ROCKY MOUNTAIN DEALERSHIPS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the Year Ended December 31, 2018
ROCKY MOUNTAIN DEALERSHIPS INC.
MANAGEMENT'S DISCUSSION & ANALYSIS
FOR THE YEAR ENDED DECEMBER 31, 2018
This Management’s Discussion and Analysis (“MD&A”) was prepared as of March 12, 2019, and is provided to assist readers
in understanding Rocky Mountain Dealerships Inc.’s financial performance for the year ended December 31, 2018. It should
be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2018 and 2017
together with the notes thereto. 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, unless otherwise indicated, are presented in thousands of 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 subsidiaries, all of which are wholly-owned.
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 12, 2019 (“AIF”), is available at www.sedar.com.
This MD&A contains forward-looking information and statements (collectively, “FLS”). See the section “Caution Regarding
Forward-Looking Information and Statements” for a discussion of the risks, uncertainties and assumptions relating to those
statements.
SELECTED FINANCIAL INFORMATION
Earnings before finance costs and income taxes
12,748
$ thousands
Sales
Cost of sales
Gross profit
Gross profit as a % of sales
Selling, general and administrative
Loss (gain) on derivative financial instruments
Loss on vacant land
Restructuring charges
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 / share – December 31
Non-IFRS Measures(1)
Adjusted Diluted Earnings per Share
Adjusted EBITDA
Operating SG&A
Operating SG&A as a % of sales
Quarter ended December 31,
Year ended December 31,
2018
2017
2016
2018
2017
2016
273,699
235,378
38,321
14.0
285,749
1,051,088
251,633
34,116
11.9
909,626
141,462
13.5
959,341
819,917
139,424
14.5
930,435
797,028
133,407
14.3
27,251
(3,131)
25,205
100,129
(605)
3,587
295,421
255,257
40,164
13.6
26,595
821
—
—
3,559
9,189
2,557
6,632
2.2
0.34
0.34
—
—
14,201
2,799
11,402
3,134
8,268
3.0
0.42
0.42
—
—
9,516
3,346
6,170
1,466
4,704
1.6
0.24
0.24
0.1225
0.1150
0.1150
0.33
11,285
25,729
8.7
0.40
12,886
23,042
8.4
0.23
8,176
23,044
8.1
—
—
37,746
13,093
24,653
6,771
17,882
1.7
0.90
0.90
0.4750
10.46
0.95
34,816
95,159
9.1
99,754
(4,578)
641
—
43,607
11,921
31,686
8,777
22,909
2.4
1.18
1.18
0.4600
10.05
1.16
40,176
89,097
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
0.4600
9.13
0.83
31,621
89,238
9.6
87,626
Operating Cash Flow before Changes in Floor Plan
(34,858)
(36,367)
14,542
(50,509)
(1) See further discussion in “Non-IFRS Measures” and “Reconciliation of Non-IFRS Measures to IFRS” sections below.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 2
SUMMARY OF THE QUARTER ENDED DECEMBER 31, 2018
While early snowfalls in mid-to-late September across the Canadian Prairies delayed harvest, more normal weather for the
remainder of the year allowed for essentially all crops to be harvested in most areas. Despite an uncertain start, we
demonstrated strong sales in the face of equipment pricing headwinds.
SALES AND MARGINS
• Sales increased 7.9% or $21,722 to $295,421 compared with $273,699 for the same period in 2017 due primarily
to $15,953 of acquired sales for the quarter.
• Gross profit increased by 4.8% or $1,843 to $40,164 from $38,321 for the same period in 2017.
COST STRUCTURE
• As a percentage of sales, Operating SG&A for the fourth quarter of 2018 increased by 0.3% to 8.7% compared
with 8.4% for the same period in 2017. The modest increase is due largely to the fixed nature of the costs associated
with the recently acquired inventory/stores.
• Finance costs for the quarter ended December 31, 2018 increased 27.2% or $760 to $3,559 compared with $2,799
during the same period in 2017 due primarily to an increase in the average level of interest-bearing floor plan.
EARNINGS
• Adjusted EBITDA for the quarter ended December 31, 2018 decreased by 12.4% or $1,601 to $11,285 compared
with $12,886 for the same period in 2017.
• Adjusted Diluted Earnings per Share decreased by 17.5% or $0.07 to $0.33 for the fourth quarter of 2018, compared
with $0.40 for the same period of 2017.
NORMAL COURSE ISSUER BID ("NCIB")
• During the fourth quarter of 2018, RME also repurchased 400 thousand of its outstanding common shares pursuant
to an NCIB.
SUMMARY OF THE YEAR ENDED DECEMBER 31, 2018
RME hit a significant milestone in 2018 reporting record revenues of $1,051,088, up 9.6% year-over-year. This increase in
revenue reflects growth in both same store and acquired sales and is in line with our growth plan that was announced in May
of 2018.
SALES AND MARGINS
• Sales increased 9.6% or $91,747 to $1,051,088 compared with $959,341 for the same period in 2017. The increase
is largely due to a $65,389 increase in same store new equipment sales, reflecting both stronger market demand
and out-of-season deliveries of harvest equipment.
• Gross profit increased by 1.5% or $2,038 to $141,462 from $139,424 for the same period in 2017.
COST STRUCTURE
• As a percentage of sales, Operating SG&A for the year ended December 31, 2018 decreased by 0.2% to 9.1%
compared with 9.3% for the same period in 2017 due to increased sales.
• Finance costs for the year ended December 31, 2018 increased 9.8% or $1,172 to $13,093 compared with $11,921
during the same period in 2017 due primarily to an increase in the average level of interest-bearing floor plan.
EARNINGS
• Adjusted EBITDA for the year ended December 31, 2018 decreased by 13.3% or $5,360 to $34,816 compared with
$40,176 for the same period in 2017.
• Adjusted Diluted Earnings per Share decreased by 18.1% or $0.21 to $0.95 for the year ended December 31, 2018,
compared with $1.16 for the same period of 2017.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 3
BALANCE SHEET AND INVENTORY
For the year ended December 31, 2018, inventory turns were 1.73 times, down from 1.81 times for fiscal 2017. Used
equipment inventories increased as a result of trades taken on increased new equipment sales as well as business
acquisitions. The increase in used equipment inventory also reflects an increase in the average cost per unit.
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. During 2018, RME also established a presence in the United States
(“U.S.”) with our used equipment distribution location in Tonganoxie, Kansas.
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” 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.
MARKET FUNDAMENTALS AND OUTLOOK
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, as well as input costs. Many of these factors are influenced
by weather conditions on both a local and, to an extent, 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 enables us to respond to these shifts in
buying patterns and provides a measure of stability within our financial results.
COMPETITIVE LANDSCAPE
Our distribution contracts grant us the right to sell new equipment and parts as well as provide warranty service 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 within our sales territories. Our installed base
and customer relationships create an annuity of equipment sales and product support revenue, which help drive dependable
earnings and cash flow.
CROP OUTLOOK
In its Outlook for Principal Field Crops dated February 22, 2019, Agriculture and Agri-Foods Canada forecasted a modest
0.6% year-over-year decline in the production of principal field crops for the 2018-2019 farm year, despite an unusually
late harvest in certain regions. While the early 2018 snowfall is expected to cause some deterioration in grade, the resulting
additional moisture should bode well for the 2019 growing season.
U.S. MARKET
In October 2018, RME commenced an initiative to sell late-model used equipment to farmers based in the U.S. To this end,
RME entered into a lease for a property in Tonganoxie, Kansas, which is located on the outskirts of Kansas City. This location
is situated in close proximity to the vibrant agriculture markets of Kansas, Iowa, Nebraska, Missouri and Oklahoma. With
minimal capital and startup costs, we will be able to give our U.S. customers more visibility into RME's used equipment
offerings, while also helping to establish RME within the U.S. dealership landscape. At present, we anticipate that this facility
will only handle the sale of late-model used equipment. In early 2019, this location commenced operations.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 4
CAPITAL ALLOCATION STRATEGY AND GROWTH PLAN
Our success has enabled us to consider a variety of capital allocation strategies, including returning capital to shareholders,
acquisitive growth and further debt reductions. To that end, RME repurchased and canceled 400 thousand of its common
shares pursuant to an NCIB during the fourth quarter of 2018.
With the improvements we have made to our operational model and integration capabilities, we are well-positioned to
pursue, and are actively seeking, further acquisitive growth opportunities. RME anticipates continued stability or modest
growth in its dividend through this process.
During 2018, RME launched its growth plan that aims to grow revenues to at least $1.5 billion in 2023. RME intends to do
this through a combination of revenue sources including:
• $200 million in organic growth through RME’s present geographic foot print;
• $200 million in acquired top-line revenue in Canada and/or the U.S.; and
• $100 million in revenue synergies on assets that are acquired through this growth plan.
As part of this growth plan, during fiscal 2023 RME is targeting Adjusted Earnings of $33.8 million and Adjusted EBITDA of
$60.0 million.
Please note that the adoption of IFRS 16, ‘Leases’ on January 1, 2019 is expected to increase Adjusted EBITDA. RME will
recalibrate its Adjusted EBITDA target to reflect the new accounting standard once adopted and preserve the targeted $19.8
million improvement in this metric.
Our progress to-date with respect to these growth initiatives as represented by RME’s results on a trailing twelve month
basis (“TTM”) is summarized in the chart titled TTM vs. Target. While encouraging, our growth in revenues has yet to translate
into progress against our Adjusted Earnings and Adjusted EBITDA targets.
Competitive market pressures have weighed on margins during the TTM ended December 31, 2018. Meanwhile, costs
associated with acquired locations as well as investment in our sales force have contributed to increased operating costs
and resulted in reductions in both Adjusted Earnings and Adjusted EBITDA relative to their respective 2017 benchmark
values.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 5
During 2018, RME completed the acquisitions of John Bob Farm Equipment (“JBFE”) and the New Holland Agriculture
dealership in Olds, Alberta (“Olds”). RME estimates average historical sales for the acquired stores during the period from
acquisition date to December 31, 2018, to be $27,598 and has presented this as “acquired” revenues during the TTM ended
December 31, 2018. The decomposition of progress towards our revenue growth initiative is presented in the chart titled
Revenue Growth Initiative below.
In the near- to mid-term, we will continue to pursue acquisitive growth opportunities. We typically target dealership operations
in areas with similar farm characteristics 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 U.S., particularly those states falling between the eastern slopes of the Rocky Mountains
and the mid-west. U.S. regions with crops similar to the crop mix of the Canadian Prairies currently benefit from good
economics, and farming operations in these regions are supportive of ongoing equipment purchases. While we would require
manufacturer approval prior to doing so, a significant acquisition in these regions of the U.S. would be transformational.
RESULTS OF OPERATIONS
We use the terms “acquired” versus “same store” in assessing our revenue. Each acquired store has an average historical
level of sales prior to being acquired by RME. When we discuss “acquired” results, we are referring to these average historical
levels. This base level of activity continues to be classified as acquired until such time as the acquired store has been
included in our dealership network for twelve months after which point, all activity is classified as “same store”.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 6
SALES
Fourth Quarter (“Q4”) 2018 vs. Q4 2017
$ thousands
Sales
New equipment
Used equipment
Parts
Service
Total sales
Gross profit
Gross margin %
2018
2017
Total
Change
Acquired
Same Store
163,757
99,369
23,690
8,605
295,421
40,164
13.6
155,378
89,245
21,132
7,944
273,699
38,321
14.0
8,379
10,124
2,558
661
21,722
1,843
(0.4)
7,477
4,776
2,649
1,051
15,953
902
5,348
(91)
(390)
5,769
For the quarter ended December 31, 2018, total sales increased by $21,722 or 7.9% to $295,421 from $273,699 during the
same period in 2017 due primarily to $15,953 of acquired sales for the quarter. On a same store basis, the late completion
of harvest activity, namely in Central and Northern Alberta, supported activity levels during the fourth quarter of 2018.
Meanwhile, RME continued to focus its sales efforts on used equipment leading to a $5,348 improvement relative to Q4
2017.
Year-to-Date (“YTD”) 2018 vs. YTD 2017
$ thousands
Sales
New equipment
Used equipment
Parts
Service
Total sales
Gross profit
Gross margin %
2018
2017
Total
Change
Acquired
Same Store
514,110
393,311
111,015
32,652
1,051,088
141,462
13.5
435,683
381,577
109,568
32,513
959,341
139,424
14.5
78,427
11,734
1,447
139
91,747
2,038
(1.0)
13,038
8,265
4,501
1,794
27,598
65,389
3,469
(3,054)
(1,655)
64,149
For the year ended December 31, 2018, total sales increased by $91,747 or 9.6% to $1,051,088 from $959,341 in 2017.
The increase was largely due to a $65,389 increase in same store new equipment sales, reflecting both stronger market
demand and out-of-season deliveries of harvest equipment. Acquired sales contributed $27,598 to the year-over-year
increase.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 7
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. Product Support activity is
reconciled to our reported revenues for the respective departments as follows:
$ thousands
Parts activity
Total activity
Internal activity eliminated
Reported revenues
Service activity
Total activity
Internal activity eliminated
Reported revenues
Quarter ended December 31,
2017
2018
Change
Year ended December 31,
2017
2018
Change
27,075
(3,385)
23,690
13,197
(4,592)
8,605
24,443
(3,311)
21,132
12,201
(4,257)
7,944
2,632
(74)
2,558
126,234
(15,219)
111,015
122,231
(12,663)
109,568
996
(335)
661
54,755
(22,103)
32,652
50,435
(17,922)
32,513
4,003
(2,556)
1,447
4,320
(4,181)
139
1,586
Total reported Product Support revenues
32,295
29,076
3,219
143,667
142,081
Q4 2018 vs. Q4 2017
Product Support revenues for the quarter increased by 11.1% or $3,219 to $32,295 compared with $29,076 in the same
period of 2017 due primarily to locations acquired during 2018.
YTD 2018 vs. YTD 2017
Product Support revenues for 2018 increased by 1.1% or $1,586 to $143,667 compared with $142,081 in 2017. The
reconditioning of trades taken on increased equipment sales volumes consumed much of the year-over-year increase in
overall Product Support activity levels. So while activity levels were up 4.8%, the shift toward internal activity constrained
reported Product Support revenue growth to 1.1%.
GROSS PROFIT
Q4 2018 vs. Q4 2017
Gross profit for the quarter ended December 31, 2018 increased by $1,843 or 4.8% to $40,164 compared with $38,321 for
the same period in 2017. As a percent of sales, gross profit decreased to 13.6% compared with 14.0% during the same
period of 2017. During the fourth quarter of 2018, transactional level margins continued to reflect the highly competitive
conditions in the Western Canadian agriculture equipment marketplace. Elevated sales levels have, however, largely negated
the impact of lower margins on gross profit dollars. Our sales performance also translated into an increase in incentives
from our original equipment manufacturers (“OEMs”).
YTD 2018 vs. YTD 2017
Gross profit for 2018 increased by $2,038 or 1.5% to $141,462 compared with $139,424 during the same period in 2017.
Gross profit as a percent of sales decreased to 13.5% in 2018 compared with 14.5% during the same period of 2017. A
favourable sales volume variance was largely offset by an unfavourable variance in sales prices, however, the elevated sales
levels resulted in additional incentives recognized from our OEMs.
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 expenditures, 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.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 8
$ thousands
Variable sales commissions
Other Operating SG&A
Operating SG&A
Operating SG&A as a % of sales
Q4 2018 vs. Q4 2017
Quarter ended December 31,
2017
2018
Change
Year ended December 31,
2017
2018
Change
3,449
22,280
25,729
8.7
3,531
19,511
23,042
8.4
(82)
2,769
2,687
0.3
13,617
81,542
95,159
9.1
13,303
75,794
89,097
9.3
314
5,748
6,062
(0.2)
Operating SG&A for the fourth quarter of 2018 increased by $2,687 or 11.7% to $25,729 from $23,042 in 2017. The increase
is due primarily to costs associated with the locations acquired during 2018.
As a percentage of sales, Operating SG&A for the quarter ended December 31, 2018 increased by 0.3% to 8.7% from 8.4%
in 2017.
YTD 2018 vs. YTD 2017
For the year ended December 31, 2018, Operating SG&A increased by $6,062 or 6.8% to $95,159 from $89,097 in 2017.
The year-over-year increase reflects the impact of the locations acquired during 2018 as well as our investment in customer-
facing personnel in response to elevated activity levels.
As a percentage of sales, Operating SG&A for the year ended December 31, 2018 decreased by 0.2% to 9.1% from 9.3%
in 2017, within our target of 10% on an annual basis.
FINANCE COSTS
Q4 2018 vs. Q4 2017
Finance costs for the quarter ended December 31, 2018 increased by $760 or 27.2% to $3,559 from $2,799 for the same
period in 2017, due to a quarter-over-quarter increase in the average amount drawn on RME’s interest-bearing credit facilities.
YTD 2018 vs. YTD 2017
Finance costs for the year ended December 31, 2018 increased $1,172 or 9.8% to $13,093 from $11,921 in 2017, as a
result of an increase in the average balances being carried on RME’s interest-bearing credit facilities.
NET EARNINGS
Q4 2018 vs. Q4 2017
Net earnings for the quarter ended December 31, 2018 decreased by $1,636 or 19.8% to $6,632 from $8,268 in 2017.
Additional gross profit was more than offset by increases in Operating SG&A and finance costs. Earnings per share on a
basic and diluted basis for the fourth quarter of 2018 decreased by $0.08 or 19.0% to $0.34 from $0.42 for the same period
in 2017.
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, 2018 decreased $0.07 or 17.5% to $0.33 from
$0.40 for the same period in 2017.
YTD 2018 vs. YTD 2017
Net earnings for the year ended December 31, 2018 decreased by $5,027 or 21.9% to $17,882 from $22,909 in 2017.
Additional gross profit was more than offset by increases in Operating SG&A and finance costs. Earnings per share on a
basic and diluted basis for 2018 decreased by $0.28 or 23.7% to $0.90 from $1.18 in 2017.
Adjusted Diluted Earnings per Share for the year ended December 31, 2018 decreased by $0.21 or 18.1% to $0.95 from
$1.16 for the same period in 2017.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 9
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.
Q4 2018 vs. Q4 2017
Adjusted EBITDA for the quarter ended December 31, 2018 decreased by $1,601 or 12.4% to $11,285 from $12,886 for
the same period in 2017. Increased gross profit was more than offset by increases in Operating SG&A and short-term finance
costs associated with RME’s floor plan facilities. The change in fourth quarter Adjusted EBITDA from 2017 to 2018 can be
reconciled as follows:
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 10
YTD 2018 vs. YTD 2017
For the year ended December 31, 2018, Adjusted EBITDA decreased by $5,360 or 13.3% to $34,816 from $40,176 in 2017.
Additional gross profit year-over-year was more than offset by increases in Operating SG&A and short-term finance costs
associated with RME’s floor plan facilities. The change in annual Adjusted EBITDA from 2017 to 2018 can be reconciled as
follows:
SUMMARY OF QUARTERLY RESULTS
$ thousands, except per share
amounts
Sales
Gross profit
Gross margin %
SG&A
Other expense (income)
Finance costs
Income taxes
Net earnings
Diluted earnings per share
Q4 2018 Q3 2018 Q2 2018 Q1 2018 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016
295,421
40,164
13.6
233,374
36,235
15.5
302,639
38,100
12.6
219,654
26,963
12.3
273,699
38,321
14.0
238,812
38,807
16.3
236,890
35,518
15.0
209,940
26,778
12.8
285,749
34,116
11.9
26,595
821
3,559
2,557
6,632
0.34
24,434
511
3,659
2,083
5,548
0.28
25,631
829
3,133
2,385
6,122
0.31
23,469
1,426
2,742
(254)
(420)
(0.02)
27,251
(3,131)
2,799
3,134
8,268
0.42
24,834
(1,308)
3,105
3,327
8,849
0.46
24,566
923
3,026
2,092
4,911
0.25
23,103
(421)
2,991
224
881
0.05
25,205
(605)
3,346
1,466
4,704
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.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 11
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,
2018
December 31,
2017
December 31,
2016
560,518
60,107
620,625
49,975
420
983
178
21,856
694,037
403,180
53,840
457,020
31,282
254
—
1,672
490,228
203,809
694,037
469,540
64,112
533,652
42,229
—
4,109
343
18,776
599,109
305,342
61,889
367,231
30,919
75
561
464
399,250
199,859
599,109
440,783
67,384
508,167
48,586
1,304
578
507
18,776
577,918
296,061
61,761
357,822
40,778
521
—
1,871
400,992
176,926
577,918
RME’s primary investment is in inventory, which is comprised predominantly of new and used agriculture equipment. We
have a diverse customer base for our equipment and strive to carry an appropriate mix of both new and used equipment
to best serve our customers. We manage our inventory levels and composition through our sales and procurement functions
with the intention of growing our equipment revenues while improving the efficiency of our investment in inventory as
measured by turns.
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 are as follows:
$ thousands, except turns and days
Inventory expensed through cost of sales – trailing 12 months
Average total inventory – trailing 12 months (quarterly observations)
Inventory turns
Days in inventory
December 31,
2018
December 31,
2017
December 31,
2016
897,408
519,238
1.73
211
807,010
445,497
1.81
201
782,802
476,198
1.64
222
RME’s equipment inventory as at December 31, 2018 increased as follows:
• Used equipment inventory was $388,488, representing an increase of $73,494 or 23.3% compared with
December 31, 2017. This increase is the result of trades taken on elevated equipment sales, particularly during the
first half of 2018 as well as equipment inventory acquired through the purchase of complementary businesses. The
increase in used equipment inventory also reflects an increase in average cost per unit.
• New equipment inventory was $130,475, representing an increase of $14,547 or 12.5% compared with
December 31, 2017, due primarily to inventory acquired through the purchase of complementary businesses.
Overall, total inventory turns moderated during the trailing twelve-months ended December 31, 2018, as compared with
the same period a year ago.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 12
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,
2018
December 31,
2017
December 31,
2016
130,475
388,488
518,963
403,180
77.7
115,928
314,994
430,922
305,342
70.9
113,517
289,485
403,002
296,061
73.5
During 2018, equipment inventory levels increased $88,041 or 20.4%, whereas draws on our floor plan facilities have
increased $97,838 or 32.0% over the same period. In recent years, RME had made temporary use of available cash by
paying down interest-bearing floor plan debt. In response to the acquisitive activity undertaken during 2018 as well as the
repurchase of common shares pursuant to a NCIB, RME has reinstated a more historically normal level of inventory leverage
and applied much of the cash generated therefrom to finance these initiatives. As a result, at December 31, 2018, our
inventory leverage ratio was 77.7%, up from 70.9% at December 31, 2017, and from 73.5% at December 31, 2016.
Non-current financial liabilities as at December 31, 2018 amounted to $33,208 (December 31, 2017 – $31,458, December 31,
2016 – $43,170).
LIQUIDITY
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 inventory, floor plan payable and other components of working capital;
• 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.
SUMMARY OF CASH INFLOWS (OUTFLOWS)
For the respective years ended December 31, cash inflows (outflows) were as follows:
$ thousands
2018
2017
2016
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
Effect of foreign exchange on cash
Cash, beginning of period
Cash, end of period
Operating Cash Flow before Changes in Floor Plan
CASH FLOWS FROM OPERATING ACTIVITIES
17,882
7,705
25,587
(12,572)
(21,119)
(8,104)
53
20,097
12,046
(50,509)
22,909
(15,954)
6,955
(13,985)
(1,415)
(8,445)
—
28,542
20,097
(720)
14,966
12,197
27,163
(6,694)
(8,617)
11,852
—
16,690
28,542
87,626
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.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 13
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, 2018 was an outflow of $50,509
compared to an outflow of $720 during 2017. The incremental outflow year-over-year is primarily attributable to the growth
in our inventory balance.
Cash flows from operating activities for the year ended December 31, 2018 increased by $18,632 compared to the same
period in 2017. In recent years, RME had been making temporary use of available cash by paying-down interest-bearing
floor plan, reducing our carrying cost. During 2018, draws on our various floor plan facilities exceeded the growth in our
inventory levels. The surplus funds generated were applied to businesses acquired during the year and shares repurchased
pursuant to an NCIB. The increase in the level of floor plan payable relative to equipment inventory realigns our inventory
leverage ratio to a more historically normal level as we redeploy some of this capital in a more productive capacity.
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 business acquisitions.
During the year ended December 31, 2018, cash outflows from financing activities decreased by $1,413 over the same
period in 2017. During the year ended December 31, 2018, dividends, scheduled principal repayments on our debt facilities
and cash paid to repurchase common share under the NCIB were partially offset by $7,401 in draws on our Term Facility
associated with the acquisitive activity undertaken during 2018.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities is comprised of consideration paid for the acquisition of complementary businesses,
maintenance capital spend and facility construction expenditures, offset by any proceeds received on the disposition of
such assets. Cash outflows associated with investing activities for the year ended December 31, 2018 increased by $19,704
compared to the same period last year, due primarily to business acquisitions during 2018.
CAPITAL RESOURCES
We use operating cash flows to finance the purchase of inventory, service our debt requirements, pay dividends, and fund
our operating activities, including working capital, both operating and finance leases and floor plan payable. Our ability to
service our debt and distribute dividends to shareholders will depend upon our ability to generate cash, which depends on
our future operating performance, general economic conditions, availability of adequate credit facilities, compliance with
debt covenants, as well as other factors, some of which are beyond our control. Based on our current operational
performance, we believe that cash flows from operations, along with existing credit facilities, will provide for our capital
needs.
FINANCE FACILITIES
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. During 2018, the Syndicated Facility was amended,
extending the maturity date to September 24, 2021. Other amendments included the redistribution of overall facility limits
between the Operating and Term Facilities as well as a reduction of the debt to tangible net worth covenant threshold to
4.0:1.0 from 5.0:1.0. The reduction of this threshold also eliminated the highest pricing tier which was associated with a
debt to tangible net worth ratio of between 4.0:1.0 – 5.0:1.0.
Subsequent to these amendments, advances under the Syndicated Facility may be made based on our lenders’ prime rate
or the U.S. base rate plus 1.0% – 1.8% or based on the banker’s acceptance (“BA”) rate plus 2.0% – 2.8%. RME pays
standby fees of between 0.4% – 0.6% 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.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 14
The Syndicated Facility consists of:
• The “Operating Facility” – which may be utilized to advance up to the lesser of the established borrowing base and
$50,000. 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 $125,000. 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 $85,000. 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 $593,580 (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 $12,046 as at December 31, 2018, we have $286,538 available on our various
credit facilities.
$ thousands
Operating Facility
Term Facility
Various floor plan facilities
OEM floor plan facilities
Syndicated Flooring Facility
Other floor plan facilities
Total
Facility limit
Amount drawn
Available
50,000
85,000
240,000
125,000
228,580
728,580
—
38,266
155,897
75,448
172,431
442,042
50,000
46,734
84,103
49,552
56,149
286,538
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.
FINANCIAL COVENANTS
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, 2018
December 31, 2017
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.
1.91
1.55
2.70
2.40
1.38
2.21
1.67
2.21
1.83
1.48
As at December 31, 2018 and 2017, 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
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 15
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.
Losses (gains) recognized on derivative financial instruments are as follows:
$ thousands
Recognized in net earnings
Recognized in other comprehensive (loss) income – net of tax
Tax on amount recognized in other comprehensive (loss) income
Interest Rate Swaps
2018
2017
3,587
962
357
(4,578)
(2,852)
(1,055)
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.
RME’s hedged and at risk positions are summarized as follows:
$ thousands
Hedged position
Current debt
Maturity
Type
Rate %
Amount $
Rate %
Amount $
December 31, 2018
December 31, 2017
Floor plan facility #1
Floor plan facility #2
Floor plan facility #3
Floor plan facility #4
August, 2018
September, 2020
September, 2022
August, 2025
Non-amortizing
Non-amortizing
Non-amortizing
Non-amortizing(1)
Long-term debt
Term Facility
Total position hedged
April, 2023
Amortizing
Position at risk – floating-rate debt
Position hedged %
(1) Notional amount expands to $60,000 in October, 2020.
—
5.1
4.4
4.9
4.7
3.5
4.5
—
35,000
50,000
25,000
110,000
25,479
135,479
303,476
44.6
4.2
5.1
5.4
—
5.0
3.5
4.7
25,000
35,000
50,000
—
110,000
30,671
140,671
229,754
61.2
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, 2018, we recognized in net earnings, mark-to-market gain of $91, respectively, on our
interest rate swaps (2017 – gain of $104).
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 16
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 March and July, 2020. 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.
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,
2018, we recognized an unrealized mark-to-market loss of $3,678 (2017 – gain of $4,474).
During the first quarter of 2018, RME also unwound its hedged position by 510 thousand shares for cash proceeds of
$1,683. This unwinding realigned our hedged position with our position at risk.
RME’s hedged and at risk positions are summarized as follows:
In thousands of shares/units except per share amounts
Hedged position
Position at risk:
DSUs
SARs
Total
Position hedged %
DIVIDENDS
December 31, 2018
December 31, 2017
Weighted
average price/
share
$
9.14
Shares/
units
Weighted
average price/
share
$
Shares/
units
660
85
565
650
101.5
9.34
1,170
60
599
659
177.5
On March 4, 2019, RME’s Board of Directors (the "Board") approved a quarterly dividend of $0.1225 per common share on
its outstanding common shares. The common share dividend is payable on March 29, 2019, to shareholders of record at
the close of business on March 15, 2019.
SHARE CAPITAL – OUTSTANDING SHARES
Changes in the number of issued and outstanding common shares during the years ended December 31, 2018 and 2017
are as follows:
Thousands
January 1
Shares purchased under NCIB
Shares issued upon exercise of stock options
December 31
2018
2017
19,877
(400)
11
19,488
19,384
—
493
19,877
During 2018, RME implemented an NCIB to repurchase existing common shares. At December 31, 2018, RME had
repurchased 400 thousand shares under the NCIB.
As at March 12, 2019, there were 19,488 thousand common shares outstanding.
RME also 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.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 17
As at December 31, 2018, there were 139 thousand fully-vested options outstanding with an exercise price of $11.52. These
options expire on March 27, 2019. As at March 12, 2019, there were 139 thousand 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, 2018, 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, 2018, assuming the Syndicated Facility
is renewed prior to maturity on September 24, 2021. 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
2019
2020-2021
2022-2023
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
24,283
416,441
44,150
583
35,101
2,556
523,114
24,283
416,441
8,466
307
8,491
461
458,449
—
—
16,044
246
13,773
1,005
31,068
—
—
10,571
30
8,688
693
19,982
—
—
9,069
—
4,149
397
13,615
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, 2018, would be $33,257 in 2020-2021, $11 in 2022-2023 and $Nil thereafter.
RELATED PARTY TRANSACTIONS
During the years ended December 31, 2018 and 2017, RME entered into the following transactions with related parties:
$ thousands
Equipment and product support sales
Expenditures
Rental payments on RME facilities
Equipment purchases
Vehicle purchases
Flight costs
Donations
Other expenses
2018
2017
4,398
2,683
5,833
3,158
1,376
101
—
39
5,987
1,278
—
55
57
42
Donations made by RME are comprised of payments to Ag for Life.
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.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 18
The remuneration of the directors and officers identified as RME's key management for the respective years ended December
31 is as follows:
$ thousands
Salary and short-term benefits
Post-retirement benefits
Share-based compensation
Total
2018
2017
1,881
32
(2,070)
(157)
3,054
35
2,973
6,062
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,
2018
December 31,
2017
4
(106)
27
(1,087)
The amounts due from related parties are not secured and are to be settled in cash. As at December 31, 2018 and 2017,
the amounts due from related parties are considered collectible and, therefore, have not been provided for in the loss
allowance provision. During the year ended December 31, 2018, $Nil has been recognized in bad debt expenses with respect
to related party transactions (2017 – $Nil).
RME has contractual obligations to related parties in the form of facility leases. As at December 31, 2018, these contractual
obligations and due dates, are as follows:
$ thousands
Total
2019
2020-2021
2022-2023
Thereafter
Operating lease obligations
26,530
5,890
10,328
6,599
3,713
OFF-BALANCE SHEET ARRANGEMENTS
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. 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.
LOSS ALLOWANCE PROVISION
Trade Receivables
RME applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which permits the use
of the lifetime expected loss provision for all trade receivables. To measure the expected credit losses, trade receivables
have been grouped based on shared credit risk characteristics and the days past due. Historical loss rates are adjusted if,
and to the extent that, future loss rates are expected to differ from historical averages.
Other Receivables
The credit quality of these financial assets is assessed by reference to external credit ratings (if available) or to historical
information about counterparty default rates. Historical loss rates are adjusted if, and to the extent that, future loss rates are
expected to differ from historical averages.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 19
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 based on the recent sales of the same or similar equipment inventory or market values
as established by industry publications, less the costs to sell. The value assigned to equipment inventory acquired through
trade-in is based on 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. Impairment losses and reversals of impairment losses are recorded within cost of sales.
REVENUE RECOGNITION
Sale of goods
RME sells goods which include new and used equipment and parts. Revenue is recognized when control of the goods has
transferred to the customer. Control has been transferred at the point in time when the following conditions have been met:
i. RME has transferred to the customer the control of ownership of the goods;
ii.
the goods have been delivered;
iii. RME has a present right to payment;
iv. the customer has legal title; and
v.
the customer has accepted the asset.
Payment of the parts transaction price is due immediately when the customer purchases the part or by the terms of the
customer’s established credit. It is RME’s policy to sell parts to the end customer with the right of return and we estimate
returns based on an analysis of historical results. Therefore, a contract liability (estimated parts refunds) and a right to the
returned good (contract asset) are recognized for the parts estimated to be returned. The validity of this assumption and
the estimated amount of returns are reassessed at each reporting date.
Sale of goods - Bill and hold arrangement
RME sells new and used equipment where RME retains physical possession of the equipment until it is transferred to the
customer in the future. For a bill and hold arrangement, control has been transferred at a point in time when the following
conditions have been met:
i.
the equipment is ready for physical transfer to the customer; the customer has made the decision to put the equipment
in a bill and hold arrangement;
ii. RME does not have the ability to use the equipment or to direct it to another customer; and
iii. the equipment is identified separately as belonging to the customer.
The consideration on such transactions is due when the equipment arrives at one of RME’s locations. When consideration
has been received but one or more terms and/or conditions of the sale remain unfulfilled, any consideration received is
recorded on the consolidated statements of financial position as a contract liability for customer deposits.
Rendering of service
Revenue derived from the rendering of services is recognized upon completion of the service when the following has
occurred:
i.
the amount of revenue can be measured reliably;
ii.
it is probable that the economic benefits associated with the transaction will flow to RME; and
iii. the stage of completion of the transaction at the end of the reporting period can be measured reliably.
Payment of the transaction price is due when the service is completed. Labour hours and parts used from rendering of a
service that is not complete is considered a cost incurred to fulfill a contract and is disclosed in the consolidated statements
of financial position as a contract asset.
Financing component
RME does not expect to have any contracts where the period between the transfer of the promised goods or services to
the customer and payment by the customer exceeds one year. As a consequence, RME does not adjust any of the transaction
prices for the time value of money.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 20
DEPRECIATION PERIODS AND METHODS
Items of property and equipment are depreciated commencing on the date they are ready for use using the following methods
and rates:
Land
Buildings
Not depreciated
Straight-line over 20 years
Computer equipment
Straight-line over 3 – 6 years
Furniture and fixtures
Straight-line over 5 – 10 years
Leasehold improvements
Straight-line over the lesser of the lease term (including renewals) and useful life
Shop tools and equipment
Straight-line over 3 – 10 years
Vehicles
Straight-line over 3 – 5 years
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, 2018 and 2017, 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, 2018, the rate used to discount the forecasted cash flows was 12.8% (2017 – 12.3%), and represents
RME’s estimate of the appropriate pre-tax discount rate, given current market assessments of the time value of money and
the risks specific to the particular CGU. As at December 31, 2018 and 2017, the recoverable amount of the CGU to which
goodwill has been allocated exceeded its carrying value and therefore, no impairment charge was recognized.
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 4.5% (2017 – 4.6%) higher than
management’s estimates or had the estimated growth rate used in extrapolating forecasted results been 10.0% (2017 –
8.5%) 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 these assumptions 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.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 21
Goodwill is measured as the excess of the fair value of consideration transferred over the acquisition-date fair value of the
net identifiable assets acquired.
The purchase price allocation is subject to change throughout the duration of the measurement period. The measurement
period is the period from the date of acquisition, to the date 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. A CGU is subject to impairment testing as described under the heading "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 of the fiscal year.
CHANGES IN ACCOUNTING POLICIES
NEW STANDARDS AND AMENDMENTS IN EFFECT ON JANUARY 1, 2018
As outlined in Note 4 to the consolidated financial statements for the years ended December 31, 2018 and 2017, certain
prior period financial results contained herein have been restated pursuant to the retrospective adoption of IFRS 15 and 9
IFRS 15, ‘Revenue from Contracts with Customers’
Effective January 1, 2018, the Company adopted IFRS 15, ‘Revenue from Contracts with Customers’. IFRS 15 replaces IAS
11, ‘Construction Contracts’, IAS, ‘18 Revenue’ and IFRS 13, ‘Customer Loyalty Programs’, as well as various other
interpretations regarding revenue. 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. Refer to Note 4 of the consolidated financial
statements for the years ended December 31, 2018 and 2017 for details on the impacts of this new accounting standard.
IFRS 9, ‘Financial Instruments’
Effective January 1, 2018, the Company adopted IFRS 9, ‘Financial Instruments’. IFRS 9 introduces new requirements for:
(i) the classification and measurement of financial assets and financial liabilities and (ii) the recognition and measurement
of impairment for financial assets. IFRS 9 introduces a simplified hedge accounting model that aligns more closely with risk
management. Refer to Note 4 of the consolidated financial statements for the years ended December 31, 2018 and 2017
for details on the impacts of this new accounting standard.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 22
Amendment to IFRS 7, ‘Financial Instruments: Disclosures on Derecognition’
Effective January 1, 2018, the Company adopted the amendments to IFRS 7, ‘Financial Instruments: Disclosures’. In
conjunction with the transition from IAS 39, ‘Financial Instruments: Recognition and Measurement’ to IFRS 9, ‘Financial
Instruments’, IFRS 7 was amended to require additional disclosure in the year of transition.
NEW STANDARDS AND AMENDMENTS NOT YET IN EFFECT
IFRS 16, ‘Leases’
IFRS 16, 'Leases' replaces IAS 17, 'Leases' 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. Refer to Note 2 of the consolidated
financial statements for the years ended December 31, 2018 and 2017 for details on the impacts of this new accounting
standard.
RISKS AND UNCERTAINTIES
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)
import product restrictions and foreign trade risk; (vi) information systems and cybersecurity; (vii) interest rates; (viii) reliance
on key manufacturers; (ix) seasonality and cyclicality; (x) government regulation; (xi) labour relations; (xii) restrictions on and
impediments to acquisitions; (xiii) foreign exchange exposure; (xiv) health, safety and environmental laws and regulation;
(xv) nature of dealership agreements; (xvi) competition; (xvii) industry oversupply; (xviii) credit facilities; (xix) consolidation
within the equipment manufacturing industry; (xx) customer credit risks; (xxi) growth risks; (xxii) available floor plan financing;
(xxiii) unfavorable conditions in key geographic markets; (xxiv) non-exclusive nature of key geographic markets; (xxv)
continued ability to pay dividend; (xxvi) indemnification and insurance; (xxvii) branch leases; (xxviii) key personnel; (xxix)
labour costs and shortages; (xxx) product liability risks; (xxxi) freight costs; (xxxii) changes in common share value; (xxxiii)
future warranty claims; (xxxiv) integration of acquisitions; (xxxv) issuance of additional common shares; (xxxvi) aviation risks;
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.
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 2018, RME recognized $98 in bad debt expense (2017 – recovery of $81). Bad debt expense (recovery) is recognized
within SG&A expenses.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 23
MARKET RISK
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 2018, RME recognized a foreign exchange gain of $556 (2017 – gain of $692). Foreign exchange 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.
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.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 24
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.
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 our industrial
operations, losses recognized on the impairment and subsequent disposition of vacant land and costs associated with
the acquisition and integration of complimentary business 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 our industrial operations, losses recognized
on the impairment and subsequent disposition of vacant land and costs associated with the acquisition and integration
of complimentary business 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, costs associated with the acquisition and integration of complimentary business have been
classified as non-recurring charges. 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.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 25
RECONCILIATION OF NON-IFRS MEASURES TO IFRS
ADJUSTED DILUTED EARNINGS PER SHARE
$ thousands
2018
2017
2016
2018
2017
2016
Quarter Ended December 31,
Year Ended December 31,
Earnings used in the calculation of diluted
earnings per share
Loss (gain) on derivative financial instruments
(Gain) loss on DSUs
SAR (recovery) expense
Acquisition and integration costs
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
6,632
821
(125)
(841)
6
—
—
38
8,268
(3,131)
162
2,231
—
—
—
199
4,704
17,882
22,909
14,966
(605)
16
230
—
—
—
97
3,587
(354)
(2,443)
541
—
—
(359)
(4,578)
245
2,995
—
641
—
361
(4,751)
220
757
—
1,360
3,564
57
6,531
7,729
4,442
18,854
22,573
16,173
19,793
0.33
19,515
0.40
19,384
0.23
19,862
0.95
19,413
1.16
19,384
0.83
$ thousands
2018
2017
2016
2018
2017
2016
Quarter Ended December 31,
Year Ended December 31,
Net earnings
Finance costs associated with long-term debt
Depreciation and amortization expense
Income taxes
EBITDA
Loss (gain) on derivative financial instruments
(Gain) loss on DSUs
SAR (recovery) expense
Acquisition and integration costs
Loss on vacant land
Restructuring charges
Adjusted EBITDA
OPERATING SG&A
6,632
409
1,826
2,557
11,424
821
(125)
(841)
6
—
—
11,285
8,268
406
1,816
3,134
13,624
(3,131)
162
2,231
—
—
—
12,886
4,704
450
1,915
1,466
8,535
(605)
16
230
—
—
—
8,176
17,882
1,606
7,226
6,771
33,485
3,587
(354)
(2,443)
541
—
—
34,816
22,909
1,770
7,417
8,777
40,873
(4,578)
245
2,995
—
641
—
40,176
14,966
1,795
7,755
5,955
30,471
(4,751)
220
757
—
1,360
3,564
31,621
$ thousands
2018
2017
2016
2018
2017
2016
Quarter Ended December 31,
Year Ended December 31,
SG&A
Depreciation and amortization expense
Gain (loss) on DSUs
SAR recovery (expense)
Acquisition and integration costs
Operating SG&A
Operating SG&A as a % of sales
26,595
(1,826)
125
841
(6)
25,729
8.7
27,251
(1,816)
(162)
(2,231)
—
23,042
8.4
25,205
(1,915)
(16)
(230)
—
23,044
8.1
100,129
(7,226)
354
2,443
(541)
95,159
9.1
99,754
(7,417)
(245)
(2,995)
—
89,097
9.3
97,970
(7,755)
(220)
(757)
—
89,238
9.6
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 26
OPERATING CASH FLOW BEFORE CHANGES IN FLOOR PLAN
$ thousands
2018
2017
2016
2018
2017
2016
Quarter Ended December 31,
Year Ended December 31,
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
11,228
(46,061)
3,424
(39,791)
12,917
1,625
25,587
(97,838)
6,955
(7,675)
27,163
60,463
(25)
—
—
21,742
—
—
(34,858)
(36,367)
14,542
(50,509)
(720)
87,626
(1) – Includes change in floor plan payable classified as liabilities associated with assets held for sale.
INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND
PROCEDURES
The Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) have, as at December 31, 2018, 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, 2018, 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, 2018, 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. All statements, other than statements of historical fact, included herein may be 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 and Growth Plan”, including discussion regarding RME’s acquisition plans, prospects and
activities; (iv) statements 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 seed 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, and a continued availability of brand name products carried by RME; (viii) discussion on the fundamentals
of RME’s business, including discussions regarding growth in GDP, farmers’ crop receipts and profitability, field crop outlook
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 27
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
2018; (xi) statements regarding RME’s anticipated gross margins; (xii) any statements 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 Facially; (xix) statements concerning RME’s expected undiscounted cash flows as at December
31, 2018; (xx) statements that imply any future earnings, profitability, economic benefit or other financial results resulting
from any future acquisitions; (xxi) statements implying or discussing future growth or acquisition opportunities in Canada,
the U.S. or elsewhere; and (xxii) 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, 2021.
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.
Certain measures set forth in this MD&A may be considered to be future-oriented financial information or a financial outlook
within the meaning of applicable securities legislation. Financial outlook and future-oriented financial information contained
in this MD&A are based on assumptions about future events based on management's assessment of the relevant information
currently available. In particular, this MD&A contains RME’s projected revenue growth as at 2023, which is based on, among
other things: (i) the various assumptions as to RME’s increased revenue sources through 2023 as disclosed in this MD&A
or in RME’s AIF; (ii) RME's ability to find parties willing to sell their dealership operations at reasonable prices; (iii) RME's
ability to obtain and/or maintain OEM approval for its acquisitive growth strategy; (iv) the products RME sells (and by
implication, the products RME's OEMs manufacture) continue to meet the ever-evolving needs of RME's customer base;
(v) that demand drivers including, but not limited to, weather, foreign exchange or government regulation will not materially
impact customer demand; and (vi) that farmer cash receipts and balance sheets remain strong. The future-oriented financial
information and financial outlook contained in this MD&A is included to provide readers with information regarding RME’s
current expectations and plans regarding its future operations. Readers are cautioned that any such financial outlook and
future-oriented financial information contained herein may not be appropriate for other purposes and therefore should not
be used for purposes other than those for which it is disclosed herein.
Rocky Mountain Dealerships Inc. | Q4 2018 MD&A 28
ROCKY MOUNTAIN DEALERSHIPS INC.
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
For the Years Ended December 31, 2018 & 2017
Kpfgrgpfgpv!cwfkvqtu!tgrqtv!
Vq!vjg!Ujctgjqnfgtu!qh!Tqem{!Oqwpvckp!Fgcngtujkru!Kpe/!
Qwt!qrkpkqp!
Kp!qwt!qrkpkqp-!vjg!ceeqorcp{kpi!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu!rtgugpv!hcktn{-!kp!cnn!ocvgtkcn!tgurgevu-!
vjg!hkpcpekcn!rqukvkqp!qh!Tqem{!Oqwpvckp!Fgcngtujkru!Kpe/!cpf!kvu!uwdukfkctkgu!)vqigvjgt-!vjg!Eqorcp{*!cu!
cv!Fgegodgt!42-!3129!cpf!3128!cpf!Lcpwct{!2-!3128-!cpf!kvu!hkpcpekcn!rgthqtocpeg!cpf!kvu!ecuj!hnqyu!hqt!
vjg!{gctu!gpfgf!Fgegodgt!42-!3129!cpf!3128!kp!ceeqtfcpeg!ykvj!Kpvgtpcvkqpcn!Hkpcpekcn!Tgrqtvkpi!
Uvcpfctfu!)KHTU*/!
Yjcv!yg!jcxg!cwfkvgf!
Vjg!Eqorcp{u!eqpuqnkfcvgf!hkpcpekcn!uvcvgogpvu!eqortkug