at December 31, 2017, there is a $2.0 million commitment (2016 – $1.5 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
December 31,
2017
December 31,
2016
27
(1,087)
45
(766)
The amounts due from related parties are not secured and are to be settled in cash. As at December 31, 2017 and 2016,
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, 2017, $Nil has been recognized in bad debt expenses with
respect to related party transactions (2016 – $Nil).
RME has contractual obligations to related parties in the form of facility leases. As at December 31, 2017, these contractual
obligations and due dates, are as follows:
$ thousands
Total
2018
2019-2020
2021-2022
Thereafter
Operating lease obligations
31,663
5,777
11,011
9,320
5,555
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OFF-BALANCE SHEET ARRANGEMENTS
18
We use off-balance sheet financing in connection with numerous operating leases. These leases relate to RME’s buildings
and certain operating assets with lease terms of up to 11 years. Most building leases contain renewal options for periods of
3 to 5 years. We have paid monthly amounts under these operating leases of up to $67.3 thousand. In some instances, the
counterparty to RME’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 July 2027.
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 RME’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. RME takes into consideration the customer’s payment history, their creditworthiness and the current economic
environment in which the customer operates to assess impairment. RME’s historical bad debt expenses have not been
significant and are usually limited to specific customer circumstances. Bad debt expenses are reported within 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.
Timing of Revenue Recognition
Revenue from the sale of goods including new and used equipment and parts is recognized when all the following conditions
are satisfied:
RME has transferred to the buyer the significant risks and rewards of ownership of the goods;
RME 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 RME; and
the costs incurred or to be incurred in respect of the transaction can be measured reliably.
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Depreciation Periods and Methods
19
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
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 – 10 years
Straight-line over 3 – 5 years
Net Recoverable Amount of Goodwill
For the purposes of impairment testing, goodwill is allocated to a cash-generating unit (“CGU”). The recoverable amount of
a CGU is determined using a value in use calculation. The key assumptions for the value in use calculation 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.
As at December 31, 2017 and 2016, RME 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, 2017, the rate used to discount the forecasted cash flows was 12.3% (2016 – 10.3%), and represents
RME’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.
RME 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 4.6% (2016 – 7.3%) higher than
management’s estimates or had the estimated growth rate used in extrapolating forecasted results been 8.5% (2016 –
14.5%) lower than management's estimates, 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.
Derivative Financial Instruments
RME 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 RME’s own credit risk and the credit risk of the
counterparty, if different from the spread implicit in the swap curve.
RME 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 RME, 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.
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.
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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 RME obtains complete information about facts and circumstances
that existed as of the acquisition date and is subject to a maximum of one year.
Impairment of Assets Other than Goodwill
At the end of each reporting period, RME 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, RME estimates the recoverable amount of the CGU to which the asset
belongs. Corporate assets are also allocated to a CGU on the basis of the distribution of assets deployed in the CGU. A
CGU is subject to impairment testing as described under the heading “Net Recoverable Amount of Goodwill”.
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.
Share-based Payments
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. RME 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 RME’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.
Manufacturer Incentives
Certain manufacturers offer annual performance incentives which are linked to RME’s market share achievement and annual
settlement volumes. RME 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 settlement volume to accrue
manufacturer incentives earned during the year. These programs are subject to change at the discretion of the OEM. Annual
performance incentives are recorded as a reduction to cost of sales. A credit to our account for the annual performance
incentive is typically received in the first quarter following year end.
KEY FINANCIAL STATEMENT COMPONENTS
Equipment Sales
Equipment revenues are derived from the sale of new and used 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. Equipment sales also include rental and other ancillary 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.
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21
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 RME’s Operating and Term Facilities.
CHANGES IN ACCOUNTING POLICIES
New Standards and Amendments in Effect on January 1, 2017
Amendment to IAS 7, ‘Statement of Cash Flows’
This amendment improves information provided to users of financial statements about changes in liabilities arising from the
entity’s financing activities. The adoption of this amendment had no material impact to RME’s financial statements.
Amendment to IAS 12, ‘Income Taxes’
This amendment clarifies how to account for deferred tax assets related to debt instruments measured at fair value. The
adoption of this amendment had no material impact to RME’s financial statements.
New Standards and Amendments not yet in Effect
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. Management has performed its initial assessment of the new standard and does not believe there will be a material
impact to the consolidated financial statements, other than additional note disclosure and the presentation of a contract
liability for parts returns on the statement of financial position.
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.
Management has performed its initial assessment of the new standard and does not believe there will be a material impact
to the consolidated financial statements.
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. Management has performed its initial assessment
of the amendment and does not believe there will be a material impact to the consolidated financial statements, other than
additional note disclosure.
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. Management is currently in the process of assessing this
standard.
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RISKS AND UNCERTAINTIES
22
Risk factors faced by RME are listed in RME’s AIF under the heading "Risk Factors" and 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: (i) economic conditions; (ii) weather and climate conditions; (iii) commodity prices; (iv) inventory risk; (v)
reliance on key manufacturers; (vi) seasonality and cyclicality; (vii) import product restrictions and foreign trade risks; (viii)
information systems and cybersecurity; (ix) interest rates; (x) government regulation; (xi) health, safety and environmental
laws and regulation; (xii) nature of dealership agreements; (xiii) foreign exchange exposure; (xiv) competition; (xv) restrictions
on and impediments to acquisitions; (xvi) industry oversupply; (xvii) labour relations; (xviii) credit facilities; (xix) consolidation
within the equipment manufacturing industry; (xx) customer credit risks; (xxi) available floor plan financing; (xxii) unfavorable
conditions in key geographic markets; (xxiii) non-exclusive nature of key geographic markets; (xxiv) continued ability to pay
dividend; (xxv) indemnification and insurance; (xxvi) branch leases; (xxvii) key personnel; (xxviii) labour costs and shortages;
(xxix) changes in common share value; (xxx) product liability risks; (xxxi) issuance of additional common shares; (xxxii)
freight costs; (xxxiii) aviation risks; (xxxiv) future warranty claims; (xxxv) growth risks; (xxxvi) integration of acquisitions; and,
(xxxvii) 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, RME 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 RME.
RME 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, RME uses other publicly available
financial information and its own trading records to rate its major customers. RME’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.
RME’s exposure to credit risk on its cash balance and derivative financial assets is mitigated as these financial assets are
held with major financial institutions with strong credit ratings.
During 2017, RME recognized a $0.1 million recovery of bad debts (2016 – recovery of $0.1 million). Bad debt expense
(recovery) is recognized within SG&A expenses.
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Market Risk
23
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 RME’s common shares, which will affect RME’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 2017, RME recognized a net foreign exchange gain of $0.7 million (2016 – gain of $0.7 million). Foreign exchange
losses (gains) 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, many 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.
RME manages its interest rate risk by using floating-to-fixed interest rate swaps when appropriate. Generally, RME will
obtain floor plan financing and long-term debt at floating rates. When RME 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, RME 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 RME’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 RME’s share value result in
additional compensation expense to RME related to these two programs. As share-based payments, the DSUs and SARs
are not accounted for as financial instruments.
RME 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 RME 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.
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Liquidity Risk
24
RME’s objective is to have sufficient liquidity to meet its liabilities when due. RME 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 RME as
well as a description of RME’s various credit facilities.
SUBSEQUENT EVENT
In January 2018, RME initiated the unwinding of 510 thousand shares of our equity hedge position in order to realign the
hedge position with the number of SARs and DSUs outstanding. RME anticipates that a loss will be recognized on the
unwinding of this position as a result of the decline in the share price during the unwinding period, with such period
culminating during the first quarter of 2018.
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 RME’s derivative financial instruments and DSUs, as well as the expense (recovery) associated with
its SARs. These items arise primarily from changes in RME’s share price as well as fluctuations in interest rates and
are not reflective of RME’s core operations.
RME 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 RME 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, restructuring costs associated with amalgamating the industrial
operations and losses recognized on the impairment and subsequent disposition of vacant land have been classified as
non-recurring charges. The losses on the sale of vacant land are not expected to give rise to a reduction in our tax
provision.
“Adjusted EBITDA” is derived by eliminating the following items from net earnings: finance costs associated with long-
term debt; income taxes; depreciation and amortization; the impact of the losses (gains) arising from derivative financial
instruments and DSUs; and the expense (recovery) associated with SARs. Adjusting net earnings for these items allows
management to consistently compare periods by removing the impact of fluctuations in tax rates, long-term assets,
financing costs related to RME’s capital structure and RME’s share price.
RME also adjusts for any non-recurring charges (recoveries) recognized in Adjusted EBITDA. Management deems non-
recurring charges (recoveries) to be unusual or infrequent items that RME 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, restructuring costs associated with amalgamating the industrial operations and losses
recognized on the impairment and subsequent disposition of 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 RME’s DSUs and the expense (recovery) associated with its SARs. These items arise
primarily from changes in RME’s share price and are not reflective of RME’s core operations.
RME also adjusts for any non-recurring charges (recoveries) recognized in SG&A. Management deems non-recurring
charges (recoveries) to be unusual or infrequent items that RME incurs outside of its common day-to-day operations.
For the periods presented, no non-recurring charges (recoveries) have been identified. 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.
“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.
25
For the year ended
December 31,
2016
2015
2017
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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
Non-deductible loss on vacant land
Restructuring charges
Tax effect of adjustments (27%)
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
Adjusted EBITDA
$ thousands
For the quarter ended
December 31,
2016
2015
2017
8,171
(3,131)
162
2,231
-
-
199
4,704
(605)
16
230
-
-
97
4,580
274
(53)
6
-
-
(61)
22,899
(4,578)
245
2,995
641
-
361
14,966
(4,751)
220
757
1,360
3,564
57
11,293
3,548
(211)
24
-
-
(907)
7,632
4,442
4,746
22,563
16,173
13,747
19,515
0.39
19,384
0.23
19,272
0.25
19,413
1.16
19,384
0.83
19,327
0.71
For the quarter ended
December 31,
2016
2015
2017
For the year ended
December 31,
2016
2015
2017
Net earnings
Finance costs associated with long-term debt
Depreciation and amortization expense
Income taxes
EBITDA
(Gain) loss on derivative financial instruments
Loss (gain) on DSUs
SAR expense
Loss on vacant land
Restructuring charges
Adjusted EBITDA
8,171
406
1,816
3,099
13,492
(3,131)
162
2,231
-
-
12,754
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
22,899
1,770
7,417
8,774
40,860
(4,578)
245
2,995
641
-
40,163
14,966
1,795
7,755
5,955
30,471
(4,751)
220
757
1,360
3,564
31,621
11,293
2,060
7,803
4,105
25,261
3,548
(211)
24
-
-
28,622
Operating SG&A
$ thousands
For the quarter ended
December 31,
2016
2015
2017
For the year ended
December 31,
2016
2015
2017
SG&A
Depreciation and amortization expense
(Loss) gain on DSUs
SAR expense
Operating SG&A
Operating SG&A as a % of sales
27,275
(1,816)
(162)
(2,231)
23,066
8.4%
25,205
(1,915)
(16)
(230)
23,044
8.1%
27,175
(1,962)
53
(6)
25,260
8.8%
99,772
(7,417)
(245)
(2,995)
89,115
9.3%
97,970
(7,755)
(220)
(757)
89,238
9.6%
108,228
(7,803)
211
(24)
100,612
10.3%
26
For the year ended
December 31,
2016
2015
2017
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Operating Cash Flow before Changes in Floor Plan
For the quarter ended
December 31,
2016
2015
2017
$ thousands
Cash flow from operating activities
Net (increase) decrease in floor plan payable(1)
Floor plan assumed pursuant to business
combinations
Operating Cash Flow before Changes in Floor Plan
(1) – Includes change in floor plan payable classified as liabilities associated with assets held for sale.
3,424
(39,791)
12,917
1,625
12,839
(5,995)
6,955
(7,675)
-
(36,367)
-
14,542
-
6,844
-
(720)
27,163
60,463
-
87,626
35,460
23,951
32,782
92,193
INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES
The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have, as at December 31, 2017, designed, or
caused to be designed under their supervision, disclosure controls and procedures ("DC&P") to provide reasonable
assurance that: (i) material information relating to RME is made known to them by others, particularly during the period in
which the annual and interim filings are being prepared; and (ii) information required to be disclosed by RME 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 period specified in securities legislation.
The CEO and CFO have designed or caused to be designed under their supervision, internal controls over financial reporting
("ICFR") to provide reasonable assurance regarding the reliability of RME’s financial reporting and the preparation of financial
statements for external purposes in accordance with IFRS. RME's management, under the supervision of the CEO and
CFO, used the criteria and framework established in the 2013 Internal Controls - Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO") to design RME's ICFR.
As at December 31, 2017, the CEO and CFO have evaluated the design and operation of RME’s DC&P and ICFR and
concluded that they were effective. During the quarter ended December 31, 2017, there were no changes in RME’s ICFR
that have materially affected, or are reasonably likely to materially affect RME’s ICFR.
It should be noted that a control system, no matter how well conceived or operated, can provide only reasonable, but not
absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure
and internal controls and procedures will prevent all errors or fraud.
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 RME 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 RME,
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 RME's products and services, and the cyclical nature of agriculture
equipment demand and any revenue or inventory statements or forecasts attributed thereto; (iii) disclosure under the heading
"Capital Allocation Strategy – Acquisition Strategy", including discussion regarding RME's acquisition plans, prospects and
activities; (iv) disclosure under the heading "Capital Allocation Strategy – Dividend and Debt", including any discussion
regarding RME's plans to maintain its current dividend, continue to pay down debt and keep RME's balance sheet ready for
a potential transaction; (v) statements pertaining to the anticipated crop outlook in Western Canada, including the anticipated
area seeded to field crops, crop yield and quality and the weather conditions associated with crop yields; (vi) statements
regarding the disparity between the Canadian and U.S. dollars and the impact such disparity may have on RME's business
and new equipment pricing in Canada; (vii) any discussion regarding RME's anticipated inventory balance and profile; (viii)
discussion on the fundamentals of RME's business, including discussion regarding growth in GDP, farmers' crop receipts
and profitability, field crop outlook and the future demand for agriculture equipment and commodities; (ix) statements
regarding customer buying patterns, including the extent to which we are able to convert new equipment customers to used
equipment customers; (x) statements regarding the impact of a change in incentive programs from RME's manufacturer on
RME's reported cost of sales during 2017; (xi) statements regarding RME’s anticipated gross margins; (xii) any statements
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27
or discussions regarding RME's inventory management and any expected increases or decreases in RME's inventory levels,
and the timing and delivery thereof; (xiii) statements that we believe cash flow from operations, along with existing credit
facilities, will provide for our capital needs; (xiv) discussion around Operating SG&A expenses, including the seasonal
variances and expectations in Operating SG&A and RME’s targeted annual Operating SG&A; (xv) discussion that the first
quarter is generally the weakest financial quarter and that the fourth quarter is generally the strongest quarter financially;
(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 RME's ongoing compliance with, or potential breaches of, its
covenants under its credit facilities, including the Syndicated Facility; (xix) statements concerning RME’s expected
undiscounted cash flows as at December 31, 2017, and (xx) statements regarding any anticipated losses recognized as a
result of the unwinding of RME's equity hedge position.
With respect to the FLS listed above and contained in this MD&A, RME 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 RME’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) RME’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 RME will, generally, return to RME for their product support needs; (xii)
our realigned investment in inventory is consistent with current market demand; and, (xiii) RME 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, 2020.
RME’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 RME’s AIF. Although the FLS
contained in this MD&A are based upon what management of RME believes are reasonable assumptions, RME 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 RME’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 RME’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, RME assumes no obligation to update or revise them to reflect new events or circumstances.