Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

October 30, 2009 06:00 ET

Strongco Announces Third Quarter 2009 Results

MISSISSAUGA, ONTARIO--(Marketwire - Oct. 30, 2009) - Strongco Income Fund (TSX:SQP.UN) -

Summary *

  • In the third quarter, the markets that Strongco serves were down year over year similar to the declines experienced throughout 2009.  Overall, for the first nine months of 2009, markets were off 50%-60%, with largest decline in Alberta
  • Total revenues in third quarter decreased 24% from 2008 to $74.6 million; year to date the decrease was 22%
  • Gross margin as percent of revenue improved to 19% from 16% in third quarter of 2008; increased to 21% from 17% for nine-month period
  • Expenses decreased 10% to $13.5 million in third quarter; down 9% year to date
  • Earnings from continuing operations for third quarter increased to $0.3 million from a loss of $0.3 million in 2008; for nine-month period increased to $3.6 million from $2.0 million in 2008

* All comparative figures have been restated to reflect treatment of Strongco Engineered Systems as a Discontinued Operation.

Strongco Income Fund (TSX:SQP.UN) today released financial results for the third quarter ended September 30, 2009.

"We continue to operate profitably, improve results over last year and maintain a strong market position in a difficult ongoing economic climate," said Robert Dryburgh, President and Chief Executive Officer of the Fund. "We are, nevertheless, disappointed in our third quarter results. Our margins in the quarter, while an improvement over last year, have been squeezed compared to earlier in 2009. This was partially the result of aggressive pricing in the marketplace as some dealers attempted to reduce inventories and partially the result of the recent strength of the Canadian dollar. In addition, our costs were higher in a number of areas including bad debt write-offs, a loss on the sale of a closed branch and higher inter-branch freight costs resulting from our inventory management."

Mr. Dryburgh added: "We continue to refine and improve our business operations, which reflects in the year over year improvement of our operating results. At the same time, we are strengthening the Fund's balance sheet by reducing debt, largely through improved inventory management."

Third Quarter 2009 Review

In light of the ongoing weakness in construction markets in Canada, Strongco's sales of new equipment in the third quarter were down year over year. As has been the case earlier this year, customers have continued to utilize Strongco's product support capability to extend the life of their existing machinery, while others rented machinery rather than buy new.

"These areas have offset the reduction in equipment sales and as a result, while Strongco's sales of new equipment were down 31% during the nine-month period, total revenues were off by only 22%," said David Wood, Vice President and Chief Financial Officer. "They also provide better margins than sales of new machinery."

Financial Highlights *
($ millions except per unit amounts)

Period ended September 303 months9 months
  2009200820092008
Revenues$74.6$98.7$224.3$294.6
Earnings (loss) from continuingoperations$0.2$(0.3)$3.6$2.0
Earnings (loss) from discontinuedoperations$(0.8)$0.1$(1.5)$0.2
Net income (loss)$(0.5)$(0.2)$2.1$2.2
Basic and diluted earnings (loss)from continuing operations perunit$0.02$(0.02)$0.34$0.19
Basic and diluted net income(loss) per unit$(0.05)$(0.01)$0.20$0.21
Distributions per unitNil$0.10Nil$0.70
Total assets    $217.5$249.2
Total debt    $129.0$142.6

* Strongco's Engineered Systems division was sold during the second quarter of 2009 and is considered a Discontinued Operation in the current period. Results for 2008 have been restated accordingly.

Total revenues during the three-month period decreased by 24% from the same period in 2008 to $74.6 million. Of the total, equipment sales declined by 29% to $47.8 million, while rentals were down by 38% to $3.6 million and product support revenues were lower by 10% to $23.2 million. For the first nine months of 2009, revenues decreased by 22% over 2008 to $224.3 million.

On the lower revenues, gross margin decreased year over year by 9% to $14.5 million during the third quarter. That equates to a gross margin percentage of 19%, up from 16% in the third quarter of 2008. The improvement reflects higher margins earned on equipment sales compared to last year, as well as higher margins offered by product support activities compared to sales of new equipment. During the third quarter, product support revenues again constituted a higher proportion of total revenues than last year. For the nine months, gross margin percentage improved to 21% from 17% in 2008.

Administrative, distribution and selling expenses were down 10% year over year to $13.5 million during the third quarter. The addition of new and expanded facilities in key markets across Canada in 2008 added incremental expenses in 2009. During the quarter there were also additional provisions for bad debts related to customer insolvencies and unrecoverable receivables. However, these expenses have been more than offset by cost control measures implemented in late 2008 and 2009, resulting in a year over year improvement in expense levels. Since the beginning of 2009, Strongco's headcount has been reduced by 10% and three branches in Ontario have been consolidated into other branches. Year to date expenses were down 8% from 2008 to $41.5 million.

Earnings from continuing operations for the quarter totalled $0.25 million or $0.02 per unit, compared to a loss from continuing operations of $0.26 million or loss of $0.02 per unit in 2008. For the nine month period, earnings from continuing operations were $3.6 million in 2009, up from $2.0 million in 2008, equating to $0.34 per unit compared to $0.19 last year.

Losses from the unprofitable discontinued Engineered Systems business, which was sold during the second quarter, amounted to $0.8 million in the quarter and $1.5 million for the year to date.

After the loss from discontinued operations, the Fund ended the third quarter with a net loss of $0.5 million (loss of $0.05 per unit) compared to a net loss of $0.2 million in 2008 (loss of $0.01 per unit). For the nine months, net income was $2.1 million or $0.20 per unit, versus $2.2 million or $0.21 per unit last year.

Financial Position

The Fund continues to have access to a $20.0 million operating line of bank credit and $10.0 million foreign exchange facility. In addition, Strongco makes use of additional lines of credit from equipment manufacturers and other third party lenders on an as-needed basis to facilitate equipment purchases. These lines total $150.0 million, of which Strongco had drawn $118.0 million at September 30, 2009, down from $134.0 million at the same time in 2008.

The Fund's total indebtedness, comprising bank debt plus equipment notes and other notes payable, totalled $129.0 million at September 30, 2009. At the same time last year the total was $142.6 million.

Outlook

While economic conditions in North America remain depressed, there have been signs that the Canadian economy is beginning to stabilize and an emerging sense of confidence that a recovery is imminent. The recent rebound in oil prices and commodity prices, in general, and the strength of the stock market and the Canadian dollar are evidence that recovery is beginning.

While construction markets in Canada remain weak, the rate of decline in heavy equipment markets slowed in the third quarter which may be an indication that the worst is over. Government stimulus and infrastructure spending is now starting to filter through the system with allocation to specific projects anticipated in the near future. The growth in the number of construction projects being put out for tender and increased activity amongst construction companies in project engineering, design and planning are optimistic signs that construction activity and the purchase of heavy equipment will improve in the new year.

The markets for heavy equipment in which Strongco operates are expected to remain soft for the remainder of 2009 but management is cautiously optimistic that recovery will begin in the spring of 2010. Management attention will remain focused on market share relative to margins, a continuing emphasis on product support sales and cost reductions consistent with maintaining a high standard of customer service. Managing working capital and inventory and debt reduction will also remain a priority.

Conference Call Details

Strongco will hold a conference call on Friday, October 30, 2009 at 10 am ET to discuss third quarter results. Analysts and investors can participate by dialing 416- 644-3416 or toll free 1-800-814-4860. An archived audio recording will be available until midnight on October 31, 2009. To access it, dial 416-640-1917 or 1-877-289- 8525 and enter passcode 4175242#.

About Strongco

Strongco Income Fund is a trust established to hold one of the largest multi-line industrial equipment distribution providers in Canada. Over 600 employees provide retail service at 27 branches located from Newfoundland to Alberta. Strongco sells, rents and services mobile industrial equipment to sectors that include construction, road building, mining, forestry, utilities and municipalities. Strongco represents leading equipment manufacturers, including Volvo, Case, Manitowoc, Cedarapids, Fassi, Allied, Gomaco, Taylor, ESCO and Dressta.

Strongco Income Fund is listed on the Toronto Stock Exchange under the symbol SQP.UN.

Information Contact

J. David Wood

Vice President and Chief Financial Officer

Phone: 905 565 3808

E-mail: jdwood@strongco.com

Forward-Looking Statements

All statements contained in this news release that do not directly and exclusively relate to historical facts constitute forward-looking statements as of the date of this press release. These statements include the statement concerning our outlook for the balance of 2009 and are not guarantees. Although we believe that these forward-looking statements are based on information and assumptions which are current, reasonable and complete, these statements are necessarily subject to a number of factors that could cause actual results to vary significantly from current expectations. Please refer to the "Forward–Looking Statements" section in the accompanying Management's Discussion and Analysis.

www.strongco.com

Strongco Income Fund     
 
                                                           CONSOLIDATED BALANCE SHEETS     
 
 
  As at  As at
  September 30  December 31
[unaudited - in thousands of dollars] 2009  2008
 
ASSETS     
Current     
Accounts receivable 33,427 $ 40,190
Inventories 161,364  164,091
Prepaid expenses and deposits 1,417  1,232
Assets held for sale -   9,675
Total current assets196,208  215,188
 
Capital assets, net 13,906  15,073
Other assets 242  241
Accrued benefit asset 5,348  5,415
Intangibles 1,800  1,800
Assets held for sale -   3,166
Total assets217,504 $ 240,883
 
LIABILITIES AND UNITHOLDERS' EQUITY     
Current     
Bank indebtedness 9,018 $ 12,844
Accounts payable and accrued liabilities 29,610  42,116
Deferred revenue and customer deposits 342  2,654
Equipment notes payable - non-interest bearing 41,280  35,577
Equipment notes payable - interest bearing 76,322  83,307
Current portion of notes payable 1,181  -
Liabilities related to assets held for sale -   5,342
Total current liabilities157,753  181,840
 
Future income taxes 1,181  1,517
Other liabilities -   -
Notes payable 1,184  2,264
Accrued benefit liability 718  712
Total liabilities160,836  186,333
 
Unitholders' equity     
Unitholder capital 57,089  57,089
Retained Earnings (deficit) (421)  (2,539)
Total unitholders' equity56,668  54,550
  217,504 $ 240,883
 
 
               
 Strongco Income Fund   
                                           CONSOLIDATED STATEMENTS OF OPERATIONS     
                                                           AND RETAINED EARNINGS         
 
        
    Three months ended September 30   Nine months ended September 30
[unaudited - in thousands of dollars, except units and per unit amounts]   2009  2008   2009  2008
 
Revenue$74,638$ 98,652 $224,301$ 294,610
Cost of sales   60,124  82,771   177,442  244,800
Gross margin  14,514  15,881   46,859  49,810
 
Expenses               
Administration, distribution and selling   13,543  15,016   41,448  45,261
Amortization of intangibles -- order backlog   -   -   -   217
Other income   (273)  (104)   (1,226)  (1,034)
 
Income before the following   1,244  969   6,637  5,366
Interest   1,154  1,066   3,298  3,084
 
Earnings (loss) from continuing operations before income taxes   90  (97)   3,339  2,282
Provision for income taxes   (159)  161   (267)  323
Earnings (loss) from continuing operations  249  (258)   3,606  1,959
Income (loss) from discontinued operations   (778)  105   (1,488)  221
 
Net income (loss) and comprehensive income (loss)$(529)$ (153) $2,118$ 2,180
 
Retained earnings (deficit), beginning of period   108  1,748   (2,539)  4,979
Unitholder distributions   -   (1,556)   -   (7,120)
Retained earnings (deficit), end of period$(421)$ 39 $(421)$ 39
 
Earnings (loss) per unit               
Continuing operations -- basic and diluted   0.02   (0.02)   0.34  0.19
Discontinued operations -- basic and diluted   (0.07)   0.01   (0.14)  0.02
Earnings per unit $(0.05)$ (0.01) $0.20$ 0.21
 
Number of units issued and to be issued   10,508,719  10,508,719   10,508,719  10,508,719
Strongco Income Fund               
 
  CONSOLIDATED STATEMENTS OF CASH FLOWS     
 
 
    Three months   Nine months
    ended September 30    ended September 30
[unaudited - in thousands of dollars]   2009  2008    2009  2008
 
OPERATING ACTIVITIES               
Income (loss) from continuing operations $249$(258) $3,606$ 1,959
Add (deduct) items not involving a current outlay (inflow) of cash                
 Amortization of capital assets   212  223   637  601
 Amortization of intangible assets   -   -   -   217
 Loss (gain) on disposal of capital assets   108  (7)   93  (21)
 Stock based compensation   -   10   -   30
 Future income taxes (recovery)   (41)  155   (161)  355
 Interest accretion on note payable   34  42   101  76
 Other   69  14   72  202
    631  179   4,348  3,419
Net change in non-cash working capital balances                
 related to operations   4,070  10,902   (6,295)  9,896
Cash provided by (used in) operating activities of continuing operations   4,701  11,081   (1,947)  13,315
Cash provided by (used in) operating acitivities of discontinued operations   (600)  1,132   (392)  476
Cash (used in) provided by operating activities  4,101  12,213   (2,339)  13,791
 
INVESTING ACTIVITIES               
Purchase of capital assets   (128)  (390)   (433)  (1,167)
Acquisition   -   -   -   (7,169)
Proceeds on disposal of capital assets   850  7   870  21
Cash provided (used in) investing activities of continuing operations   722  (383)   437  (8,315)
Cash provided (used in) by investing activities of discontinued operations   (178)  (201)   5,728  (724)
Cash provided by (used in) investing activities  544  (584)   6,165  (9,039)
 
FINANCING ACTIVITIES               
Increase (decrease) in bank indebtedness   (4,645)  (10,594)   (3,826)  817
Unitholder distributions   -   (1,035)   -  (5,569)
Cash used in financing activities  (4,645)  (11,629)   (3,826)  (4,752)
 
Net increase in cash and cash equivalents during the period$- $ - $- $ -
Cash and cash equivalents, beginning of period   -   -   -   -
Cash and cash equivalents, end of period$- $ - $- $ -

Contact Information

  • Strongco Income Fund
    J. David Wood
    Vice President and Chief Financial Officer
    905 565 3808
    jdwood@strongco.com