Strongco Income Fund
TSX : SQP.UN

Strongco Income Fund

April 30, 2009 10:57 ET

Strongco Announces First Quarter 2009 Results

MISSISSAUGA, ONTARIO--(Marketwire - April 30, 2009) - Strongco Income Fund (TSX:SQP.UN) today released unaudited financial results for the first quarter ended March 31, 2009.

Highlights (i)

- Total revenues down 6.3% to $78.8 million

- Equipment division revenues down 4.8% to $73.0 million with equipment sales down 17.4%; rentals and product support up 23.0%

- Gross margin $17.3 million (22.0% of sales) vs $16.1 million (19.1% of sales)

- Net income of $1.2 million vs net loss of $0.5 million

- Market share gains across all major markets and brands

- Renewed bank credit facility with amended covenants

(i) Figures compare first quarter 2009 results with first quarter 2008 results

"Higher margins and lower expenses in a very tough market produced better results than the first quarter of last year," said Robert Dryburgh, President and Chief Executive Officer. "Unit sales were down, but we increased market share across our major brands in most regions. Improved margins on equipment sales and higher margins on increased revenues from rentals and product support resulted in a substantial improvement in our total gross margin."

Following a sharp decline in the fourth quarter of 2008, economic activity across North America remained very slow in the first quarter of 2009. This was particularly true in the oil and gas, forestry and residential construction sectors. Economic weakness was most pronounced in Alberta where, as a result of the drop in oil prices, activities in the oil sands have slowed considerably. While governments have announced plans for major infrastructure improvements, funding has been slow to be allocated to specific projects. As a result, customers have delayed or reduced equipment purchases until there are clear signs of increased capital spending and approved projects. Instead, many Strongco customers have opted to rent new equipment or repair and refurbish existing equipment, which has benefited Strongco's rental and product support activities.

The market for heavy equipment is estimated to be down approximately 35% to 40% year over year. "Despite the weak economy, revenues in Strongco's Equipment Distribution segment decreased only slightly by 4.8%, as lower equipment sales were mostly offset by stronger equipment rentals and product support revenues. Our top line for the quarter also benefited from the acquisition of Champion Road Equipment in March 2008," Mr. Dryburgh said.

"It is also significant that discussions with our bank successfully concluded with the renewal of Strongco's line of credit at $20 million and agreement with the covenant amendments we had requested. We can now focus our efforts on improving our business."

First Quarter 2009 Review

Revenues for the first quarter decreased by 6.3% from the same period in 2008, to $78.8 million. The Equipment Distribution segment decreased revenues by 4.8% to $73.0 million. Equipment sales were down $9.3 million or 17% due to general weakness in the economy and construction markets in particular. Rental revenues were up 30% to $4.3 million and product support revenues gained 23% to $24.6 million. Weak economic conditions in Canada and the U.S. resulted in a 21.6% decline in revenues generated by the Engineered Systems segment.

Gross margin increased by $1.2 million or 7.6% to $17.3 million in the first quarter of 2009 from $16.1 million in the same period of 2008. Gross margin as a percentage of revenue increased to 22.0% from 19.1% last year. The improvement primarily resulted from a higher proportion of rental and product support revenues, which offer higher margins than equipment sales. A slightly higher proportion of used-equipment sales in the most recent quarter also contributed to the improvement.

Gross margin for the Engineered Systems segment decreased to $1.4 million (23.7% of sales) in the first quarter of 2009 from $1.7 million (23.0% of sales) in the same quarter of 2008, mainly because of lower sales.

Administrative, distribution and selling expenses decreased by 1.9% to $15.7 million in the first quarter of 2009 from $16.0 million last year. The acquisition of Champion at the end of the first quarter of 2008 and the new and expanded facilities in Fort McMurray, Red Deer and Calgary in Alberta, St. John's, Newfoundland and Boucherville, Quebec resulted in additional administrative, distribution and selling costs. However, the restructuring activities and cost controls undertaken in 2008 resulted in lower overall expenses.

Net income for the quarter was $1.2 million, compared to a net loss of $0.5 million in the first quarter of 2008. Basic and diluted earnings amounted to $0.12 per unit, versus a net loss of $0.05 per unit last year.

The Fund's distributable cash for the first quarter was $1.2 million, compared to a cash shortfall of $0.8 million in the same period of 2008. No distributions were made or declared in the first quarter; they were suspended beginning in August 2008.



Financial Highlights
($ millions except per unit amounts)

For the three months
ended March 31,
($ millions, except per unit amounts) 2009 2008
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Revenues $ 78.8 $ 84.1
Earnings (loss) before income taxes $ 1.1 $ (0.5)
Net income (loss) $ 1.2 $ (0.6)

Basic and diluted earnings (loss) per unit $ 0.12 $ (0.05)

Distributions per unit $ - $ 0.30

Total assets $ 239.3 $ 238.3

Debt $ 136.6 $ 134.6
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Financial Position

On April 15, 2009, a Canadian chartered bank renewed Strongco's credit facility and $20 million operating line of credit, and increased the foreign exchange line to $10 million from $5 million. In conjunction with this renewal, the bank amended certain of the financial covenants under the credit agreement with effect as of March 31, 2009, at which date the Fund was in full compliance with the amended covenants.

Outlook

The overall economic outlook for Canada for 2009 remains extremely uncertain. In particular, questionable prospects for near-term oil and gas production continue to depress the market in Alberta. While various levels of government have committed to stimulus programs that include infrastructure spending, the impact of these initiatives and the timing of any spending is not yet clear. In the current climate, it is expected that reduced demand for new equipment will prevail in the markets in which Strongco operates.

The acquisition of Champion Road Equipment at the end of the first quarter of 2008 will add to sales in 2009. More importantly, Champion has improved Strongco's access to municipal governments, not only for the road graders and compact equipment which were Champion's expertise, but also for the larger pieces of equipment historically offered by Strongco. When infrastructure spending does begin to generate construction activities, Strongco will aim to participate at the early site preparation stage of projects, where earth-moving equipment is most utilized.

Because of the poor economic environment, Strongco expects sales of used equipment to be stronger in 2009. In addition, it is expected that Strongco's higher margin product support business, which involves parts and service, will increase as some customers seek to extend the life of existing equipment.

Strongco management remains focused on controlling costs and continues to closely manage inventory and debt levels.

Management's Discussion and Analysis and Financial Statements can be accessed at www.strongco.com and www.sedar.com.


Conference Call Details

Strongco will hold a conference call today at 3:30 pm ET to discuss first quarter results. Analysts and investors can participate by dialing 416-644-3426 or toll free 1-800-591-7539. An archived audio recording will be available until midnight on May 14, 2009. To access it, dial 416-640-1917 or 1-877-289-8525 and enter passcode 21303943#.

About Strongco

Strongco Income Fund is a trust established to hold one of the largest multi-line industrial equipment distribution providers in Canada. Over 700 employees provide retail service at 29 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 and ESCO.

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

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 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.



CONSOLIDATED BALANCE SHEETS

As at As at
March 31 December 31
(unaudited in thousands of dollars) 2009 2008
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ASSETS
Current
Accounts receivable $ 38,762 $ 46,350
Inventories 172,746 167,469
Prepaid expenses and deposits 2,174 1,369
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Total current assets 213,682 215,188

Capital assets, net 18,063 18,110
Other assets 330 370
Accrued benefit asset 5,419 5,415
Intangibles 1,800 1,800
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$ 239,294 $ 240,883
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LIABILITIES AND UNITHOLDERS' EQUITY
Current
Bank indebtedness $ 9,213 $ 12,844
Accounts payable and accrued liabilities 41,079 46,498
Deferred revenue and customer deposits 3,769 3,614
Equipment notes payable - non-interest
bearing 43,330 35,577
Equipment notes payable - interest bearing 81,712 83,307
Current portion of notes payable 1,181 -
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Total current liabilities 180,284 181,840
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Future income taxes 1,418 1,517
Notes payable 1,117 2,264
Accrued benefit liability 714 712
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Total liabilities 183,533 186,333
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Contingencies

Unitholders' equity
Unitholder capital 57,089 57,089
Deficit (1,328) (2,539)
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Total unitholders' equity 55,761 54,550
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$ 239,294 $ 240,883
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CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS
Three Months
(unaudited in thousands of dollars, ended March 31
except units and per unit amounts) 2009 2008
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Revenue $ 78,830 $ 84,134
Cost of sales 61,507 68,033
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Gross margin 17,323 16,101

Expenses
Administration, distribution and selling 15,696 15,958
Amortization of intangibles -- order backlog - 124
Other income (672) (434)
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Income before the following 2,299 453
Interest 1,175 958
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Earnings (loss) before income taxes 1,124 (505)
Provision (recovery) for income taxes (87) 49
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Earnings (loss) from continuing operations 1,211 (554)
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Income (loss) from discontinued operations
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Net income (loss) and comprehensive
income (loss) $ 1,211 $ (554)
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Retained earnings (deficit), beginning of
period (2,539) 4,979
Unitholder distributions - (2,511)
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Retained earnings (deficit), end of period $ (1,328) $ 1,914
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Earnings (loss) per unit - basic and diluted $ 0.12 $ (0.05)
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Number of units issued and to be issued 10,508,719 10,508,719
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months
(unaudited in thousands of dollars, except ended March 31
units and per unit amounts) 2009 2008
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OPERATING ACTIVITIES
Net income (loss) $ 1,211 $ (554)
Add (deduct) items not involving a current outlay
(inflow) of cash
Amortization of capital assets 333 251
Amortization of intangible assets - 124
Gain on disposal of capital assets (5) (14)
Stock based compensation - 10
Future income taxes (recovery) (99) 45
Interest accretion on note payable 34 -
Other 38 (357)
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1,512 (495)
Net change in non-cash working capital balances
related to operations 2,400 6,002
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Cash provided by operating activities 3,912 5,507
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INVESTING ACTIVITIES
Purchase of capital assets (291) (341)
Acquisition - (7,146)
Proceeds on disposal of capital assets 10 14
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Cash used in investing activities (281) (7,473)
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FINANCING ACTIVITIES
Increase (decrease) in bank indebtedness (3,631) 4,979
Unitholder distributions - (3,013)
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Cash provided by (used in) financing activities (3,631) 1,966
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Net increase in cash and cash equivalents during
the period $ - $ -
Cash and cash equivalents, beginning of period - -
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Cash and cash equivalents, end of period $ - $ -
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Supplemental cash flow information
Interest paid $ 1,085 $ 948
Income taxes paid (recovered) $ 12 $ (292)


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